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TMI Blog2018 (2) TMI 1783X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 allowed for statistical purposes. Allocation of common expenses to the unit claiming benefit u/s 10A - Held that:- AO to verify whether the recomputation of the deductible amount is properly done, in the light of the submission that the deduction of the amount allocated to the STP unit’s net profit is incorrect and instead of the same the learned AO should have deducted the same from the assessee’s operating income. For this purpose, we remand issue to the learned AO for verification. Grounds allowed for statistical purposes. Disallowance u/s 40A(i) - assessee had incurred expenditure in foreign currency under the head ‘royalty’ - Held that:- We are satisfied that the disallowance under section 40(a)(i) of the Act is revenue neutral and the learned AO is directed to allow the corresponding deduction to the assessee u/s 10A of the Act. Expenditure represents the purchase of spares from foreign affiliates - TDS liability - PE in India - Held that:- Inasmuch as the payees are not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned 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 pricing adjustment had come down to ₹ 31,77,69,775/-. In respect of additions on account of corporate issues, learned DRP sustained the addition to the tune of ₹ 13,06,80,262/-. Learned AO completed the assessment by making an addition of ₹ 31,77,79,775/- on account of transfer pricing adjustment and a sum of ₹ 13,06,82,262/- on account of corporate tax disallowance and concluded the assessment at ₹ 91,92,67,610/-. Challenging this, the assessee is in appeal before us. 4. Ground No.1 is general in nature. Ground No.2 to 2.1 relate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 depreciation at the higher rate of 60 per cent." 8. In the case of Nokia India (P.) Ltd. (supra), wherein a co-ordinate bench of this Tribunal has held as under: - "13.1 This issue pertains to claim of depreciation @ 60% on UPS, LAN/WAN equipment, switches, network equipment and visual studio etc.13.2 We find that this issue is squarely covered by the decision of the Hon'ble Jurisdictional High Court in IT Appeal No. 1266 (Delhi) of 2010 in the case of C.I.T. v. BSES Rajdhani Powers Ltd. vide order dated 31.8.2010 wherein it was held that the Court was in agreement with the view of the tribunal that the computer peripherals such as printer, scanner etc. form an integral part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee 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 that originally the income was offered to tax by way of entries in the books of accounts. 13. Learned AR placed reliance on the decision of the Hon'ble Apex court in TRF Ltd. vs CIT in Civil Appeal No.5293 & 5294 of 2003 and also a circular No.12 of 2016 issued by the CBDT pursuant to the order in M/s TRF Ltd., clarifying that the claim for bad debts shall be admissible for taxes, if the said sum is written off as irrecoverable in the books of accounts and the company should not be required to establish before the tax authorities that the debt had become irrecoverable. In support of his contention that the claim for TDS recoverable is allowable, assessee placed reliance on the following observations of the coordinate bench of this Tribunal in the case of Vertex Customer Services India (P.) Ltd. vs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sional 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 the support functions were separately maintained for STP unit, as such, all direct costs pertaining to STP units were directly charged to the P&L account of the STP unit. It was further stated that the common cost have already been apportioned on the basis of turnover and the managerial remuneration was incurred on directors of telecom division and the said directors have nothing to do with the STP unit, as such, the question of allocation does not arise. The DRP did not agree with the assessee. 16. It is argued by the learned AR that direct cost incurred in respect of STP unit was charged to STP unit itself and it does not call for any further allocation, inasmuch as the directors of the telecom division never performed any functions for STP unit. 17. It is further brought to our notice that in the order of the learned AO vide paragraph No.5.3, learned AO committed a mistake by deducting the amount a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espect of repairs and ₹ 1,83,43,136/- in respect of accruals in respect of projects. 