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TMI Blog2017 (7) TMI 1335X X X X Extracts X X X X X X X X Extracts X X X X ..... sh search for selection of comparable companies. The TPO finally selected 13 companies in software development services and 3 companies in Sales & Marketing Software Services segment and accordingly proposed adjustment under Section 92CA of Rs. 4,87,86,247 in respect of software development transactions and Rs. 22,40,047 in respect of transactions of ITES. The assessee challenged the action of the TPO/AO before the DRP by filing the objections. The DRP rejected 10 companies out of the set of 13 companies selected by the TPO in the software development segment and one company in the Sales & Marketing Support Services segment. Thus both the assessee as well as department are aggrieved by the directions of DRP and raised the following grounds: Assessee's Grounds. General Grounds:- 1. Passing the Order which is bad in law. 2. Passing the Order disregarding the principles of natural justice. Grounds relating to Transfer Pricing:- 3. Making transfer pricing adjustment of Rs. 4,93,98,250/-. 4. Making a reference to Transfer Pricing Officer for determining arm's length price. 5. Not appreciating that there is no amendment to the definition of "income" and the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p;i. Not appropriately computing working capital adjustment; and j. Not recognizing that the Appellant was insulated from risks, as against comparables, which assume these risks and therefore an appropriate risk adjustment has to be provided. Computation of Arm's Length Price for Sales and Marketing segment 10. Without prejudice, the lower authorities have erred in:- a. Adopting inappropriate filters for selecting comparables; b. Rejecting comparables selected by the Appellant in the TP study and additional comparables proposed by the Appellant on unjustifiable grounds; c. Rejecting Transfer pricing analysis performed by the Appellant on unjustifiable grounds and performing fresh TP analysis; d. Selecting inappropriate comparables and selecting companies as comparables despite which are not functionally comparable. e. The Honourable DRP has erred in rejecting ICRA Management Consulting Services Limited as an additional comparable proposed before DRP on the ground that additional evidence petition is not filed. f. Not appropriately computing the operating margin of the comparables and the Appellant; g. Tre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparable, when it satisfies all the qualitative and quantities filters adopted by the TPO. (2) Whether while seeking the exact comparability as mentioned above the DRP was right in fact and in law in imposing condition beyond law where the requirement of law is to acknowledge only those differences that are likely to materially affect the margin. Grounds of appeal: (a) Whether the Hon'ble DRP erred in fact and law by holding the company M/s. ICC International Agencies as functionally dissimilar without analysing the facts of the company. (b) Whether the Hon'ble DRP erred in fact and law by considering the comparable as functionally dissimilar based on the grounds that there is lack of clarity in the segment report without analysing the facts in depth. Ground of appeal: The Hon. DRP has erred in holding that the foreign exchange transaction is to be considered as operating in nature, ignoring provision of the Rule 10B(2)(d) that the net profit margin realized by the taxpayer in the international transaction shall done be computed under the TNMM method. 3. First we take up the comparability of the companies selected by the TPO in software development ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the set of comparables and to that extent the grounds of the revenue's appeal are allowed. 5. As regards the comparability of the remaining 10 companies, the learned Authorised Representative of the assessee has submitted that the comparability of all these companies except the companies E-Infochips Limited and Sasken Communication Technologies Limited have been considered by the co-ordinate bench of this Tribunal in the Applied Material India Ltd. v. ACIT vide order dt. 21.9.2016 IT (TP) A Nos. 17 & 39/Bang/2016 for the same assessment year 2011. He has further pointed out that in a subsequent decision dt6.4.2017 this Tribunal in the case of AMD India (P.) Ltd. v. ACIT IT (TP) Appeal Nos. 1487 & 1496/Bang/2015 has again considered the functional comparability of all these companies. 6. As regards the company M/s. E-Infochips Limited & Sasken Communication Technologies Ltd., the learned Authorised Representative of the assessee has submitted that the functional comparability of these two companies have been considered by the Delhi Bench of ITAT in the case of Saxo India (P.) Ltd. v. Asstt. CIT [2016] 67 taxmann.com 155 (Delhi - Trib.) which has been confirmed by the Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) E-Jest Solutions Ltd. 9.1.1 The learned Authorised Representative has submitted that the assessee raised the objection before the DRP for exclusion of this company from the set of comparables but the DRP has not adjudicated the objections of the assessee. He has referred the objections raised before the DRP at page No. 1373 of the paper book as well as referred the relevant part of the Annual Report of this company at page Nos. 39, 42 & 50 of the Annual Report. The learned Authorised Representative has submitted that this company is engaged in the diversified activity and reported the income under only one segment. Therefore it cannot be considered as a comparable of the assessee's software development services segment. He has relied upon the decision of the co-ordinate bench of this Tribunal dt.22.4.2016 in the case of Electronics for Imaging India (P.) Ltd. v. DCIT in IT (TP) A Nos. 227 & 285/Del/2013. 