9911796707
TMI Blog2018 (8) TMI 2070X X X X Extracts X X X X X X X X Extracts X X X X ..... ustment requires reconsideration and is thus, restored to file of AO/TPO for re-computation in light of our observations in the preceding paragraph, after granting sufficient opportunity of hearing to the assessee. Allowability of working capacity adjustment - We are of the opinion that once the TPO/Ld. DRP has principally allowed the claim of working capital adjustment with respect to Software Development Segment than there is no occasion to disallow similar claim for SIM Card Assembly Segment. Now there are various guidelines and factors that have been laid down to work out the working capital adjustment and accordingly, we direct the assessee to provide the detailed working of the working capital adjustment to the TPO and he is directed to verify the correctness of the amount and the working capital adjustment as given by the assessee and allow the same in accordance with settled principles. Thus, with this direction, this issue is treated as allowed for statistical purposes. Levy of interest under section 234B - We direct the AO to verify and allow the claim of the Assessee regarding granting full credit of advance tax of 20,698,500/- paid by the Assessee and also short credit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Transfer Pricing Study (TP Study) had selected a total of 18 comparables with an average OP/OC of 14.05% and hence claimed the said transaction to be at arm's length. The TPO while accepting the MAM as selected by the assessee, accepted only 7 out of the 18 comparables and further introduced 12 additional comparables with an average OP/OC of 24.95% thereby determining an adjustment of ₹ 1,10,57,340/- for the Software Development Segment. 2.3 In the SIM Card Assembly Segment, the assessee had declared a PLI of (15.22%) and justified the same to be owing to various circumstances such as initial years of operation, high competition in the market etc. The assessee, in its TP study, had selected 5 comparables with an average OP/OC of 6.39%. During the transfer pricing proceedings, the TPO issued a show cause notice to the assessee and vide the assessee's reply dated 05.10.2011, the assessee submitted a detailed reasoning as to why it had incurred losses and additionally also objected to one of the comparables selected by the assessee itself which was acceded to by the TPO. Thereafter, the final OP/OC of the comparables was worked out at 4.78% as opposed the margin of (15.22%) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nctional, asset and risk profile of these alleged comparable companies are dissimilar with that of the Appellant. 1.4 On the fact and in the circumstances of the case and in law, the Ld. TPO, the Ld. AO and the Hon'ble DRP erred in changing the profit margin computation of alleged comparable companies by incorrectly considering certain income / expense as operating / non-operating. 1.5 On the facts and in law, the Ld. TPO, the Ld. AO and the Hon'ble DRP erred in not allowing risk adjustment to the Appellant, thereby contravening the Rule 10B(1)(e)(iii). Transfer Pricing - SIM Card Assembly Segment [₹ 118,461,592] 2. On the facts and in law, the Ld. TPO and the Ld. AO erred in determining and the Hon'ble DRP erred in confirming the addition of ₹ 11,84,61,592 in relation to international transactions pertaining to SIM card assembly segment. 2.1 On the facts and in law, the Ld. TPO, the Ld. AO and the Hon'ble DRP erred in directly applying the Operating Margin ("OP Margin") of comparable companies in the SIM card assembly segment to that of the Appellant without taking into account commercial reasons and factual data to support the losses incurred in the SIM card ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sinterpreting the requirement of "contemporaneous" data in the Rule 10B(4) of the Rules to necessarily imply current year data, thereby breaching the principles in natural justice and "impossibility of performance". 4. On the facts and in law, the Ld. TPO, the Ld. AO and the Hon'ble DRP erred in not granting the benefit of the 5% variation as per the proviso to section 92C(2) of the Act to the Appellant, as the law stood at the time of preparation of TP documentation. 5. On the facts and in the circumstances of the case, the Ld. AO erred in initiating penalty proceedings under section 271(1)(c) of the Act. 6. On the facts and in the circumstances of the case, the Ld. AO erred in levying interest under section 234B of the Act. 7. On the facts and in the circumstances of the case, the Ld. AO has erred in not granting full credit of advance tax of ₹ 20,698,500 paid by the appellant and also short credit of tax deducted at source of ₹ 15,01,872 on the income of the appellant." 2.6 The assessee, vide application dated 24.09.2014, has also raised the following additional grounds:- 2.9 Without prejudice to our other grounds of appeal, the Ld. TPO ought to have consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO. The assessee objected to the inclusion of Avani Cincom but the objections were rejected by the TPO/ Ld. DRP. Before us, the Ld. Counsel for the assessee, vide a detailed chart and a hand out from of the website, argued that Avani Cincom was not functionally comparable to the assessee since the assessee was a captive software service provider and on the contrary Avani Cincom was engaged in provision of both software development services and also development of software products. Additionally, it was argued that the segmental details of the company were not available and that the Annual Report available in the public domain was also incomplete. The Ld. Counsel placed heavy reliance on the order of the co-ordinate Bench of ITAT Bangalore in the case of Sun Gard Solutions India Pvt. Vs. ACIT reported in [2015] 63 taxmann.com 323 (Bangalore - Trib.) and other decisions of coordinate Benches referred in his chart, which are for the same Assessment Year i.e. 2008-09, where the co-ordinate benches had take a view that Avani Cincom was not functionally comparable to a captive software service provider. 3.2.2 The Learned Departmental Representative (CIT DR), on the other hand, supported ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the contention of the learned Authorised Representative that this company has been selected by the TPO as an additional comparable only on the ground that this company was selected in the earlier year. Even in the earlier year, it is seen that this company was not selected on the basis on any search process carried out by the TPO but only on the basis of information collected under section 133(6) of the Act. Apart from placing reliance on the judicial decision cited above, including the assessee's own case for Assessment Year 2007-08, the assessee has brought on record evidence that this company is functionally dis-similar and different from the assessee and hence is not comparable. Therefore the finding excluding it from the list of comparables rendered in the immediately preceding year is applicable in this year also. Since the functional profile and other parameters by this company have not undergone any change during the year under consideration which fact has been demonstrated by the assessee, following the decisions of the co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 in ITA No.845/Bang/2011 dt.22.2.2013, and in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Product and no segmental details being available. It was fairly pointed out that though there is no finding of the Ld. DRP on this comparable but it was submitted that since all the material facts are available on record and there is no dispute on application of filters, the issue may be adjudicated. 