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TMI Blog2017 (3) TMI 1316X X X X Extracts X X X X X X X X Extracts X X X X ..... DRP"), are in bad in law and void ad-initio. 2. The AO following the order of the TPO and DRP has erred in law and on the facts of the case in determining the total income of the Appellant at Rs. 213,195,622/- as against returned income of Rs. 122,498,921/- and thereby made an upward adjustment of INR 90,696,701/-. Part I - Transfer Pricing Grounds 3. That on facts of the case and in law, the DRP/ TPO/AO have erred in rejecting certain companies and adding certain companies to the final set of alleged comparable companies on an ad-hoc basis, thereby resorting to cherry picking of comparable companies for benchmarking the international transaction pertaining to IC design and software development services ("impugned transaction"). 4. That on facts of the case and in law, the DRP erred and vitiated the principle of natural justice by not giving due cognizance to the detailed analysis and technical arguments submitted by the Appellant in respect of certain companies inter-alia ICRA Techno Analytics Private Limited, Indus Networks Limited, Quintegra Solutions Limited, SIP Technologies and Exports Limited, Blue Star Infotech Limited and K PIT Cummins Infosystems Limited. 5. That ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Indian transfer pricing regulations, international guidelines on transfer pricing and judicial precedence. 12. That on facts and in law, the DRP and TPO/AO have erred by not considering that the adjustment to the arm's length price, if any, should be limited to the lower end of the 5 percent range as the Appellant has the right to exercise this option under the second proviso to section 92C(2) of the Act. 13. That on facts of the case and in law, the DRP/TPO/AO have erred in using single year data for financial year ("FY") 2008-09 of alleged comparable companies without considering the fact that the same was not available to the Appellant at the time of complying with the transfer pricing documentation requirements and disregarding the Appellant's claim for use of multiple year data for computing the arm's length price. 14. That on facts and in law, the DRP/AO has erred in confirming that TPO has discharged his statutory onus by establishing that the conditions specified in clause (a) to (d) of Section 92C (3) of the Act have been satisfied before disregarding the arm's length price determined by the Appellant and proceeding to determine the arm's length ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... international transaction relating to software development services by selecting 20 comparables with the average working capital adjusted PLI of 3.11% and risk adjusted margin of (-) 9.06% as against the operating profit margin of the assessee company of 11.17% and held its transaction at arms length. 5. TPO, on the basis of TP study put forth by the assessee and after applying filters, finally selected 17 comparables having the average OP/TC of 25.40%, out of which 10 comparables were out of assessee's 20 comparables and 7 were identified by the TPO himself. On the basis of 17 comparables identified by the ld. TPO having average OP/TC at 25.40% proposed to determine the adjustment at Rs. 10,12,17,069/-. 6. Assessee filed objections before the ld. DRP raising objections for introducing wrong filters; for wrong inclusion of 7 comparables and wrong exclusion of 2 comparables and against denying the working capital adjustment to the assessee. However, the ld. DRP upheld the order passed by the TPO except excluding 1 comparable, namely, Bodhtree Consulting Limited. On the basis of directions issued by ld. DRP, the ld. TPO drawn the final set of comparables for benchmarking the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... djustment to the assessee for the reasons inter alia that there used to be unreliable and inadequate data in case of comparable company; that working capital adjustment can be given on the basis of daily or at least monthly average payables, receivables and inventory and not on the basis of year end figures; that the issue of working capital is relevant when there is a situation of inventory remaining tied up or receivable being held up; that out of the three components of working capital i.e. payables, receivables and inventory, only one component is effected on account of transactions with AE viz. receivables. Ld. DRP has upheld the order passed by TPO regarding working capital adjustment by and large on the same ground taken by the TPO. 13. Identical issue has already been dealt with by the ITAT, Delhi Bench-I in the cases cited as United Health Group Information Services (P.) Ltd. and Marubeni-Itochu Steel India (P.) Ltd. (supra). Operative part dealing with the issue in question in Marubeni-Itochu Steel India (P.) Ltd. (supra) is reproduced for ready perusal as under :- "16.1 Ground no. 5 relates to non-granting of working capital adjustment. The assessee requested the TPO t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature by relying upon Notification of CBDT issued on 18.09.2013, which is a notification on 'Safe Harbour Rules'. Ld. DRP has categorically held as under :- "However, the position has changed since the notification of CBDT issued on 18.09.2013. 