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TMI Blog2015 (7) TMI 214X X X X Extracts X X X X X X X X Extracts X X X X ..... , the ground raised by the appellant is allowed. Exclusion of M/s. Info Drive Software Limited as comparable taken by the TPO/TRP - Held that:- employee cost as per the financial statements of M/s. Info Drive Software Ltd. is 164.05 lacs whereas the total cost is 927.61 lacs (Page 617 of Paper Book). On the said basis, according to the appellant since the employee cost is 17.69% which is less than the filter of 25% applied by the TPO, therefore the same should be excluded. We therefore, direct the AO/TPO to verify the claim of the appellant as to the computation of percentage at 17.69% and if the said computation is correct then the said comparable of M/s. Info Drive Software Ltd. be excluded from the list of comparables. So far as objection raised by the learned DR as well as the DRP that this company has been taken as comparable at the time of filing TP study is not maintainable in light of the recent judgment of the Hon’ble Delhi High Court in the case of Chryscapital Investment Advisors (India) (P) Ltd. vs. DCIT [2015 (4) TMI 949 - DELHI HIGH COURT ] - Decided in favour of assessee for statistical purposes. Assessing Officer passed order under section 154 of the Act determining ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing officer erred in cherry picking the comparables which is not justified, as the learned assessing officer has not provided the information regarding the date of search and the date of database used. 5. That on facts and in the circumstances of the assessee company's case the Learned Dispute Resolution Panel erred in sustaining the order of the learned Transfer Pricing officer in selecting following companies as comparable companies even when these companies did not meet the comparability criteria with respect to: a) Related Party Transaction Filter - the following companies i) Tech Mahindra Ltd. that has a RPT of 58.15% of its total revenue. ii) Infodrive Software Limited has a RPT of 59.23% of its total revenue. b) Employee Cost filter - Infodrive Software Limited's employee cost is 18 % of its total operating costs as against 25% employee cost filter taken by the Ld. TPO. c) The functional and product profile of such companies was different and such companies were operating in different segments and they are : (i) Aricent Technologies (Holding) Limited (ii) Tech Mahindra Ltd. (iii) Infodrive Software Limited (iv) CAT Technologies Limited d) Some of the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee company's case the Learned Dispute Resolution Panel erred in sustaining the order of the learned Transfer Pricing officer in using entirely different set of companies as comparable companies as mentioned in the transfer pricing order dated 23.01.2013 made under section 92CA(3) of the Act when there were ample comparables available as per Transfer Pricing Study conducted by the assessee company. 9. That on the facts and in the circumstances of the assessee company's case the Learned Dispute Resolution Panel erred in sustaining the order of the learned Transfer Pricing Officer in rejecting the comparable companies as identified and selected by the assessee company without having a valid reason for the same. 10. That on the facts and in the circumstances of the assessee company's case the Learned Dispute Resolution Panel erred in sustaining the order of the learned Transfer Pricing Officer in rejecting following companies as comparable companies even when these companies meet the comparability criteria in comparison with the assessee company. (i) CG VAK Software and Exports Limited (ii) Axis-IT&T Limited (iii) MPS Technologies Limited 11. That the Learned Disput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heme of the Government of India. It is a wholly owned subsidiary of M/s. SSP SIRIES Solutions Ltd., UK (SSP (UK)). It is a captive service provider and is engaged in providing support services for development and maintenance of software to SSP (UK). In the instant assessment year, the appellant furnished a return of income on 22.9.2009 declaring Nil income after claiming exemption under section 10A of the Act. As per the Transfer Pricing document furnished by the appellant, the tax payer had entered into an international transaction for provision of software services of the value of ₹ 18,90,20,954/-. The arms length price of the international transaction was determined by the tax payer by applying transactional net marginal method (TNMM) and adopting operating profit to operating income (OP/OI) as profit level indicator (PLI). The PLI of tax payer was arrived at 13.05% on revenue (pages 97 of Paper Book); whereas average PLI of the comparables was arrived at 15.99% (page 95 of Paper Book) as per the TP document. Further, as per the TP document, the tax payer claimed that it did not undertake any credit risk, idle hours risk, marketing risk and business is assured, thereby it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chnologies Limited (Consolidated) 25.76 3 Cat Technologies Limited (Standalone) 34.43 4 KPIT Cummins Infosystem Limited (Consolidated) 21.56 5 Larsen & Turbo Infotech 21.33 6 Mindtree Ltd. 27.36 7 Persistent Systems Ltd. 37.77 8 R.S. Software (I) Ltd. 10.15 9 Tech Mahindra Limited (Consolidated Seg) 35.35 10 Think Soft 16.56 11 Thirdware Solutions Limited 37.27 Average 28.00% 7 Pursuant to the above, TPO passed a final order dated 7.1.2014 originally at an assessed income of ₹ 2,70,87,490/-. However, subsequently, in pursuance to the TPO order under section 154 of the Act on 15.1.2014, the Assessing Officer passed order under section 154 of the Act determining the adjustment at ₹ 2,13,67,552/- in terms of the directions of the DRP and as such, income of the appellant finally stands assessed at ₹ 2,13,67,552/-. The said adjustment has been computed in the manner hereunder:- S.No. Particulars Amount 1. Price received 18,90,20,954 2. Total cost 16,43,66,021 3. ALP at a margin of 28% 21,03,88,507 4. Price received 18,90,20,954 5. Difference 2,13,67,552 8 Before us, learned counsel for the appellant shri Gautham Jain su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g profit at ₹ 2,46,79,428/- and operating cost at ₹ 16,43,66,021/-. According to the appellant, if the ratio of the aforesaid figures is done then the OP/OC margin would be 15.01%. Thus, from the aforesaid, it is evident that all the facts to determine additional ground of appeal are on record. The Hon'ble Supreme Court in the case of NTPC India Ltd. 229 ITR 383 has held as under: "But where the Tribunal is only required to consider the question of law arising from facts which are on record in the assessment proceedings, there is no reason why such a question should not be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability of an assessee." 