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TMI Blog2015 (1) TMI 1155X X X X Extracts X X X X X X X X Extracts X X X X ..... directed to omit these three companies chosen, i.e. Rolta India, KLG and Powersoft by the TPO from the set of comparables for the year under consideration as Rolta India Ltd has huge turnover difference, Powersoft Global Solutions Ltd has financial year of the company differs by six months and KLG Systel Ltd is functionally not comparable, thus the matter is restored back to the TPO/AO who shall carry the search of comparables afresh in terms of criteria laid down in Rule 10B(2) of Income Tax Rules 1962 after giving an opportunity of being heard to the assessee. One of the comparables Caliber Point Business Solutions has related party transactions of 30% of Revenue and going by the threshold filter of 25% of the related party transactions the said comparable cannot be said to be uncontrolled comparable and ought to be excluded from the list of comparables. We direct the TPO/AO to exclude the said comparable from the list of comparables taken for the purpose of benchmarking for the said A.Y. 2008-09. - Decided in favor of assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... at the adjustment should have been made to the profit margin of comparables and not that of profits of the assessee. 2.3 It was submitted on behalf of the assessee that Dispute Resolution Panel (DRP) has not dealt with this issue in its direction. The stand of the assessee before us has been that the external comparables including the ones selected by the TPO have followed the policy of charging depreciation as per the rates prescribed in Schedule XIV to the Companies Act and it is clear from the Notes to Account in the Audited Annual reports of such comparables. The assessee has claimed that during the relevant previous year it changed its policy of charging depreciation and has adopted higher rates of depreciation than the rates prescribed in Schedule XIV to the Companies Act. Such a change has resulted into excess charge of depreciation of ₹ 12.87 lakhs for the relevant previous year and adversely affected the profit of the assessee company. The assessee therefore asked for adjustment to reduce the impact of said excess depreciation on its profit of the previous year relevant to the A.Y. 2006-07. The TPO has stated that such an adjustment is contemplated to be made to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the comparables viz. Ace Software Exports Ltd. not functionally comparable and the remaining comparables had related party transactions. 3.2 The TPO made his own search and selected three external comparables viz. Rolta India Limited, KLG Systel Ltd. and Powersoft Global Solutions Ltd. The TPO thereafter benchmarked the average PLI of Operating Profit to Total Cost of the said three comparables chosen by him and compared the same with the PLI of the assessee company without taking into account adjustment for excess depreciation asked for by the assessee. The TPO accordingly made upward adjustment of ₹ 38,41,754/- to the export price of the services rendered ₹ 1.31 cr. by the assessee to its AE during the previous year relevant to the A.Y. 2006- 07. 3.4 We find that the assessee has adopted Transactional Net Margin Method (TNMM) as the Most Appropriate Method for comparing the profit level indicator (PLI) of Operating Profit to Total Cost with the peer companies selected by it. The assessee is a captive service provider of ITES catering to automotive sector. It does not own Intellectual Property. It does not provide services to Owner-operators of Infrastructure, Con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tinct from that of the assessee. b. KLG and Powersoft are engaged in trading of software packages and the said fact has been clearly borne by the information disclosed in the Audited Financial Statements of the said companies for the relevant F.Y. 2005-06. The said two companies are employing completely different business model and instead of having their own skilled personnel they are buying software licenses and packages and therefore the significant portion of operating costs viz. Manpower cost is very low vis-a-vis the assessee company. In case of KLG Systel the Cost of sales which comprised the cost of bought out software exceeded the manpower cost almost by 9 times for the financial year ended 31st March, 2006 in the audited Profit and Loss Account. Which is placed at page 38 of the Paper Book filled by the assessee. KLG Systel also has inventory disclosed under Current Assets in the Balance Sheet. The Auditors' report clearly states that the company has maintained proper records of inventory of software licenses and packages and they have been physically verified. As detailed in page No 37 of Paper book filed by the assessee, KLG is in the business of providing Plant/Produc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. 456.73 787.14 KLG Systel Ltd. 51.30 58.70 Powersoft 9.11 6.23 Behr India 1.31 1.00 3.5 It was is that the figures of Capital employed exclude investments. The external comparables chosen by the TPO have been excluded on similar set of facts in the succeeding years A.Y. 2007-08 and 2008-09 by the CIT(A) in the assessee's own case. Material differences exist in terms of functions performed, assets deployed and risks borne. It bears vital notice that Rolta India being one of the three new comparables had not been chosen suo motu by the assessee and the TPO has imosed it on the assessee without having regard to the differences manifest in the functions performed taking into account assets employed and risks assumed (FAR analysis) and which FAR analysis forms the very basis of comparability as laid down in the Rule 10 B (2) (b) and other TP regulations. The assessee had rejected Rolta India as comparable on the basis of said FAR analysis and not on the basis of turnover criteria only. A similar view has been taken by ITAT, Pune in the case of E Gain Communication private Limited 118 ITD 243 wherein on page 272, the Tribunal has held as under: "OECD Guidelines on applic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny purchased software of about ₹ 51.34 