9911796707
TMI Blog2018 (2) TMI 1783X X X X Extracts X X X X X X X X Extracts X X X X ..... ; For the assessment year 2008-09, the assessee filed their return of income on 30.9.2008 declaring a total income of Rs. 47,08,17,570/-. The case was selected for scrutiny. Matter was referred to the Ld. TPO for determination of the Armed Length Price of the International Transaction, and the Learned TPO by order dated 31.10.2011 determined a sum of Rs. 38,36,90,639/- as the transfer pricing adjustment u/s 92CA basing on which the learned AO made an addition to that effect. Besides this, learned AO made the following additions also: Disallowance of claim of exemption u/s 10AA to the extent of Rs.15,93,92,715/- Disallowance of excess depreciation claimed on UPS Rs.1,44,75,008 Disallowance of employees contribution to Provident Fund Rs.19,25,243/- Disallowance of TDS recoverable written off Rs.2,83,86,834/- Disallowance of penalty expenses Rs.4000/- Disallowance u/s 40(a)(i) Rs.6,91,99,702/- 3. Assessee carried the matter before the learned DRP. In respect of transfer pricing adjustment, learned DRP excluded one M/s Cybermet Infotech Ltd. from the set of comparables due to which the transfer prici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the argument of the learned AR that the equipment in respect of which the depreciation at 60% is claimed does not function on their own and for deriving any functionality they must be connected to the computer equipment, as such, they are part and parcel of the computer systems in respect of which depreciation at 60% has to be allowed. He placed reliance on the decisions reported in BSES Yamuna [2013] 358 ITR 47 (Delhi); Nokia India (P.) Ltd. vs. ACIT [2012] 22 taxmann.com 109 (Delhi - Trib.) & [2012] 20 taxmann.com 810 (Delhi); ACIT vs. Timex Watches Ltd [2016] 71 taxmann.com 177 (Delhi - Trib.); GE Capital Business Process Management Services (P.) Ltd. vs. ACIT [2015] 64 taxmann.com 156 (Delhi - Trib.) in support of his contentions. 7. In BSES Yamuna (supra) the Hon'ble jurisdictional High Court has held as under:- "6. We are in agreement with the view of the Tribunal that computer accessories and peripherals such as, printers, scanners and server, etc., form an integral part of the computer system. In fact, the computer accessories and peripherals cannot be used without the computer. Consequently, as they are the part of the computer system, they are entitled to d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere the reasons for such shortfall like any deficiency of service known at that time. When the TDS certificate was issued to the assessee in respect of the same for TDS credit claim, then the assessee is treating the difference of the TDS receivables and the TDS certificate issued, as bad debts and writing off such bad debts in their accounts under the provisions of 36(1)(vii) and claiming the expense under section 36(2) of the Act. 12. Record reveals that the assessee claimed before the learned AO that the expense on account of this written off bad debts has to be allowed or in the alternative, the same may be allowed to the assessee as a business loss. However, learned AO was of the view that the unclaimed TDS does not form part of the P&L account and the assessee has the right to recover the same. In first appellate proceedings, assessee claimed to have produced the party wise and year-wise break up of TDS recoverable written off supported by the undertakings of one of the directors of the company stating that the income corresponding to the TDS written off was duly offered to tax. Learned DRP stated that there was no evidence of the fact tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ently, whether the assessee written off the difference amount of deficit payment and the amount under the TDS certificate issued, in their books of accounts. It would be conveniently verified by the learned AO and if he finds that initially the assessee recognized the total invoice amount and subsequently, identified the bad debt with reference to the deficit payment by the party and the amount under TDS certificate issued. On verification of compliance with these two conditions, learned AO will allow this expense. Ground Nos.3 and 3.1 are allowed for statistical purposes. 15. Grounds No. 4 to 4.2 are in respect of the allocation of common expenses to the unit claiming benefit u/s 10A. It is the argument of the learned AR that vide para 5.2, learned AO observed that in the absence of details provided by the assessee, travelling expenses of the directors and legal and professional expenses incurred by the company, 5% of the total travelling expenses which may be relatable to the director's travelling needs to be apportioned amongst 10A and non 10A units in the proportion of their turnover. It is the argument of the assessee before the learned DRP that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in foreign currency under the head 'royalty' to the tune of Rs. 4.25 crores and other to the tune of Rs. 16.55 crores. There is no dispute in respect of the royalty expenditure. The break up figure relating to the other expenditure of Rs. 16.55 crore shows that out of such amount, an amount of Rs. 4,35,81,838/- was in respect of the unit claiming deduction under section 10A of the Act, which the Ld. AO disallowed, and Rs. 12,19,74,482/- was in respect of other business not entitled to any tax holiday benefit. Again, out of this Rs. 12,19,74,482/-, learned AO satisfied with the explanation of the assessee except in relation to two expenses. One is Rs. 72,74,728/- classified under the head 'Repairs' and Rs. 1,83,43,136/- under the head 'accruals in respect of projects'. Therefore, the dispute under this ground revolves around the deduction of Rs. 4,35,81,838/- claimed in respect of 10A of the Act, Rs. 72,74,728/- in respect of repairs and Rs. 1,83,43,136/- in respect of accruals in respect of projects. 