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TMI Blog2018 (2) TMI 1975X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the assessee risk adjustment Charging of Interest u/s. 234B 234D - HELD THAT:- The charging of interest is consequential and mandatory and the Assessing Officer has no discretion in the matter. X X X X Extracts X X X X X X X X Extracts X X X X ..... cer ('TPO') erred in making an addition of INR 234,637,983 to the total income of the Appellant on account of adjustment in the arm's length price of the software research and development services transaction entered by the Appellant with its associated enterprise; 4. The learned AO/TPO erred, in law and in facts, by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Rules, and conducting a fresh economic analysis for the determination of the ALP in connection with the impugned international transaction and holding that the Appellant's international transaction is not at arms length; 5. The learned AO/TPO erred, in law and in facts, by determining the arm's length margin/price using only FY 2010-11 data which was not available to the Appellant at the time of complying with the transfer pricing documentation requirements; 6. The learned AO/TPO erred in rejecting certain comparable companies by applying the following quantitative and qualitative filters: (a) The learned AO/TPO erred, in law and in facts, by rejecting certain comparable companies identified by the Appellant for having d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , respectively. 14. The learned AO erred, in law and in facts, in initiating penalty proceedings u/s 271(1)(c) of the Act." 3.1.2 The assessee has also filed additional grounds vide letter dt.21.7.2017 :- 15. "The learned AO/TPO and DRP erred in accepting Acropetal Technologies Limited, E-Infochips Limited, E-Zest Solutions Limited, ICRA Techno Analytics Limited, Infosys Limited, Tata Elxsi Limited and Persistent Systems and Solutions Limited as comparable companies applying unreasonable comparability criteria." 16. "The learned AO/TPO and DRP erred in rejecting Akshay Software Technologies Limited, Cat Technologies Limited, LGS Global Limited, Silverline Technologies Limited, Caliber Point Business Solutions Limited, Helios & Matheson Information Technology Limited and R Systems International Limited as comparable companies." 17. "Larsen & Toubro Infotech Limited, Persistent Systems Limited and Sasken Communication Technologies Limited were chosen as comparables in transfer pricing study, however upon availability of more details in public domain, these companies are found to be not comparable and should be excluded from the final set of comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sis carried out, the assessee concluded that its international transactions with the AE are at arm's length. 4.4.1 The TPO examined and assessee's TP Report and rejected the same for the various reasons given in his TP order. The TPO then, adopting TNMM as the MAM conducted his own comparability analysis and applying certain criteria / filters, finally selected the following 13 companies as the final set of comparables. Sl. No Name Sales Cost PLI 1 Acropetal Technologies Ltd.(seg) 814,016,893 616,754,876 31.98% 2 e zest solutions (from Capitaline) 112866098 93255341 21.03% 3 E-infochips Ltd 260384251 166447527 56.44% 4 Evoke (from Capitaline) 144869912 133996568 8.11% 5 I C R A Techno Analytics Ltd. (in 000) 158401000 126894000 24.83% 6 Infosys Ltd 253850000000 177,030,000,000 43.39% 7 Larsen & Toubro Infotech Ltd. 23318122096 19,764,861,289 19.83% 8 Mindtree Ltd.(seg) 8,783,000,000 7,937,143,242 10.66% 9 Persistent Systems & Solutions Ltd. 189,490,457 155,172,089 22.12% 10 Persistent Systems Ltd. 6,101,270,000 4,971,860,000 22.84% 11 R S Software (India) Ltd. 1,882,638,471 1,617,804,170 16.37% 12 Sasken Communi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gn Exchange Gain / Loss. 6.1 In these grounds, the Revenue contends that the DRP has erroneously considered foreign exchange gain / loss as part of operating income when the TPO has excluded this item while computing the operating margins of the assessee. On the contrary, the assessee contends that the foreign exchange loss / gain are closely linked to its business operations and therefore should be considered as operational in nature as has been held by the DRP. 6.2.1 We have heard the rival contentions, perused and carefully considered the material on record. In the case on hand, the DRP has accepted the assessee's contention that foreign exchange loss / gain is operational in nature, by following the decision of the co-ordinate bench of this Tribunal in the case of SAP Labs Ltd. v. Asstt. CIT[2012] 134 ITD 253/17 taxmann.com 16 (Bang.) and of another co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08. We find that another co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2010-11 in its order in IT(TP)A Nos.291 & 427/Bang/2015 