3.2.6 The Learned Departmental Representative, on the other hand, supported the orders of the authorities below. It was fairly conceded before us that there is no difficulty in adjudication of this comparable basis the facts on record. It was vehemently argued before us that since this company passes all filters, thus, it is a fit comparable. 3.2.7 We have heard the rival submissions and perused the material on record along with the various decisions of the co-ordinate benches. We are of the opinion that in view of all relevant facts being available on record, there is no impediment in adjudicating the issue. Our view is fortified by the judgment of the Hon'ble Delhi High Court in the case of Pr. CIT vs. Pitney Bowes Software India Pvt. Ltd in ITA 681/2015, vide order dated 28.09.2015, wherein the High Court had categorically held that the Tribunal was justified in adjudicating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utions and also consultancy which is not the case with the assesse company. Another relevant factor to be noticed is Page 1254 of the paper book, which divulges the significant accounting policies of this company. Under the head 'Revenue recognition', it has been mentioned that: "revenue from software development is recognized based on software developed and billed to clients." As against this, the Schedule forming part of the accounts of the assessee company provides for revenue recognition in the terms: "revenue from software developed is recognized over the contracted period of development on cost plus basis." It can be seen that there is a lot of difference in the revenue recognition models of the assessee as well as Bodhtree Consulting Ltd. This factor, in addition to the functional dissimilarity as discussed above, makes this company non comparable with the assesse company. We, therefore, order to exclude it from the list of comparables." 46. There is no dispute that the Aircom is also into the business of software development and providing related services to its AE. We are, therefore, of the considered opinion that being a software solutions company which is engaged in pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on this comparable could be made. 3.2.11 On merits, the Ld. Counsel submitted that Celestial could not be held as a comparable since its functionality was very different from that of the Assessee. It was further submitted that Celestial was into bio-informatics software products and owing to insufficiency of segmental data in the Annual Report, the same could not be accepted as a comparable. The Ld. Counsel took us through the annual report to show that during the impugned year Celestial had issued an IPO and also owned intangibles. 3.2.12 On the contrary, the Ld. CIT DR appearing on behalf of the Department contended that the said comparable had already been accepted by the assessee as being functionally comparable in the preceding year and hence the assessee was barred from taking a contrary stand in the impugned year. On merits she placed strong reliance on the orders of the TPO/ Ld. DRP and contended that the findings of the TPO were well substantiated. 3.2.13 Having heard the parties, we are in agreement with the contentions of the Ld. Counsel for assessee that unless the Function, Assets and Risk profile of a comparable is demonstrated to be similar/dissimilar from record, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alysis for this company for this year viz. Assessment Year 2008-09. To that extent, in our considered view, the selection process adopted by the TPO for inclusion of this company in the list of comparables is defective and suffers from serious infirmity. 9.4.2 Apart from relying on the afore cited judicial decisions in the matter (supra), the assessee has brought on record substantial factual evidence to establish that this company is functionally dis-similar and different from the assessee in the case on hand and is therefore not comparable and also that the findings rendered in the cited decisions for the earlier years i.e. Assessment Year 2007-08 is applicable for this year also. We agree with the submissions of the assessee that this company is functionally different from the assessee. It has also been so held by co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) as well as in the case of Triology EBusiness Software India Pvt. Ltd. (supra). In view of the fact that the functional profile of and other parameters of this company have not changed in this year under consideration, which fact has also been demonstrated by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e find that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has omitted this company from the list of comparables on the ground that the KPO services rendered by it are not comparable to those rendered by a captive provider of software development services. At para 14.4 of its order, the coordinate bench has held as under:- "14.4 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the list of comparables only on the basis of the statement made by the company in its reply to the notice under section 133(6) of the Act. It appears that the TPO has not examined the services rendered by the company to give a finding whether the services performed by this company are similar to the software development services performed by the assessee. From the details on record, we find that while the assessee is into software development services, this company i.e. eZest Solutions Ltd., is rendering product development services and high end technical services which come under the category of KPO services. It ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egmental data, directed its exclusion. 3.2.21 The Ld. CIT DR, on the other hand, whilst taking support from the orders of the lower authorities vehemently supported Igate's inclusion. She fairly conceded that since the assessee is not arguing regarding application of filters and reliance is placed only on the financials to demonstrate difference in functionality, she has no objection if the issue of exclusion of this comparable is adjudicated by the Bench. 