20. In respect of the deduction of ₹ 4,35,81,838/- claimed in respect of 10A of the Act, it was the submission of the assessee that the TDS in respect of the expenditure incurred by 10A units of the assessee was duly complied and even otherwise inasmuch as 10A unit is entitled to 100% deduction u/s 10A of the Act, any disallowance u/s 40(a) of the Act will not impact the tax liability of such unit. The prayer of the learned AR is that if the disallowance is not deleted, the learned AO may be directed to increase the corresponding deduction also. 21. In this regard reliance is placed on the order passed by the Gujarat High Court in case of ITO vs. Keval Constructions 354 ITR 013 (guj.) wherein while dealing with a similar issue, the court held as under:- "5. Having heard counsel on both the questions today in this appeal, we find no error in the Tribunal's ultimate conclusion. Even if a certain expenditure which was incurred by the assessee for the purpose of developing housing project was not allowable by virtue of section 40(a)(ia) of the Act, since the assessee had not deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 in the context of the present proceedings, even as we take on record learned counsel's submission that, even on merits, the issue is now covered in favour of the assessee and that the assessee did not have any obligations to deduct tax at source at all. That aspect of the matter is wholly academic. In view of these discussions, and bearing in mind entirety of the case, we uphold the preliminary objection of the assessee and dismiss this ground of appeal as not maintainable." 23. In this set of facts and circumstances, we are satisfied that the disallowance under section 40(a)(i) of the Act is revenue neutral and the learned AO is directed to allow the corresponding deduction to the assessee u/s 10A of the Act. 24. Coming to the disallowance of ₹ 72,74,728/-, according to the assessee, this expenditure represents the purchase of spares from foreign affiliates and inasmuch as it constitutes business income to the foreign entity and since there is no permanent establishment in India such incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing made immediately on receipt of invoice from identifiable parties and the credit of the same was made in the books of accounts. 28. In this regard, reliance was placed by the Assessee on the decision of this Tribunal in the case of Apollo Tyres Ltd. vs. Deputy Commissioner of Income Tax (78 taxmann.com 195) wherein it has been held as under:- "12. At the time of hearing before us, learned DR has referred to the above section so as to buttress his argument that tax is to be deducted even if there is provision of the amount payable. The ITAT, Cochin Bench in the case of Abad Builders (P) Ltd. (supra), after considering the above provision, has held that tax is to be deducted even in respect of provision for expenses. However, the ITAT, Chennai Bench in the case of Dishnet Wireless Ltd. (supra) has held that in the case of the year end provision where the party/payee is identifiable, the TDS is to be deducted and where the party is not identifiable, no TDS is deductible. Similar view has been taken by the ITAT Mumbai Bench in the case of Industrial Development Bank of India (supra). After considering the scheme of Chapter XVIIB with regard to tax deduction at source, we agree w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned AO observed that the assessee entered into the following international transactions: S. No. International Transactions Segment Amount (INR) 1 Purchase of Raw-materials components and Telecommunication Segment 428,172,674 2 Export of finished goods 18,711,838 3 Payment of Royalty 42,506,831 4 Availing of services 70,176,029 5 Commission Income 7,212,421 6 Reimbursement of expenses to AEs 8,402,472 7 Reimbursement of expenses by AEs 23,807,212 8 Provision of Software Services Software Segment 1,673,082,480 9 Availing of services 12,363,736 10 Purchase of software 14,567,640 11 Reimbursement of expenses by AEs 112,102,011 32. Hence, the matter was referred to the Transfer Pricing Officer (for short called "TPO") for determination of the arm's length price of the international transaction. The dispute before the TPO relates only to the software segment of the assessee. 33. Assessee as a tested party has been characterized as provider of software development services to its AEs which had used Transactional Net Margin Method (TNMM) as the most appropriate method for its benchmarking of international transaction. Search for uncontr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14. Persistent Systems Limited 15. Quintegra Solutions Limited 16. R Systems International Limited (Segmental) 17. Softsol India Limited 18. Tata Elxsi Limited (Segmental) 38. We find from the order of the TPO, that the assessee is a wholly owned subsidiary of NSNPL, which in turn is a wholly owned subsidiary of Nokia Siemens Networks B.V. The company is engaged in the business of manufacturing and trading of telecommunication network equipments and network design, installation and commissioning. The company also provides support services to major telecom and IP service providers. NSNIPL also develops telecom software for its AEs. The company's product and solution portfolio comprises Switching, Transmission, VoIP. Next Generation Networks like SURPASS, intelligent Network, Microwave solutions, Mobile data solutions, 2.5G and 3G networks including GPRS, EDGE and UMTS, Radio, Broadband, Access products apart from services encompassing related products and systems. We shall now proceed to deal with the contentions on either side in detail on the aspect of comparability of the disputed entities with the assessee. 