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TMI Blog2018 (5) TMI 252X X X X Extracts X X X X X X X X Extracts X X X X ..... PO - Held that:- CIT-A rejected the computation of arm’s length margin of 18.5% made by the TPO erroneously on the basis of financial data of earlier two financial years and proceeded to determine the arm’s length margin afresh on the basis of second set of comparables selected by the TPO. While disposing of the appeal of the assessee, we have already approved this approach adopted by the learned CIT(A) in principle. Consequently, we find no merit in the appeal of the Revenue and dismiss the same. - I.T.A. No. 1652/Del/2014, I.T.A. No. 1663/Del/2014 - - - Dated:- 27-4-2018 - SHRI P.M. JAGTAP, ACCOUNTANT MEMBER AND SMT. BEENA A PILLAI, JUDICIAL MEMBER Department by : Sh. Manoneet Dalal, Advocate Respondent by : Sh. Sanjay Kumar Yadav, Sr. DR ORDER Per P. M. Jagtap, A. M. These two appeals, one filed by the assessee being ITA No. 1652/Del/2014 and the other filed by the Revenue being ITA No. 1663/Del/2014, are cross appeals which are directed against the order of learned CIT(A)-2, Faridabad dated 10.1.2014. 2. In its appeal, the assessee has raised ground no. 1 to 7 relating to the corporate tax issues while ground no. 8 to 11 involve the issue relating to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred on the facts and in law in upholding the actions of the Ld. AO in disallowing the deduction of actual warranty cost of ₹ 4,53,34,551 for which the provision was created in the earlier year(s) and duly disallowed for tax purpose in such year(s). 6.1 That without prejudice to the above, the Ld. CIT(A) and Ld. AO erred on facts and in law in making/upholding the afore-mentioned disallowance on the ground that the appellant had failed to file evidence in this respect as no such evidence was requisitioned by the Ld. AO/CIT(A) at any 7. That the ld. CIT(A) grossly erred on the facts and circumstances of the case and in law in upholding the disallowance of bad advances written off amounting to ₹ 1,19,10,539/- for which the provision was created in the earlier year(s) and also duly disallowed in such respective year(s) 4. The assessee in the present case is a wholly owned subsidiary company of Motorola Inc USA. It has been set up as a 100% captive design centre for Motorola Inc USA and provides designing services to its holding company. The return of income for the year under consideration was filed by it on 31.10.2002 declaring its total income at nil. The s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arehousing facilities and to maintain the records of the company. Immediately upon the communication of your direction, the assessee has made a request to the warehousing service provider for making the said records available However, we are constrained to say that the said records have not been yet made available to us and we are taking the necessary follow- up steps for ensuring compliance with your Honour s direction. We humbly prays that some more time may be granted to enable us to comply with your directions and also pray that no adverse interference may be drawn on this account as the inability to produce accounts is clearly on account of reasons beyond the control of the assessee. The above submission of the assessee was not found acceptable by the AO. According to him, the assessee company was not taking the issue relating to production of books of account seriously and there was a complete failure on the part of the assessee to produce the books of account for verification despite reasonable opportunity given in this regard. He, therefore, proceeded to complete the assessment under section 143(3) vide an order dated 22.3.2005 on the basis of the material available on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciation Depreciation not allowable A Plant Machinery 25,68,426 @ 25% 6,42,107/- B Computers 33,32,977 @ 60% 19,99,786/- Total not allowable 26,41,893/- During the year under consideration assessee company has claimed ₹ 1,46,77,62,882/- under the head operating expenses. (i) Assessee has shown increase of 9.26% in the salaries, wages and bonus whereas there is decrease of 37.57% in the expenses under the head contribution to provident and other funds. It casts serious doubts on the claim of the assessee as there is increase in salaries and wages etc., but proportionately there should be increase in contribution to provident fund @ 12.50% and ESI @ 4.50% as per PF and ESI Acts. (ii) The AR of the assessee vide order sheet entry dated 10.3.2005 was asked to explain the admissibility and justification of expenses claimed in the period relevant to A.Y. 2002-03. On 22.3.2005 assessee company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... later s comments. In his remand report dated 20.9.2007 submitted to the learned CIT(A), the AO strongly objected to the admission of the additional evidence filed by the assessee on the ground that sufficient opportunity was already given to the assessee during the course of assessment proceedings to file the same. The learned CIT(A) accepted this stand of the AO and declined to admit the additional evidence filed by the assessee. He accordingly proceeded to decide the issues relating to various additions made by the AO without taking into consideration the additional evidence filed by the assessee and confirmed the said additions made by the AO substantially on merit. Aggrieved by the order of the learned CIT(A) confirming the said additions, the assessee has raised ground no. 1 to 6 in this appeal filed before the Tribunal. 