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TMI Blog2016 (6) TMI 1322X X X X Extracts X X X X X X X X Extracts X X X X ..... 0D (4) so far as possible the current year and contemporaneous data has to be considered for determining comparable price. Only in the case of exceptional circumstances where current year data cannot be relied upon and does not give the true and correct state of affairs of the functional comparability then multiyear data up to 2 earlier years can be used. The assessee has failed to demonstrate that the current year data of the comparables are not reliable. Accordingly, we do not find any substance or merit in this ground of the assessee’s appeal and the same is rejected. Rejection of companies functionally dissimilar with that of assessee who provides off shore software development services to its parent company (Associated Enterprise – AE) and also execute project to support engineering system or to develop software for internal use or for development of new product for AE Comparable selection - filter applied by the DRP in respect of the Related Party Transaction (‘RPT’) at 0% - Held that:- RPT filter of 15% is proper in the case of the assessee. Consequently, the impugned order of the CIT (Appeals) whereby applied filter of 0% RPT is set aside. Hence we direct the Assessing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in rejecting the CPM/ CUP method adopted by the Appellant and using Transactional Net Margin Method ("TNMM") as the most appropriate method for determining arm's length price; Grounds of objections relating to TNMM: 4. The learned AO/TPOerred, in law and in facts, by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Rules, and conducting a fresh economic analysis for the determination of the ALP in connection with the impugned international transaction and holding that the Appellant's international transaction is not at arm's length; 5. The learned AO/ TPOerred, in law and in facts, by determining the arm's length margin/ price using only FY 2009-10 data which was not available to the Appellant at the time of complying with the transfer pricing documentation requirements; 6. The learned AO/TPOerred in rejecting certain comparable companies by applying the following quantitative and qualitative filters: a) The learned AO/TPO erred, in law and in facts, by rejecting certain comparable companies identified by the Appellant for having different accounting year (i.e. companies having accounting year other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s 271(1)(c) of the Act. The Appellant submits that each of the above grounds is independent and without prejudice to one another. The Appellant craves leave to add, alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon'ble Tribunal to decide on the appeal in accordance with the law." 3. Ground Nos.1 & 2 are general in nature and does not require any specific adjudication. 4. Ground No.3 is regarding rejection of Most Appropriate Method ('MAM') adopted by the assessee as CPM/CUP by the TPO and adopting Transactional Net Margin Method ('TNMM') as MAM by TPO for determining the Arm's Length Price ('ALP'). 5. The assessee is engaged in the business of contract Software Research & Development Services in automobile engineering. The assessee is a 100% subsidiary of Daimler AG, Germany and was set up with specific purpose of carrying on R&D activities in India for its parent company. Thus the assessee provides off shore software development services to its parent company (Associated Enterprise - AE) and also execute project to support engineering system or to develop software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntal Representative and considered the relevant material on record. At the outset we note that an identical issue has come up before this Tribunal for the Assessment Year 2008-09 and vide order dt.16.3.2016 in IT(TP)A No.1336/Bang/2012 the Tribunal has held in paras 5.5 to 5.8 as under : " 5.5 Against the Cost Plus Method, the assessee states that OECD guidelines called for adoption of this method in cases where semi-finished goods are sold between associates or where there are long term buy and supply arrangements or in the case or provision of services, particularly where these are of subsidiary or peripheral nature. It was stated that appropriate method for attracting R&D services is Cost Plus Method which is ideally suited for the case of the assessee. It was submitted that all costs have been considered and arrived at the gross profit and operating profit margin of around 32% is quite reasonable. The net margin of 5% of overall cost is also very significant and reasonable, especially because the company does not resume any significant business risks. Thereafter, the assessee has taken 15% of the profits of companies who have R&D activities as per decision of ITAT in Rolls Roy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n required for these adjustments is not readily available in the public domain, assessee submits that this cannot be done. Thereafter, assessee proceeded to analyse and submit that on a rough and ready basis, this analysis was done with reference to rates charges by major Indian companies although the functions performed or risk assumed by them are significantly higher, as this will provide the connection of upper price charge at which arm's length transactions takes place. The assessee has given Annexure- IV working out the USD rates and INR rates worked out at rate per hour to submit that this was external CUP and assessee's margin at ₹ 1333.63 is higher than other comparable companies. After examining Annexure-VIII of the report, we have asked the ld. counsel about the working adopted by the assessee in arriving at the rate per hour either in USD terms or INR terms. It was submitted that by taking general accounts and annual repot of the respective companies, assessee has derived offshore consultancy amount and thereafter assumed the persons who have worked offshore and then the rate per day at 20 days per month working and rate per hour at 8 hours per day, thus on various ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the facts and circumstances for the year under consideration are identical as for the Assessment Year 2008-09. Accordingly, following the earlier order of this Tribunal in assessee's own case this issue is decided against the assessee and confirmed the order of the TPO in adopting TNMM as MAM. 7. Ground No.4 is general in nature and does not require any specific adjudication. 