3.2.22 We have heard the rival submissions and perused the material on record. In view of the necessary facts being available on record, we do not see any impediment in adjudicating this comparable. On merits, we do not agree with the submissions of Ld. Counsel for the assessee that this Company ought to be removed from the list of comparables only on account of disclosure of 'Amalgamation' in the Annual Report being undertaken during this relevant period. The Ld. Counsel has not shown the effect of this exceptional event (Amalgamation) on the financials for the relevant period. However, we agree with the submissions of the Ld. Counsel for Assessee that this company is engaged in providing array of services under the he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lude this comparable company on the basis of its magnitude. The coordinate bench has rejected this comparable by making following observations:- "17.2. We have considered the rival submissions and perused the relevant material on record. It can be seen that the TPO has included this company in the list of comparables by rejecting the assessee's contentions. The assessee is providing and assigning software services to its AE alone without acquiring any intellectual property rights in the work done by it in the development of software. The Hon'ble Delhi High Court in CIT vs. Agnity India Technologies (P) Ltd. (2013) 219 Taxmann 26 (Del) considered the giantness of Infosys Ltd., in terms of risk profile, nature of services, number of employees, ownership of branded products and brand related profits, etc. in comparison with such factors prevailing in the case of Agnity India Technologies Pvt. Ltd., being, a captive unit providing software development services without having any IP rights in the work done by it. After making comparison of various factors as enumerated above, the Hon'ble Delhi High Court held Infosys Ltd. to be non-comparable with Agnity India TechnologiesPvt. Ltd. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e note that on similar set of facts, the coordinate Bench of the Tribunal in the case of Nokia Siemens Networks India Pvt. Ltd. vs. ACIT in ITA No. 333/Del/2013 has excluded this comparable by observing as follows: "81. At the outset it is brought to our notice that this company was considered by a coordinate bench of this tribunal in the immediately preceding year that is assessment year 2007-08 in assessee's own case and this Tribunal rejected this company to be included as a comparable to the assessee. 82. On a perusal of the order dated 18.5.2016 in ITA No. 5837/Delhi/2011 in assessee's own case, we find that this company was considered by this Tribunal vide paragraph numbers 37 to 39 and found that the software segment of this company also includes revenues from software and training, whereas the assessee company is not engaged in imparting any training or selling its software products to attract revenue. On this premise, this Tribunal held that the finances of this company are not comparable with the assessee company and on that ground this company is not a valid comparable. 83. Further, the Assessee has placed reliance on Aircom (supra), in order to exclude this c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew has been taken by the Tribunal in the assessee's own case for the immediately preceding assessment years 2006-07 and 2007-08. Respectfully following the precedents, we hold that Kals Information Systems Ltd. (Seg.) should be expunged from the set of comparables." 84. No change of circumstances is brought to our notice either by the assesse or the revenue, as such we do not find any reason to take a different view from the view taken by this Tribunal for the earlier year. We, therefore, consequently hold that this company is not a valid comparable to that of the assessee and has to be excluded from the final set of comparable companies for benchmarking international transaction related to software segment." 3.2.30 Respectfully following the view taken by the coordinate Bench, we direct the AO/TPO to exclude Kals from the list of comparables. (viii) LGS Global Ltd. ("LGS"): 3.2.31 The next comparable being contested before us is LGS Global Ltd. At the outset, it was fairly accepted by the Ld. Counsel of the assessee that the said comparable was submitted by the assessee itself in its Transfer Pricing Study. He, however, submitted that this is not a fit comparable and there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fortified by the judgment of the Hon'ble Bombay High Court in CIT vs. Tata Power Solar Systems Ltd. reported in [2017] 298 CTR 197 (Bombay), wherein it has been observed as follows : "We find that the impugned order of the Tribunal holding that a party is not barred in law from withdrawing from its list of comparables, a company, if the same is found to have been included on account of mistake as on facts, it is not comparable. The Transfer Pricing Mechanism requires comparability analysis to be done between like companies and controlled and un-controlled transactions. This comparison has to be done between like companies and requires carrying out of FAR analysis to find the same. Moreover, the Assessee's submission in arriving at the ALP is not final. It is for the TPO to examine and find out the companies listed as comparables which are, in fact comparable." 3.2.35 On merits, we note that on similar set of facts, the coordinate Bench of Tribunal in the case of Nokia Siemens Networks India Pvt. Ltd. vs. ACIT in ITA No. 333/Del/2013, has excluded this comparable by observing as follows: "85. Initially the assessee offered this company as a comparable, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed for the earlier comparable i.e. LGS Global Ltd. 3.2.38 On merits, the Ld. Counsel submitted that Mindtree is structured into two business units that focus on software development Research and Development Services and IT Services. It was further submitted that in addition to these services, Mindtree also offers IT strategic consulting services, application development, data warehousing and business intelligence, application maintenance, package implementation, product architecture, design and engineering embedded software, technical support, testing and infrastructure management service. Additionally, it was submitted that even though the software development segment has been taken by the TPO, the services provided under the umbrella of software development are in a wide array and can by no stretch of imagination be compared to a software developer like the assessee. He further invited our attention to various pages of the Annual report and submitted that the income declared during the year includes revenue of WOS [TES PV and Projects Solutions Pvt. Ltd.] which was acquired on 17.12.2007. Additionally, it was also submitted that the said company earned substantially from onsite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f this company as on 31st March 2008 of ₹ 64.80 millions has been included in the above revenues for that year. 93. Needless to say the vast functional dissimilarity coupled with the extraordinary event of acquisition of equity shares stated above suggests that this company is not a good comparable with the assessee and consequently is liable to be excluded from the list of comparables." 