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TMI Blog2017 (11) TMI 1725X X X X Extracts X X X X X X X X Extracts X X X X ..... ment, the reference made by the Ld. AO under section 92CA(1) of the Act suffers from jurisdictional error, as the Ld. AO had not recorded any reasons nor he had any material whatsoever on the basis of which he could even reach a prima-facie opinion, that it was 'necessary or expedient' to refer the matter to the Ld. Assistant Commissioner of Income Tax, Transfer Pricing Officer - I(l)(l), New Delhi (hereinafter referred to as Ld. TPO ) for computation of arm's length price ( ALP') 2. That on the fact of the case and in law, the Ld. TPO / Hon'ble Dispute Resolution Panel ( Hon'ble DRF') has erred by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962 ( the Rules'), and conducting a fresh comparability analysis for the determination of the ALP of the Appellant's international transaction pertaining to provision of contract software development ( CSD ) services by the Appellant and holding that the said international transaction is not at arm's length. 3. That on the facts and circumstances of the case and in law, the order passed by Ld. AO/Ld. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a cost plus basis irrespective of the outcome of the services provided and hence undertakes no market risk, product/ service liability risk, credit risk, capacity utilization risk etc. as against comparable companies that are the full- fledged risk taking entrepreneurs. 11. That on facts of the case and in law, the Ld. TPO/ Hon'ble DRP has grossly erred in making an entity level adjustment by re- computing the operating cost of the Appellant for provision of CSD services to associated enterprise and thereby has inadvertently applied the TP provisions on the cost base of third party segment of the Company. Corporate Tax Grounds 12. 12. That on the facts and circumstances of the case and in law, the Ld. AO has erred in holding that liquidated damages of INR 55,35,88,892/- incurred by the Appellant pursuant to breach of its contractual arrangements are penal in nature and are thus, not allowable u/s 37(1) of the Act. 12.1 That the Ld. AO failed to follow the spirit and intent of the directions of the Hon'ble DRP as he failed to appreciate the correct facts and evidences brought on record for verification in accordance with the directions of Hon'ble DRP and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exercising the powers of enhancement vested under section 144C(8) of the Act which powers can be exercised only to the variations proposed in the draft assessment order. 17.1 Without prejudice, on the facts and circumstances of the case and in law, the Hon'ble DRP / Ld. AO has erred in holding that the reimbursements amounting to ₹ 29,23,40,542/- made in respect of the seconded employees to the overseas entities, are in the nature of fees for technical services amounting to sums chargeable u/ s 9(l)(vii) and under the relevant clause of the tax treaty of the country from where the employees are seconded and thereby liable to TDS u/s 195 of the Act. 17.2. Without prejudice, on the facts and circumstances of the case and in law the Hon'ble DRP / Ld. AO has erred in summarily rejecting the contentions of the appellant and the detailed argument made for differentiating the facts of the appellant's case from the ruling of Hon'ble Delhi High Court in the case of M/s Centrica India Offshore Pvt. Ltd. 18. That on facts in the circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 271(l)(c) of the Act mechan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. The TPO passed order u/s 92CA(3) dated 29.01.2016 and suggested an upward adjustment of ₹ 114.29 CR to the income of the assessee, being the difference between Arm s Length Price and the price charged by the assessee. The cumulative adjustment made in this case by the TPO is tabulated hereunder:- Operating Cost 1194.76 Arm s Length Margin(%) 21.59 Arm s Length Price (ALP) 1452.70 Price Received 1338.41 Shortfall being adjustment u/s 92CA 114.29 5. The AO passed the draft assessment order u/s 144C(1) r.w.s 143(3} of Income Tax Act 1961on 30.03.2016 at an income of ₹ 225,65,85,440/- after making various additions and addition made by TPO amounting to ₹ 114,29,00,000/-. Against the draft order, the assessee company filed objection before Hon ble DRP-I, New Delhi. The DRP passed the order dated 22.12.2016 u/s 144C(5) of the IT Act. Thereafter, fresh notice u/s 142(1} of the IT Act was issued on 28.12.2016 by the Assessing Officer. Pursuant to the directions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to say, the assessee be given due opportunity of being heard as per law. 9. In result, Ground No. 12 to 18 are allowed for statistical purpose. 