9.1.2 On the other hand, the learned Departmental Representative has submitted that the main activity of this company is software development services. Therefore the insignificant variation in activity if any cannot be a determinative factor while computing the ALP under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable with the software development services provider. He has further pointed out that in assessee's own case for the Assessment Year 2010-11, the DRP vide its order dt. 24.11.2014 has excluded Persistent Systems and Solutions Ltd. from the list of comparables by holding that this company is not comparable to the assessee. 9.2.3 On the other hand, the ld. DR has submitted that the TPO as well as DRP has examined the functional comparability of these companies and found that these companies are comparable with the assessee. These two companies have satisfied all the filters applied by the TPO and DRP therefore the minor variation in the activity would not render these companies non-comparable when a comparable price is considered under TNMM. 9.2.4 We have considered the rival submissions as well as the relevant material on record. At the outset we note that the functional comparability of these two companies have examined by the co-ordinate bench of this Tribunal in the case of DCIT v. Electronics for Imaging India (P.) Ltd. (supra) in paras 60 and 61 & paras 24 to 26 as under: " Persistent Systems & Solutions Ltd. 60. The assessee has the grievance against rejecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t from the revenue from software services, it also earns income from licence of products, royalty on sale of products, income from maintenance contract, etc. These facts recorded by the DRP has not been disputed before us. 26. Therefore, when this company is engaged in diversified activities and earning revenue from various activities including licencing of products, royalty on sale of products as well as income from maintenance contract, etc., the same cannot be considered as functionally comparable with the assessee. Further, this company also earns income from outsource product development. In the absence of any segmental data of this company, we do not find any error or illegality in the findings of the DRP that this company cannot be compared with the assessee and the same is directed to be excluded from the set of comparables." We further find from the Annual Report that there is no change in the activity and functions of these companies during the year under consideration in comparison to the Assessment Year 2010-11. Accordingly, following the decisions of the co-ordinate benches of this Tribunal (supra), we direct the AO/TPO to exclude these two companies from the set o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y identifiable with/allocable to the segment, in Schedule 18, the revenue have been shown from 3 segments, i.e. financial services, manufacturing and telecom. However, in paragraph 23, it is mentioned that the company is mainly engaged in the business of software development. The Assessing Officer has considered entire revenue from 3 segments from the software development services. Out of the software development expenses of Rs. 1,488.30 crore debited in profit and loss account, salary to overseas staff is Rs. 1200.28 crore which also indicates that the company is predominantly engaged in development, of software on-site. In view of the above differences, in our view the above company cannot be retained as comparable, the Assessing Officer is accordingly directed to exclude the above company from comparable. We further find that the comparability of this company has been considered by the co-ordinate bench of this Tribunal in the case of DCIT v. Electronics for Imaging India (P.) Ltd. (supra) in paras 62 to 65 as under : " 62. The assessee has raised objection against this company on the basis of high turnover in comparison to the assessee. It was also contended that related pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by us from page 14 that software development and services consist of embedded product design, industrial design and visual computing labs which are not comparable to the software development services provided by the assessee and therefore, we direct the Assessing Officer to exclude the above company from the comparables. We further note that the DRP has also recorded the fact that export revenue of this company is 73.30% which is less than 75% applied by the TPO. Therefore this company does not qualify the export earning filter applied by the TPO. Further the co-ordinate bench of this Tribunal in the case of DCIT v. Electronics for Imaging India Pvt. Ltd. (supra) has considered this issue in paras 30 to 33 as under : 30. The assessee has raised objections against this company on the ground that the company is functionally different from the assessee. Though the TPO has considered the software development and services segment of this company as comparable to that of assessee, however, the assessee contended that even within the software segment, this company is engaged in diverse activities. The assessee placed reliance on the information in the annual report under the Directors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded by the DRP as well as the decision of the Tribunal in the case of DCIT v. Electronics for Imaging India (P.) Ltd. (supra), we do not find any error or illegality in the directions of the DRP to exclude this company form the set of comparables.' We further note that the Tribunal in the case of AMD India (P.) Ltd. (supra) has again taken similar view in respect of these six companies. Following the earlier order of the