lakh. The material consumed amounted to about ₹ 5.19 crore and the personnel cost was about ₹ 40.78 lakh. From the narration above, it can be seen that this company is also trading in software and it is not a software development company. From the Directors' report, it is seen that the company is mainly engaged in the business of providing integrated solutions and also undertakes the man-power supply. Therefore, the sales of about ₹ 5.59 crore appear to be in respect of providing integrated solutions, which may be in the nature of project development rather than software development. The technical services receipts are in respect of the man-power supply. Thus, this company is engaged in providing technical services, integrated solutions and sale of software. Therefore, the business model of this company is also different from that of the assessee, which is stated to be development of software for the Vedaris, U.K. In the light of this discussion, the mention about future focus of the company regarding computer education in government schools becomes of no significance. Thus, we find that the argument taken by the ld. DR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in holding the said expenditure as capital expenditure. a. In respect of Product Development Expenses ₹ 2,20,03,000/- the DRP has given the finding at Para 6.3 Page 19 that perusal of the details shows that the expenses relate to quality testing and validation, soft tooling for testing, proto samples. The DRP and the A.O. have disallowed the expenditure on the premise that it is of enduring nature. The stand of the assessee has been that in respect of disallowance of Product Development Expenses it was submitted that identical issue had come up before the ITAT, Pune in assessee's own case for the A.Y. 2001-02, A.Y. 2004-05 and A.Y. 2005-06, wherein the Tribunal has held that prima facie the expenditure is towards testing of products manufactured by the assessee and has remitted the matter back to the A.O. for verification of facts in support of contention of the assessee that the expenditure is for testing of products and is entirely revenue expenditure fully deductible in the relevant previous year. The relevant portion of the same is reproduced as under: "10. In this connection, it appears from the record that both the authorities below have proceeded on the basis that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4.1 Nothing contrary has been brought to our knowledge on behalf of the Revenue. Facts being similar, so following the same reasoning, we remit the issue back to the Assessing Officer with direction to decide the issue as per fact and law after providing an opportunity of being heard to the assessee. 5. Revenue for the A.Y. 2007-08 and A.Y. 2008-09 in ITA Nos.647 & 648/PN/2013 regarding transfer pricing issue that the three external comparables chosen by the TPO viz. Rolta India Limited, KLG Systel Ltd. and Powersoft Global Solutions Ltd. should be retained for benchmarking the PLI of the assessee. The TPO rejected the external comparables mainly on following parameters: a. The assessee did not use data of the relevant financial year b. Some of the comparables were not functionally comparable 5.1 The TPO has for the A.Y. 2007-08 retained only one comparable viz. Onward Technologies Ltd. after rejecting four comparables viz. Ace Software Exports Ltd., Federal Technologies Ltd., Genesys International Ltd., Pentasoft Technologies Ltd. For the A.Y. 2008-09 the TPO has retained three external comparables selected by the assessee viz. Caliber Point Business Solutions Ltd., Cosmic Gl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as not taken before the CIT Appeals due to inadvertence. However it is submitted that relevant facts are on record as evident from Para 7(6) page 4 of TPO`s order and in terms of TP regulations as well as OECD Guidelines such RPT cannot be considered as uncontrolled transaction and inclusion of comparable having RPT of more than 25% of gross revenue would be an error. In this regard, the assessee has submitted that he may be allowed to point out the error. In this regard, the assessee has placed reliance on the decision of Special Bench of Chandigarh Tribunal in the case of Quark Systems P. Ltd. Reported in 132 TTJ 1, wherein, the Tribunal held as under: "Appeal (Tribunal) - Additional ground - Admissibility - Ground raised by the assessee that one of the independent comparable which has been included by the assessee as also by the TPO while computing ALP has been wrongly included in the comparable admitted by the Tribunal- Taxpayer is not stopped from pointing out a mistake in the assessment through such mistake is the result of evidence adduced by the taxpayer". 6.1 In this background, the assessee has submitted that Caliber Point Business Solutions Ltd be allowed to be excluded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y one AE to another AE is very much a 'transaction' as per section 92F(v) And, consequently, is equally in international transaction as per section 92B requiring consideration as per section 9. The revenue could not demonstrate the fact that such reimbursement of expenses was without any mark-up. 'D' is liable to be excluded from the final list of comparables as it involves related party transactions at a much higher level as against the filter adopted by the TPO himself, being companies with less than 25 per cent related party transactions" . In the light of the facts and the decisions of the co ordinate benches cited before us we find that one of the comparables Caliber Point Business Solutions has related party transactions of 30% of Revenue and going by the threshold filter of 25% of the related party transactions the said comparable cannot be said to be uncontrolled comparable and ought to be excluded from the list of comparables. We direct the TPO/AO to exclude the said comparable from the list of comparables taken for the purpose of benchmarking for the said A.Y. 2008-09. 7. In the result, appeals filed by the assessee are allowed as indicated above and the appeals filed b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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