3.2.41 Respectfully following the view taken by the coordinate Bench, we direct the AO/TPO to exclude this company from the list of comparables. (x) Persistent Systems Pvt. Ltd. ("Persistent"): 3.2.42 The next comparable being agitated by the assessee before us is Persistent Systems Pvt. Limited. The Ld. Counsel fairly accepted that Persistent was the Assessee's own comparable and placed reliance on his arguments advanced in respect of LGS and Mindtree. 3.2.43 On merits, the Ld. Counsel submitted that Persistent could not be considered as a comparable since they primarily dealt in product development and analytical services. To establish the difference in functionality, he referred to the handouts of the screenshot of website of Persistent and various pages of the Annual Report. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e submitting that this company is functionally different and also that there are several other factors on which this company cannot be taken as a comparable. In this regard, the learned Authorised Representative submitted that: (i) This company is engaged in software designing services and analytic services and therefore it is not purely a software development service provider as is the assessee in the case on hand. (ii) Page 60 of the Annual Report of the company for F.Y. 2007-08 indicates that this company, is predominantly engaged in 'Outsourced Software Product Development Services' for independent software vendors and enterprises. (iii) Website extracts indicate that this company is in the business of product design services. (iv) The ITAT, Mumbai Bench in the case of Telecordia Technologies India Pvt. Ltd. (supra) while discussing the comparability of another company, namely Lucid Software Ltd. had rendered a finding that in the absence of segmental information, a company be taken into account for comparability analysis. This principle is squarely applicable to the company presently under consideration, which is into product development and product design serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tegra on this count as well could not be accepted as a comparable. It was also fairly accepted that though there is no finding of the Ld. DRP on this comparable but since all the material facts are available on record and as there is no dispute on application of filters, the issue could be adjudicated. 3.2.48 In response, the Ld. CIT Departmental Representative vehemently opposed the submissions of the assessee's counsel and prayed that since this company passes all filters, it is a suitable comparable. In terms of the submission made by the Ld. Counsel for assessee that he is not disputing the application of filters, the Ld. CIT Departmental Representative, in all fairness, accepted that the Bench could take a view on the comparability. 3.2.49 We have considered the arguments of both the parties and also the material available on record. We are of the opinion that since all the necessary facts for adjudication of this comparable are available on record, there is no reason to remit this issue back to the file of the lower authorities. We are of the view that the factual position in the present matter is similar with decision of the coordinate bench in Sun Gard Solutions India Pvt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d its own intangible assets thereby making it functionally different from the assessee in the case on hand is a captive software service provider; as is the assessee in the case on hand. At paras18.3.1 to 18.3.3 of its order, the co-ordinate bench has held as under:- "18.3.1 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details brought on record that this company i.e. Quintegra Solutions Ltd. is engaged in product engineering services and is not purely a software development service provider as is the assessee in the case on hand. It is also seen that this company is also engaged in proprietary software products and has substantial R&D activity which has resulted in creation of its IPRs. Having applied for trade mark registration of its products, it evidences the fact that this company owns intangible assets. The co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (ITA No.227/Bang/2010 dt.9.11.2012) has held that if a company possesses or owns intangibles or IPRs, then it cannot be considered as a comparable company to one that does not own intangibles and requires to be omitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tangibles as well. It was also fairly accepted that though there is no finding of the Ld. DRP on this comparable, the same could be adjudicated. 3.2.53 The Ld. CIT Departmental Representative relied on the orders of the lower authorities and prayed that since this company passes all filters, it is a suitable comparable. In terms of the submission made by the Ld. Counsel for Assessee that he is not disputing the application of filters, the Ld. CIT Departmental Representative had no objection to the adjudication of this comparable by this Bench. 3.2.54 We have heard the rival submissions and perused the material available on record. We note that all the relevant facts necessary for adjudication of this comparable are available on record and, therefore, we do not see any reason to remit the matter back to the file of the lower authorities. We are of the view that the factual position in the present case is similar to the decision of coordinate Bench of Tribunal in the case of Nokia Siemens Networks India Pvt. Ltd. vs. ACIT in ITA No. 333/Del/2013, wherein this comparable was excluded by observing as follows: "103. Assessee objected the inclusion of this company in the set of compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above arguments, the Ld. Counsel submitted that the filter as adopted by the TPO of RPT<25% was not a valid filter and for the same the assessee placed reliance on the Bengaluru Bench's decision in the case of LSI Technologies India Pvt. Ltd. vs. ITO in ITA No. 1380/Bang/2010, order dated 13.05.2016. As in the case of some of the earlier comparables being contested, it was fairly pointed out that though there is no finding by the Ld. DRP on this comparable, the Bench could adjudicate the issue all the same. Further, the Ld. Counsel for the Assessee also submitted that the arguments regarding application of filters may be treated as not pressed and prayed for adjudication of this comparable. 3.2.57 The Ld. CIT Departmental Representative vehemently argued for the comparable's inclusion and took support from the TPO's order. In terms of the submission made by the Ld. Counsel for assessee that he is not disputing the application of filters, the Ld. CIT Departmental Representative had no objection to the adjudication of this comparable by the Bench. 3.2.58 We have heard the rival submissions and also perused the relevant material on record. We are of the opinion that since all t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparables. (xiv) Tata Elxsi Limited ("Tata Elxsi"): 3.2.60 The next comparable being agitated before us is Tata Elxsi Limited. The said comparable was chosen by the assessee itself in its TP Study. The Ld. Counsel for the assessee relied on the case laws as relied upon while arguing for exclusion of LGS and some other comparables, to contend exclusion of Tata Elxsi even though the comparable was chosen by the assessee itself in its TP Study. 