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TMI Blog2018 (9) TMI 1943X X X X Extracts X X X X X X X X Extracts X X X X ..... ORDER PER N.K. BILLAIYA, ACCOUNTANT MEMBER, This appeal by the assessee is preferred against the order of the Commissioner of Income Tax [Appeals] - dated 24.04.20187 framed u/s 143(3) r.w.s 144C of the Income-tax Act, 1961 [hereinafter referred to as 'the Act'] pertaining to assessment year 2013-14. 2. The assessee has raised the following substantive grievances: "1. That on the facts and in the circumstances of the case, the learned Transfer Pricing Officer ("Ld. TPO"), Hon'ble Dispute Resolution Panel ("Hon'ble DRP") and the learned Assessing Officer ("Ld. AO") has erred in making transfer pricing ("TP") adjustment of INR 11,58,07,710 in respect of international transaction of "provision of Integrated Circuit ("I/C") design implementation, maintenance/ software development services: 2. That the Ld. TPO/ Hon'ble DRP/ Ld. AO erred on facts and in law in:- 2.1 rejecting the arm's length price ("ALP") determined by the Appellant and in conducting a fresh economic analysis by applying inappropriate filters; 2.2 the Ld. TPO erred in law in applying certain filters for selecting/ excl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aking addition on account of order of the TPO u/s 92CA(3) amounting to ₹ 11.58 crores. 5. The international transactions during the year as per Form 3CEB report is as under: Provision of IC design and software development services ₹ 2,23,91,92,485/- 6. The assessee adopted TNMM as the most appropriate method and the PLI was determined by operating profit/operating cost. The summary of financial statements of the appellant is as under: Integrated Circuit Design, Implementation & Maintenance / Software Development 2,23,91,92,485 2,23,91,92,485 2,23,91,92,485 Service & Marketing Activities 8,94,93,546 8,94,93,546 8,94,93,546 Foreign exchange fluctuation Gain (Net) 3,73,28,435 3,73,28,435 3,73,28,435 Interest on bank deposits 8,71,438 8,71,438 8,71,438 Profit on sale of fixed assets 1,39,04,893 1,39,04,893 1,39,04,893 Gain on cancellation of lease 1,77,606 1,77,606 1,77,606 Miscellaneous Income 7,18,360 7,18,360 7,18,360 Consideration of Transfer of Assembled work force 2,01,17,159 2,01,17,159 2,01,17,159 Total operating Income 2,36,67,32,82 3,50,71,096 2,40,18,03,922 2,40,18,03,922 Expenditure Personnel Expenses 1,28,36,25,72 1, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the international transactions relating to provision of IC design and software development services as under: S.No Company Name Corrected Adjusted . 1 Acropetal Technologies Ltd. (Seg.) 11.58OP/OC% OP/OC4.63% 2 CG VAK Software & Exports Ltd. 18.61% 16.96% 3 E-Zest Solutions Ltd. 9.79% 8.24% 4 ICRA Techno Analytics Ltd. 14.60% 10.05% 5 Mindtree Ltd. (Seg.) 20.23% 18.53% 6 Persistent Systems Ltd. 33.86% 32.08% 7 R S Software (India) Ltd. 17.48% 16.96% 8 Sasken Communication Technologies 11.82% 11.02% 9 Thirdware Solution Ltd. (Overseas 33.47% 32.17% Average 19.05% 16.74% 10. As can be seen from the above, adjusted OP/OC was taken at 16.74%. Accordingly, ALP of the international transactions was computed by the TPO as under: Particulars Amount (in Operating Cost (A) 2,168,915,373 Arm's Length Margin (OP/OC) (%) (B) 16.74% Arm's Length Operating Profit (C=A*B) 363,076,433 Arm's Length Operating Revenue (D=A+C) 2,531,991,806 Actual Operating Revenue of the Assessee 2,329,404,391 Difference (D-E) 202,587,415 Proposed Adjustment u/s 92CA 202,587,415 11. The assessee objected to the comparables before the DRP but without a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly, diversified itself into the domain of business analytics and business process outsourcing. This can be found from the significant accounting policies at page 958 of the paper book. Surprisingly, this company was not selected by the TPO in assessee's own case in assessment years 2009-10 and 2012-13. Moreover, this company was excluded from the comparables by the co-ordinate bench in the case B.C. Management Services Private Limited Vs. DCIT in ITA No. 1064 & 1083 of 2017. The reasons for exclusion were functional dissimilarities and that segmental data was unavailable. We find that there is no change in the facts of this company for assessment year 2013-14 as well. 19. We further find that under the head 'Revenue Recognition', which is at page 959 of the paper book, the Revenue from services consists of revenue earned from services performed for software development and consultancy, licensing and sub-licensing fee, annual maintenance charges for software support, web development and hosting which is recognised to the extent services are performed and revenue from sales is recognised as and when delivery of the branded software is made and is booked after a discount. Considerin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount for the year ending March 31, 2010 of Persistent, available at page 1848 of the Paper Book - IV, it shows that the substantial income of Persistent is from sale of software services and products and has earned its revenue from sale of licensing of products and royalty. For ready perusal, revenue recognition of Persistent, available at page 1858, is extracted as under :- ITA No.168/Del./2015 "H. Revenue recognition Revenue is recognised to the extent it is probable that the economic benefits will flow to the Company an revenue can be reliably measured. I. Income from software services Revenue from time and material engagements is recognised on time basis in accordance with the terms contracts. In case of fixed price contracts, revenue is recognised based on the milestones achieved as specified in the contracts on proportionate completion basis. Revenue from licensing of products is recognised on delivery of products. Revenue from royalty is recognised on sale of products in accordance with the terms of the relevant agreement. Revenue from maintenance contracts are recognised on a pro- rata basis over the period of the contract as and services are rendered. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -II. The Company is engaged in the business of Information Technology and Information Technology enabled services. The company caters to both domestic and international markets. A perusal of the Annual Report shows that segmental information of the revenue from information technology and information technology enabled services is not available. From page 882 of the paper book, we find that the revenue recognition policy is that Revenue from Subscription contract is recognised on acceptance or renewal of the contract and is accrued over the period of the contract. Revenue from sale of user licenses for software applications is recognised on e-delivery of Software Licence Key to end user. This company has intangibles worth ₹ 108.22 crores. 25. We further find that this comparable has been rejected by the Tribunal in assessee's own case in assessment year 2010-11 in ITA No. 609/DEL/2015 and the relevant finding is given at page 1644 Volume IV. Considering the functional profile of this company in the light of the finding of the co-ordinate bench [supra], we direct for exclusion of this company from the final list of comparables. 26. Second bone of contention relates to the fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ending December 2009 was unaudited and as such quarterly result shall not be considered. 61. Identical issue has been decided by Hon'ble High Court of Punjab & Haryana High Court in CIT vs. M/s. Mercer Consulting (India) Pvt. Ltd. in ITA No.101 of 2015 (O&M) order dated 24.08.2016, available at page 2628 of Paper Book - V, relevant page 2637, which has been decided in favour of the assessee by returning following findings :- "27. The TPO excluded the case of R. Systems International Limited from the list of comparables. The ITAT included the same. The TPO excluded the case of R. Systems International Limited on the ground that it follows the calendar year i.e. Ist January to 31st December for maintaining its annual account whereas the accounting year of the assessee is 1st April to 31st March. The TPO followed an order passed by the Mumbai Bench of the Tribunal in ACIT v. Hapag Lloyd Global Services Ltd. 2013-TII-68-ITATMUM-TP in which it had been held that a ITA No.168/Del./2015 company with a different financial year ending cannot be compared. 28. We are unable to agree with the decision of the TPO and of the DRP that affirmed it. The view taken by the Tribunal co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the international transaction has been entered into is directly available from the annual accounts of that comparable, then it cannot be held as not passing the test of sub-rule(4) of rule 10B." 62. So, following the findings returned by Hon'ble High Court in CIT vs. M/s. Mercer Consulting (India) Pvt. Ltd. (supra), we are of the considered view that when data for the financial year is available, the comparable cannot be rejected merely on the ground that financial year followed is different. So, this issue is remitted back to the TPO to decide afresh in the light of the judgment in CIT vs. M/s. Mercer Consulting (India) Pvt. Ltd. (supra) by providing an opportunity of being heard to the taxpayer. CG VAK SOFTWARE & EXPORTS LTD. (CG VAK) 32. Respectfully following the same, we direct accordingly. R. Systems International Ltd. 33. In the very same order [supra], the co-ordinate bench has given similar direction for this company also. For similar reasons, as given for comparable Caliber Point Business Solutions Limited, we direct accordingly. 34. The next grievance relates to the rejection of the appellant's claim for risk adjustment. 35. We find that similar di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nded that the risk adjustment is required to be given on each comparable as has been held by the coordinate Bench 'A', Pune Bench of the Tribunal in case of Honeywell Turbo Technologies (India) Pvt. Ltd. vs. DCIT in ITA No.2584/PUN/2012 order dated 10.02.2017 by following the case of Sony India Pvt. Ltd. cited as 114 ITD 448 by making following observation:- "33. Further, the Delhi Bench of Tribunal in the case of Sony India Pvt. Ltd. reported in 114 ITD 448 has allowed 20% risk adjustment considering the fact that it may not be possible to quantify risk adjustments. The assessee applying the said ratio in the case of Sony India Pvt. Ltd. (supra) has worked out the risk adjustment on the operating margins of comparables to be allowed when computed @ 20%. We direct the Assessing Officer to allow the risk adjustment and re-compute the margins of comparables by applying the ratio laid down by Delhi Bench of Tribunal in the case of Sony India Pvt. Ltd. (supra) and compute the TP adjustment, if any, in the hands of assessee." 19. Similar view has been taken by the coordinate Bench of the Tribunal in case of ITO vs. M/s. Supportsoft India Pvt. Ltd. in IT (TP) A.No.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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