20. In respect of the deduction of Rs. 4,35,81,838/- claimed in respect of 10A of the Act, it was the submiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Officer, on this point, is indeed not maintainable. As regards the point made by the learned counsel that the non-deduction of tax at source from payments made to the non-residents must be dealt with at a different level, and bearing in mind the need to protect our tax base, we can only point out that lapses with respect to tax withholding obligations from payments made to non-residents is visited with several type of consequences- disallowance under section 40(a)(i), recovery under section 201, penalty under section 271C and, in certain situations, even prosecution under section 276B. What we are dealing with right now is a limited aspect of the matter having impact on computation of taxable income, and while dealing with this limited aspect of the matter, we must not bother about the considerations which are not germane to this context. As for the present context, the issue raised in the appeal, given the settled legal position, is wholly academic and revenue neutral, and, in the light of the CBDT instructions which bind all the field authorities under section 119 of the Act, cannot be pursued by the appellant. We, therefore, see no need to even deal with the matter on merits i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ooks of accounts in respect of accruals made for various ongoing projects, as the invoices in respect of concerned supplies/expenses are not received at the end of the year, the same were provided as accrued in the books of accounts, immediately upon receipt of the invoice from identifiable parties, tax withholding in respect of the said amount is made and credited the same in the books of accounts. It is submitted that immediately upon deduction of tax, other compliances like issuance of certificate, furnishing of prescribed quarterly statements are made. 27. Learned AO rejected the contentions of the assessee stating that the details of nature of services of accruals in respect of projects have not been furnished and therefore, it cannot be claimed that these are not for technical services. It is the argument of the learned AR that these are the amounts on an estimate basis where the parties in respect of various ongoing projects were not identified and the invoices in respect of concerned supplies/expenses were not received. He further submits that wherever required tax withholding made immediately on receipt of invoice from identifiable part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is further submitted that the provision was created to follow the matching concept of accounting entries in accordance with accounting standards, without actual identity of payees being known. He further submitted that there is no dispute from the revenue that the said expenses are otherwise allowable for tax purposes. Basing on this, he submitted that in the absence of requirement of withholding tax at source, no disallowance is warranted under section 40(a)(i) of the Act. 30. On a careful consideration of the contentions, we are of the considered opinion that inasmuch as the payees are not identifiable, it would not be possible for the assessee to deposit any TDS even in case of its deduction. We are, therefore, deem it just and proper to direct the learned AO has to verify from the evidence to be produced by the assessee relating to the creation of provisions for project accruals and the year end reversal of such provisions, and accordingly to delete the disallowance. This ground is set aside to the file of learned AO for verification. &nb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted updated margins of 14 comparable companies. 35. However, learned TPO rejected 4 comparables selected by the Assessee and selected remaining 10 comparables. Further, learned TPO performed a detailed analysis and introduced additional 15 comparables, thereby selected a final set of 25 comparables with a PLI of 28.16%. Accordingly, transfer pricing adjustment of Rs. 38,36,90,639 was made. However, subsequently, as stated above, learned TPO in compliance to the directions issued by the Dispute resolution Panel (DRP) passed supplementary order wherein Cybermate Infotek Limited was excluded from the final set of comparables and made final TP adjustment at INR 31,77,69,775 in respect of international transaction related to provision of software development services. 