39. At the outset learned DR brought to our notice that ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... identifiable reporting segment that is software development service, showing that no separate segmental finances relating to the software development open and end-to-end web solutions, software consultancy designs and software products are available. 44. It is argued on behalf of the assessee that this company is following a different pricing model, as is evident from the annual report to be found at paper book page No. 24 that the revenues from software development is recognized based on software developed and billed to the client whereas the assessee is a captive software developer for its AE's. 45. Ld. AR placed reliance on a decision of this Tribunal in ITA No. 6402/DEL/2012 (AY 2008-09) in the case of Aircom International (India) Pvt Ltd v DCIT, (2017) 50 CCH 0280 (hereinafter "Aircom") in support of his plea that Bodhtree is engaged in providing open and end-to-end web solutions, software consultancy, design and development of solutions, using the latest technologies and not comparable with the company which is into the business of software development and providing related services to its AE. The coordinate Bench in the judgment of Aircom (supra) has excluded this compara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany considered whole of India as a single geographical segment. Vide page No. 94 at schedule No. 9, the software development and consulting services are clubbed together. No separate credentials are available. It's also argued that the annual report of the comparable also does not disclose sufficient related party disclosures. 49. Inasmuch as the company is dealing with software development and consulting services as well as medical transcription and no separate financials in respect of the software development from consulting services are available, we are of the considered opinion that this company is not a good comparable with the assessee. E - Infochips Bangalore Limited: 50. Assessee objected the inclusion of this company on the ground that the company was engaged in diversified set of services and segmental data was not available. Ld. TPO rejected the said objection stating that there was nothing in the annual report to suggest that the company was in the business of product engineering and semiconductor design services. 51. From page No. 116 of the paper book under the caption segment information, we find that the company is engaged in software development and IT ena ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onic board. 56. The Assessee is relying on the order passed by this Tribunal in the case of Saxo India Ltd v ACIT [2017] 397 ITR 160 (Delhi) in support of his contention that a company deriving its income from software development, hardware maintenance, information technology, consultancy etc. is not a good comparable with the assessee and for excluding this comparable from the final set of comparable. It was held as follows:- "10.2. After considering the rival submissions and perusing the relevant material on record, we find that the Annual report of this company is available in the paper book with its Profit and loss account at page 1025. Schedule of Income indicates its operating revenue from software development, hardware maintenance, information technology, consultancy etc. Revenue from hardware maintenance stands at ₹ 3.92 crore, which has been considered by the Transfer Pricing Officer himself as sale of products. Such sale of products constitutes 15% of total revenue. There is no segmental information available as regards the revenue from sale of products and revenue from software development segment. As the assessee is simply engaged in rendering software developm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to give the quantitative details of sales. 61. Assessee submitted that a company which is in E-learning and Digital Consultancy cannot be compared to a captive software developer like assessee, and relied on the order passed by this Tribunal, in case of Tibco Software India Pvt. Ltd. v DCIT, [2015] 56 taxmann.com 91 (Pune-Trib), (AY 2008-09) to exclude this company from the final set of comparable. This Tribunal, in the case of Tibco(supra), ordered to exclude this comparable company by making following observations:- "24. Moreover, the assessee had referred to the following extract from the Annual Report of the said concern in relation to the E-learning and Digital Consulting before the TPO to say that it is in the nature of IT enabled services:- "E-learning and Digital Consulting Services: US corporations look at E-learning of web / CD based training programs as one of the ways to achieve organizational growth and improved business performance. "E-learning helps employees, vendors, and dealers of a company to better their performance and deal with fast-changing environments. E-learning makes training highly efficient, by making it available anytime, anywhere and reduces ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t from page No. 303 of the paper book, the company had carried inventory of set top boxes and movie rights in its balance sheet for the previous year. 64. Schedule 5-forming part of balance sheet under the head 'investments- cost' at page No. 314 of the paper book coupled with Note No. 3 of the notes on accounts at page No. 320 of the paper book, shows that during the year under consideration, the company has undergone exceptional circumstances as it has acquired its wholly owned subsidiary namely, Staytop Systems Inc, USA and acquired 51% stake in 4G Informatics Private Limited. 