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TMI Blog2017 (4) TMI 866X X X X Extracts X X X X X X X X Extracts X X X X ..... excluded from the final list of comparables. Accordingly, we hold so. The ground of appeal raised by the assessee is thus, partly allowed. Assessee which is providing software development services thus selection of comparable as companies functionality dissimilar with that of assessee need to dis-selected as final list of comparable. Non-allowance of risk adjustment - Held that:- We direct the Assessing Officer to allow the risk adjustment and re-compute the margins of comparables by applying the ratio laid down by Delhi Bench of Tribunal in the case of Sony India Pvt. Ltd. (2008 (9) TMI 420 - ITAT DELHI-H) and compute the TP adjustment, if any, in the hands of assessee. Assessee is against applicability of +/- 5% and the benefit can be allowed if the adjustment is within such range and hence, no adjustment is to be made in case it is not more than 5% from the arm's length price. We hold so. Allowance of payment made for meeting expenses, travel cost, stay cost, etc. - Held that:- uthorized Representative for the assessee pointed out that the said expenditure was part of operating cost and was recovered @ 7%. The factual aspects of this issue are not clear and the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parable (i.e. Helios and Matheson Information Technology Ltd identified as comparable even though the turnover of the said company is INR 213.37 crores) 4. Selecting inappropriate qualitative filters and applying certain filters on selective basis Erred in selecting following inappropriate qualitative filters, applying certain filters on selective basis for rejecting/accepting certain companies such as: - Use of single year data for comparability analysis (as opposed to three years data used in the Transfer Pricing study report); - Rejection of companies with less than 75% earnings from exports; - Rejection of loss making companies; - Rejection of companies with peculiar circumstances and - Use of diminishing revenue filter 5. Rejection of certain comparable companies identified by the Appellant in the transfer pricing study report Erred in rejecting certain comparable companies from the comparable set identified by the Appellant in respect of international transaction pertaining to provision of software development services. 6. Selecting certain additional companies as comparable for FY 2007-08 Erred in selecting certain additional companies as comparable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act Erred in levying interest under section 234B of the Act to the extent addition is made to the total income of the Appellant on account of transfer pricing adjustments related matters without considering the fact that shortfall in advance tax resulted due to the proposed additions to total income, which are unanticipated in nature. 3. Briefly, in the facts of the case, original return of income was filed on 15.10.2008 declaring total income of ₹ 39,54,550/-. Thereafter, the assessee filed revised return of income declaring total income of ₹ 42,18,320/- on 31.03.2010. The case of the assessee was taken up for scrutiny. Since the assessee was engaged in the business of software development, the Assessing Officer made reference under section 92CA(1) of the Act for determination of arm's length price of international transactions with associate enterprises. The assessee had applied TNNM method for benchmarking the international transactions of provision of software development services at ₹ 14,37,01,094/-. The Transfer Pricing Officer (in short 'the TPO') agreed that the TNNM method was most appropriate method. The assessee had selected 12 companies as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompanies selected by the assessee and the comparables selected by him and finally selected eight companies to be comparable and after allowing the working capital adjustment as provided by the assessee, the arithmetic mean of PLI was worked out at 31.92% and after working capital adjustment at 27.32%. The TPO also verified the working PLI submitted by the assessee and extraordinary expenses on account of rent paid for premature termination of leave and license agreement was excluded while working PLI. Similarly, miscellaneous income was found to be included in the operating income and Fringe Benefit Tax was held to be considered for the said working. The PLI of assessee was thus, re-worked and revised to 4.12% by applying the indicator of operating profit / operating cost. In view thereof, the TPO proposed an adjustment of ₹ 3,21,60,400/-. The assessee sought risk adjustment which was not allowed to the assessee. Further, the TPO observed that expenditure of ₹ 14,88,134/- was reimbursed to the Singapore company for business meetings. Since the assessee had not only borne the expenses on travel, etc. for its employees but also borne the expenses on organizing such meetin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dismissed as not pressed. 7. Now, coming to the second limb of ground of appeal No.3. The assessee is aggrieved by the order of Assessing Officer / TPO in considering the turnover range on cost basis instead of turnover basis and hence, the inclusion of Helios and Matheson Information Technology Ltd., which was identified as comparable even though its total turnover was ₹ 213.37 crores. The grievance of assessee in considering the turnover range on cost basis merits to be allowed. Various Benches of the Tribunal including the Pune Bench of Tribunal in series of cases have held that the turnover basis is to be adopted range for the selection of companies. The total turnover of the assessee was ₹ 14.37 crores, as against which we hold that the turnover filter of ₹ 1 to ₹ 200 crores merits to be applied. Since the turnover of Helios and Matheson Information Technology Ltd. was more than ₹ 200 crores i.e. ₹ 213.39 crores, then the same merits to be excluded from the final list of comparables. Accordingly, we hold so. The ground of appeal No.3 raised by the assessee is thus, partly allowed. 