36. Assessing Officer ("learned AO") framed assessment and passed final assessment order under section 143(3) of the Income Tax Act, 1961 on 30.11.2011. Assessee is aggrieved by the inclusion of 18 companies which the assessee objected, exclusion of three companies which are desired by the assessee to be included and non grant of the working capital adjustment. COMPARABLE COMPANIES SO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. vs. DCIT [2015] 376 ITR 183 (Delhi) and submitted that the functionality of an entity is the key determinative factor for its inclusion or exclusion from the list of comparables and there is no such thing as estoppel on the ground of assessee accepting the entity as functionally comparable in a previous assessment year. 41. On a careful perusal of the decisions relied upon by the assessee, we find ourselves in agreement with the submission that in order to decide the comparability of an entity, the key determinative factor is its functionality but not the acceptance or rejection by any of the parties. Consent does not make an otherwise functionally dissimilar entity, a better comparable. We, therefore, find it difficult to reject the objections of the assessee in respect of these comparables. Bodhtree Consulting Limited: 42. Assessee objects this company on the ground of functional difference and non-availability of segmental information. According to the Assessee the company is engaged in diversified set of services and segmental data is not available. Ld. TPO rejected assessee's contention on the ground that it is engaged in software dev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the assessee company. Another relevant factor to be noticed is Page 1254 of the paper book, which divulges the significant accounting policies of this company. Under the head 'Revenue recognition', it has been mentioned that: "revenue from software development is recognized based on software developed and billed to clients." As against this, the Schedule forming part of the accounts of the assessee company provides for revenue recognition in the terms: "revenue from software developed is recognized over the contracted period of development on cost plus basis." It can be seen that there is a lot of difference in the revenue and recognition models of the assessee was well as Bodhtree Consulting Ltd. This factor, in addition to the functional dissimilarity as discussed above, makes this company noncomparable with the assessee company. We, therefore, order to exclude it from the list of comparables." 46. There is no dispute that the Aircom is also into the business of software development and providing related services to its AE. We are, therefore, of the considered opinion that being a software solutions company which is engaged in providing open and end-to-end web solutions, softw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and held that the company is engaged in high-end technology driven services and product development. We also found from page numbers 111 and 116 of the paper book that the entity level profitability was taken into consideration and no segmental bifurcation of cost is available. 52. It is not in dispute on behalf of the revenue that the Ld. DRP rejected this company as a comparable in respect of the assessment year 2010-11 on the ground of functional dissimilarity holding that the company is engaged in highend technology driven services and product development. Having regard to this fact coupled with the situation that no segmental data is available in respect of the software development and the IT enabled services separately, we do not consider this company as a right comparable. E - Infochips Limited: 53. Assessee's objection for an inclusion of this company in the set of comparables on the ground of diversified set of services and non-availability of the segmental data was rejected by the Ld. TPO on the ground that as per the annual report the company was only deriving income from software development services. 54. However from a reading of the note 13 of the note ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any is available indicating operating profit from software development services, we order to exclude this company from the list of comparables." 57. It is further submitted on behalf of the assessee that Ld. TPO has erred in taking the entity level profitability. The sales figure taken by the TPO is Rs. 24.03Crores, which includes the revenue from software services as well as income from sale of software products. In the light of same, it is apparent that the PLI arrived at by the TPO is incorrect as same does not represent the margin of the software segment, as no segmental data is available. 58. In the light of above, we are satisfied that E-Infochips Limited is functionally dissimilar to the Assessee and accordingly it is to be excluded from the final set of comparable companies for benchmarking international transaction related to software segment. FCS Software Solutions Limited: 59. Much against the objections of the assessee, Ld. TPO selected this company as a comparable on the ground that it passed all the filters. Ld. DRP confirmed the same. 60. However from page No. 222 of the paper book, we find that this company is dealing in IT consult ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reproduced by the TPO in the impugned order. Therefore, even the said segment is not to be included as part of the software development services, as asserted by the assessee. Once the segment of application support and infrastructure management services are removed along with the exclusion of E-learning and Digital consulting segment, then the income of the said concern from software development services falls below 75% of its total income and therefore, it deserves to be excluded even on the basis of the filter applied by the TPO. Thus, on this aspect, assessee succeeds." 