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TMI Blog2017 (7) TMI 768X X X X Extracts X X X X X X X X Extracts X X X X ..... ependent of each other and without prejudice to each other. That on the facts and circumstances of the case and in law, Transfer Pricing grounds: 1. The learned AO/TPO/DRP have erred in making an addition of INR 334,238,459 to the total income of the Appellant on account of adjustment in the arm's length price ("ALP") of the international transactions related to software development services entered into by the Appellant with its associated enterprises ("AEs"). 2. The learned AO/TPO/DRP have erred by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962 ("the Rules"). 3. The learned AO/TPO/DRP have erred in making an adjustment under Section 92CA(3) of the Act without returning a finding about existence of any of the circumstances specified in clauses (a) to (d) of sub-section (3) of Section 92C of the Act. 4. The learned AO/TPO/DRP have erred by rejecting certain comparable companies identified by the assessee for having different accounting year (i.e. having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said grounds of appeal and the facts and circumstances of the case." 2. Ground nos. 1 to 11 relate to the determination of Arm's Length Price (ALP) of the international transactions entered by the assessee. The facts culled out from the record in this regard are that the assessee company is engaged in development of software in various stages like engineering, research, development, debugging, coding, quality control checks, testing application, designing and programming and is exporting its services to M/s Adobe Systems Inc., USA and to M/s Adobe Systems Software, Ireland. 3. On examination it was noticed that the assessee has entered into international transactions and during the year has made transactions with its Associated Enterprise (A.E.). The total transactions have been declared at Rs. 3,35,31,95,993/-. The Assessing Officer (A.O.) accordingly made a reference to the Transfer Pricing Officer (TPO) and the T.P.O. having taken 21 comparables determined the ALP. The order of the TPO was challenged before the Dispute Resolution Panel (DRP) and the DRP rejected the objections raised by the assessee and confirmed the ALP as determined by the TPO. The A.O. accordingly framed th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt services and back office support services, to its Sun Life Information Service Ireland Ltd. the A.E. for assisting in their projects. 5.2. The method selected was also TMM method as was done in the instant case. A copy of the order of the Tribunal is also placed on record. The Ld.D.R. placed heavy reliance upon the order of the lower authorities with the submission that profile of the assessee and Sun Life India Service Centre Pvt.Ltd. is not same, therefore, the order in this case will not apply to present case. 5.3. Having heard the rival submissions and from a careful perusal of the order of The Tribunal we find that the assessment year involved in that case is 2010-11 and that the profile of Sun Life Service Centre Pvt.Ltd. and assessee are almost similar. Having examined the profile and data available with respect to the comparables the Tribunal directed the AO/TPO to exclude these companies from the final list of comparables. The relevant observation of the Tribunal is extracted hereunder for ready reference. "Software development segment : E-Infochips Bangalore Ltd. 10.1. It has been submitted by the ld.AR that this comparable was selected by ld.TPO (page33- 35 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in earlier year or in later years. The ld.AR submitted that insufficient segmental information was available in respect of this comparable. The counsel has relied on the order passed by ld.TPO for assessment year 2009-10. 10.7. Ld. DR, however, referred to the extracts from the order of ld.TPO, and submitted that Infinite Data Systems Pvt Ltd is a comparable company with that of assessee. 10.8. After considering the rival contentions and pursuing the annual reports placed on record, we are of the opinion that this company cannot be selected as comparable for TP analysis. A perusal of the annual report of this company for assessment year 2010-11, suggests that it is a full-fledged IT consulting organisation and provides services in the nature of technical consulting, design and development of software, maintenance, system irrigation, implementation, testing and infrastructure management services. Further this company as a sole customer, Fujitsu services Ltd, and accordingly is exposed to significant single customer risk. The above company cannot be considered as comparable on functional basis. 10.9. As this company is functionally different from assessee and in absence of segm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l for the assessee further contended that both these comparables were examined by the Tribunal in the case of Equant Solutions India Pvt. Ltd. in ITA 1202/Del/2015 A.Y. 2010-11, wherein the Tribunal has held that if the RPT is in excess of 25% which is the filter set by the TPO himself, then this comparable fails and therefore to be excluded and for verification the matter was restored to the TPO. With regard to Wipro Technology Services Ltd. the Tribunal held relying upon the other judgements of the Coordinate Bench in the case of Agnity Technology Pvt. Ltd. that this Wipro Technology Services Ltd. is not a good comparable. The relevant observations of the Tribunal in this regard are as under. a. The TPO has included Sonata Software Ltd, which has a margin of 35.87%. As per TPO's RPT/ sales ratio is 11.93% and therefore to be included as comparable. Ld DRP also held that this comparable is accepted. Before us, the Id. AR of the assessee submitted that AO has wrongly calculated related party transaction of this company wherein for the purpose of calculation TPO has only taken profit and loss account items and not balance sheet items such as receivables and payables. It was su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee and has huge brand value of Wipro and therefore it should be excluded. He further buttressed his claim of exclusion by submitting the volatile PLI of the company from 52.55 % to 80.81 % in a chart for three years. b. Ld. DR Relied on the order of TPO and DRP for the reason given for selection of this comparable. c. We carefully considered the rival contention regarding exclusion of this comparable. This company had agreed an agreement with CITI Technology Services Ltd, which is 100% subsidiary of Wipro Technology Ltd. The entire revenue during the year is covered by a master service agreement entered into by Wipro with CITI Group Services. Further, this company is also a subsidiary of Wipro Ltd., which company has a considerable brand name, therefore benefit accruing to this company from the brand name of Wipro cannot be denied. Therefore relying on the decision of the Coordinate Bench in the case of Agnity Technology Pvt.Ltd. in ITA no.955/Del/2015 for A.Y. 2010-11, wherein the Infosys owns of its brand name was held to be incomparable on the same analogy, brand value of 'Wipro' does help this comparable. Hence, we direct TPO to exclude this comparable, it is ordered ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ese comparables be included in the final list of comparables. The relevant observations of the Tribunal is extracted hereunder for the sake of ready reference. "Software Development Segment CG-VAK Software and Exports Ltd (Seg.) 10.36. The ld.TPO excluded this company from the list of comparables by holding that this company does not satisfy the employee cost filter. 