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TMI Blog2017 (12) TMI 180X X X X Extracts X X X X X X X X Extracts X X X X ..... by the TPO/AO. The initial inclusion of CIL as a comparable by the assessee proved to be a valid comparable later on by the TPO/AO as TNMM requires only broad functional and product/services comparability. That is the raison detre of TNMM. That being the case we uphold the order of the AO in including CIL as a comparable. X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee filed objection against the draft assessment order before the DRP. The DRP vide its order dated 05.12.2016 u/s 144C(5) gave revised directions. Accordingly, the AO requested the TPO vide letter dated 22.12.2016 to provide comments on the order of the DRP. After receipt of the comments of the TPO, the AO made an addition of ₹ 7,09,24,015/- u/s 92CA(3) and passed an order u/s 143(3) r.w.s 144C(13) dated 24.01.2017. 4. Before us, the Ld. counsel of the assessee submits on CIL that (i) the company is engaged in providing custom built software development, product development and IT services, (ii) it develops in-house products and is a high end IT service provider and earns revenue from there, (iii) it earns income from both services as well as products, and does not provide segmental information, (iv) it undertake R&D activity for creating newer technologies to meet the latest technology needs of the clients and (v) The percentage of employee cost to total is only 6.83% while that of the assessee is 48.37%. Hence it is not a predominately a service company. He refers to page 767-769 of the Paper Book (P/B) filed by him. 4.1 The Ld. counsel further submits that (i) a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Cost (B) 85,51,05,070 Arm's Length Price (C=(19.90%*B)+B) 1,02,52,32,974 Difference between ALP and Operating Revenue (C-A) 4,76,27,152 5% of Operating Revenue (5%*B) 4,88,80,291 4.4 The Ld. counsel thus submits that the adjustment would be Nil since the difference between the ALP and the international transaction is less than 5% of the latter. 5. Per contra the Ld. DR supports the order passed by the TPO/AO stating that to fall in the filter of functional comparability, it only needs to checked if the company is broadly into software development business and whether the software development is high end or low end does not have any significant relevance. Also, merely because the company has its own R&D Centre and low employee cost, it does not mean that the same is not a service company. Thus the Ld. DR submits that the TPO/AO has rightly included CIL as a comparable. 6. We have heard the rival submissions and perused the relevant materials on record. The reasons of our decisions are given below. As mentioned hereinbefore, the assessee has adopted TNMM. It has taken operating profit to operating cost (OP/TC) as PLI. We find that LB India (the assessee) provides ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparables. However, that cannot be the consideration for diluting the standards of selecting comparable transactions/entities. A higher product and functional similarity would strengthen the efficacy of the method in ascertaining a reliable ALP. Therefore, as far as possible, the comparables must be selected keeping in view the comparability factors as specified. Wide deviations in PLI must trigger further investigations/analysis.' As mentioned at para 6 hereinbefore the services/products and functions rendered by the assessee and CIL fall broadly in similar domain. 6.1.4 In Tata Power Solar Systems Ltd. (supra) it has been held that 'where for purpose of determining ALP, company-assessee, engaged in generation of solar energy, had mistakenly included two companies engaged in area of wind energy in its list of comparables, assessee would not be barred in law from withdrawing these two comparables from its list on ground of functional difference'. There is no dispute about the ratio laid down in the above decision. However, we find that CIL included by the assessee as a comparable initially still remains a valid comparable confirmed by the TPO/AO as the services/products and fun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rability and functional comparability than the traditional transaction methods. Unlike Resale Price Method (RPM) and Comparable Uncontrolled Price (CUP), TNMM involves comparison of margins at net profit level, not at gross profit level. TNMM is a transactional profit method; not a traditional transactional method like CUP or RPM . In general, closely comparable products/services are required if CUP method is used to determine ALP. And RPM and CPM (Cost Plus Method) generally require a lesser degree of products or services comparability and may be appropriate if functional comparables are available. The TNMM, however, requires only broad functional and product/services comparability. Thus TNMM is less dependent on product comparability and on functional comparability than the traditional transaction methods. 6.4 As mentioned hereinbefore at para 6 and 6.2, the services/products and functions rendered by the assessee and CIL fall broadly in similar domain. The assessee has adopted TNMM which has been followed by the TPO/AO. The initial inclusion of CIL as a comparable by the assessee proved to be a valid comparable later on by the TPO/AO as TNMM requires only broad functional and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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