62. Since this company is engaged in a diversified fields and deriving revenues from different sources, the functional segmental information in respect of revenue and cost is not available, and the information relating to the geographical segmentation is not at all helpful for comparison of this company with the assessee, we find that FCS Software Solutions Limited is functionally dissimilar to the Assessee and accordingly it is to be excluded from the final set of comparable companies for benchmarking international transaction related to software segment. Goldstone Technologies Limited: 63. According to the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee pointed out that before the DRP, it was pointed out that the said concern Goldstone Technologies Ltd. was engaged in the activities related to Media & IP TV and further, the company had carried inventory of set top boxes and movie rights in its Balance Sheet for the previous year. In addition, the said company had some income from sale of industrial material. Looking at the services provided by the said concern, it is clear that the same are functionally dissimilar to the services provided by the assessee and there is no merit in comparing the results of the said concern while benchmarking the international transaction of the assessee. Accordingly, we direct the Assessing Officer to exclude Goldstone Technologies Ltd." 67. In view of the functional dissimilarity coupled with the fact that there were extraordinary events during the year, we find that this company has to be excluded from the final set of comparable companies for benchmarking international transaction related to software segment. Helios & Matheson Information Technology Limited: 68. Assessee objected the inclusion of this company on the ground that it is functionally different. However, Ld. TPO included it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this company was functionally incomparable to software development firms by making following observations:- "15. The ld. Counsel for the assessee submitted that the third company that should be excluded from the final list of comparables is Helios & Matheson Information Technology Ltd. The said company should be excluded on the ground of functional disparity. The ld. Counsel contended that Helios & Matheson Information Technology Ltd. is engaged in rendering ITES including BPO services, Offshore delivery, Project management services, etc. Therefore, the services rendered by Helios & Matheson Information Technology Ltd. are not comparable to ITS rendered by the assessee. The ld. Counsel submitted that in assessee's own case in assessment year 2007-08 the Tribunal has excluded Helios & Matheson Information Technology Ltd. from the list of comparables. 16. On the other hand the ld. DR vehemently defended the findings of TPO in including Helios & Matheson Information Technology Ltd. in the final set of comparables. 17. Both sides heard. Orders of the authorities below perused. We find that the Co-ordinate Bench of the Tribunal in assessee's own case in assessment year 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp; 498, 509 and 511 shows that the financial statements lack in providing the segmental results. Further, the heading "subsidiaries and joint ventures" at page No. 499 and the heading "Merger of iGate Technology Services Private Limited" at page No. 507 show that in addition to the same, it is pertinent to note that there has been an exceptional event during the year, i.e. the company is wholly owned subsidiary iGate Technology Services Private Limited has been amalgamated and accordingly, the financials include the effect of the same. 77. Considering the non-availability of the segmental information coupled with the fact that that the company has an exceptional event of operations, makes this company excludable from the final set of comparable companies for the present year under consideration. Infosys Technologies Limited: 78. This company is undoubtedly a corporate giant with its large scale of operations vis-à-vis the Assessee company; that it had a brand impact to determine the premium pricing; that it has a different model of revenue recognition. It is submitted on behalf of the assessee that this comparable has been rejected in Assessee's own case in immedi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chmarking international transaction related to software segment. Kals Information Systems Limited (Segmental) 81. At the outset it is brought to our notice that this company was considered by a coordinate bench of this tribunal in the immediately preceding year that is assessment year 2007-08 in assessee's own case and this Tribunal rejected this company to be included as a comparable to the assessee. 82. On a perusal of the order dated 18.5.2016 in ITA No. 5837/Delhi/2011 in assessee's own case, we find that this company was considered by this Tribunal vide paragraph numbers 37 to 39 and found that the software segment of this company also includes revenues from software and training, whereas the assessee company is not engaged in imparting any training or selling its software products to attract revenue. On this premise, this Tribunal held that the finances of this company are not comparable with the assessee company and on that ground this company is not a valid comparable. 