10. The Ld. AR further submits that as relates to transfer pricing issues, there is a contract in respect of Software Development Segment and in the TPO s show cause notice, there was no mention of entity Level Segmental Bifurcation and thus the same was not considered by the TPO. There were 15 comparables which was finalized by the TPO. The Ld. AR is seeking exclusion of the following comparables: (i) Infosys (ii)Zylog (iii) Persistent Systems and Solutions Ltd. (iv) L T (v) E-Zest (vi) Arcopetal 10.1. Infosys The Ld. AR submits that this comparable was rejected by the ITAT in assessee s own case for AY 2011-12 and confirmed by the Hon ble Delhi High Court vide order dated 18.07.2017 for A.Y. 2003-04, 2004-05 and 2006-07. The Ld. AR submits that Infosys offers software products, platforms, diversified services like software consulting and systems integration, design development, re-engineering and maintenance, integration etc. Infosys Turnover is 31,254 Crore which is 54 times of assessee company (573.54 Cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oftware products and solutions. There are diverse business activities such big data analytics, cloud computing etc. which requires owning large computing infrastructure. This company deals in software products therefore, it incurred high end product development cost. Besides this company also owns intangibles from which revenue is generated. The scale of operations is drastically high as can be seen from the operating income which is of ₹ 1219 crore. 10.5 The Ld. DR submitted that the TPO has rightly selected this comparable and relied upon the order of the TPO. 10.6. We heard both the parties and perused the records. This company is engaged in providing onsite services, specializes in providing software products and solutions and there is revenue from consulting, licensing fee, as well as from software products and solutions. But, the assessee company is engaged in the business of digital switching equipment and related software, cellular exchange / transmission equipment and provides related services, intelligent network and broadband solutions, equipment and related services. Thus, the functions of both the companies are different. In fact in earlier Assessment Year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urther submitted that the TPO has not given any reason for including this company as comparable. 10.11 The Ld. DR submitted that the TPO has rightly selected this comparable and relied upon the order of the TPO. 10.12 We heard both the parties and perused the records. This company is engaged in software product. The functions of both the companies are different. There are three business segments which are not comparable to the computer software development. However, segmental data with respect to business segment is not available in the annual report of the company. In fact in earlier Assessment Year the ITAT already excluded this company as comparable in assessee s own case on account of functional difference which was confirmed by the Hon ble High Court. Therefore, this company has to be excluded. We, therefore, direct TPO to exclude this company from comparable. 10.13 e-Zest Solutions The Ld. AR submits that this company fails the service income filter applied by the TPO i.e. Service Income / Total Income 75%. This company is engaged in providing diverse services like BPO, product engineering, software product development and KPO. The segmental data is also not ava ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nologies Ltd. ii. Infomile Technologies Ltd. iii. SQS India BFSI Ltd. 12. The Ld. AR submitted that these comparables were submitted first time before the DRP. The DRP has directed the TPO to include these comparable if it meets filter approved by TPO. 13. The Ld. DR relied upon the order of the DRP and submitted that these comparables were not before the TPO. 14. We have heard both the parties and perused the records. Since these comparables were not before the TPO it will be appropriate that these three comparable be verified by the TPO as to whether these will qualify the filters given by the TPO or not. Needless to say, the assessee will be given full opportunity of being heard as per law. 15. We have heard both the parties and perused the material available on record. Ground No. 1 and 2 are general therefore, the same are not adjudicated. Ground No. 3, 4, 5, 6, 7, 8, 9 and 10 are relating to exclusion and inclusions of the comparables by the TPO. The reasons for each comparables are given hereinabove paras. Thus, Ground No. 3, 4, 5, 6, 7, 8, 9 and 10 are partly allowed for statistical purpose. 16. In result, appeal of the assessee is partly allowed for sta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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