6. The learned counsel for the assessee has raised a preliminary issue challenging the action of the learned CIT(A) in refusing to admit the additional evidence filed by the assessee before him. He submitted that the assessee company was requested by the AO to produce the books of account on 10.3.2005 vide an order sheet entry dated 3.3.2005 and for the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of accounts either during the course of assessment proceedings and even during the remand proceedings for the verification of the AO. He contended that there was thus a clear failure on the part of the assessee to produce its books of account for the verification of the AO despite sufficient opportunity afforded in this regard and the learned CIT(A) therefore, was fully justified in rejecting to admit the additional evidence filed by the assessee before him. 8. We have considered the rival submissions and also perused the relevant material available on record. It is observed that even though the case of the assessee for the year under consideration was selected for scrutiny initially by issuing a notice under section 143(2) on 10.1.2003, the proceedings were kept pending till the second notice under section 143(2) alongwith a notice under section 142(1) was issued by the AO on 6.12.2004 after the case of the assessee was transferred from Bangalore to Delhi. Moreover, the assessee company was asked to produce its books of account specifically by the AO vide order sheet entry dated 3.3.2005 and keeping in view that the assessment under section 143(3) was completed by him on 22.3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to produce the books of account and other record as may be required by the AO for the purpose of completing the assessment afresh on the relevant issues and extend full cooperation to him. The relevant grounds of the assessee s appeal are accordingly treated as allowed for statistical purposes. 9. Ground no. 8 to 11 of the assessee s appeal and ground no. 1 to 3 of the Revenue s appeal involve a common issue relating to the addition of ₹ 2,66,00,617/- made by the AO on account of transfer pricing adjustment which is sustained by the learned CIT(A) to the extent of ₹ 1,97,98,335/-. 10. The business of the assessee company was organised under six different divisions and one of such divisions namely Semi Conductor Product Centre, International Transactions of providing Chip design / software development services were entered into with associated enterprises aggregating to ₹ 22,99,51,995/-. A reference was made by the AO to the TPO in order to determine the arms length price inter alia in respect of these international transactions. The assessee company had maintained segmental financial details and in the transfer pricing study report, TNMM was adopted as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h price of the international transactions of providing software development services entered into by the assessee company as against the OP / TC of 5.81% shown by the assessee and since the remuneration so worked out was ₹ 25,65,52,612/- as against ₹ 22,99,51,995/-, he recommended a transfer pricing adjustment at ₹ 2,66,0,617/-. Accordingly, in the assessment made under section 143(3), an addition of ₹ 2,66,00,617/- was made by the AO to the total of assessee on account of transfer pricing adjustment. 13. The addition of ₹ 2,66,00,617/- made by the AO on account of TP adjustment was challenged by the assessee in the appeal filed before the learned CIT(A). Before the learned CIT(A), two major contentions were raised on behalf of the assessee. Firstly, it was contended that the two entities namely Zigama Software Limited and Saroh Infotech Limited selected as comparables having functional similarity with the assessee were wrongly rejected by the TPO. After having considered the functional profile of the said two entities vis a vis., the assessee company, the learned CIT(A) however, found that both these entities were functionally different from the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justment was restricted by the learned CIT(A) to ₹ 1,97,98,335/-. Aggrieved by the same, the assessee has raised the following grounds in this appeal on the issue of transfer pricing adjustment:- 8. That on the facts and circumstances of the case and in law, the ld. Transfer pricing Officer ( TPO ) / AO and ld. CIT(A) have erred in re-determining the Arm s Length Price ( ALP ) of the international transactions of the Appellant. Thus, the order of ld. TPO / AO determining the arm s length price at ₹ 2,66,00,617 and ld. CIT(A) re-determining the arm s length price at ₹ 1,97,98,335/- are bad in law. 9. That on the fact and circumstances of the case and in law, ld. CIT(A) has erred in not appreciating the fact that the set of two comparables constitute a valid set to determine the ALP of international transactions of the Appellant. 