3.2.61 On merits, the Ld. Counsel submitted that the said company could not be considered as a comparable since the company, along with providing software development, also dealt in product design services, innovation design engineering, visual computing and systems integration and support. The Ld. Counsel drew our attention to the 'Notes to accounts' of the Annual Report to argue that the company, although, dealt with wide array of services, it did not maintain proper segmentals, and, hence, the same could not be retained as a comparable. Like some of the earlier comparables, it was also fairly accepted that though there is no finding of the Ld. DRP on this comparable but in view of all the material facts being available on recor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rables as it is functionally different and dis-similar from a captive software service provider, as is the assessee in the case on hand. At paras 13.4.1 and 13.4.2 of its order, the co-ordinate bench has held as under:- '13.4.1 We have heard both parties and carefully perused and considered the material on record. From the details on record, we find that this company is predominantly engaged in product designing services and not purely software development services. The details in the Annual Report show that the segment "software development services" relates to design services and are not similar to software development services performed by the assessee. 13.4.2 The Hon'ble Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. v. ACIT (ITA No.7821/Mum/2011) has held that Tata Elxsi Ltd. is not a software development service provider and therefore it is not functionally comparable. In this context the relevant portion of this order is extracted and reproduced below:- "... Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of filters, request was made to adjudicate this comparable. 3.2.66 The Learned CIT Departmental Representative, on the other hand, supported the orders of the authorities below. She also had no objection to the adjudication of this comparable by the Bench. 3.2.67 We have heard the rival submissions of the parties and also perused the relevant material on record. We are of the opinion that all necessary facts for adjudication of this comparable being available on record, we can adjudicate this issue. We are of the view that the factual position in the present matter is similar with decision of coordinate bench in Sun Gard Solutions India Pvt. Ltd. v ACIT inITA No. 1487/Bang/2012, wherein it is held as follows: "14.1 This company was selected as a comparable by the TPO inspite of the assessee's objections to its inclusion on the ground that its turnover was in excess of ₹ 500 Crores. Before us, the assessee has objected to the inclusion of this company as a comparable on the ground that apart from software development services, it is in the business of product development; trading in software and giving licenses for the use of software. The learned Authorised Represe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e co-ordinate bench (supra), we direct the Assessing Officer/TPO to exclude this company from the list of comparables." 3.2.68 Respectfully following the view taken by the coordinate Bench, we direct the AO / TPO to exclude this company from the list of comparables. (xvi) Wipro Limited (Segmental) ["Wipro"]: 3.2.69 The last comparable being agitated for exclusion before us is Wipro Limited. The said comparable was introduced by the TPO by holding that it satisfies all filters. Before us the Ld. Counsel for the Assessee submitted that the said company cannot be held to be comparable to the Assesse since the same is functionally different. It was submitted that although the TPO has taken the software segment, Wipro is engaged in several operations within the said segment itself and additionally deals in software products too. The Ld. Counsel took us through various pages of the Annual Report to substantiate the above argument and whilst referring to the 'Notes to Accounts' of the financials it was submitted that the said company did not maintain proper segmentals bifurcating the revenues/expenses between the services and products within the software segment. Addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... At para 12.4.1 and 12.4.2 of its order the co-ordinate bench in its order (supra) has held as under:- "12.4.1 We have heard both parties and carefully perused and considered the material on record. We find merit in the contentions of the assessee for exclusion of this company from the set of comparables. It is seen that this company is engaged both in software development and product development services. There is no information on the segmental bifurcation of revenue from sale of product and software services. The TPO appears to have adopted this company as a comparable without demonstrating how the company satisfies the software development sales 75% of the total revenue filter adopted by him. Another major flaw in the comparability analysis carried out by the TPO is that he adopted comparison of the consolidated financial statements of Wipro with the stand alone financials of the assessee; which is not an appropriate comparison. 12.4.2 We also find that this company owns intellectual property in the form of registered patents and several pending applications for grant of patents. In this regard, the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the view that the factual position in the present case is similar to the decision of coordinate Bench of Tribunal in the case of Nokia Siemens Networks India Pvt. Ltd. vs. ACIT in ITA No. 333/Del/2013, wherein this comparable was included by observing as follows: "116. This company selected by the assessee was rejected by the TPO on the ground of diminishing revenues. Ld. DRP also held that the companies having diminishing revenues/persistent losses for the previous 3 years were exceptions and refused to interfere with the findings of the Ld. TPO. 117. It is submitted by the Ld. AR that this company was accepted as functionally comparable to the assessee by the Department as well as by a Coordinate Bench of this Tribunal in assessee's own case for the previous assessment year of 2007 - 08. It is argued by the Ld. AR that the diminishing revenue filter is invalid for the simple reason that revenue is not a true indicator of the performance of company as during its business life cycle owing to changing economic conditions, a company could have variation in its revenue pattern over a period of time. For example a company with increasing revenues over a period of time does not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere losses right from financial year 2002-03 up to 2005-06. On an overview of the above extracted Table, it can be seen that the assessee's profit is not steady, but, has diminished during the instant year from the preceding year. In such a situation, if we exclude the companies having diminishing profits, it would mean that the companies whose profit pattern is also similar to that of the assesse would face the axe. Doing so would mean excluding the comparable companies from the final tally, which is not appropriate. However, the companies having persistent losses, obviously, cannot be compared with the assessee because it has earned positive income not only in this year, but, in the preceding year as well. We, therefore, hold that the companies having diminishing revenue should not be excluded, but, only the companies having persistent losses should be expelled from the final tally of comparables." 