Tribunal, we direct the TPO/AO to exclude these six companies from the set of comparables. E-Infochips Limited. Sasken Communciation Technologies Ltd. 9. The functional comparability of these two companies have been examined by the Delhi Bench of ITAT in the case of Saxo India (P.) Ltd. (supra) in paras 10.1 to 10.2 and 15.1 to 15.2 as under: " (i) E-Infochips Limited: 10.1 The Transfer Pricing Officer included this company in the list of comparables. On being called upon to explain as to why it should not be considered as a comparable, the assessee contended that there was functional dissimilarity inasmuch as this company was engaged in software development and IT enabled services and also Products. The Transfer Pricing Officer observed that the revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny as comparable. The assessee's contention is accepted on this issue." We further note that the Hon'ble High Court vide its decision dt.28.09.2016 has confirmed the decision of the Delhi Bench of ITAT. We are aware that the co-ordinate bench of this Tribunal in the case of Applied Materials India (P.) Ltd. (supra) has remitted the issue of functional comparability of Sasken Communication Technologies Ltd. that in the said case the DRP did not adjudicate the objections of the assessee. Therefore in view of the decision of the Delhi Bench of the Tribunal in the case of Saxo India (P.) Ltd. (Supra) which has been confirmed by the Hon'ble Delhi High Court, we direct the TPO/AO to exclude these two companies from the set of comparables. 10. Icra Technology Analytics Limited & Infosys Technologies Limited were rejected by the DRP on functional comparability and the revenue has not challenged the said directions of the DRP. Even otherwise we find that the functional comparability in these two companies was considered in the case of Applied Materials India Pvt. Ltd. (supra) wherein the Tribunal found that these two companies are not functionally comparable to the software de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts. The Mumbai Bench of the Tribunal in the case of RGA Services India (P.) Ltd. (supra) while considering the functional comparability of this company has held at paras 11 and 12 as under:- '11. We have considered the submission of the parties and perused the relevant material on record. On perusal of the order passed by the TPO it is noticed that the TPO while dealing with assessee's objection with regard to selection of Asian Business Exhibition and Conferences Limited as a comparable has admitted that the nature of function performed by this company is event management. It is further relevant to observe, on perusal of annual report of this company it is seen that as per directors report, the main operation is organizing exhibition and events. Further, schedule 12 of the profit and loss account as well as notes to the accounts reveals, revenue earned by the company is from sponsorship, delegates attending conferences, events and entry fees charged from visitors for visiting exhibition, sale of stall place etc. 12. Thus, on overall analysis of facts and materials placed on record it is very much clear that the business model of the assessee and Asian Business Exhibiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is directed to exclude the same from the set of comparables. ICC International Agencies Limited 14. We have heard the learned D.R. as well as learned A.R. and considered the relevant material on record. The learned Authorised Representative has submitted that this company is engaged in the trading activity and therefore functionally different from the assessee. He has relied upon the decision of the co-ordinate bench of this Tribunal in the case of ITO v. Interwoven Software Services India (P.) Ltd. [2016] 74 taxmann.com 103 (Bang. - Trib.) and further submitted that a similar view has been taken by the Tribunal in the case of AMD India (P.) Ltd. (supra) for the Assessment Year 2011-12. Hence the learned Authorised Representative has submitted that this company is not functionally comparable and liable to be rejected. 15. On the other hand, the learned Departmental Representative has relied upon the order of the TPO. 16. Having considered the rival submissions as well as the relevant material on record, we note that the DRP has rejected this company on the ground that it is functionally dissimilar as earning income from the trading activity and further the margins of this comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aterial. Following the above decision, the assessee's plea and the DRP's directions are upheld and the Revenue's appeal is dismissed.' Thus it is clear that the Tribunal after considering the nature of functions has followed the earlier order of this Tribunal in the case of Interwoven Software Services India (P.) Ltd. (supra) and taken a similar view. Accordingly, in view of the above decisions of the Tribunal, we do not find any error or illegality in the order of the DRP in rejecting this company. 17. Since we have directed the TPO/AO to exclude certain companies from the set of comparables in both segments, therefore the ALP has to be computed on the basis of the remaining comparables. We may clarify that in Sales & Marketing Support Service Segment, only one company is left in the list and therefore the TPO has to consider the benefit of second proviso to Section 92C and decide the same as per law. 18. The assessee has also raised an issue in Ground No.13 regarding exclusion of the expenditure from the export turnover while computing the deduction under Section 10A of the Act. 19. The learned Authorised Representative has submitted that since this expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X
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