8. Ground No.5 is regarding rejecting the multiyear data and adopting the current year data by the TPO. 8.1 We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. There is no dispute that as per the Rule 10B(4) as well as Rule 10D (4) so far as possible the current year and contemporaneous data has to be considered for determining comparable price. Only in the case of exceptional circumstances where current year data cannot be relied upon and does not give the true and correct state of affairs of the functional comparability then multiyear data up to 2 earlier years can be used. The assessee has failed to demonstrate that the current year data of the comparables are not reliable. Accordingly, we do not find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee and further there are precedence wherein the Tribunal has held that these companies cannot be considered as good comparables. He has relied upon the decision of the Special Bench of the Tribunal in the case of CIT Vs M/s Quark Systems Pvt.Ltd.,(2010) 38 SOT 0307. 10.2 On the other hand, the learned Departmental Representative has objected to the admission of the additional ground and submitted that when the assessee itself has selected these companies and the authorities below had no occasion to consider the objections raised by the assessee at this stage, then the additional ground cannot be admitted at this stage. 10.3 Having considered the rival submissions as well as the relevant material on record, we find that the functional comparability of these three companies have been considered by the Tribunal in various cases which has been relied upon by the learned Authorised Representative. By way of the additional grounds, the assessee is raising objection regarding the functional dissimilarity and/or extraordinary events during the year and exclusion of three comparable companies which was considered by the TPO/A.O for determining the Arm's Length Price ('ALP'). We are o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mine the question as per the statutory regulations." "38. Accordingly, on facts and circumstances of the case, we hold that taxpayer is not estopped from pointing out that Datamatics has wrongly been taken as comparable. While admitting additional ground of appeal raised by the assessee to require us to consider whether or not Datamatics should be included in the comparable, we make no comments on merit except observing that assessee from record has shown its prima facie case. Further claim may be examined by the AO. This course we adopt as objection to the inclusion of Datamatics as comparable has been raised now and not before Revenue authorities. Therefore, we deem it fit and proper to remit the matter to the file of the AO for consideration of claim of the taxpayer and make a de novo adjudication of the ALP after providing reasonable opportunity of being heard to the assessee. We order accordingly." Accordingly, we admit the additional ground for deciding on merits. 11. Now we will consider the functional comparability as well as the issue whether these companies can be considered as good comparables one by one as under : (i) KALS Information System : 12.1 The learned Auth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny. DRP confirmed the same. 10.1. Assessee's main objection before us is on functionality of the comparable company. As seen from the annual report of 2008-09 and 2009-10 and comparative statement placed by Assessee, the company classified itself as 'the company engaged in development of software and software products since its inception'. The company consisting of STPI unit engaged in development of software and software products and a training centre engaged in training of software professionals on on-line projects. This indicates that company is engaged in development of software and products and its inventory also indicates that Assessee has been using its readymade libraries for sales. This company was rejected in earlier year on functional analysis by ITAT in the case of Planet Online Pvt. Ltd., in ITA No. 464/Hyd/2014 where in it was held that company is engaged in development of software products. Since its annual report states the same facts in this assessment year also, we are of the opinion that the company cannot be selected as a comparable as it was engaged in development of software and software products. Accordingly, Assessee's objections are accepted and AO is direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions Technologies Ltd. from the final set of comparables. As per the discussion in para 11(viii) of the order of the TPO, it is noticed that the said concern has been excluded on the ground that during the year under consideration it has undertaken business restructuring. The Ld. Representative also pointed out that in the show-cause notice dated 31.10.2012 issued by the TPO another reason has been advanced which is to the effect that the said concern fails the export turnover filter of 75% of the total turnover." 53. Having regard to the above judgment and since it is evident from record that Sasken Communication Technologies Limited is functionally not similar to the appellant and also having gone through restricting in the instant year, it cannot be treated as comparable to assessee. We order accordingly." As it is clear from the finding of the Tribunal that the Tribunal has followed the decision in the case of Tibco Software (India) Pvt. Ltd. Vs. DCIT in ITA No.94/ PN/2014 Dt.10.4.2015 wherein the Tribunal found that this company failed export turnover filter of 75% and accordingly cannot be treated as comparable. It is not clear from the finding of the Tribunal in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13. Following were the relevant observations of the Tribunal:- II. UNREASONABLE COMPARABILITY CRITERIA : 19. The learned Chartered Accountant pleaded that out of the six comparables shortlisted above as comparables based on the turnover filter, the following two companies, namely (i) Tata Elxsi Ltd; and (ii) M/s. Flextronics Software Systems Ltd., deserve to be eliminated for the following reasons : (i) Tata Elxsi Ltd., : The company operates in the segments of software development services which comprises of embedded product design services, industrial design and engineering services and visual computing labs and system integration services segment. There is no sub-services break up/information provided in the annual report or the databases based on which the margin from software services activity only could be computed. The company has also in its response to the notice u/s.133(6) stated that it cannot be considered as comparable to any other software services company because of its complex nature. Hence, Tata Elxsi Ltd., is to be excluded from the list of comparables. 