119. While following the decision of the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) (P.) Ltd. this view has further been affirmed by another co-ordinate bench of this ITAT in case of Vestergaard Asia (P.) Ltd. vs. DCIT [2017] 88 taxmann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o eliminate the material effect of such differences has to be made." In light of the above, we direct the TPO to include this company in the list of comparables." 120. With regards to Revenue's stand that SIP technologies need to be rejected on the ground that it suffered losses, it is submitted on behalf of the assessee that for the filter of persistent losses to come into play it should be shown that the comparable under dispute has incurred losses for three preceding years including the assessment year in question. Reliance in this regard is placed on the Pune ITAT order in case of Bobst India (P.) Ltd. vs. DCIT [2015] 63 taxmann.com (Pune-Trib.) wherein the bench observed that a company can be rejected as persistent loss maker only if it has incurred losses for more than 3 years. In the present case in the immediate preceding year the comparable company has showed operating profit of 13.90%, thus, as the company has not suffered losses and its functionality has not been challenged by the TPO, it becomes clear that there is no valid ground to exclude this company as comparable. 121. On a careful consideration of the factual and legal position, we find that this company is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he coordinate Bench in Motorola Solutions India (P.) Ltd's case, Intellinet Technologies India (P.) Ltd. vs. ITO reported in [2012] 22 taxmann.com 28/53 SOT 92 (Bang.) (URO) and Bearing Point Business Consulting (P.) Ltd. vs. Dy. CIT reported in [2013] 33 taxmann.com 92/57 SOT 244 (Bang. - Trib.) in support of assessee's claim for risk adjustment. 3.4.2 The Learned CIT Departmental Representative, on the other hand, supported the orders of the authorities below and vehemently argued that since contemporaneous data was not produced by the assessee to substantiate its claim of risk adjustment the claim has been correctly rejected. 3.4.3 We have considered the submissions of the parties and also perused the relevant material on record. On overall factual matrix of the issues and as last and final opportunity and in the interest of justice, it is our considered opinion that the issues raised in Ground Nos. 1.4 and 1.5 require reconsideration and re-examination and are thus restored to the file of AO/TPO for passing appropriate orders in accordance with law after giving proper opportunity to the assessee. It is ordered accordingly. 3.5.0 Now we will deal with grounds relating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced on the judgment of the Hon'ble Bombay High Court in the case of CIT vs. Alstom Projects India Ltd. reported in [2017] 394 ITR 141 (Bombay) and of the Hon'ble Delhi High Court in the case of CIT v. Keihin Panalfa Ltd. (ITA No.11 of 2015), judgment dated 09.09.2015. He further pointed out that the Ld. Dispute Resolution Panel has decided this issue in favour of Assessee in Assessment Year 2014-15 whilst directing the TPO to allow proportionate adjustment and restricting the transfer pricing adjustment to related party international transactions. 3.5.5 The Ld. CIT Departmental Representative placed heavy reliance on the order of the TPO / DRP. 3.5.6 We have heard the rival submissions of the parties and perused the relevant material on record. We notice that the TPO, while benchmarking this transaction (SIM Card Assembly Segment), has taken the value of transaction at entity level rather than restricting the exercise of benchmarking to the value of international transaction between the Associated Enterprises and also included the value of indigenous purchases from the local parties. We are of the considered opinion that the mandate of Chapter X of the Act is very clear a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue of transfer pricing adjustments being done in respect of all transactions (entity level) or only in respect of transaction entered into with Associated Enterprises in the following cases:- (i) CIT v. Hindustan Unilever Ltd. [2017] 394 ITR 73/[2016] 72 taxmann.com 325 (Bom.); (ii) CIT v. Tara Jewels Exports (P.) Ltd. [2016] 381 ITR 404/80 taxmann.com 117 (Bom.); (iii) CIT v. Petro Araldite (P.) Ltd. Income Tax Appeal No.1804 of 2013 rendered on 24th November 2015; (iv) CIT v. Thyssen Krupp Industries (P.) Ltd. [2016] 381 ITR 413/70 taxmann.com 329 (Bom.); (v) CIT v. Summit Diamond (India) Pvt. Ltd. Income Tax Appeal No.1647 of 2013 rendered on 11th July 2016. In all above appeals, this Court after hearing both sides upheld the view of the Tribunal that the transfer pricing adjustment has to be done only in respect of International Transactions with Associated Enterprises and not at an entity level. It may be pointed out that during the course of all the above appeals, the fact that two appeals had been admitted on the above issue were not pointed out. 8. Nevertheless, the distinction sought to be made by the Revenue is that the issue of non keeping of segmental ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view of the Delhi High Court in Keihin Panalfa Ltd. (supra). One must not lose sight of the fact that the transfer pricing adjustment is done under Chapter X of the Act. The mandate therein is only to redetermine the consideration received or given to arrive at income arising from for International Transactions with Associated Enterprises. This is particularly so as in respect of transaction with non Associated Enterprises, Chapter X of the Act is not triggered to make adjustment to considerations received or paid unless they are Specified Domestic Transactions. The transaction with nonAssociated Enterprises are presumed to be at arms length as there is no relationship which is likely to influence the price. If the contention of the Revenue is accepted, it would lead to artificial increase in the profits of transactions entered into with non Associated Enterprises by applying the margin at entity level which is not the object of Chapter X of the Act. Absence of segmental accounting is not an insurmountable issue, as proportionate basis could be adopted as done by the Delhi High Court in Keihin Panalfa Ltd. (supra). 