10. That on the facts and circumstances of the case and in law, ld. CIT(A) is not justified in conducting an inappropriate search and selecting comparables companies which are functionally not comparable to the Appellant in terms of their functions, assets and risk employed. 14. Ground no. 8 raised in this appeal is gene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparables. In this regard, the learned counsel for the assessee has filed a summary giving the relevant details in respect of 7 entities, the inclusion of which by the learned CIT(A) in the final set of comparables is being challenged by the assessee. He has also made a detailed submission in support of the assessee s case seeking exclusion of the said entities from the final list of comparables by referring to the relevant portion of their annual reports placed in the paper book. He has also relied on the various judicial pronouncements in support of the assessee s case on these issues. The learned DR, on the other hand, has strongly objected to the exclusion of the said entities from the list of final comparables as sought by the assessee. He has made a detailed submission to support and substantiate the action of the learned CIT(A) in including the said entities in the final list of comparables. He has referred to the functional profile of the said entities vis a vis., the functional profile of the assessee company in an attempt to show that there is a functional similarity. After taking into consideration all these submissions made by the learned representatives of both the si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... direct the TPO to exclude Rolta India Limited from the list of final comparable. 18. Infosys Technology Limited:- It is observed that Infosys Technology Limited was selected as comparable by the TPO in assessee s own case for A.Y. 2007-08, but the tribunal (ITA No. 5637/Del/2011) directed exclusion of the same on the ground that it was owning brand and proprietary products. As submitted by the learned counsel for the assessee, the relevant position has remained the same inasmuch as Infosys has now high brand value of ₹ 7,256 Crores. Moreover, it is not functionally comparable to the assessee company inasmuch as it is mainly engaged in Software Development Services and generates substantial Revenue from the sale of its own software products. In the case of CIT vs. Agnity India Technologies Private Limited (ITA No. 1204/Del/2011 dated 10th July, 2011) cited by learned counsel for the assessee, Hon ble Delhi High Court has also upheld the exclusion of Infosys Technologies Limited from the list of final comparables after taking into consideration that it s operation as full fledged risk taking enterprise the nature of services rendered by it in diversified filed such as applic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . As further mentioned in the annual report, the emphasis on R D efforts during the financial year had yielded a new product TDS SOFT . It is also mentioned that the company improved and invented leading edge technology tools, intellectual property and engineering techniques that were applied to commercial projects all over the world. Total revenue from software development of this entity was 43.29 Crores out of which Revenue from export of Software Development Services and products constituted 33.93 Crores. It is, thus, clear that this entity is engaged mainly in software development having its own product and the same, therefore, cannot be considered as functionally comparable to the assessee company. We, therefore, direct the TPO to exclude this entity from the final list of comparable. 21. Federal Technologies Limited:- The learned counsel for the assessee has contended that this entity is mainly engaged in designing set top boxes which are not comparable with the functions of the assessee company. As pointed out by the learned DR, the said entity however has generated major part of Revenue from designing development and services. There is nothing to show that the said en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n and embedded technologies. He has also submitted that this entity has developed its own products such as insurance products and CRM products. He has contended that this entity thus is not functionally similar to the assessee company. A perusal of the relevant portion of the annual report of the said entity at page no. 2028 and 2029 however shows that although Mindteck is stated to have developed insurance product, it is clearly mentioned in the segment wise and product wise performance given in the annual report that Mindteck has evolved as a leading international I.T. Services with key focus in the area of embedded systems and business application. There is also nothing on record to show that this entity has generated any significant revenue from the sale of products. The learned counsel for the assessee has also contended that the said entity has successfully acquired M/s Infotech Holdings IMC as a result of which its Revenues were bound to be multiplied. However, as rightly pointed out by the learned DR, the said acquisition was completed by Mindteck in the year 2000-01 and there is nothing to show as to how the same has affected on the operating Revenue s or operating profit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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