TaxTMI 
TaxTMI 
2018 (5) TMI 2146
X X X X Extracts X X X X
X X X X Extracts X X X X
....cts and in the circumstances of the case and in law, the learned TPO and the learned AQ-under the directions of the Hon'ble DRP erred in arbitrarily cherry picking new companies and using non-contemporaneous data; 3. On the facts and in the circumstances of the case and in law, the learned TPO and the learned AO under the directions of the Hon'ble DRP erred in following an inconsistent approach in the application of filters in selecting comparable companies. 4. On the facts and in the circumstances of the case and in law, the learned TPO and the learned AO under the directions of the Hon'ble DRP erred in rejecting companies, by applying incorrect filters, which undertake functions, employ assets and bear risks similar to the Appellant; 5. On the facts and in the circumstances of the case and in law, the learned TPO and the learned AO under the directions of the Hon'ble DRP erred in cherry picking companies as comparable for the purpose of determining the arm's length price without considering the fact that their functions undertaken, assets employed and risks borne were not comparable to that of the Appellant; 6. On the facts ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he case and in law, the learned AO erred in levying interest under Section 234B and Section 234C of the Act. 3. Though the assessee has raised several grounds, the main ground relates to the determination of the arm's length price by the Assessing Officer. 4. As regards ground nos. 13 & 14, the ld. Counsel of the assessee submitted that she will not be pressing for the same. Accordingly, ground nos. 13 & 14 are dismissed as not pressed. 5. The assessee is incorporated in India and is a wholly owned subsidiary of Lion bridge Mauritius Limited. The assessee has centers in Mumbai, Chennai and Bangalore. The services rendered by the assessee include providing low-end, routine, software development and related services (i.e., Information Technology (IT) and Information Technology Enabled Services (ITES) and export thereof. As per the Transfer Pricing (TP) study and based on functional and risk analysis it has been characterized as software development and globalization service provider and accordingly it has selected it as the tested party. As per the Profit Level Indication (PLI) working in the TP study report, the cost base did not consider the amount of outsourcing cost Rs.1....
X X X X Extracts X X X X
X X X X Extracts X X X X
....arty transactions > 25% is taken as explained below. 5 Consistently loss making companies rejected This is an appropriate filter. 7. The Assessing Officer gave certain sets of comparables to the assessee and thereafter obtained assessee's comments. The companies suggested by the Transfer Pricing Officer and the contentions of the assessee against them and Transfer Pricing Officer's comment against them are summaries as under: Sr. No. Name of the comparable Contentions of the assessee TPO comments 1 Acropetal Technologies Limited * Functionally not comparable - company operates under three business segments viz., Engineering Design Services, Information Technology Services and Health Care * Product company is different from a service company * Insufficient segment information between product and service income * Presence of intangibles i.e. 52.48% * Research and development activities Assesee's contentions are rejected as segmental profits are available and the function of IT segment is comparable with ; the assessee company. Hence, it is functionally comparable. 2 Aspire Systems (India) Private Limited * Functionally not ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ee's contentions are rejected and company is accepted as comparable due to the fact that it is engaged in providing software development & solutions . Hence it is functionally comparable.___ __ 7 Third ware Solution Limited * Functionally not comparable - engaged in diversified operations offering comprehensive application implementation services, application services, application development services support services in enterprise applications space * Product company is different from a service company * Non-availability of segment data * Presence of intangible assets in development of products_______ Assessee's contentions are rejected and company is accepted as comparable due to the fact that it is engaged in providing software development & solutions . Hence it is functionally comparable. 8. The Transfer Pricing Officer further rejected the following comparables selected by the assessee by observing as under: Sr. No. Name of the Company Reasons for rejecting 1 Cosmic Global Ltd. Export Turnover to total sales is 56.01% which is less than 75% 2 Kelton Tech Solutions Different accounting period. The company's year ended o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the TPO had rightly rejected the comparable. * Kelton Tech Solutions The TPO had rejected the comparables as the company has different accounting period. The Company's year ended on June 30, 2013. We find from the submission of the assessee that though the company is into software, but it follows different accounting period. The company with different financial year was rightly rejected by the TPO. * Prism Informatics The TPO had rejected the comparable of Prism Informatics on the ground that it has less than 75% export turnover. We have gone through the submission of the assessee and have observed that the export turnover is just below 75%. Hence, the TPO was right in rejecting the comparable. * R Systems International Limited The TPO rejected the comparable as the company follows different accounting year ending December, 30 2012. Since the company does not follow the same accounting year as the assessee does and as there are other similar comparables available, the said comparable was rightly rejeaed by the TPO. * Virinchi Technologies Limited The TPO rejected the comparable as the company has l....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ny is functionally not comparable as it is providing diversified services. From the submission of the assessee it is seen that the company Infobeans Technology Ltd is into development of software and its sale hence, the claim of the assessee that company is not functionally similar to the business of the assessee is rejected. Merely because the company has shown sale of software in profit and loss acount, one cannot reject the comparable. Hence, the claim of the assessee U rejected. (d) Persistent Systems Limited The assessee objects to the selection of the company as comparable because it is not functionally similar to the business of the assessee which has IP's in the name of the company and in house R & D centre. From the submission of the assessee it is seen that the company Persistent is into development of software hence, the claim of the assessee that company is not functionally similar to the business of the assessee is rejected. Merely because the company has IP's and R & D centre in its own name, one cannot reject the comparable. Hence, the claim of the assessee is rejected. (e) Thirdware Solution limited The a....