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TMI Blog2019 (4) TMI 289X X X X Extracts X X X X X X X X Extracts X X X X ..... pment services provided by a captive service provider like the assessee in the absence of segmental information. Infosys limited has a huge brand value, it has huge turnover, and its Finacle' Software is a leading product in banking industry. Therefore, it is functionally different and has significant R&D. Working capital adjustment - HELD THAT:- It is necessary to allow working capital adjustment for better comparability. Accordingly, we direct the AO/TPO to grant working capital adjustment on the final set of comparables Risk adjustment - HELD THAT:- It is not necessary to give any directions on the issue of risk adjustment. We note that the contentions of the Ld. AR on risk adjustment in the present case have been rendered academic as the entire TP adjustment gets deleted consequent to the exclusion of the 4 companies as directed above and upon grant of the working capital adjustment. We, therefore, feel that it is not necessary to return any findings on the above issue. - Appeal of the assessee stands partly allowed - ITA No.-1481/Del/2015 - - - Dated:- 2-4-2019 - Shri N.S. Saini, Accountant Member And Shri Sudhanshu Srivastava, Judicial Member For the Assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... study has not been rejected and that it has been only modified by use of current year data and some appropriate filters. The TPO issued show cause notice modifying some of the filters applied in the transfer pricing study and accepted 10 out of the 13 comparables. The TPO also added another 6 comparables as detailed in the TP order. After a detailed discussion, accepting and rejecting some comparables, the TPO arrived at the final set of 17 comparables with average margin of 25.78%. Further, the TPO opined that working capital adjustment was not relevant for service industry and hence refused to allow any working capital adjustment. Similarly, the TPO rejected the assessee s claim for risk adjustment pointing to absence of reliable and robust data. Initially, an adjustment of ₹ 2,01,10,731/- was determined, however, vide rectification order dated 25.07.2014 this adjustment was reworked to ₹ 1,77,46,170/-. 2.1 The Draft assessment order dated 14.2.2014 was objected to before the Ld. Dispute Resolution Panel (DRP), where the assessee was not successful in securing any major relief except direction to grant working capital adjustment as per the methodology given in OEC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treatment of operating and non operating items while computing margins of the appellant and comparable companies. 9. The learned TPO/AO/DRP have erred in not acting in conformity of directions passed by Hon ble DRP and thereby not granting benefit of working capital adjustment to the appellant. 10. The learned TPO/AO/DRP have erred in not making suitable adjustment to account for differences in risk profile of the appellant vis-a-vis the comparable companies. 11. The learned AO is grossly erred in initiating penalty proceedings under section 271(1) . 12. The learned AO is erred in living interest under section 234 B and 234 C of the act while completely disregarding the provisions affecting the judicial precedence. 3.0 It is seen that although several grounds of appeal have been raised in the appeal memorandum, the assessee is mainly aggrieved by transfer pricing adjustment made to software development services segment and denial of working capital and Risk Adjustments. 3.1 Submissions by the Learned Authorised Representative (Ld. AR) for the assessee/appellant centred around ground nos. 1,2,5,9 and 10. While application of filters in the context of spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany had related party transactions less than 25% was not correct. The learned counsel also relied on the decision of the coordinate bench of Tribunal in case of Freescale Semiconductors India (P) Ltd (ITA No 1263/DEL/2015), wherein at paragraph 18, the coordinate bench set aside the matter to the TPO for testing related party transaction filter. The Ld. Counsel submitted that in the case of Freescale Semiconductors India (P) Ltd a remand may have been justified as no details of whether such contention was raised before the lower authorities is forthcoming from the order. However, in the present case, this very information was submitted before both the lower authorities. The Learned counsel prayed for a clear direction to exclude this company from the final set of comparables on the ground that multiple innings cannot be allowed to the tax authorities. He relied on the judgment of the Hon ble Gujarat High Court in Rajesh Babhubhai Damania reported in 251 ITR 541 (Guj) and also contended that this principle was applied in a series of decisions by this Tribunal. In response, the Ld. Departmental Representative (DR) contended that the breakup of some of the figures mentioned in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paragraph 9.1 of the Transfer Pricing order and it was submitted that though all these contentions were raised before the TPO, the same were rejected without even obtaining any information under section 133 (6)of the Act. By drawing our attention to page 152 of paper book volume 1, wherein objections filed before the Ld. DRP were placed, it was contented by the learned counsel that though all these aspects were also brought to the notice of the Ld. DRP, the same were rejected as a matter of routine. Lastly, the learned counsel invited our attention to paragraphs 13 to 15 of the coordinate Bench s decision in Freescale Semiconductors India (P) Ltd (ITA 1263/ Del/2015) relating to same assessment year, and contended that for these very same reasons, the coordinate Bench directed exclusion of E Infochips Bangalore Limited from the final set of comparables for benchmarking software development services. The Ld DR objected to the exclusion of companies relying on coordinate bench s decisions. In this context, the Ld DR invited our attention to the judgment of the Hon ble Delhi High Court in ST Micro (IT 913/2017). It was his contention that the business of Freescale Semiconductors I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Ld. transfer pricing officer rejected the claim of the assessee stating that annual report of the above comparable company shows that it is functionally comparable as it develops software for its clients and do not perform any IT enabled services. The Ld. dispute resolution panel also confirmed the action of the Ld. transfer pricing officer. The Ld. authorised representative reiterated the same arguments which were raised before the Ld. lower authorities. Over and above ld AR relied up on decision of the coordinate bench in ITA No. 1051/KOL /2015 for assessment year 2009 - 10 dated 19 - 10 - 2016 wherein in para No. 8.2 the above comparable company was excluded. 