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TMI Blog2016 (5) TMI 198X X X X Extracts X X X X X X X X Extracts X X X X ..... e other functionally comparable entities. We, therefore, agree in principle with the grant of working capital adjustment. To sum up, we set aside the impugned order on the issue of addition towards transfer pricing adjustment and remit the matter to the file of AO/TPO for fresh determination of the ALP of the international transaction of rendering of software services in consonance with our above directions. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. Grant of deduction u/s 10AA denied - Held that:- As discussed in detail about the international transaction of rendering of Software services to its AE, on which transfer pricing adjustment was made. Under such circumstances, the point of view of the AO that the services were rendered by the assessee to its holding company, is wholly incorrect. As regards the other point considered by the AO for denial of deduction about the assessee rendering services to its head office alone, thereby leading to transaction with self, in our considered opinion, is again devoid of merits. Once the law requires an Indian branch of a foreign enterprise to be considered independen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o called the Act ) on 30.12.2013 in relation to the assessment year 2009-10. 2. The first major issue raised by the assessee in this appeal is against the addition of ₹ 3,84,30,722/- made by the AO on account of transfer pricing adjustment. 3. Briefly stated, the facts of the case are that the assessee is an Indian branch office of Sony Mobile Communications International AB (hereinafter referred to as `SMCI ) (formerly called Sony Ericsson Mobile Communications International AB), a company incorporated under the laws of Sweden. The assessee s Head office is a wholly owned subsidiary of Sony Ericson Mobile Communications AB (hereinafter referred to as `SEMC ). SMCI set up a branch office (R D Centre) in a Special Economic Zone (SEZ) in Chennai with the objective of entering into research and development activity in the information technology industry. The assessee filed its return along with the audit report in Form No. 3CEB showing four international transactions. On a reference made by the AO to the Transfer Pricing Officer (TPO) for determining the arm s length price (ALP) of these international transactions, the TPO took up for consideration the international trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up these three companies in seriatim to decide their inclusion in the final list of comparables. 5. Before deciding the comparability or otherwise of the three companies under challenge, it is of paramount importance to first ascertain the functional profile of the assessee. It has been noticed above that the assessee is providing research and development services relating to Contract software development maintenance and up gradation and Contract design, development, testing and any similar activities in relation to mobile phones, their accessories, communication devices or communication systems. Such services were provided pursuant to an Agreement entered into between the assessee through its head office, namely, SMCI on the one hand and SEMC on the other. A copy of this Agreement dated 19.9.2008 is available on page 102 onwards. The nature of services provided by the assessee pursuant to this Agreement are contained in Annexure, which are verbatim reproduction of what has been mentioned above. This Agreement provides that the assessee will be compensated by its AE on all Costs incurred in providing such software services with a certain mark up. The term Costs has been defin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of which the assessee is rightly chargeable to tax. As the income not originally offered for taxation, if otherwise chargeable, is required to be included in the total income, in the same breath, any income wrongly included in the total income, which is otherwise not chargeable, should also be excluded. There can be no estoppel against the provisions of the Act. Extending this proposition further to the context of the transfer pricing, we find that if an assessee fails to report an otherwise comparable company, then the TPO is obliged to include it in the list of comparables, and in the same manner, if an assessee wrongly reports an incomparable case as comparable in its TP study and then later on claims that it should be excluded, then, there should be nothing to forbid from claiming so, provided the TPO is satisfied that the company so originally reported as comparable is, in fact, not comparable. The Special Bench of the Tribunal in DCIT vs. Quark Systems Pvt. Ltd. (2010) 132 TTJ (Chd) (SB) 1 has also held that a company which was included by the assessee and also by the TPO in the list of comparables at the time of computing ALP, can be excluded by the Tribunal, if the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this company includes a larger chunk from the sale of equipment and software licenses, which renders it incomparable with the assessee, which is solely engaged in rendering software services to its AE. 7.3. Significantly, page 23 of the Annual report of this company divulges that: During the year 2008-09, the company has acquired Citigroup Inc. s (Citi) 96.26% interest in TCS e-Serve Ltd. (formerly known as Citigroup Global Services Ltd.), the India-based capital BPO, for a total consideration of USD 504.54 million. This indicates that this company made acquisition during the year