dt.24.6.2016 has held that if foreign exchange gain / loss is operatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wherein 1% risk adjustment was allowed. From the above, it is seen that the DRP has merely referred to a decision in which 1% risk adjustment was granted and it is not correct to say that DRP directed that 1% risk adjustment is to be granted in this case. 7.3.2 The Bangalore Benches of the Tribunal, while allowing risk adjustment to captive service providers, as a matter of principle has held in many cases, ;including the one cited (supra), that risk adjustment cannot be granted unless the assessee has submitted computation of the same before the authorities below. In the case on hand, we find that though the assessee in Form 35A submitted before the DRP, at Annexure/Objection 13 thereof, mentioned risk adjustment at 4.92%, no scientific basis or working in respect of the assessee's claim vis-à-vis the comparable companies had been provided. Even on pages 890 & 891 of paper book (Annexure 9-B), no working has been given in respect of risk adjustment claimed at 6.26% vis-à-vis the comparable companies. Since the assessee has not given the computation of risk adjustment of the assessee vis-à-vis the comparable companies, we hold that the assessee shall not b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was submitted that all costs have been considered and arrived at the gross profit and operating profit margin of around 32% is quite reasonable. The net margin of 5% of overall cost is also very significant and reasonable, especially because the company does not resume any significant business risks. Thereafter, the assessee has taken 15% of the profits of companies who have R&D activities as per decision of ITAT in Rolls Royce case and analysed the Cost Plus Method. 5.6 However, as the ld. TPO has stated in the report, there is no data furnished by the assessee with reference to Cost Plus method. Even when we enquired, the ld. counsel fairly admitted that assessee would prefer CUP method over Cost Plus Method. In view of this, in the absence of any data, we are not in a position to appreciate the Cost Plus Method. More over, most of captive service provides work on Cost Plus Method ranging from 5% mark-up to 25% mark-up. All the transactions are related party transactions. Therefore, uncontrolled comparable prices are generally not available in the Cost Plus Method. Even the assessee's analysis of 32% Gross Profit and 5% Net Profit cannot be accepted as there cannot be any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we have asked the ld. counsel about the working adopted by the assessee in arriving at the rate per hour either in USD terms or INR terms. It was submitted that by taking general accounts and annual report of the respective companies, assessee has derived offshore consultancy amount and thereafter assumed the persons who have worked offshore and then the rate per day at 20 days per month working and rate per hour at 8 hours per day, thus on various assumptions and presumptions, the rate per hour was arrived from the total profits as reported in the public domain. It was fairly admitted that rate per hour is not available for strict comparison. It was also submitted that the assessee has not taken NASCOM rates as the basis in comparing the rate per hour. This indicates that assessee's comparability under the CUP method is based on various assumptions of (a) estimating the offshore profits, (b) estimating number of employees, (c) estimating the working hours per employee per day per month, and then dividing the profit by so many assumptions/ numbers. This analysis of the assessee cannot be relied on as an external CUP. As can be seen from the above, there is no internal CUP whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustments made by the TPO under TNMM. Some of these grounds are either general or conceptual in nature. Before us, the learned Authorised Representative for the assessee made submissions only in respect of the grounds related to exclusion / inclusion of companies to the final set of comparables selected by the TPO. 11.2 In Ground No.7 (supra), the assessee has contended that the TPO erred in accepting / rejecting companies based on unreasonable comparability criteria. This general ground has been expanded in the Additional Grounds at S.Nos.15, 16 & 17 (supra) wherein the assessee has specified the companies which it seeks exclusion / inclusion. In this view of the matter, except for the grounds at S.No.7 (supra) and additional grounds 15 to 17 (supra), all other grounds (i.e. Grounds 3 to 6, 8 to 12) raised on TP issues were not urged or pressed before us and are accordingly dismissed as infructuous. 11.3 In proceedings before us, the learned Authorised Representative for the assessee submitted a chart indicating the companies which the assessee is seeking exclusion / inclusion with details regarding each of the companies. 