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TMI Blog2017 (8) TMI 1585X X X X Extracts X X X X X X X X Extracts X X X X ..... interest is consequential and mandatory and the AO has no discretion in the matter. This proposition has been upheld by the Hon'ble Apex Court in the case of CIT v. Anjum M.H. Ghaswala [ 2001 (10) TMI 4 - SUPREME COURT] and we therefore uphold the action of the AO in charging the said interest. - IT (TP) Appeal No. 115 (BANG.) OF 2016 [Assessment Year 2011-12] - - - Dated:- 16-8-2017 - Sunil Kumar Yadav, Judicial Member And Jason P. Boaz, Accountant Member R.N. Parbat, CIT-III for the Appellant. , Nageshwar Rao, Adv. for the Respondent. ORDER Jason P. Boaz, This appeal by the assessee is directed against the final order of assessment for Assessment Year 2011-12. passed under section 143(3) r.w.s. 144C(I3) of the Income Tax Act, 1961 (in short 'the Act') dated 31.12.2015, in pursuance of the directions issued by the Dispute Resolution Panel - 2, Bengaluru ( DRP ) on 14.12.2015. 2. Briefly stated, the facts of the case are as under: 2.1 The assessee company, a subsidiary of Microsoft Corporation, USA, is a captive provider of software research and development services to its Associated Ente ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alysis- 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 economic analysis for the determination of the arm's length price ('ALP') of the Appellant's international transaction and holding that the international transaction is not at firm's length. 3 The transfer pricing .adjustment of INR 40,626,688 made by the Ld. AO based on the order of Ld. TPO and confirmed by the Hon'ble DRP is bad in law inter-alia for the reason that: (a) the order of the Ld. TPO is bad in law in as much as based on an invalid reference made by the Ld. TPO without, complying with the statutory requirements: (b) the Appellant's AE being chargeable to tax at a higher rate in the US there was no question of shifting of any profit from a low tax paying country to a high tax paying country. 4. That on fact's and in law, the- Ld. TPO/AO/DRP has erred by making a transfer pricing adjustment even though the arm's length price as determined in the TP documentation of the Appellant has been accepted by the tax office in the previous years. M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sorted to cherry picking of comparables to determine ALP for the Impugned Transaction. 10. That on facts and in law, the Ld. TPO has passed an order under section 92CA (3) of the Act which has computational errors while: (a) Computing the operating margin of the comparable companies as well as tested party; (b) Determining the working capital adjustment. 11. That on facts and in law, the Ld. TPO/AO have erred in law and in facts by selecting certain companies which are earning super normal profits as being comparable to the Appellant. 12. That on facts and in law, the Ld. TPO /AO erred by ignoring that the Appellant, being only a captive service provider and a risk free entity, is entitled to suitable adjustments to account for differences in its risk profile vis-a-vis the comparables. 13. That on facts and in law, the Ld. TPO has erred, by not discharging the statutory onus to establish that the conditions specified in clauses (a) to (d) of Section 92C(3) of the Act have been satisfied before disregarding the ALP determined by the Appellant and proceeded-to determine the ALP himself. 14. That on facts and in law the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espectfully following the ratio of the decision of the Hon'ble Apex Court in the case of NTPC Ltd., (229 ITR 383), we admit the additional grounds at SI. Nos. 16 and 17 for consideration in this appeal. 4. Grounds hi SI. Nos. 1 to 6, 8,11 to 13 and 15 and Additional ground Nos. 16 (partly) and 17 Not Pressed 4.1 At the outset of the hearing, the learned AR for the assessee submitted at the Bar that the assessee in this appeal will only be pressing grounds at SI. Nos. 7, 9, 10 and 14 and partly additional ground No. 16 (i.e., only to the extent of seeking exclusion of two companies from the list of comparables viz., E-infochips Ltd., and Acroperal Technologies Ltd.,). In view of the above, it was submitted that the remaining grounds at SI. Nos. 1 to 6, 8, 11 to 13 and 15 and additional ground No. 16 in respect of two companies namely ICRA Techno Analytics Ltd., and E-Zest Solutions Ltd.,) and 17 are not pressed in this appeal. Since the grounds 1 to 6, 8, 11 to 13, 15 and additional grounds 16 (partly) and 17 are not pressed by the asscssee in this appeal, they are rendered infructuous and are accordingly dismissed as not pressed. Grounds 7,9,10 and Ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , (seg) 20.19% AVERAGE MARGIN 24.82% 5.2 The assessee filed its objections to the TPO's order dated 05.01.2015 passed u/s. 92CA of the Act, before the DRP, Bengaluru. While considering the assessees objections, the DRP has excluded 6 companies at SI. Nos. 8, 10, 12 and 13 of the TPO's list (supra) applying the turnover filter. Assessee's plea for Exclusion of Comparables: 6. In these grounds (supra), the assessee prays for exclusion of the following two comparables from the list of comparables: (i) Acropetal Technologies Ltd., and (ii) E-Infochips Ltd., 7. Acropetal Technologies Ltd.. 7.1 This company was selected by the TPO for inclusion in the final set of comparables. According to the Id. AR for the assessee, the total employee cost of this company is 11.51% of the total operating revenue and therefore fails the employee cost filter of 25% applied by the TPO in his TP study, which fact was brought to the TPO's notice by assessee in submissions placed at pages 317 to 318 of paper book. It is further po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bench in the case of GT Nexus Software (P.) Ltd. for Assessment Year 2011-12 (supra), we direct the TPO/AO to exclude this company, M/s. Acropelal Technologies Ltd. from the list of comparables. 