83. Further, the Assessee has placed reliance on Aircom (supra), in order to exclude this comparable company on the ground that this company consisting of STP unit is engaged in software products an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ars 2006-07 and 2007-08. Respectfully following the precedents, we hold that Kals Information Systems Ltd. (Seg.) should be expunged from the set of comparables." 84. No change of circumstances is brought to our notice either by the assessee ot the revenue, as such we do not find any reason to take a different view from the view taken by this Tribunal for the earlier year. We, therefore, consequently hold that this company is not a valid comparable to that of the assessee and has to be excluded from the final set of comparable companies for benchmarking international transaction related to software segment. LGS Global Limited: 85. Initially the assessee offered this company as a comparable, but the assessee claims to have found that this company is not a comparable and wrongly included in the final list of comparable companies. Inasmuch as the key determinative factor as far as the inclusion/exclusion of any company from the list of comparables is the functionality of an entity, we are of the considered opinion that this company has to be considered on the parameters of functionality and assessee cannot be prevented from challenging the same. 86. Page No. 26 of the 9th annual r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other factors this company cannot be a comparable to the assessee and has to be excluded from the final list of comparable companies for benchmarking international transaction related to software segment. Mindtree Limited 91. Assessee sought the exclusion of this company on the ground of functional dissimilarity. However Ld. TPO included it on the ground that this company is deriving revenue from both software as well as ITES and sufficient segmental information is not available in the financial statements. Under the head "the business performance", at page No. 1010 of the paper book it is revealed that this company is structured into two business units that focus on software development R&D services, and IT services. It also offers IT Strategic Consulting, Application Development, Data Warehousing and Business Intelligence, Application Maintenance, Package Implementation, Product Architecture, Design and Engineering, Embedded Software, Technical Support, Testing and Infrastructure Management Service. 92. Further at page No. 27 of the annual report incorporated at page No. 1027 of the paper book it is mentioned that on 17/12/2007 the company acquired hundred percent of the outs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ware product company, is not a good comparable with the assessee, assessee placed reliance on Aircom (supra), in order to exclude this comparable company. The coordinate bench has rejected this comparable by making following observations:- "19.2. We have heard the rival submissions and perused the relevant material on record. It can be seen from the information supplied by this company u/s 133(6) of the Act, a part of which has been reproduced in the TPO's order, that this company 'has developed a few of its own products in the area of identity management connectors.' Revenue from product licences stands at Rs. 288.93 million as against the revenue from software development services at Rs. 4829.57 millions. Though this company is more engaged in software development services, but, at the same time is also a software product company, which is evident from the information supplied by it to the TPO. Thus, the total revenue of the company on entity level also, inter alia, includes revenue from product licences. There is no information available from the Annual report of this company or the data collected by the TPO u/s 133(6) of the Act to divulge the amount of revenue from software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of fixed assets at schedule 5 incorporated at page No. 1260 it is clear that there has been an exceptional circumstance during the year, i.e. the company has acquired intellectual property rights in the nature of copyrights. 101. The Assessee has placed reliance on Aircom (Supra) wherein, this comparable has been excluded on account of holding copyrights for the year under consideration. Relevant extracts from the order has been reproduced hereunder: "20.1. The assessee initially treated this company as comparable in its TP documentation. The TPO obtained information from this company which transpired that it was into software development services. The assessee objected to the same by contending that it had certain peculiar economic circumstances. Not convinced with the assessee's submissions and considering the information obtained from this company u/s 133(6) of the Act, the TPO treated it as comparable. The assessee is aggrieved. 20.2. Having heard the rival submissions and perused the relevant material on record, we find from the Annual report of this company that it has 'Copyrights' included in its Schedule of fixed assets with the closing written ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompanies. 