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 "operating income" respectively. Therefore, the TPO was correct in excluding forex items from the calculation of operating profit. This objection of the assessee is rejected." 16. However, as is apparent from the date of Notification of the Rule relied upon by the ld. DRP dated 18.09.2013, the same is not applicable to the case of the assessee which is qua Assessment Year 2009-10. This identical issue has also been dealt with by the coordinate Bench of the Tribunal in case cited as Westfalia Separator India (P.) Ltd. vs. ACIT - (2014) 52 taxmann.com 381 (Delhi - Trib.) by making following observations :- "4.8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices towards integrated design development, verification, maintenance and software development and is rendering these services only to ST-Ericsson (STE Group). 23. The ld. DR for the assessee contended that the assessee is not into software development rather assessee is engaged in development, verification and maintenance and integrated service design and software development to communication services which is a high end job which can only be benchmarked qua international transaction with proper FAR analysis and further contended that the error committed by TPO cannot be perpetuated. 24. Bare perusal of the profile of the assessee company and Agreement dated 03.08.2008 entered into between the assessee and STE Group apparently goes to prove that the assessee is a designer and not a software developer. In other words, the assessee is a IC Designer, so cannot be a software developer as is categorically mentioned in para 2 of the Agreement (supra). Ld. DR for the Revenue also relied upon the judgment cited as CIT vs. Jansampark Advertising & Marketing (P.) Ltd - (2015) 56 taxmann.com 286 (Delhi) and ITO vs. Smt. Gurinder Kaur - 288 ITR 207. 25. However, on the other hand, ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot only on the grounds decided in favour of the respondent but also on grounds decided against it. However, Rule 27 of the said Rules would not extend to permitting the respondent to expand the scope of an appeal and assail the decision on issues, which are not subject matter of the appeal. In CIT vs. Edward Keventer (Successors) Pvt. Ltd (supra), this court had reiterated that "it would not be open to a respondent to travel outside the scope of the subject matter of the appeal under the guise of invoking r 27." 29. In the given circumstances, the judgment cited as in cases of CIT vs. Jansampark Advertising & Marketing (P.) Ltd and ITO vs. Smt. Gurinder Kaur (supra) relied upon by the ld. DR are not applicable to the facts and circumstances of the case. 30. So, we are of the considered view that the assessee being a hardware designer, a captive service provider involved at the design and development stage only with a limited scope of work and is not involved in the process of conceptualization of any products or works and works only on the specification provided by the STE Group for the implementation of IC design, its maintenance, verification and software development. So, the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rendered by ITAT, Delhi in case of ST Micro (2011-TII-63-ITAT-DEL-TP). 37. Assessee in order to highlight the dissimilarities between the assessee company and Infosys Technologies Limited and TCS, referred to the chart "Annexure 1" annexed with its synopsis which has not been controverted by the Revenue, which is reproduced as under for ready perusal :- S. No. Basic / Particular Infosys Technologies Ltd. TCS ST Ericsson 1. Reserve & Surplus 17, 523 crores 13,248 crores 3.77 crores 2. Current Liabilities 1507 crores 3501 crores 35.98 crores 3. Operating income Rs.6,212 crores (Pg 65/ Annual Report (AR) 5139 crores (Pg 105 / AR) 6.47 crores (pg 435 / Annual Report) 4. OP / TC 40.74% 11.17% 5. Risk Profile Operates as a full fledged risk taking entrepreneur Operates as a full fledged risk taking entrepreneur Operates as a captive service provider bearing limited risk. 6. Nature of services Design, development, re-engineering, maintenance, systems integration, package evaluation and implementation, testing and infrastructure management services (Pg 71 of AR) IT Infrastructure Services, Business Process Outsourcing, IT enables services, engine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure of Rs. 267 crores on its R&D which would certainly affect its profitability and is a highly risk taking company whereas the assessee company being a captive service provider is remunerated on a cost plus mark up basis for rendering services only to STE Group. 39. Hon'ble High Court in case cited as CIT vs. Agnity India Technologies Pvt. Ltd. - (2013) 219 Taxman 26 (Delhi) upheld the decision rendered by the Tribunal by making following observations :- "3. Before the TPO, the respondent-assessee was asked to re-work the list of comparables and the same was reduced to 20. TPO also directed inclusion of Infosys Technologies Ltd. in the said list. The TPO in the final analysis has taken the comparables as under:- S.No. Name OP/TC(%) 1. Satyam Computer Service Ltd. 30.07 2. L&T Infotech Ltd.. 11.11 3. Infosys Technologies Ltd. 40.08 4. Arithmetic mean 27.08 4. One of the companies which was included by the TPO was Satyam Computer Services Ltd. Dispute Resolution Panel excluded the said company from the comparables for obvious reasons. 