65. Lastly it is contended on behalf of the assessee that this comparable was rejected as a comparable by the learned TPO in Assessee's own case for AY 201011 owing to functional dissimilarity since the company is engaged in rendering ITES services. This assertion on behalf of the assessee is not controverted by the Revenue. 66. Reliance has been placed on order passed by this Tribunal in case of Emptoris Technologies India Pvt. Ltd. v DCIT [2016] 67 taxmann.com 279 (Pune - Trib.) (AY 2008-09) to the effect that Goldstone Technologies Ltd. was engaged in the activities related to Media & IP TV and fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame for the segment in all the locations and hence segment reporting is not applicable to the company. It is further submitted on behalf of the assessee that, the employee cost filter cannot be ascertained from the financials. 71. The Assessee also submitted that the revenue recognition model of this comparable is also different from the revenue recognition model of the Assessee. According to the revenue recognition policy of the company to be found on page 416 of the paper book Annual Reports paper book Vol - II, - "revenue from software services and projects comprise income from time and material and fixed price contracts. Revenue from time and material contracts is recognized using percentage of completion method calculated as a percentage of the cost of efforts incurred up to the reporting date to estimated total cost of efforts. Maintenance revenue is recognized over the period of underlying maintenance contracts, interest receipt is recognized on accrual basis. Dividend is recognized on receipt basis. Unbilled revenue primarily comprises the revenue recognized in relation to efforts incurred up on fixed price, fixed time frame contracts until the balance sheet date." 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... & Matheson Information Technology Ltd. from the final set of comparables." 73. Further, assessee also placed reliance on the judgment of Bangalore Tribunal in the case of NMS Communication Private Ltd. v DCIT, [2016] 68 taxmann.com 72 (Bangalore-Trib) in support of their contention that Helios is not a good comparable for the assessee which renders captive software development service as its main revenue is from sale of software. 74. In view of the fact that this company was found to have been engaged in rendering IT has including BPO services, offshore delivery, project management services etc and no segmental information is available, we find it difficult to hold that this company could be continued as a good comparable. We, therefore, direct the exclusion of this company from the final set of comparable companies for benchmarking international transaction related to software segment. iGate Global Solution Limited: 75. On the ground of functional dissimilarity the assessee objected the inclusion of this company in the set of comparables, but the Ld. TPO proceeded to include the same on the ground that it passed all the filters. 76. A reading of the segmental reporting to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble Delhi High Court in CIT vs. Agnity India Technologies (P) Ltd. (2013) 219 Taxmann 26 (Del) considered the giantness of Infosys Ltd., in terms of risk profile, nature of services, number of employees, ownership of branded products and brand related profits, etc. in comparison with such factors prevailing in the case of Agnity India Technologies Pvt. Ltd., being, a captive unit providing software development services without having any IP rights in the work done by it. After making comparison of various factors as enumerated above, the Hon'ble Delhi High Court held Infosys Ltd. to be non-comparable with Agnity India Technologies Pvt. Ltd. The facts of the instant case are similar to the extent that the extant assessee is also not owning any branded products and having no expenditure on R&D etc. When we consider all the above factors in a holistic manner, there remains absolutely no doubt that Infosys Technologies Ltd. is not comparable with the assessee company. Respectfully following the judgment of the Hon'ble jurisdictional High Court in Agnity India (supra), we hold that Infosys Technologies Ltd., cannot be treated as comparable with the assessee company. This company is, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... object laboratories is only to the tune of maximum 4.24%. By no imagination this can be construed as revenues from software products. When we peruse the Annual report of this company, which is available in the paper book, it can be seen that there is no such