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TMI Blog2017 (10) TMI 687X X X X Extracts X X X X X X X X Extracts X X X X ..... . Adding back the amount of Rent equalization reserve to the book profits of the Appellant, declared under section 115JB - Held that:- AO has rightly added back the rent acquisition reserve debited to profit & loss account while computing the book profit for the purpose of section 115JB of the Act - ITA No.6866/Del./2014 - - - Dated:- 13-10-2017 - SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER For The ASSESSEE : Shri Ravi Sharma, Advocate Ms. Shruti Khimta, Advocate Shri Ravi G. Gupta, Advocate For The REVENUE : Shri H.K. Choudhary, CIT DR ORDER PER KULDIP SINGH, JUDICIAL MEMBER : The Appellant, M/s. Stryker Global Technology Center Pvt. Ltd. (hereinafter referred to as the taxpayer ) by filing the present appeal sought to set aside the impugned order dated 16.10.2014, passed by the AO in consonance with the directions issued by the ld. DRP/TPO under section 143 (3) read with section 144C of the Income-tax Act, 1961 (for short the Act ) qua the assessment year 2010-11 on the grounds inter alia that :- 1. The Learned Dispute Resolution Panel ('Ld. DRP') and the Ld. Deputy Commissioner of Incometax (&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P/ Ld. AO erred in ignoring the fact that the Appellant is entitled to tax holiday under section 10A of the Act on its profits and therefore would not have any untoward motive of deriving a tax advantage by manipulating transfer prices of its international transactions; 4. The Ld. DRP and Ld. AO have erred on facts and in law in adding back the amount of rent equalisation reserve of INR 5,99,003 to the book profits of the Appellant, declared under section 115JB of the Act, and in doing so has grossly erred in: 4.1 proposing that the amount of rent equalisation reserve charged to profit and loss account is covered under clause (b) or (c) of Explanation 1 to Section 115JB of the Act, and thus needed to be added in Book profits. 5. The Ld. AO erred in initiating penalty proceedings under section 271(l)(C) of the Act. 6. The Ld. AO erred in charging interest under section 234D of the Act. 2. Briefly stated the facts necessary for adjudication of the controversy at hand are : Stryker Technology started its business from October 1, 2006 as a global technology centre for the Stryker Group in India. The taxpayer operates as a technology support centre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty margin at 21.47% as against average OP/TC margin of 14.27% of 15 comparables chosen by the assessee. However, on the basis of show-cause notice and filters proposed to be used by TPO, the taxpayer given fresh search conducted during TP proceedings and selected 11 comparables having OP/TC as PLI at 7.69% for software development and maintenance services transactions. Similarly, the taxpayer has given fresh search conducted during TP proceedings for ITES on the basis of showcause notice and filters adopted to be applied and computed the OP/TC margin of 10 comparables at 15.83%. 6. TPO then chosen 15 comparables having OP/OC at 27.64% and worked capital adjustment of OP/OC at 25.95% relating to software development services and proposed the adjustment of Arms Length Price (ALP) of international transaction at ₹ 1,20,55,936/-. 7. TPO finally chosen 9 comparables having OP/OC at 32.72% and working capital adjustment OP/OC at 32.72% and working capital adjustment OP/OC at 32.62% and thereby proposed an adjustment of ₹ 34,90,402/- relating to ITES. TPO accordingly proposed the total adjustment of ₹ 1,55,46,338/- to the income of the assessee. 8. AO added an a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ix. Mindtree Ltd. 16.62 15.39 x. Persistent Systems Solutions Ltd. (merged) 15.38 12.74 xi. R S Software India Ltd. 10.29 11.07 xii. Sasken Communication Technologies Ltd. 17.54 18.75 xiii. Tata Elexi Ld. 19.82 17.93 xiv. Thinksoft Global Services Ltd. 17.35 14.51 xv. Thirdware Solutions Ltd. 41.63 38.94 Average 27.64 25.95 10. On the basis of mean margin of 27.60% of comparable companies after giving working capital adjustment of OP/OC at 25.95%, TPO computed the arms length price of international transaction relating to software development services as under :- Particulars Amount INR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Arm s Length Price 41528201 Price charged by the assessee 38037799 105% of price charged in international transaction 39939689 Difference between ALP and price charge by assessee 3,490,402 % of difference with ALP 9.18% 13. Ld. AR for the assessee in order to cut short the controversy sought to exclude two comparables viz. E-Infochips Bangalore Ltd. and Infinite Data Systems Pvt. Ltd. (merged) for benchmarking international transactions relating to