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 6.2 Discussions and [Directions of the PRP: 6.2.1 We have considered the facts of the case and submissions made by the assessee. Ground No. 7 relates to re-computation PLI of the assessee. The assessee has raised objection that the TPO has recomputed the PLI by considering the outsourcing cost of INR 160,880,492/- as operating cost where as the assessee had treated the same as pass through cost and adjusted the same in indirect expenses. 6.2.2 We have gone through the objections of the assessee and have also seen the T P Order. It is noted that the entire outsourcing cost has been treated as operating cost by the TPO on the ground that the outsourcing cost is directly related to software development and services and the assessee has merely developed a part of the software through outsourcing instead of in-house development. It is not a case where AE has directly given contract to other parties rather it is the assessee, who has subcontracted its part of work. Therefore, the TPO has correctly considered the outsourcing cost as operating expenses of the assessee. Hence, the claim of the assessee in the said ground is rejected. 14. As regards the assessee....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e considered unless the assessee demonstrates that prior year's data has had an influence on the setting of transfer price of international transaction either at the time of setting of transfer price of international transaction either at the time of setting them or by way of adjusting them subsequent to entering into the international transaction to align them to the arm's length price. This is a condition precedent for user of the multiple year financial data. Reliance is placed on various decisions in this regard including (i) AZTEC Software 107 ITD (AT) 141 (SB) (Bang), (ii) Mentor Graphic 109 ITD 101 (Del) and (iii) Honeywell Ltd. 209-TIOL-104 (AT) (Pune) and (iv) Chrys Capital Investments Advisors India Private Limited ITA 417/2014 dated 27.04.2015. In view of the same, the assessee's contention is rejected. 15. Finally, the Dispute Resolution Panel summarized its discussion on risk adjustment as under: 12.2.8 The discussion on the risk adjustment is summarized as under: a. As discussed above, the assessee has also undertaken several risks. Therefore, it is not correct to say that it is a risk mitigated entity. b. The assessee is tota....
X X X X Extracts X X X X
X X X X Extracts X X X X
....isk was actually undertaken by the comparables and to what extent it affected the profitability. Adjustment can be allowed only if it is demonstrated that is leading to better comparability and only when a credible methodology is adopted for calculating a reasonably accurate adjustment. The methodology used by the assessee does not have any application in the area of transfer pricing i. In the various decisions of the ITATs as referred to above no risk adjustment has been allowed in such cases in absence of any credible methodology to grant risk adjustment. 12.2.9 In view of above, the claim of assessee about risk adjustment is hereby rejected. 16. Against the assessment order pursuant to the direction of the Dispute Resolution Panel, the assessee has finally appealed before us. 17. We have heard both the counsel and perused the records. The ld. Counsel of the assessee made submissions in support of some of the comparables selected by the assessee and rejected by the Transfer Pricing Officer. She further made submissions against some of the comparable selected by the Transfer Pricing Officer. 18. Per contra, the ld. Departmental Representative relied upon....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... We find that in the above years, the tribunal had accepted the exclusion/non comparability of the above comparable. We find that the Revenue has not brought out any difference in the functional profile of the assessee for the year under consideration with that of the assessee for those assessment years. Hence, the Tribunal in assessee's own case has accepted that a software product company is not comparable to assessee company which is into software development services. Accordingly, respectfully following the above precedent, we hold that this comparable has to be excluded from the final list of the comparables. Aspire Systems (India) Private Limited: 23. This comparable was selected by the Transfer Pricing Officer but has been objected by the assessee. In this regard, the ld. Counsel of the assessee submitted that this company is into IT Consultancy and Software Product Development and it is not Software Service Company. In this regard, we note that the Transfer Pricing Officer has held that this company as well as the assessee are broadly engage into same services. This proposition has also been accepted by the Dispute Resolution Panel. We find that this plea of the asse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bmitted that this comparable is into acquisition/purchase of hardware and software including software as a service. She further submitted that it is into software development, implementation and support services. It has been claimed that it earned income from products and services. While the assessee on the other hand is not into product activity and is solely into software services. It has been further submitted that in several case laws, Thirdware Solutions Ltd., has been held to be a company not engaged in software development services. In the ITAT Delhi Bench decision in the case of St-Ericsson India (P.) Ltd. vs. Asst. CIT [2017] 79 taxmann.com 207 (Delhi - Trib.) it was held that the substantial revenue of this company is from sales and operating sales of licence; software services, export from SEZ unit, export from STPI unit and revenue from subscription. So, when this company's substantial revenue is from other various business segments like sale of licence, software services and segmental results are not available, this company cannot be a valid comparable for benchmarking the international transaction. This decision of the ITAT had been upheld by the Hon'ble Delhi....