12 Having regard to the above factual and judicial position, we admit the above ground of appeal raised by the appellant. Further on consideration of the facts, we direct the Assessing Officer to recompute the OP/OC by adopting the operating profit at ₹ 2,46,79,428/- and operating cost at ₹ 16,43,66,021/-. The additional ground is therefore, allowed for statistical purposes. 13 Ground No. 6 of the grounds preferred by the appellant relates to the claim of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be. Operating expense is ordinarily an expense that a business incurs as a result of performing its normal business operations. As the business of 'Assembly' done by the assessee under this segment is not possible without purchases and forex gain is in relation to such purchase transactions, we have no hesitation in holding that it is an item of operating cost." 15 The learned DR during the course of arguments, supported the action of the authorities below only on the ground that DRP has rejected the contention of the appellant by observing as under: "The operating income/expenditure was never defined in any of the legislation so far. It was the conventional wisdom which went into the components of operating income/expenditure while calculating the operating profit. However, the position has changed since the notification of CBDT issued on 18.9.2013. This is the notification on 'Safe Harbour Rules'. Rule 10TA(j)(k) and (l) define the concept of "operating expense", "operating revenue" and "operating profit" respectively. According to this Rule, loss or income arising on account of foreign currency fluctuations are excluded from the calculation of "operating expense" and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the material on record. We find that TPO at pages 44 to 45 of the order has held that filter for selection of comparables should include a filter of employees cost less than 25% of total cost. The TPO has observed as under: "7.3 The assessee has objected to the use of filter of employee cost less than 25% of total cost:- 7.3.1 The assessee has objected to applying a filter of employees cost less than 25% of total cost. The assessee has objected to the use of the employee cost filter. The assessee believes that there is no rational basis for application of this filter and fixing the threshold of 25%. The assessee must understand that employee cost is a factor the software development segment. It has been held in the case of Vedaris Technologies Ltd. by the ITAT Delhi that companies that have lower levels of employee cost may not be software developers. They may be involved in other activities like trade of software products etc. Such a differentiation will not be achieved by applying this filter in the ITES segment. Therefore, this filter shall be used in this segment. The asessee must understand that filters like this one may be described as 'diagnostic tools'. The objective o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermined is whether, notwithstanding the apportionment made by the respondent in the profit and loss statements, the deduction is admissible under the law." Further, a Division Bench of this Court in CIT v. Bharat General Reinsurance [1971] 81 ITR 303 has also held that there is no estoppel against law under the Act. The Court therein held as follows: "It is true that the assessee itself had included that dividend income in its return for the year in question but there is no estoppel in the Income tax Act and the assessee having itself challenged the validity of taxing the dividend during the year of assessment in question, it must be taken that it had resiled from the position which it had wrongly taken while filing the return. Quite apart from it, it is incumbent on the income-tax department to find out whether a particular income was assessable in the particular year or not. Merely because the assessee wrongly included the income in its return for a particular year, it cannot confer jurisdiction on the department to tax that income in that year even though legally such income did not pertain to that year." 21 Also Special Bench of Tribunal in the case of DCIT v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed right in injustice being done due to some mistakes on its part. 38. Accordingly, on facts and circumstances of the case, we hold that taxpayer is not estopped from pointing out that Datamatics has wrongly been taken as comparable. While admitting additional ground of appeal raised by the assessee to require us to consider whether or not Datamatics should be included in the comparable, we make no comments on merit except observing that assessee from record has shown its prima facie case. Further claim may be examined by the Assessing Officer. This course we adopt as objection to the inclusion of Datamatics as comparable has been raised now and not before revenue authorities. Therefore, we deem it fit and proper to remit the matter to the file of the Assessing Officer for consideration of claim of the taxpayer and make a de novo adjudication of the arm's length price after providing reasonable opportunity of being heard to the assessee. We order accordingly." 22 Thus, in view of the above judicial and factual position, ground raised is allowed for statistical purposes. 23 According to the appellant, as a result of the above, i.e. treatment of foreign exchange gain/loss as oper ..... X X X X Extracts X X X X X X X X Extracts X X X X
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