13. In the above view, no substantial question of law arises. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ins more or less constant. Hence, there is no case for a comparability adjustment on account of unutilized capacity in this case. Besides this, admittedly the capacity utilization risk in this segment is also borne by the assesse. Hence, as argued earlier, there can be no case for comparability adjustment once the risk is borne by the assesse." 3.6.1 While dealing with the objections filed by the assessee regarding allowability of capacity adjustment, the Ld. DRP has observed as follows: "The issue of capacity adjustment has been considered in detail by the TPO. Since the data of the comparables was not available with the TPO, he tried to make a study using depreciation figure in order to find out if there was any marked differences in asset utilization levels. It was not an implied position of the TPO to ascertain cash loss of the assesse. However, since the capacity utilization figures duly certified by auditors are not available, the capacity utilization was not considered. We do not find any infirmity in this." 3.6.2 Before us, the Ld. Counsel for the assessee has vehemently argued that, undisputedly, assessee was bearing the risk of idle capacity and this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r se not considered the issue of allowability of capacity adjustment and had refused to interfere with the findings of lower authorities on this issue as the relevant data was not available on record. He submitted that the relevant data is now available on record. To buttress his arguments, he placed heavy reliance on a recent decision of the Hon'ble Supreme Court in Canara Bank vs. N.G. Subbaraya Setty & Anr. Reported in 2018 SCC OnLine SC 427, wherein exceptions to the principle of res judicata have been explained. He argued that since now issue of allowability and computation of capacity adjustment has been settled by a higher forum, i.e., the Bombay High, whilst interpreting the provisions of Rule 10B (1)(e) read with Rule 10B(2)/(3) of the Rules, a legally sustainable claim of Assessee cannot be rejected. 3.6.4 The Learned CIT Departmental Representative, on the other hand, supported the orders of the authorities below and argued that the decision of this Tribunal rejecting the claim of capacity adjustment be followed. 3.6.5 We have heard the rival submissions of the parties and also perused the relevant material on record. We find force in the submissions of the Ld. Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be a Court competent to try such suit. When read with Explanation (I) to Section 11, it is obvious that both the former as well as the subsequent suit need to be decided in Courts competent to try such suits, for the "former suit" can be a suit instituted after the first suit, but which has been decided prior to the suit which was instituted earlier. An erroneous decision as to the jurisdiction of a Court cannot clothe that Court with jurisdiction where it has none. Obviously, a Civil Court cannot send a person to jail for an offence committed under the Indian Penal Code. If it does so, such a judgment would not bind a Magistrate and/or Sessions Court in a subsequent proceeding between the same parties, where the Magistrate sentences the same person for the same offence under the Penal Code. Equally, a Civil Court cannot decide a suit between a landlord and a tenant arising out of the rights claimed under a Rent Act, where the Rent Act clothes a special Court with jurisdiction to decide such suits. As an example, under Section 28 of the Bombay Rent Act, 1947, the Small Causes Court has exclusive jurisdiction to hear and decide proceedings between a landlord and a tenant in respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeding is based on different facts from the matter directly and substantially in issue in the first suit or proceeding. Equally, where the law is altered by a competent authority since the earlier decision, the matter in issue in the subsequent suit or proceeding is not the same as in the previous suit or proceeding, because the law to be interpreted is different." 3.6.6 On the issue of allowability of capacity adjustment, we are of the considered view that higher capacity utilization would lead to higher profitability as fixed costs would be spread over in a larger number of units manufactured. The difference in capacity utilization would materially affect the profit margin. Thus, if there is a difference in the level of capacity utilization of the assessee and the level of capacity utilization of the comparable, then adjustment would be required to be made to the profit margin of the comparable on account of difference in capacity utilization in terms of Rule 10B (1)(e)(iii) read with Rule 10B(2)/(3) of the Rules. Our view is fortified by the recent decision of Hon'ble Bombay High Court in the case of CIT vs. Petro Araldite Pvt. Ltd. reported in [2018] 93 taxmann.com 43 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tisfactory, whereas its profitability has been bench marked against comparables which are established entities -and have been set up over the years. The plea set- up by the assessee for economic adjustments on account of under capacity utilization and being in start up phase, is not something which is unreasonable and neither it is otiose to the mechanism of transfer pricing assessments. In fact, in principle, the plea of the assessee is in line with the decisions of the Tribunal in the case of Global Venttedge (P.) Ltd. v. DCIT in ITA Nos. 1763-2764/ Del/09 (Del); Brintons Carpets' Asia (P) Ltd. v. DCIT 139 TTJ -177; and, Skoda, Auto India (P.) Ltd. v. ACIT 122 TT J 699. In our view, the matter requiring factual appreciation, the same is remanded back to the file of the Assessing Officer, who shall consider the propositions put forth by the assessee and allow appropriate economic adjustments on a reasonable basis." 31. On the same lines, Delhi Bench of the Tribunal in the case of Global Turbine Services Inc. v. ADIT (International Taxation) [2013] 38 taxmann.com 220 allowed economic adjustment on-account of under capacity utilization considering the fact that the year u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rused the important findings of the Tribunal in the case of the Fiat India (P.) Ltd (supra ) placed at page 191 of the paper book. For the sake completeness, the same is reproduced as under. . . . . . as regards the adjustments made by the appellant to work out its operating margin for comparing the same with the profit margin of comparable cases, it was held that there was a material difference in the facts of the appellant's case and that of the comparable cases in terms of capacity utilization as well as in other terms. Appropriate adjustments thus were required to be made to eliminate such differences. Further, the TPO himself has allowed similar adjustments made by the appellant in the immediate preceding years i.e. AY 2002- 03, 2003-04 as well as in the immediate succeeding years i.e. 2005-06 and 2006-07 wherein the facts involved were similar to that of the year under consideration i.e. AY 2004-05; accordingly, no infirmity is found in the impugned order of the CIT (A) as the adjustments made by the appellant in TNMM analysis were reasonable and accurate and as reflected in the said analysis, international transactions made by the appellant company with its associate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ld. CIT, DR in this matter. As a matter of fact, he has fairly accepted the proposition that adjustment in this regard is required to be made. At the same time, it is also held that suitable adjustment has to be made to such PLI in respect of idle capacity."' 