8. E-Infochips Ltd.. 8.1 This company was selected by the TPO and included in the final list of comparables. According to the. Id. AR for the' assessee, this company is functionally different from the assessee in the case on hand as is evident from its Annual Report, (pages 789 to 857 of Paper Book); as apart from software development services it is also engaged in providing ITEs; it also earns income from sale of products (pages 821 to 824 of Paper Book) and holds inventories (page 814,Inventory-schedule). It is further submitted that the segmental details are not available and also that it fails the 75% revenue from software development services filter which is applied by the TPO. In support of its plea for exclusion of this company from the list of comparables, reliance was placed on the decision of the co-ordinate bench of this Tribunal in the case of GT Nexus Software (P.) Ltd. for Assessment Year 2011-12 (supra). 8.2 Per contra, the Id. DR for Revenue s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee is simply engaged in rendering software development services and there is no sale of any software products, this company, in our considered opinion, ceases to be comparable. It is obvious that from the common pool of income from both the streams of software products and software services, one cannot deduce the revenue from software services and no one knows the impact of revenue from Products on the overall kitty of profit, which may be significant. Since no segmental data of this company is available indicating operating profit from software development services., we order to exclude this company from the list of comparables. Accordingly following the order of the Delhi Bench of ITAT we direct the TPO/AO to exclude this company from the set of comparables.' 8.3.2 Following the decisions of the co-ordinate bench in the case of GT Nexus Software (P.) Ltd. (supra) and the decision of the ITAT, Delhi Bench in the case of Saxo India (P.) Ltd. (supra), we direct the TPO/AO to exclude this company, from the final set of comparables.' 9. Ground No. 10 - Working capital Adjustment:- 9.1 In these grounds, the assessee contends that it has-not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should also be considered as arm's length price of the cost of the capital in transfer pricing exercise. Accordingly, the average, cost of capital computed in the case of the uncontrolled comparables should be an upper cap for the purpose of allowing working capital adjustment. 26. It was submitted that the TPO in the order has advocated limiting the working capital adjustment contending that the adjustment would be negative for the assessee/tested party, since it does not have significant' debtors/inventory and generally, the assessee/tested party receives the money in advance for the services from the AEs. Whereas, the entrepreneurial companies selected as comparable will have debtors, inventory and the creditors. 27. The ld. counsel for the assessee submitted that in advocating this principle the TPO has ignored the characterisation, of the assessee as a low risk captive services provider that, does not perform entrepreneurial functions and consequently does not bear related risks. The assessee being part of the larger group has the advantage of healthy working capital position, whereas, entrepreneurial companies cannot have that advantage and therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se how the mind is applied to the subject-matter for a decision, whether it is purely administrative or quasi-judicial. They should reveal rational nexus between the facts considered and the conclusion reached. Only in this way can opinions or decisions recorded be shown to he manifestly just and reasonable. 29. In view of the decision in the case of Dresser- Rand India Pvt. Ltd. (supra) rendered by the Mumbai Bench of the Tribunal, the restriction placed by the TPO in providing the working capital adjustment was not justified. The AO/TPO is directed to allow the actual adjustment towards the differences in the working capital position between the. assesses and the entrepreneurial companies selected as comparable.' 9.3.2 Following the decision of the co-ordinate bench of this Tribunal in the ease of Moog Controls (India) (P.) Lid. (supra), we direct the TPO/AO to allow the actual adjustment towards the differences in working capital position between the assessee and the companies in the final set of comparables. 10. Consequently, grounds 7, 9, 10 and additional ground No. 16 (supra) are disposed off as indicated above. 11. Ground No. 14 - Ch ..... X X X X Extracts X X X X X X X X Extracts X X X X
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