mention of software products revenue limited to 4.24%. On the contrary, it has been mentioned in the Notes to the financial statement that: "the company is engaged in development of software and software products since its inception." The company consisting of STPI unit is engaged in software products and development of software and is also undertaking training activity of software professionals on online projects. Not only the revenues of the segment considered by the TPO also include the revenue from software products, but also from training imparted on commercial basis. It is clear that the assessee is not providing any training under this segment, which has been rather included by the assessee in the second category of the assessee's business, namely, 'Software Deployment, Training, Consultancy and Equipment Rental.' Since the assessee's activity under this segment does not include any revenue from training, but the revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... co Global Systems Inc. 88. In view of the vast functional diversity of this company as is evident from the "offerings of the LGS service and solution" to be found at page No. 935 of its annual report coupled with the fact of the exceptional circumstance occurred during the year, we are of the considered opinion that this company is not a good comparable with the assessee and on that score it has to be excluded from the final set of comparable companies for the present year under consideration. Larsen & Toubro Infotech Limited 89. This company also was originally offered as a comparable by the assessee itself but now the assessee is challenging the said company before us. Undoubtedly this company is also a corporate giant and a reading of the annual report of this company incorporated from page No. 824 of the paper book shows that this company is into the manufacturing and product engineering services, besides which dealing with banking, financial services, insurance, energy and petrochemicals etc. Note No. 18 of the Notes on Account under the heading segmental reporting shows that segmental reporting of revenues of this company are on the basis of geographical locatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... different from the assessee. However, This company was selected as comparable by the TPO and the assessee, during the course of TP proceedings, opposed the inclusion of this comparable on ground of functional dissimilarity but the TPO selected it as the final comparable by rejecting the argument of the Assessee and holding that this company is deriving revenue from both software as well as products and insufficient segmental information is available in the financial statements. 95. It is evident from a reading of page numbers 1085, 1090, 1136, 1140, 1154, 1162 & 1183 of the paper book containing the Annual Report of this company, that the company is engaged into software product development with complete life cycle and is functionally dissimilar to that of the Assessee. Further the profit and loss account at page No. 1154 of the paper book shows that the income from the sale of software services and products is bundled up, the schedule No. 11 forming part of profit and loss account at page No. 1160 shows the segmentation on the basis of overseas and domestic. Item number 'L' at page No. 1166 under the heading "segment reporting policies" reads that the company has disclos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question and Toluna India Pvt. Ltd., and Lear Automotive India Pvt. Ltd. Respectfully following the precedents, we order for the exclusion of this company from the list of comparables." 97. In view of the functional dissimilarity coupled with the fact of nonavailability of the segmental information, while respectfully following the decision in Aircom (supra), we hold that this company is liable to be excluded from the list of comparables. Quintegra Solutions Limited: 98. This company was offered as comparable by the Assessee itself, and there was no occasion for the learned TPO to controvert its functional similarity. However, The Assessee now contends that Quintegra Solutions Limited is not comparable and was wrongly included in the final list of comparable companies, on the ground that the company is functionally dissimilar to that of the Assessee as the company is engaged in providing end to end solutions and also deals in software products as well. 99. The overview of the company at page No. 1238 of the paper book clearly shows that this company is providing a full range of custom IT solutions (such as Development, Testing, Maintenance, ACAP, Product Engineering and Infras ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparables. R Systems International (Seg.) 103. Assessee objected the inclusion of this company in the set of comparables on the ground that this company was functionally different from the assessee. However, this company was selected as a comparable by the TPO and the assessee has argued for its exclusion on the ground that it functionally dissimilar to that of the Assessee as this company is engaged in the Outsourced Product Development and Customer