8. The issue raised by way of ground of appeal No.4 is aga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in engineering and product development, which was more akin to ITES segment. Where the assessee was providing mixed set of services i.e. product and engineering services, then the same is comparable to Bodhtree Consulting Ltd. Reliance placed upon by the assessee on the ratio laid down by the Pune Bench of Tribunal in John Deere India Pvt. Ltd. Vs. ACIT in ITA No.2236/PN/2012, relating to assessment year 2008-09, vide order dated 18.11.2015, it was held to be distinguishable since Bodhtree Consulting Ltd. was not providing data cleaning services and hence the data referred to does not pertain to the assessment concerned. 12. On perusal of record, we find that the concern Bodhtree Consulting Ltd. was considered by the TPO to be functionally comparable despite the submissions of assessee that it was functionally different, wherein the said concern was also engaged in software products. Since no segmental details were available and the concern Bodhtree Consulting Ltd. being software product development company as well as providing services, can the same be held to be functionally comparable with the assessee which is providing software development services to its associate enterpri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad reversed the decision of Tribunal to exclude E-Infochips Bangalore Ltd. He stressed that where the assessee was also engaged in sale of software products and ITES, then the assessee was functionally comparable to E-Infochips Ltd. 15. We have heard the rival contentions. The assessee while carrying out its transfer pricing analysis had applied certain filters to select the concerns by applying the filter of accept / reject matrix, the concerns which they do not have significant (less than 25%) foreign exchange earning were held to be reason for rejection of companies as comparable. The perusal of financial reporting of the concern E-Infochips Ltd. at page 625 of the Paper Book reflects that the income from software services at ₹ 21.03 crores with consulting services at ₹ 2.16 crores and hardware sales were at ₹ 82.61 lakhs. The consultancy services were linked to the software services provided by the assessee and the hardware sales undertaken by the said concern were less than 4% of the total turnover. Where the assessee had itself applied the turnover filter of 75% of the sales for software development services, then the said concern qualifies the filter as it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that the same arguments as in the case of E-zest Solutions Ltd. are raised against exclusion of KALS Information Systems Ltd. 21. We find that the concern KALS Information Systems Ltd. is functionally not comparable to the assessee as it is engaged in software services as well as software products and has reported inventory and work in progress in annual report. Reference is made to pages 719 and 720 of the Paper Book. Even the website of KALS Information Systems Ltd. states that the company has developed two products i.e. Virtual Insure and La-Vision. Since the revenue breakup is not available, then the margins of said concern cannot be applied to benchmark the international transactions undertaken by the assessee of provision of software development services to its associate enterprises. Similar proposition has been laid down by the Pune Bench of Tribunal in John Deere India Pvt. Ltd. Vs. ACIT (supra). Further the Hon'ble Bombay High Court in the case of CIT Vs. PTC Software (I) Pvt. Ltd. in Income Tax Appeal No.732 of 2014 judgement dated 26-09-2016 has held that Kals Information Systems Ltd. was engaged in Software products not comparable to concern providing software serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xport turnover of the said concern was less than 75% of the operating revenue. The learned Authorized Representative for the assessee pointed out that the said concern was not persistent loss making and following the decisions of various Benches of Tribunal, the same should be included in the final set of comparables. 25. The learned Departmental Representative for the Revenue on the other hand, strongly objected to its inclusion as the filter applied by the assessee that the concern with export turnover less than 75% should be excluded, has been applied by the TPO also. He pointed out that the said concern was excluded on two accounts i.e. it was loss making company and it failed in export turnover filter. The learned Departmental Representative for the Revenue placed reliance on the ratio laid down by the Bangalore Bench of Tribunal in Trilogy E-Business Software India (P.) Ltd. Vs. DCIT (2013) 29 taxmann.com 310 (Bangalore - Trib.), wherein it was held that the said concern Indium Software (India) Ltd. to be not comparable to the concern engaged in software development services. 26. On perusal of record and after considering the submissions made by both the learned Authorized ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... risk adjustment. 33. The assessee is captive service provider to its Associated Enterprises and claims to be risk free and hence desires risk adjustment in the margins of its finally selected comparables. We have already decided similar issue in Honeywell Turbo Technologies (India) Pvt. Ltd. Vs. DCIT in ITA No.2584/PUN/2012 order dated 10-02-2017 wherein it was held as under : "32. Under the TP provisions, where in the facts of the present case, the assessee is risk mitigating entity, wherein all the risks are taken care of by the associate enterprises, then adjustment on account of difference in the risk profile of comparable companies merits to be allowed while benchmarking the international transaction of assessee. The Bangalore Bench of Tribunal in the case of Philips Software Centre Pvt. Ltd. Vs. ACIT reported in 26 SOT 226 has upheld that the adjustment of risk to be computed as difference between the PLR and the risk free rate of turn. The assessee prepared a summary computation considering the aforesaid rule, which reads as under:- 33. Further, the Delhi Bench of Tribunal in the case of Sony India Pv t. Ltd. reported in 114 ITD 448 has allowed 20% risk adjustment consi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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