106. Ld. TPO observed that the company at present is in various areas of software development industry and what is stated above in the annual report is a futuristic statement. Ld. TPO referred to para 2.1 to be found on page No. 1533 of the paper book to the effect that no inventory is held, since the company is engaged in developing software and providing IT solutions. This fact evidences that this company is confined only to software development and no yet into net work or internet infrastructure. Even the Profit and Loss Account to be found at page No. 1536 also shows that other than the other income, the company is a deriving income only from software exports. Even the Note 15 of the Notes on Account reads that there are no separate reportable segments. We do not find any material from the record that this company has actually been engaged in the activities like a) business of Software Products b) Software Development c) Training Services; and d) manufacture of vide range of products or that it provides end to end business solutions. 107. We therefore find it difficult that this company is functionally different from the assessee or that it is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee or by the revenue, as such, by respectfully following the reasoning of this Tribunal in assessee's own case for the immediately preceding year, we conclude that this company is not a suitable one to be continued in the set of comparables. We therefore direct the exclusion of this company from the final set of comparable companies for benchmarking international transaction related to software segment. COMPARABLE COMPANIES SOUGHT TO BE INCLUDED BY THE APPELLANT FOR BENCHMARKING OF ITS INTERNATIONAL TRANSACTION CG Vak Software Exports Limited 112. Assessee selected this company as a comparable. Though the Ld. TPO did not dispute the functional similarity of this company with the assessee, rejected the same on the ground that this company did not satisfy the employee cost filter of 25% and that its expenditure on employees was only 4.41% of the total cost. Ld. DRP did not entertain the argument advanced on behalf of the assessee that the ld. TPO has erred in not including the cost of services which represented the expenditure on salary and owing to this error the employee cost has come down to 4.41%. 113. On this aspect, assessee placed reliance on the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y observing that in the annual report of the company there was no expense such as 'salary cost' or 'remuneration to employees' in its P&L A/c. Ld. DRP observed that assessee was drawing conclusions on the basis of unsubstantiated presumptions and whenever there is doubt about the functional comparability, it is better to drop such comparable rather than indulging in presumptions. Ld. DRP did not accept the assessee's contention that some companies may include employee cost as a separate item in their financial statements while others may aggregate it under the expenses such as administrative expenses, sales and marketing expenses etc. Ld. DRP observed that employee cost is always shown as a different line item in the profit and loss account. 24. Ld. counsel submitted that this comparable has been accepted in the case of Kenexa Technologies Pvt. Ltd. (page 254 of the PB). Ld. counsel submitted that this comparable passes the employee cost filter of more than 25% as adopted by ld. TPO. He submitted that the employee cost is 46% of the total cost. In this regard ld. Counsel referred to pages 56 & 57 of the PB, wherein the objections raised before ld. DRP are cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ist of comparables selected by the Ld. TPO. SIP technologies Limited: 116. This company selected by the assessee was rejected by the TPO on the ground of diminishing revenues. Ld. DRP also held that the companies having diminishing revenues/persistent losses for the previous 3 years were exceptions and refused to interfere with the findings of the Ld. TPO. 117. It is submitted by the Ld. AR that this company was accepted as functionally comparable to the assessee by the Department as well as by a Coordinate Bench of this Tribunal in assessee's own case for the previous assessment year of 2007 - 08. It is argued by the Ld. AR that the diminishing revenue filter is invalid for the simple reason that revenue is not a true indicator of the performance of company as during its business life cycle owing to changing economic conditions, a company could have variation in its revenue pattern over a period of time. For example a company with increasing revenues over a period of time does not necessarily reflect that it is performing better as the corresponding increase in expenses could be higher than revenues and the company might still incur losses.&n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee's profit is not steady, but, has diminished during the instant year from the preceding year. In such a situation, if we exclude the companies having diminishing profits, it would mean that the companies whose profit pattern is also similar to that of the assessee would face the axe. Doing so would mean excluding the comparable companies from the final tally, which is not appropriate. However, the companies having persistent losses, obviously, cannot be compared with the assessee because it has earned positive income not only in this year, but, in the preceding year as well. We, therefore, hold that the companies having diminishing revenue should not be excluded, but, only the companies having persistent losses should be expelled from the final tally of comparables." 