9911796707
TMI Blog2016 (1) TMI 598X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act. - ITA No.64/Del./2015 - - - Dated:- 23-9-2015 - SHRI R.S. SYAL, ACCOUNTANT MEMBER and SHRI A.T. VARKEY, JUDICIAL MEMBER For The Assessee : Shri Sachit Jolly, Rahul Satija and Gautam Swarup, Advocates For The Revenue : Shri Amrendra Kumar, CIT DR Ms. Y. Kakkar, Senior DR ORDER PER A.T. VARKEY, JUDICIAL MEMBER : This appeal, at the instance of the assessee is directed against the order dated 31.12.2014 u/s 143(3) read with section 144C of the Income Tax Act, 1961 (hereinafter the Act ) in pursuance to directions of DRP dated 14.11.2014 for the Assessment Year 2010-11. 2. In this appeal, the following grounds have been raised by the assessee :- 1. That on facts and circumstances of the case and in law, final assessment order passed by the Assessing Officer ( AO ) is in complete disregard of the provisions of Section 144C(13) of the Income tax Act, 1961 (the Act ) inasmuch that the AO failed to pass the said Order in conformity with the binding and mandatory directions issued by the Dispute Resolution Panel ( DRP ) and consequently the Order is non-est, illegal and bad in law. 2. That the AO and Transfer Pricing Officer ( TPO ) erred in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the income tax return on a bonafide belief that the data in the database is reliable and correct and had furnished the Transfer Pricing Study ( TP Study ). 7. That the AO and DRP erred in confirming the action of the TPO in rejecting the Transfer Pricing Study of the Appellant and in conducting a fresh benchmarking analysis on the basis of conjectures and surmises. 8. That the AO and DRP erred in confirming the order passed by the TPO without appreciating that the TPO erred in rejecting the functional filters applied by the Appellant in its TP Study. 9. That on facts and circumstances of the case and in law, the AO and DRP erred in confirming the action of the TPO in applying the following filters: a) Use of only current year (i.e. financial year 2009-10) data for comparability despite the fact that at the time of comparison done by the Appellant, the complete data for the FY 2009-10 was not available in the public domain; b) Rejecting companies with turnover below ₹ 5 crore; c) Rejecting companies whose ratio of service income to total income is less than 75%; d) Rejecting companies whose export revenues are less than 75% of the operating revenues withou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity of segmental information;(iii) there was acquisition and restructuring and (iv) the said Company had turnover of more than ₹ 200 crores. 15. That the TPO erred on facts and in law in excluding Vama Industries from the list of comparables even though the Company had passed all the filters applied by the TPO. 16. That the AO and DRP erred in confirming the action of the TPO in treating foreign exchange gain/loss as non-operating item while computing the margin of the Appellant and comparable companies and holding that it will have no impact on pricing. 17. That the AO and DRP erred in confirming the action of the TPO in not allowing risk adjustment claimed by Appellant in terms of Rule 10B(1)(e) read with Rule 10B(3) of the Income tax Rules, 1962. 18. Without prejudice, the AO/TPO erred in denying the claim of benefit of standard deduction of +/- 5% contained in the proviso to Section 92C(2) of the Act to the Appellant. 19. That the Ld. AO erred on facts and in law in mechanically initiating penalty proceeding under Section 271(1)(c) of the Act without recording any adequate satisfaction for such initiation. 3. During the relevant assessment year, the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stituted a fresh process and modified the filters and comparable selected by the assessee. Thereafter the TPO selected a list of 10 comparables and proposed an adjustment of ₹ 1,47,63,279/- by computing the mean Profit Level Indicator (PLI) of the comparable companies at 23.68% as against PLI of 11.16% of the assessee. 6. Thereafter Dispute Resolution Panel (DRP) vide order dated 14.11.2014, upheld the adjustment made by the TPO, subject to - a. exclusion of two comparables, b. the claim of working capital adjustment as per the OECD Methodology, c. furnishing the annual report of Wipro Technology Services Ltd. to the assessee and d. directed to re-compute the operating margin of the assessee as well as comparable companies as per the guidelines provided by Safe Harbor Notification dated 18.09.2013. 7. As per the said directions, revised final list of the comparable companies is as under :- S.No Name of the Company OP/OC 1 Evoke Technologies Private Limited 18.56% 2 Quintegra Solutions Ltd. -8.20% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Services Ltd. iii. Zylog Systems Ltd. (b) treatment of foreign exchange fluctuation gain/loss as operating item; and (c) Addition of transfer pricing adjustment to income assessed under Section 115JB (MAT). 