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2019 (10) TMI 1487 - AT - Income TaxTP Adjustment - Comparable selection - HELD THAT - Acropetal Technologies Limited - turnover of the company excluding other income is Rs. 141, 65, 28, 000/-. Thus we observe that the comparable selected by the revenue fails their own filter choosen by the TPO on account of employee cost less than 25% of the total cost. Hence we hereby direct that the asset comparable be excluded from the TPO study. E-infochips Limited - As gone through the financials of this comparable the operating revenues gross are to the tune of Rs. 26, 03, 84, 251/- whereas the revenue from software development is Rs. 19, 21, 09, 661/- which is less than 75% hence do not qualify for the comparable as per the TPO s own filter. Hence it is directed that this comparable may be obliterated from the list of comparable. Zylog Systems Ltd. - In the case of this comparable the revenues from the software solutions and products in the current year is 45.2% and in the earlier year 39.5% which is less than 75% hence do not qualify for the comparable as per the TPO s own filter. Hence it is directed that this comparable may be obliterated from the list of comparable. E-Zest Solutions Limited - We find that cloud computing has been the major source of revenue of this company hence functionally not comparable. In the assessee s own case for the assessment year 2008-09 this comparable has been excluded by the Co-ordinate Bench of the Tribunal relying on the decision of Sunguard Solutions India Pvt. Ltd. 2015 (7) TMI 1275 - ITAT BANGALORE . Hence keeping in view the decision of the earlier year we direct that this comparable may be excluded from the list of comparables. Infosys Ltd. - In the assessee s own case for the assessment year 2008-09 this comparable has been excluded by the Co-ordinate Bench of the Tribunal relying on the decision of Nokia Siemens Networks India Pvt. Ltd 2018 (2) TMI 1783 - ITAT DELHI - Hence keeping in view the decision of the earlier year we direct that this comparable may be excluded from the list of comparables. Larsen Toubro Infotech Ltd. - We find that the submissions of the ld. AR cannot be accepted as the assessee and the comparable and the study of the TPO involves determination of ALP on software development services. In the software development services the overseas revenues do involve the similar functions. The assessee is also in the software development segment so as the comparable. Increase in turnover cannot entitle to exclude the comparable. The revenues have shown to be from the IT services. The case laws supported by the assessee are not applicable to the facts of this case. 93.56% of revenue is coming from the export of software development only. Functionally Infosys is on a different format whereas L T is similar. Keeping in view the judgment of Hon ble Supreme Court in the case of Morgan Stanley and Company Inc. 2007 (7) TMI 201 - SUPREME COURT regarding the functions and comparability thereof we hold that this can be included an appropriate comparable. Persistent Systems and Solutions Ltd. - Revenues and expenses have been shown in a consolidated manner and no segmented disclosure has been made. In the assessee s own case for the assessment year 2008-09 this comparable has been excluded by the Co-ordinate Bench of the Tribunal. Hence keeping in view the decision of the earlier year we direct that this comparable may be excluded from the list of comparables. Sasken Communication Technologies Ltd - The comparable is a provider of Tele-communication Software Services to Mobile Terminal Vendors and Solutions to Network equipment manufactures. The restructuring reserve account and the diminution value of investment do not necessarily adversely affect this to be a comparable. The profits EBITDA margins software services network engineering services do not change perceptibly. The company has enquired R D charges on account of R D centre at IIT Madras and incurred expense of Rs. 8.94 lacs do not impact the profitability. Hence we hold that this comparable may be included in the TP study. Wipro Technologies Services Limited - The accumulated depreciation and amortization remained constant as at 1st April 2010 and as at 31st March 2011. Regarding the segmental information the company reports that it is engaged in providing services which are considered as one segment. Since there are no separate reportable segments no segmental reporting was done in the audit report. The comparable was rejected by the Tribunal in the case of Orange Business Service India Solution Pvt. Ltd. 2016 (5) TMI 1333 - ITAT DELHI on the ground that this company is a subsidiary of Wipro Ltd which has a considerable brand name and further that the entire revenue during the year in this company is covered by a master service agreement entered into by breakthrough with CITI group services. R Systems Ltd - The comparability of an uncontrolled transaction can be analyzed only with the data relating to the financial year in which the international transaction has been entered into. As the assessee follows the accounting year ending 31st March the comparables must also have the data relating to the financial year ending 31st March. Since this data is not available such