5. The tribunal has observed that the assessee was not comparable with Infosys Technologies Ltd., as Infosys Technolo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Technologies Ltd. cannot be compared with the respondent-assessee as seen from the financial data etc. to the two companies mentioned earlier in the order i.e. the chart. In the grounds of appeal the Revenue has not been able to controvert or deny the data and differences mentioned in the tabulated form. The chart has not been controverted." 40. So following the decision rendered by Hon'ble jurisdictional High Court in CIT vs. Agnity India Technologies Pvt. Ltd. (supra) wherein on the basis of high risk profile, nature of services, number of employees, ownership of branded products and giant status of the company, Infosys Technologies Ltd. was excluded from the list of comparables and as such, in the instant case, this is not a valid comparable. 41. Moreover, ld. DRP-II, Delhi for AY 2011-12 in assessee's own case in the same set of facts and circumstances ordered to exclude this company from the list of comparables vide order dated 07.08.2015, available at page 2618 of the Paper Book Vol.VII. So, by applying the rule of consistency, this company is also required to be excluded from the final list of comparables for benchmarking the international transaction. TATA CONSULTANCY S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 46. From the annual report of this company, available at page 1465 to 1540 of the Paper Book, we can easily make out that this company is into software development services, product design services, innovation design engineering services, system integration and support services. But the TPO has taken software development services only for the purpose of comparability with the assessee. However, perusal of the detail segment goes to prove that design and development of hardware is also included in the software services. In other words, Tata Elexi Ltd. is into software produce as is evident from the annual report and as such, cannot be taken as a valid comparable. So, we order to exclude this company from the final list of comparables. THIRDWARE SOLUTIONS LIMITED 47. This is again TPO's own comparable and assessee sought to exclude this company from the list of comparables on the ground of non-comparable services i.e application implementation, management and development services. TPO rejected objections raised by the assessee by observing that software development, implementation and support services are various sub-segments of software development services only and require em ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ating Cost 1,64,73,072 Operating Profit -34,26,417 OP / OC -20.80% Particulars Reference Amount (Rs. in million) Employee Cost Page 1456/Vol. III 63,00 Employee Cost Ratio 38.25% Export Earning Page 1463/Vol. III 12.48 Forex Gain Page 1461/Vol. III 0.55 Total Exports 13.04 Export Earning Ratio 100.00% 52. From the perusal of the aforesaid table based upon P&L account and relevant schedule and Notes, it becomes apparently clear that employee cost filter and export ratio are 38.25% and 100% respectively sufficient to pass the filters applied by the TPO. 53. So far as question of low turnover of a company to be accepted as comparable is concerned, it is settled principle of law that turnover should not be the sole criteria to choose a particular company for comparability rather functional similarity is a fundamental requirement. Reliance in this regard is placed on the judgment cited as Chrys Capital - (2015) 376 ITR 183 and CIT vs. Mckinsy Knowledge Centre India Pvt. Ltd. - ITA No.217/2014 order dated 27.03.2015. 54. Since this company passes employee cost ratio and export cost ratio filter employed by the TPO, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be deferred and as such, are revenue expenses to run the business. So, the AO is directed to re-examine the issue accordingly and as such, this ground is determined in favour of the assessee. 60. Assessee debited an amount of Rs. 38,09,220/- in his profit & loss account on account of training expenses and claimed the same as revenue expenditure. However, AO being not satisfied with the explanation given by the assessee came to the conclusion that these expenses have been incurred for providing various training which is in the nature of giving enduring benefit to the assessee and treated the same as capital expenditure and then added to the income of the assessee. 61. However, ld. AR for the assessee contended that the payment of training expenses is in the nature of revenue expenses and relied upon the decision rendered by Hon'ble High Court of Delhi in judgment cited as Commissioner of Income-tax-II vs. Munjal Showa Ltd. - (2010) 329 ITR 449 (Delhi). 62. The ratio of the judgment in case of Commissioner of Income-tax-II vs. Munjal Showa Ltd. (supra) rendered by Hon'ble Delhi High Court is that :- "when the training of the personnel of the assessee was imperative to run the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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