11.3.1 As per Addl. Ground No.15 (supra); out of the 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncements cited. We have perused the orders of the authorities below and the grounds of objections raised by the assessee before the DRP in respect of the issue of exclusion of the aforesaid 7 companies. It is seen therefrom, that while the assessee has filed its objections in respect of exclusion of the aforesaid comparables before the DRP at Ground of objection 9 at pages 74 to 98 thereof, the DRP in its order has only addressed the issue of inclusion / exclusion of two of the above comparables; (i) Acropetal Technologies Ltd. and (ii) E-Zest Solutions Ltd. at paras 10.6 to 10.7 of its order respectively while disposing off the assessee's grounds of objection No.9. The objections raised by the assessee in respect of the other five companies listed in para 12.1 above i.e. (i) E-Infochips Limited (ii) ICRA Techno Analytics Ltd. (iii) Infosys Technologies Ltd. (iv) Tata Elxsi Limited (Seg.) and (v) Persistent Systems & Solutions Ltd. have not been addressed by the DRP and we find that there is not even a mention of these companies in the DRP's order. In this fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ering the facts and circumstances of the case, as discussed above; that the DRP has not rendered findings on some of the issues raised by the assessee before it and there is a contradiction in the number of segments that this company 'Acropetal' operates in, we are of the opinion that it is necessary to remand the issue of comparability of this company back to the file of the DRP for examining and adjudication of the issues raised by the assessee, after affording the assessee adequate opportunity of being heard in the matter and to file details /submissions in this regard, which shall be duly considered. We hold and direct accordingly. 14. E-Zest Solutions Limited ('E-Zest') 14.1 Before us, the assessee submitted that this company 'E-Zest' ought to be excluded from the list of comparables as it is engaged in the business of software development services and product engineering, but however segment details in this regard are not available. It was also submitted that this company has inventories, indicating that it is into software products and also R & D activities. In support of the assessee's plea for exclusion of this company form the list of compara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m operations'. It is further borne out that it is providing end-to- end development, software project development services. As the assessee is also engaged in the customised software development, we find this company to be functionally similar. The same is, therefore, retained in the list of comparables." 14.3.2 Respectfully following the decision of the co-ordinate bench of this Tribunal in the case of AMD India (P.) Ltd. (supra), we uphold the inclusion of this company, E-Zest Solutions Ltd. in the list of comparables. Consequently, the assessee's ground on this company fails. Addl. Ground No.16 -Inclusion of companies sought for by the assessee. 15.1 The assessee seeks exclusion of the following seven comparables :- (i) Akshay Software Technologies Ltd. (ii) Cat Technologies Ltd. (iii) LGS Global Limited (iv) Silverline Technologies Ltd. (v) Caliber Point Business Solutions Ltd. (vi) Helios & Matheson Information Technology Ltd. (vii) R Systems International Ltd. 15.2 In the course of proceedings before us, the learned Authorised Representative of the assessee submitted that these 7 companies (supra) are all comparable to the assessee in all respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Representative, the other two companies were chosen as comparables by the assessee in its TP Study itself. The learned Authorised Representative however submits that the assessee seeks exclusion of L & T Infotech Limited and Persistent Systems Limited, due to more details being now available in the public domain which render these two companies as not comparable to the assessee and therefore prays that they be excluded from the list of comparable companies. 16.4 Per contra, the learned Departmental Representative for revenue objected to the admission of this additional ground stating that when the assessee itself has selected these two companies, the authorities below had no occasion to consider the objections now raised by the assessee before the Tribunal. 16.5 After having heard both parties and perused and considered the material on record, we find that the functional comparability of these two companies i.e. (i) L & T Infotech Limited and (ii) Sasken Communication Technologies Limited have been considered by benches of this Tribunal in various cases, including those cited by the ld.AR. By way of this additional ground, the assessee is raising objections to the inclusion of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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