11. We have considered the rival submissions and perused the material on record. First, taking up the each of the comparables contested and disputed by the assessee in this appeal. PERSISTENT SYSTEMS LTD. (PERSISTENT) 12. The case of the assessee is that Persistent is not only engaged in the business of software development services but also manufacture and sale of software products and owns significant intangibles and that segmental data for services and products is not available. It is also argued that on the same principle, Persistent has been deleted, inter alia, in the case of group company of the assessee, viz. Fiserv India Pvt. Ltd. in ITA No.6737/Del/2014 vide Order dated 26.06.2015. 13. The DRP repelled the objection of the assessee as under: The taxpayer primarily wants this comparable to be excluded on account of Functionally Different Significantly high turnover Significant RPT 10% The company is involved in diversifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material on record. A co-ordinate Bench of the Delhi Tribunal in the case of Ciena India Pvt. Ltd. v. DCIT in ITA Nos. 2948, 3324/Del/2013, has held as under 9.2. We have heard the rival submissions and perused the relevant material on record. It can be seen from the information supplied by this company u/s 133(6) of the Act, a part of which has been reproduced in the TPO's order, that this company 'has developed a few of its own products in the area of identity management connectors.' Revenue from product licences stands at ₹ 288.93 million as against the revenue from software development services at ₹ 4829.57 millions. Though this company is more engaged in software development services, but, is also a software product company, which is evident from the information supplied by it to the TPO. Thus, the total profits of the company on entity level also, inter alia, include revenue from product licences. As there is no separate segmental information and it has been considered as comparable on entity level, it implies that the total revenue considered also consist of some part from product licences. In such circumstances, it is not possible to ascertain t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is submitted that there is no segmental information regarding revenues of ₹ 968.19 crores which, as per the annual report of Zylog, is derived both from services and products. It was further submitted that the assessee had included Zylog Systems (India) Ltd. in its list of comparables which was substituted with Zylog by the TPO. 19. The DRP repelled the objection of the assessee as under: As regards Zylog Systems Ltd. since the taxpayer himself has selected this company as a valid comparable and therefore as discussed above this company cannot be taken out because of high turnover filter. Hence, it is a valid comparable since it appeared in the taxpayer s TP study also and clears all the filters used by TPO. 20. Before us the learned counsel, vide written submissions, submitted as under: Functionally dissimilar: it is submitted that the company is not only engaged in software services but also products and the revenue of the company is derived from licensing of software products. The company deals in software products like Bank Companion- Mobile Banking Software, Closed Loop Marketing Software- CLM, INFORManufacturing Distribution, TalentFlow, Pharmetrix ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of Agnity India Technologies for the same AY 2010-11 due to functional dissimilarity and in any case, it fails the filters applied by the TPO himself. 25. The DRP repelled the objection of the assessee as under: At the very outset since taxpayer has objected this company also on the ground that the annual data is not available, therefore TPO is directed to provide the necessary data to the taxpayer. Reference website indicates that the company is involved in the provision of program management and third party information security assessment services to businesses that outsource technology and operations to third party vendors in India. The company also offers software quality management, quality assurance, and business process management services, as well as technology infrastructure support, development, and deployment for strategic software applications to information technology and business professionals. The company s technology infrastructure services include data security, systems administration, change management, database administration, log reviews and controls etc. Annual report of the company is available. It is providing software development servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Wipro) and the non-associated enterprise (Citi Group) is treated as a deemed international transaction