35. Further, the Hon'ble Bangalore bench of the Tribunal in the case of Genisys Integrating Systems (India) (P.) Ltd. v. Dy. CIT [2012] 53 SOT 159/20 taxmann.com 715 the Hon'ble Tribunal held as under: "The appellant should also be given adjustment for under utilization of its infrastructure. The AO shall consider this fact also while determining the ALP find make the TP adjustments. With these directions, the appeal of the appellant is disposed of. " 36. Further, the Hon'ble Delhi' Bench of the Tribunal in the case of Transwitch India (P.) Ltd. v. Dy. CIT [2012] 53 SOT 151/21 taxmann.com 257 held as under: "4.11 Another TPO's contention is that claim of the appellant that the sealing drive reduced its revenue is unsubstantiated. In this regard, appellant has submitted that the appellant had placed on record its quarterly 'capacity' utilization statement demons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s regard and the adjustments are on a conceptually sound basis. In any case, as pointed out by the learned counsel, the adjustments so directed by the learned CIT(A) have duly been made by the Assessing Officer, and there have been no issues regarding implementing these adjustments. We approve the conclusions arrived by the CIT (A) on this issue and decline to interfere in the matter." 38. In view of the aforesaid, it is in the case of Transwitch India (P.) Ltd. (supra ) affirmed by Hon'ble Delhi High Court. Therefore, respectfully following the decision of Hon'ble High Court, we direct TPO/A.O. to adjust operating cost by excluding abnormal cost incurred on account of start-up company like salary, rent and depreciation. This matter is restored to the file of TPO/A.O. to re-determine the operating cost on the above lines to arrive at operating profit." 3.6.7 Respectfully following the judgment of the Hon'ble Bombay High Court and the decision/s of the coordinate benches of Tribunal as aforementioned, we are of the considered opinion that the Assessee is entitled to the benefit of capacity adjustment whilst benchmarking the international transaction of SIM C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base ; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base ; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market ; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in subclause (iii) ; (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction." 9.2 Sub-clause (i) in the process of determination of the ALP under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... making a meaningful and effective comparison. The above analysis overtly transpires that the law provides for adjusting the profit margin of comparables on account of the material differences between the international transaction of the assessee and comparable uncontrolled transactions. It is not the other way around to adjust the profit margin of the assessee. In other words, the net operating profit margin realized by the assessee from its international transaction is to be computed as such, without adjusting it on account of differences with the comparable uncontrolled transactions. The adjustment, if any, is required to be made only in the profit margins of the comparables. 9.4 Reverting to the facts of the instant case, we find that the authorities below have adjusted the operating costs of the assessee in allowing the capacity adjustment. As against that, the correct course of action provided under the law is to adjust the operating costs of the comparable and their resultant operating profit. There is hardly need to accentuate that there can be no estoppel against the law. Once the law enjoins for doing a particular thing in a particular manner alone, it is not open to any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity, as against A incurring full fixed costs with 50% of its capacity utilization. This divulges that the assessee has incurred relatively more fixed costs and A has incurred lower costs. In order to make an effective comparison, there arises a need to obliterate the effect of this difference in capacity utilizations. It can be done by proportionately scaling up the fixed costs incurred by A so as to make it fully comparable with the assessee. This we can do by increasing the fixed costs of A to ₹ 200 (₹ 100 into 50/25) as against the actually incurred fixed costs by it at ₹ 100. When we compute operating profit of A by substituting the fixed costs at ₹ 200 with the actually incurred at ₹ 100, it would mean that the fixed costs incurred by the assessee and A are at the same capacity utilization. There can be converse situation as well. Suppose the fixed costs incurred by a comparable (say, B) are ₹ 100 and it has capacity utilization of 25% as against the capacity utilization of 50% by the assessee. The above percentages show that the assessee has incurred full fixed costs at 50% of the utilization of its capacity, as against B incurring full fix ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.7.0 The next issue is regarding allowability of working capacity adjustment. Before us, the Ld. Counsel for the assessee has vehemently argued that the TPO/Ld. DRP has erred in not allowing working capital adjustment in terms of Rule 10B (1)(e)(iii) read with Rule 10B(2)/ (3) of the Rules. He pointed out that during the relevant period, working capital adjustment has been granted for Software Development Segment, however, the same has not been granted for the SIM Card Assembly Segment. Placing reliance on the recent decision of the coordinate Bench of the Delhi Tribunal in Agilent Technologies (International) (P) Ltd. vs. ITO reported in [2018] 91 taxmann.com 59 (Delhi - Trib.), he submitted that the claim of working capital adjustment is to be allowed for service industry also. He argued that such an adjustment is restricted to inventory, trade receivables and trade payables. It was submitted that if a company carries high trade receivables, it would mean that it is allowing its customers relatively longer period to pay their dues, which will result into higher interest cost and the resultant low net profit. Similarly, by carrying high trade payables, a company benefits from a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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