in question which is an extraordinary financial event. The Mumbai Bench of the Tribunal in Petro Araldite (P) Ltd. Vs. DCIT (2013) 154 TTJ (Mum) 176, has held that a company cannot be considered as comparable because of exceptional financial results due to mergers/demergers. Similar view has been adopted by the Delhi Bench of the Tribunal in several cases including Ciena India Pvt. Ltd. Vs. DCIT (ITA No.3324/Del/2013) vide its order dated 23.4.2015. The ld. DR contended that the mere fact of acquisition and merger should not be considered as a decisive test for exclusion of a company unless it has a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of a different model of revenue recognition. He invited our attention towards the Annual report of this company, in which it has been reported that revenue from software development is recognized based on software developed and billed to clients. He submitted that the costs incurred by this company in respect of the projects pending completion at the end of the year are booked at the time of incurring, but, the income is recognized on the raising of bills in subsequent year, thereby distorting the comparability with the assessee company. 8.5. We find that the assessee is raising invoices on month to month basis. From the dates of invoices raised by the assessee, it is found that such invoices are raised in succeeding month of doing the work. For example, total expenses incurred by the assessee in rendering the services in the month of June, 2008 will be billed in the month of July, 2008. This shows that expenses incurred in rendering services between April 2008 to February, 2009 and debited to the Profit and loss account match with the corresponding invoices raised during the months of May 2008 to March 2009. However, difficulty arises qua the expenses incurred in rendering th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s otherwise functionally comparable, except Ciena accounting for expenses matching with the revenue as against the otherwise position in Bodhtree, which led to treating it as non-comparable on the basis of such income recognition methodology. Adverting to the facts of the instant case, we find such distinguishing factor to be absent here. We, therefore, hold that the authorities below were justified in including this company in the final list of comparables. 9.1. The next issue raised by the ld. AR is about not granting of working capital adjustment. The assessee requested for allowing working capital adjustment which the TPO refused to allow on the ground that such adjustment would be relevant only when some inventory remains tied up or receivables are held up which cannot be a criteria in a service industry as the assessee is engaged in. He, therefore, refused to allow any working capital adjustment. 9.2. We have heard the rival submissions and perused the relevant material on record. It is observed that the assessee lodged a claim for grant of working capital adjustment. The TPO refused to allow such adjustment. The DRP strengthened the case of the TPO by adding one more r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an adjustment is allowable, then it should be carried out whether it favours or disfavors the assessee. It goes without saying that the assessee will be allowed an opportunity of hearing in such fresh determination of the working capital adjustment, if any. 10. To sum up, we set aside the impugned order on the issue of addition towards transfer pricing adjustment and remit the matter to the file of AO/TPO for fresh determination of the ALP of the international transaction of rendering of software services in consonance with our above directions. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. 11. The only other ground which survives for our consideration is the disallowance of deduction u/s 10AA of the Act amounting to ₹ 5,42,10,177/- 12. The facts apropos this issue are that the assessee claimed this deduction u/s 10AA. The AO refused it giving three major reasons as recorded on pages 6 and 7 of his order, namely, first, that the services were rendered by the Indian branch office to its holding company at cost plus basis and the branch office cannot be treated as separate taxable entity different from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hence, no deduction, which is otherwise available, should be given. If the principle of mutuality as invoked by the AO for denial of deduction u/s 10AA is taken to its logical conclusion, then, it would also mean that the assessee did not earn any income at all from its head office again on the principle of mutuality. Obviously, this position is not sustainable. Be that as it may, we are confronted with a situation in which the assessee has rendered software services to its AE and not head office. 14. The other reason of the AO for denial of deduction u/s 10AA is that the assessee did not receive any income at all in foreign currency and what was received was simply the cost incurred plus a certain mark up and the same cannot be considered as sale proceeds of the software sold by the assessee. Again, we are unable to countenance this view of the AO because the assessee brought in India sale proceeds from rendering of services to its AE. The remuneration model has been decided by the parties inter se with a cost plus mark-up, which in the instant case, is 15% of costs. What the assessee has realized in India is nothing, but, sale proceeds of software service provided by it to it ..... X X X X Extracts X X X X X X X X Extracts X X X X
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