software development and maintenance services and TCS E-Serve Company for benchmarking international transactions relating to ITES. So, we will examine all the three comparable companies finally selected by TPO for benchmarking the international transactions one by one. COMPARABLE FOR BENCHMARKING INTERNATIONAL TRANSCTIONS QUA SOFTWARE DEVELOPMENT SERVICES E-INFOCHIPS BANGALORE LTD. (E-INFOCHIPS) 14. The taxpayer sought to exclude E-Infochips from the final list of comparables on the grounds inter alia that it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice Centre (P.) Ltd. which is a routine service provider like the taxpayer on the grounds inter alia that E-Infochips engaged in both software development as well as ITES and its segmental information is not available. Moreover, E-Infochips is having volatile margin trend for a period of five years which is detailed as under :- Company Name OP/TC Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 E-Infochips 91.83% 38.48% 97.29% 72.69% 27.31% 19. Moreover, E-Infochips is a product and semiconductor engineering services company and has designed 500 products for key verticals like aerospace, defence, semiconductor, security and surveillance, etc., thus functionally incomparable. So, we are of the considered view that E-Infochips is not a suitable comparable vis- -vis assessee company, hence ordered to be excluded. INFINITE DATA SYSTEMS PRIVATE LIMITED (INFINITE) 20. Assessee sought to e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. So, in view of the matter, we are of the considered view that Infinite is not a suitable comparable vis- -vis assessee company, hence ordered to be excluded. COMPARABLE FOR BENCHMARKING INTERNATIONAL TRANSACTIONS QUA ITES SEGMENT TCS E-SERVE INTERNATIONAL LTD. (TCS E-SERVE) 25. Assessee sought to exclude TCS E-Serve from the final list of comparables for benchmarking international transactions qua ITES on the ground that it is functionally dissimilar BPO services along with technical services. However, TPO/DRP have retained TCS E-Serve as a comparable by merely recording the findings that the company is functionally comparable to the assessee and it satisfies all the filters. 26. Ld. AR for the assessee in order to point out functional dissimilarity of TCS E-Serve vis- -vis assessee drew our attention towards page 927 of Paper book (Annual Report Compendium II) wherein it is categorically mentioned that TCS E-Serve is engaged in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee fairly conceded that this issue has been decided against the assessee in its own case for AY 2008-09 in ITA No.149/Del/2013 vide order dated 24.01.2017 . Ld. DR also relied upon the aforesaid order passed by the Tribunal. 32. Undisputedly, the issue in controversy has come up before the coordinate Bench of the Tribunal in assessee s own case for AY 2008-09 (supra) by way of raising following round :- 9. The Ld. AO has grossly erred in adding back the amount of Rent equalization reserve of ₹ 18,45,875/- to the book profits of the Appellant, declared under section 115JB of the Act, erroneously proposing that the amount of rent equalization reserve charged to profit and loss account is covered under clause (b) or (c) of Explanation 1 to section 115JB of the Act, and thus needs to be added in Book profits. 33. It is also not in dispute that the assessee has claimed rent acquisition reserve of ₹ 5,99,003/- in accordance with the lease deed dated 06.09.2006 entered into between M/s. Vatika Landbase Pvt. Ltd. and the assessee. The coordinate Bench of the Tribunal has determined the issue against the assessee by returning the following finding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the date the option becomes exercisable such that, at the inception of the lease, it is reasonably certain that the option will be exercised; ( c) the lease term is for the major part of the economic life of the asset even if title is not transferred; ( d) at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset; and ( e) the leased asset is of a specialised nature such that only the lessee can use it without major modifications being made. 9. Indicators of situations which individually or in combination could also lead to a lease being classified as a finance lease are: ( a) if the lessee can cancel the lease, the lessor s losses associated with the cancellation are borne by the lessee; ( b) gains or losses from the fluctuation in the fair value of the residual fall to the lessee (for example in the form of a rent rebate equalling most of the sales proceeds at the end of the lease); and ( c) the lessee can continue the lease for a secondary period at a rent which is substantially lower than market rent. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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