20. On the other hand, the learned DR supported the order of the lower authorities regarding the inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be regarded as a comparable". The co-ordinate bench in the said case has followed the decision of the Tribunal of M/s. Cisco Systems Pvt. Ltd. dt.14.8.2014 in IT(TP)A No.271/Bang/2014 and directed the A.O/TPO to exclude this company form the list of comparables. We concur with the view of the co-ordinate bench of this Tribunal and accordingly direct the A.O./TPO to exclude this company from the list of comparables. 16. Zylog System Ltd. 16.1 The learned Authorised Representative of the assessee has submitted that the comparability of this company has been examined by the co-ordinate bench of Delhi Tribunal in the case of Equant Solutions India Pvt. Ltd. Vs. DCIT vide order dt.21.1.2016 in IT(TP)A No.1202/Del/2015 and held that this company is having significant intangibles and carrying on R&D activities as well as significant intangibles cannot be considered to be a good comparable with the assessee. 16.2 On the other hand, the learned Departmental Representative has submitted that this company satisfies all the criteria and filters applied by the TPO for selecting as a comparable. He has further contended that neither the assessee nor the TPO has gone into the verticals of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Delhi Bench of the Tribunal (supra), we direct the A.O/TPO to exclude this company from the list of comparables. 17. Ground No.8 is regarding restricting the benefit of working capital adjustment. 17.1 The learned Authorised Representative of the assessee has submitted that the TPO has worked out the working capital as per Annexure C to the impugned order. However, the adjustment on account of working capital was restricted by the TPO to 1.7% which is against the law as well as the facts but based on arbitrary estimation made by the A.O/TPO. In support of his contention, he has relied upon the decision dt.21.12.2012 in case of Bearing Point Business Consulting Private Ltd. Vs. DCIT in ITA No.1124/Bang/2011 and submitted that the Tribunal has held that the TPO cannot restrict the working capital adjustment. 17.2 On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below. 17.3 Having considered the rival submissions as well as the relevant material on record, we note that the TPO has worked out the working capital as per Annexure C to the order passed under Section 92CA however the TPO has restricted the working capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company are deciding factors for treating the company as a comparable and accordingly erred in excluding M/s. Tata Elxsi Ltd., Sasken Communication Technologies Ltd., Persistent Systems Ltd., Zylog Systems Ltd., Mind Tree Ltd., L&T Infotech and Infosys Limited as comparables. 2. The ld. DRP Member erred in excluding uncontrolled comparables having turnover more than ₹ 200 Crores in the absence of turnover criterion prescribed in Rule 10B of Income Tax Rules and also there being no correlation between turnover and profit margin. 3. The Hon'ble DRP has erred in applying 0% RPT. 4. The Hon'ble DRP has erred in directing the TPO to compute Risk Adjustment in the case of the taxpayer without adducing any method for the same. 5. In the facts and circumstance of the case, the Hon'ble DRP Member erred in holding the foreign exchange loss/gain in operating in nature when such loss/gain that is attributable to the operating activity is not derived from the operating activity. 6. The Hon'ble DRP has erred in law in directing to include forex gain/loss as part of operating income / loss without ascertaining the nexus with the business activity of the tax payer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal transactions are easily available in sufficient number then this tolerance range of RPT should be restricted to minimum. Though there is no specified range in the provisions of Act or Rules, however, in due course of discussion and adjudication of this issue in a series of decisions of this Tribunal, a commonly accepted tolerance range of 5% to 25% of total revenue from RPT has been considered as reasonable depending upon the facts and circumstances of each case. In the case of the assessee before us, the TPO/A.O. selected 13 comparables. Therefore, the availability of the comparables of the international transactions of the assessee is not a difficult task. Thus, when a good number of comparables are available then the RPT cannot be allowed to the extreme limit of 25% of revenue. Accordingly, in order to determine the ALP considering by considering the uncontrolled comparable transactions, it should be kept in mind that the uncontrolled transactions should be least influenced by the controlled and related prices. This Tribunal in the series of decisions has taken a view that when good number of comparables are available, then the threshold limit of RPT shall not be more than 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... single customer risk borne by the tax payer in its status of a captive service provider was equivalent to the marketing and technical risk attached to the comparables. The Hon'ble ITAT held that the risk of having a single customer is an anticipated risk which may or may not happen unlike the marketing and technical risks which have to be contemporaneously dealt with by the comparables. The ITAT did not accept that the risk adjustment should be 5.5% or at the difference of PLR of the RBI and the banks, and directed the TPO to consider all the contentions and decide the percentage of risk adjustments to be made in accordance with law. In the case of Bearing Point Business Consulting Pvt. Ltd. Vs. DCIT (ITA No.1124/Bang/2011) this decision was once again followed by the jurisdictional ITAT. 14.6 After consideration of the various facets of this matter, and respectfully following the decision of the Hon'ble ITAT Bangalore as above, the TPO is directed to decide the percentage of risk adjustments to be calculated in this case. by means of guidance, it may be mentioned that in the case of DCIT Vs. Hello Soft Pvt. Ltd. (2013) 32 taxmann.com 101 (ITAT, Hyd) 1% adjustment to the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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