119. While following the decision of the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) (P.) Ltd. this view has further been affirmed by another co-ordinate bench of this ITAT in case of Vestergaard Asia (P.) Ltd. vs. DCIT [2017] 88 taxmann.com 313 (Delhi-Trib.) wherein the court has observed that :- "28. This comparable sought to be included by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SIP technologies need to be rejected on the ground that it suffered losses, it is submitted on behalf of the assessee that for the filter of persistent losses to come into play it should be shown that the comparable under dispute has incurred losses for three preceding years including the assessment year in question. Reliance in this regard is placed on the Pune ITAT order in case of Bobst India (P.) Ltd. vs. DCIT [2015] 63 taxmann.com 339 (Pune-Trib.) wherein the bench observed that a company can be rejected as persistent loss maker only if it has incurred losses for more than 3 years. In the present case in the immediate preceding year the comparable company has showed operating profit of 13.90%, thus, as the company has not suffered losses and its functionality has not been challenged by the TPO, it becomes clear that there is no valid ground to exclude this company as comparable. 121. On a careful consideration of the factual and legal position, we find that this company is a valid comparable to the assessee and, therefore, has to be included in the final set of comparables. Indium Software India Ltd. 122. This company was selected as comparable by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of working capital deployed by the comparables on the first and last day of the accounting period. We have no means to ascertain the working capital deployed by the comparables through the year. In fact, the working capital adjustment should be computed on the basis daily average of working capital deployed by the tested party and each of comparables, respectively. The assessee has taken the average of the amount of working capital deployed by the comparables on the first and last day of the accounting period to compute the working capital adjustment. It is quite probable that daily average is substantially difference from the average of the amount of working capital deployed by the comparables on the first and last day of the accounting period. The adjustment for functional differences etc. is to be allowed only if it can be ascertained with reasonable accuracy which is impossible in this case because of unavailability of relevant data. Therefore, this panel endorses the proposal of the AO to disallow the working capital adjustment claimed by the assessee". 127. Revenue does not dispute the submission on behalf of the assessee that the working capital adjustment was given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that while considering these aspects opportunity would be given to the assessee to present its case in this regard. The assessee is required to cooperate with the Ld. TPO in furnishing the details, break up, datas, etc. or any other necessary information to the satisfaction of the TPO so that reasonably accurate adjustment, if any, can be made as per Indian Transfer Pricing Law (i.e. Rule 10B (3)(iii)) on account of risk and working capital. Ground No.6 & 7 are thus allowed for statistical purposes." 55. Identical issue has also been dealt with by the ITAT, Delhi Bench 'E', New Delhi in case cited as Nokia India (P.) Ltd. v. Addl. CIT [2012] 51 SOT 286/20 taxmann.com 810 and determined the issue in favour of the assessee by returning the following findings :- '5.1 Thus it is the contention of the ld. counsel of the assessee that the TPO while determining the arm's length price of the subject international transaction during assessment year 2006-07 ignored the fact the assessee has been granted the benefit of the working capital adjustment during A.Y. 2005-06 by himself and the fact the same has also been allowed by his predecessors during the transfer pric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he adjustment made by the TPO has to be upheld. 6. We have carefully considered the submissions in light of the material produced and precedent relied upon. It is an undisputed fact that on the same set of facts and in the same business model the assessee has been provided the working capital adjustments in the preceding assessment years. Under the circumstances, in our considered opinion, it was incumbent upon the TPO to consider the same in the current year.' 56. Keeping in view the fact that the issue in question has been settled in the cases cited as Qualcom India (P.) Ltd. (supra) and Nokia India (P.) Ltd. (supra) and the fact that assessee in this case is engaged in providing software development services to its group companies and to arrive at ALP of the international transactions, the ld. TPO / DRP resorted to comparability by selecting different sets of comparable companies and after applying the various filters, the ld. TPO selected 10 comparable companies as mentioned in para 8.7 of his order, the appropriate transfer pricing adjustment can only to be made qua the international transaction undertaken by the assessee company during the year under assessment on the ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