14. The Ld. departmental representative vehemently submitted that the Ld. transfer pricing officer and the Ld. dispute resolution panel has given enough reasons for inclusion of the above comparable and the Ld. authorised representative could not state anything further that how the order of the Ld. transfer pricing officer and the Ld. dispute resolution panel is erroneous but merely citing a decision does not help the case of the Ld. authorised representative as it was compared with the functions of the that ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edule 17 on page 37 of the paper book containing annual reports of the comparable companies and submitted that Infinite Data Systems Private Limited provides solutions that encompass technical consulting, design and development of software, maintenance, system integration, implementation, testing and infrastructure management services. Further, our attention was also invited to Para 17.2.14 on page 41 of the paper book containing annual reports, wherein under the heading Segmental Reporting it is stated that the company s operations are predominantly related to providing software technical consultancy services to its sole customer Fujistsu Services Limited . The Ld. Counsel, therefore, contended that the business and FAR of Infinite Data systems Private Limited were totally different from FAR of a captive service provider like the assessee. The Ld. Counsel also drew our attention to schedule 13 on page 34 wherein foreign exchange gain of ₹ 61,61,087/- is indicated and in the very next page under schedule 15 relating to administrative and other expenses foreign exchange loss of ₹ 2,19,40,908/- is reported. It was the contention of the learned counsel that the det ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also rejected. Other issues with respect to abnormal margins, supernormal growth have also been rejected. He also rejected the contention of the assessee that company owns significant intangibles in the form of software. Similar arguments were also advanced before us by the Ld. authorised representative stating that the Infinite data systems private limited should be excluded from the comparability analysis. For this he relied on the decision of the coordinate bench in ITA No. 1051/KOL/2015 for assessment year 2009-10 dated 19-10-2016 wherein at para No. 8.3 the above comparable was excluded from the comparability analysis in case of a Labvantage solutions private limited. 11. The Ld. departmental representative vehemently objected to the claim of the Ld. authorised representative about exclusion of the above comparables stating that Ld. transfer pricing officer as well as the Ld. DRP has given adequate reasons for inclusion of the above comparable. It was further stated that Ld. authorised representative has not challenged it on the functional analysis with of comparable as well as of the assessee and therefore the above comparable cannot be excluded. 12. We hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mental information was not available in the audited financials so as to enable determination of margins earned for software development services and sales of software products. The Ld. Counsel, therefore, contended that in absence of segmental information, Infosys cannot be compared to a captive service provider like the assessee. Our attention was invited to the decision of the coordinate bench in Freescale Semiconductors India (P) Ltd (ITA 1263/Delhi/2015), wherein at paragraphs 16 and 17, the coordinate bench has directed exclusion of Infosys Limited from the final set of comparables for similar reasons. The Ld. DR invited our attention to paragraph 9.4 of the TPO s order. It was his contention that the very same objections were already raised and considered by the TPO. We have considered the rival submissions. We notice that the TPO has rejected the assessee s contention on the understanding that the difference between the assessee-taxpayer and the so-called giant companies like Infosys was that the latter had more number of teams than the assessee-taxpayer to render software development services. We find merit in the contention of the Ld counsel that Infosys Limited is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect exclusion of Infosys from the final set of comparables. 4.1.0 In relation to Ground no 9, our attention was invited to paragraph 12 of the Transfer Pricing order, wherein the TPO has rejected the claim for working capital adjustment on the ground that such adjustment was not relevant to service industry. By drawing attention to paragraphs 16.6 and 16.7 of the Ld. DRP s directions, it was submitted that although the Ld. DRP directed grant of working capital adjustment, the same was not allowed to the assessee. Accordingly, it was prayed that appropriate directions be given to the AO/TPO to grant benefit of working capital adjustment as directed by Ld. DRP. 4.1.1 We find that it is necessary to allow working capital adjustment for better comparability. Accordingly, we direct the AO/TPO to grant working capital adjustment on the final set of comparables. Thus, this ground stands allowed for statistical purposes. 4.2.0 In the context of grounds of appeal nos. 1, 2 and 10, the ld. counsel drew our attention to pages 15 and 16 of written submissions dated 31.10.2018, filed on behalf of the Department/Respondent. The Ld. AR drew our attention to the observations made in th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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