10.37 We find that the Ld. TPO has accepted the submissions of assessee which is as under: "38.2 In its reply, the assessee has stated that the employee cost to total cost of the company is 68.22%, and it satisfies all the filters applied by the TPO and being functionally comparable to the assessee, this company should be accepted as a comparable" 10.38. However, the Ld. TPO rejected this comparable as it did not satisfy the turnover filter. The Ld. A.O. has not brought on record any material / documents contrary to the above submissions of the assessee. The Ld. TPO has also not been able to bring out any instance of functional dissimilarity of this comparable with that of assessee. The Ld. D.R. placed his reliance on the findings of the authorities below. 10.36. We have perused the orders passed by authorities b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al year ending, were operating during the same period of time as the assessee, and were also facing similar business cycles, market and economic conditions as faced by assessee having financial year from April to March. He thus submitted that in absence of evidence available to the contrary that there has been a significant impact on the margins due to change in different reporting/accounting period, it is incorrect to disregard the comparable using this filter. Ld.DR, however, referred to the extracts made by the ld.TPO in his order to submit that R Systems International Ltd., should not be considered comparable with assessee. 10.39. After considering the rival submissions and pursuing the relevant material on record we find that the ld. TPO has not pointed out exact difference, the change of accounting year has made to the financial results of the comparable. The ld.TPO has further not pointed out whether it would not be possible to restate those financial results for a different accounting period without significant change in net profit margins or any other parameters considered relevant. Multinational companies generally operate in different geographical regions and different ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ational transaction has been entered into. This rule is based on matching principle but this role cannot be interpreted in such a rigid manner so as to defeat the basic object of rule viz., selection of the comparable for determination of arms length price of an international transaction" (emphasis supplied) 10.40. In any case the ld.TPO has not cited any instances of functional dissimilarity of this comparable company with that of assessee. We therefore direct the ld.AO/TPO to consider this company in the final list of comparable. Calibra Point, Business Solutions Ltd, Helios & Matheson Information Technology Ltd. 10.41. These comparables have been rejected by the ld.TPO applying the same filter of having different financial year. The ld.TPO has not cited any instance of functional dissimilarity of these comparable companies with that of assessee. The submissions advanced by both the sides are identical with that as raised while dealing with R Systems International Ltd. As we have this filter at length while dealing with R Systems International Ltd, the same are not being repeated. 10.42. We accordingly direct the ld.TPO/AO to consider these companies in the final list of co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the assessee and are not to be excluded on any of the filters, the same may be considered as good comparables for determining the ALP on international transactions. While doing so the order of The Tribunal be also kept in mind. 6. With regard to Silver Line Technology it was contended by the Ld.Counsel for the assessee that the different financial year filter is inappropriate and immaterial and in this regard he placed reliance upon the judgement of Hon'ble Delhi High Court in the case of CIT vs. Mckinsey Knowledge Centre India Pvt.Ltd. in ITA 217/2014 dt. 27.3.2015 in which their Lordships approved the view of the Tribunal that if the comparables are functionally same as that of tested party then the same cannot be excluded/rejected merely on the ground that the details of the entire Financial Year are not available. If from the available data on record, the results for financial year can reasonably be extrapolated, then the comparables cannot be excluded solely on the ground that the comparables have different financial year endings. 6.1. In the light of aforesaid judgements of Jurisdictional High Court we hold that the rejection of Silver Line Technology Ltd. solely on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the A.O. having treated it to be the payment on account of royalty. The Ld.Counsel for the assessee further contended at the outset that the assessee has claimed deduction u/s 10A and if any disallowance is made u/s 40A(ia) of the Act it would increase the deductions claimed by the assessee. Therefore, there would not be any tax implication. These aspects were not examined by the A.O. Therefore, in the interest of justice the matter may be restored back to the AO/TPO to readjudicate the issue in the light of the aspect that disallowance if any made, would increase the deductions claimed by the assessee u/s 10A of the Income Tax Act, 1961 (the Act) and there would not be any tax implication. It was also contended that in earlier year no such disallowance was ever made by the Revenue. 8.1. The Ld.D.R. however opposed these contentions. 9. Having carefully examined the order of lower authorities we find that the A.O. has disallowed the payment having treated the same as payment on account of royalty on non deduction of TDS. While adjudicating the issue the AO has not examined the aspect of increase in deduction claimed u./s 10A of the Act on disallowance of payment u/s 40(a)(ia) of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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