Support Services. Further, it also offers low end BPO Services. Page No. 9 of the annual report of this company establishes this fact. 104. Having regard to the information furnished in the annual report of this company vide page numbers 1356, 1362, 1366, 1371, 1378 and 1380 of the paper book, we are convinced that that this company is not a pure software service provider but is engaged in development and sale of products and on the ground excludable from the final set of comparable companies for benchmarking international transaction related to software segment. Softsol India Limited (verifiable) 105. The Assessee objected this company from the list of comparable while preparing its TP study on the ground of related party tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imedia and other electronics etc and is also making some programs developing technology in the form of intellectual property, as such the functional profile of the assessee company is not comparable to this company. 110. Further, the Appellant has placed reliance on Aircom (supra), in order to exclude this comparable company. The coordinate bench has rejected this comparable by making following observations:- "22.2. After considering the rival submissions and perusing the relevant material on record, we find that the TPO has adopted 'Software development and services' segment which, in turn, consists of three sub-segments, namely, Product design services (design and development of hardware and software), Innovation design and engineering (mechanical design with a focus on industrial design) and Visual Computing Labs (Animation and Visual Effects). Since this company offers integrated hardware and packaged software solutions, the same cannot be considered as comparable with the assessee company, which is simply providing software related services. The Tribunal in Toluna India Pvt. Ltd. VS. ACIT (2014) 151 ITD 177 (Delhi) and Motorola Solutions India Pvt. Ltd. (supra), both of wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost of services has been duly described. When the filter of employees cost more than 25% of total cost is to be applied of cost of services described in column no.15 at page 774 of Volume IV of paper book, all the cost of services are to be treated as salary and this comparable company qualifies for inclusion in the final list o comparables. So, we are of the considered view that this issue is again required to be reconsidered by the TPO by taking into account the cost of services while applying the filter of employees cost of more than 25% of total cost. So, we hereby restore the issue to the TPO to decide afresh by providing opportunity of being heard in the light of the observation made herein before." 114. Reliance in this regard is placed on another order of the co-ordinate bench in the case of Tata McGraw Hill Education (P.) Ltd. vs. ACIT [2016] 69 taxmann.com 418 (Delhi - Trib.) wherein it has been held as under:- "22. As regards CG VAK Software & Exports Ltd., the objections of ld. TPO were that this comparable was functionally not comparable to the tested party as it had employee compensation less than 25% and hence it failed employee cost filter. 23. Before ld. DRP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... / remuneration', the sub-head 'cost of service', primarily refers to employees cost. The items under this sub-head such as contribution to PF, ESI, gratuity and ex gratia payment clearly shows that all these expenses were towards employees remuneration. We, therefore, restore this matter to the file of TPO to apply the employee filter correctly and if it is found that the employee cost is more than 25% then this comparable is to be included in the list of comparables selected by TPO." 115. We have gone through the Annual Report of the assessee company for the year 2008. In schedule 15 thereof incorporated at Pg. 21 of the hand out under the head "Cost of services" there is a mentioning of the amounts of ₹ 2,46,69,456/- & 1,78,34,926/-. Since there is no separate expenditure shown under the heading "salary/remuneration", the subhead "cost of service" invariably refers to employees cost. In view of the findings of a coordinate bench of this Tribunal in SAIC (supra), we find that this cost of service was towards employees remuneration. With this view of the matter, we set aside this issue to the file of the Ld. TPO/AO to apply the employee cost filter correctly and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... some years and losses in some years is a business reality. If one were to go with the logic assumed by the learned TPO, every company should have increasing revenues and the company which has lower profits or returns losses should discontinue business operations because it would not represent an arm's length nature of business. 