companies cannot be accepted as comparables. Vama Industries Ltd. - As already held that the filter of less than 75% is to be excluded this company does not pass the test of filter of service income laid down by the TPO. Hence we hold that it is not an appropriate comparable for TP study. Allowance on account of risk adjustment - It was held in the case of EXL Servie.com India Pvt. Ltd. 2017 (8) TMI 225 - ITAT DELHI TP risk adjustment is allowed only when the differences have pointed out and the authorities can proceed to calculate the effect of such differences on the operating profits margins of the comparables. Hence keeping in view the provisions of Section 10B(2)(b) we direct the assessee to provide the detailed working of the risk assumed to the TPO so that they can verify the correctness of the working as given by the assessee and allow the same in accordance with the provisions of the Rules enforce. TDS u/s 194C - Disallowance u/s 40(a)(i) - amounts are paid on account of purchase of machinery reimbursement of pension reimbursement of travel expenses and training expenses - HELD THAT - On going to the expenses we find that training expenses purchase of materials reimbursement of travel expenses and pension are not liable to the provisions of TDS. Regarding the other reimbursement we have gone through the Circulars issued by the CBDT No. 3/2015 and 2/2014. We hold that amounts paid by way of reimbursement of expenses do not constitute income in the hands of the recipient. Consequently the payer is under no obligation to deduct TDS u/s 194C and no disallowance of the expenditure can be made u/s 40(a)(ia). Since it is the Assessing Officer who would be in a position to determine whether the payments are reimbursement are not we hereby direct the assessee to produce the relevant details pertaining to reimbursements other than training expenses purchase of materials reimbursement of travel expenses and reimbursement pension. The Assessing Officer may take a decision after the examination of the details of the reimbursement.
Issues Involved:
1. Adjustment to the value of international transactions pertaining to Software Development Services Segment. 2. Disallowance under section 40(a)(i) for non-deduction of tax at source. 3. Levy of interest under sections 234B and 234D. 4. Initiation of penalty under sections 271(1)(c) and 271AA. Issue-wise Detailed Analysis: 1. Adjustment to the Value of International Transactions Pertaining to Software Development Services Segment: The assessee challenged the adjustment of Rs. 1,63,08,413/- to the value of international transactions related to the Software Development Services Segment. The Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP) were criticized for not appreciating the business model and realities, and for adopting a flawed approach. The TPO used the Transactional Net Margin Method (TNMM) with Net Operating Profit Margin (NCP Margin) as the Profit Level Indicator (PLI). The TPO selected comparables and computed the PLI (OP/OC) at 22.92%, making an adjustment of Rs. 1,79,43,149/-. The assessee objected to the selection of certain comparables like Acropetal Technologies Limited, E-infochips Limited, e-Zest Solutions Limited, Infosys Ltd., Larsen & Toubro Infotech Ltd., Persistent Systems and Solutions Ltd., Persistent Systems Ltd., Sasken Communication Technologies Ltd., Wipro Technologies Services Limited, and Zylog Systems Ltd. The Tribunal directed the exclusion of certain comparables that failed the TPO's own filters or were functionally dissimilar. 2. Disallowance under Section 40(a)(i) for Non-deduction of Tax at Source: The assessee contested the disallowance of Rs. 20,83,040/- for non-deduction of tax at source, arguing that the reimbursement of expenses to overseas group companies was not liable to withholding tax. The DRP/AO concluded that these payments were in the nature of Fee for Technical Services (FTS) / Fees for Included Service (FIS). The Tribunal found that training expenses, purchase of materials, reimbursement of travel expenses, and pension were not liable to TDS provisions. It directed the Assessing Officer to verify the details of reimbursements and determine if the payments were genuinely reimbursements not subject to TDS. 3. Levy of Interest under Sections 234B and 234D: The assessee raised grounds regarding the levy of interest under sections 234B and 234D. These grounds were deemed consequential in nature and were not discussed in detail in the judgment. 4. Initiation of Penalty under Sections 271(1)(c) and 271AA: The assessee also contested the initiation of penalty under sections 271(1)(c) and 271AA. Similar to the interest grounds, these were also considered consequential and were not elaborated upon in the judgment. Conclusion: The Tribunal allowed the appeal of the assessee, directing the exclusion of certain comparables from the TPO study, and ordered the Assessing Officer to verify the details of reimbursements for the disallowance under section 40(a)(i). The grounds related to interest and penalty were treated as consequential. The judgment emphasized the need for accurate functional analysis and adherence to relevant filters and guidelines in transfer pricing assessments.
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