for the purposes of Chapter X of the Act. Since in the present case it appears, from the limited annual report available and provided to us, that WTS has only rendered services to the Citi Group as per the MSA between Wipro and Citi Group, the entire revenues of WTS are on account of related party transaction. Accordingly, the comparable fails the filter of 25% RPT to sales applied by your goodself in the original proceedings and confirmed by the DRP. In view of the aforesaid, WTS may be deleted from the list of comparables finally selected for the purpose of benchmarking of international transaction entered into by the Assessee with its associated enterprise. Even otherwise this kind of commitment is not in the usual course of business and would qualify as an extraordinary event during the year since it is going to affect the profit margin of the company. Such extraordinary events in a year make the comparable unviable. Without prejudice to the aforesaid, the TPO failed to provide the complete annual report of the said comparable inspite of the specific direction of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... However, the TPO has failed to appreciate that Wipro Ltd. is not WTS, the latter being a subsidiary of the former. Secondly, before the DRP, the assessee raised the other objections as were raised before us i.e. this company is rendering different services, there is insufficient segmental information and it fails RPT filter. So, when the assessee asked for the complete annual report at the time of the original TP proceedings, or the proceedings pursuant to the DRP and also in the rectification proceedings under Section 154, the TPO failed to provide the complete annual report of the said comparable to the assessee. If the TPO wanted to use WTS as a comparable, the onus was on him to provide the complete annual report to the assessee. It is a settled law that onus is on the person who asserts the facts. In any case, we fail to see how without the complete annual report of WTS, the TPO or even the DRP came to the conclusion that the said company is a valid comparable and/or that it passed all filters applied by the TPO himself. From the Annual Report, we take note of the following :- As per the profit and loss account of FY 2009-10, 100% income is from 'Revenue' and no fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the rival submissions, we find that the issue is no longer res-integra and stands concluded by the decision of the Coordinate Bench in the case of Westfalia Separator India Pvt. Ltd. vs. ACIT ITA No. 4446/D/02 for Assessment year 2003-04 wherein it has been held as under: We have heard the rival submissions and perused the relevant material on record. The forex gain or loss is the difference between the price at which an import or export transaction was recorded in the books of account on the basis of rate of foreign exchange then prevailing and the amount actually paid or received at the rate of foreign exchange prevailing at the time of actual payment or receipt. Since such forex loss or gain is a direct outcome of the purchase or sale transaction, it partakes of the same character as that of the transaction to which it relates. The Special Bench of the Tribunal in the case of ACIT vs. Prakash I. Shah (2008) 115 ITD 167 (Mum) (SB) has held that foreign exchange fluctuation gain is a part of export turnover. Though such decision was rendered in the context of section 80HHC, but the same logic applies generally as well. The essence of the matter is that any gain or loss arisin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee is allowed. ADDITION OF TRANSFER PRICING ADJUSTMENT TO MAT 33. The final issue for consideration is challenge raised by the assessee to the action of the AO in adding back transfer pricing adjustment of ₹ 1,18,93,468/- to income assessed under Section 115JB (MAT). 34. In this regard, the learned counsel for the assessee submitted that the AO has added the transfer pricing adjustment of ₹ 1,18,93,468/- to the book profits of the Assessee under Section 115JB of the Act without appreciating that book profits of the company cannot be adjusted except as provided in Explanation 1 Section 115JB(2) of the Act and that transfer pricing adjustment is not one of the adjustments contemplated under that Explanation. He placed reliance upon the following decisions to contend that except for adjustments provided in Explanation 1 Section 115JB(2) of the Act, no other adjustment can be made to book profits under Section 115JB of the Act :- i. Apollo Tyres: 255 ITR 273(SC) ii. Malayalam Manorma: 300 ITR 251(SC), iii. HCL Comnet Systems and Services Ltd., 305 ITR 409 (SC) and iv. DCIT v. Bisleri Sales Ltd.: 151 TTJ 285 (Mum)(ITAT) 35. The Ld. Sr. DR ..... X X X X Extracts X X X X X X X X Extracts X X X X
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