118. Ld. AR submits that this position has now been accepted by the Delhi High Court and various benches of this Tribunal. In a recent order passed by the coordinate bench in case of Aithent Technologies (P.) Ltd. vs. DCIT [2016] 74 taxmann.com 214 (Delhi-Trib.) on the adoption of diminishing revenue filter it has been held as under:- "14.3 A careful perusal of the pattern of profit/loss earned by the assessee as per its audited accounts divulges that as against the current year's profit of ₹ 62.39 lac, the earlier years' profit was ₹ 92.74 lac. This manifests that the profit for this year has diminished from the earlier year. When we consider the figures of losses for the financial years 2005-06 and earlier years, it comes to light that there were losses right from financial year 2002-03 up to 2005-06. On an overview of the above ext ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent Advisors (India) (P.) Ltd. (supra), in which it was observed: "'33. Such being the case, it is clear that exclusion of some companies whose functions are broadly similar and whose profile - in respect of the activity in question can be viewed independently from other activitiescannot be subject to a per se standard of loss making company or an "abnormal" profit making concern or huge or "mega" turnover company. As explained earlier, Rule JOB (2) guides the six methods outlined in clauses (a) to (f) of Ride 10B(1), -while judging comparability. Rule JOB (3j on the other hand indicates the approach to be adopted where differences and dissimilarities are apparent. Therefore, the mere circumstance of a company - otherwise conforming to the stipulations in Rule 10B (2) in all details, presenting a peculiar feature - such as a huge profit or a huge turnover, ipso facto does not lead to its exclusion. The TPO, first, has to be satisfied that such differences do not "materially affect the price...or cost"; secondly, an attempt to make reasonable adjustment to eliminate the material effect of such differences has to be made.'" In light of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he revenue is bundled up for both software services and training, besides sales of software and other income. In Schedule 12 of the Profit and Loss Account, software services and training bifurcated the income from software services in export and domestic segments. No separate financials in the lines of functional segments of software services and training are available. Further, software testing is only a part of software development in which the assessee is, and software testing cannot be compared to the whole segment of development of software. 125. With this view of the matter we do not find this company to be a good comparable to the assessee and on this premise we reject the contention of the assessee. Findings of the Ld. TPO and the Ld. DRP are confirmed. WORKING CAPITAL ADJUSTMENT: 126. It is submitted on behalf of the assessee that the TPO has not given working capital adjustment to account for difference in working capital employed by the Assessee. While rejecting the objections raised by the assessee, Ld. DRP observed that "…. To carry out the adjustment, the availability of relevant information to accurately identify the difference and then quantify impact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctors are equally important to consider while selecting comparable companies. In the present case the assessee is engaged in the business of software development and providing marketing services, hence there is no dispute that appropriate adjustment to account for difference in working capital employed by the assessee vis-a-vis the comparable companies for software development services is required to be considered. Similarly making of suitable adjustments to account for differences in the risk profile of the assessee vis. a vis. the comparable companies for software development services is also required to be considered. Of course these adjustments on account of working capital and risk is to be made after analyzing the case of the assessee since it depends upon the facts of the case of the assessee. The request for such adjustments cannot be summarily rejected unless some analysis of the case of the assessee is made vis-a-vis comparables companies. We thus set aside the matter to the file of the Ld. TPO/AO to consider these aspect of adjustment while deciding the issue afresh vis-a-vis the comparable companies in the business of software development as discussed hereinabove in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iate method, in the following manner, namely :- (a) to (d)** ** ** (e) transactional net margin method, by which,- "(iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market;" ………" The ld. counsel has further submitted that the Hon'ble Delhi, ITAT has also upheld the need of making working capital adjustment in following judgments. Mentor Graphics (Noida)(P.) Ltd. v. Dy. CIT [2007] 109 ITD 101/18 SOT 76 (Delhi) Sony India (P.) Ltd. v. Dy. CIT [2008] 114 ITD 448 (Delhi) Thus in light of the provisions of Rule 10B(1)(e) and the Hon'ble ITAT judgments, it has been pleaded to grant the Appellant the benefit of working capital adjustment. 5.3 Ld. Departmental Representative on the other hand relied upon the order of the TPO. 5.4 The DRP in its order has not dealt with the issue properly and has he ..... X X X X Extracts X X X X X X X X Extracts X X X X
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