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TMI Blog2018 (10) TMI 1947X X X X Extracts X X X X X X X X Extracts X X X X ..... he financial re-working to the TPO for the necessary adjustments. In the circumstances, the prayer of exclusion of M/s.Harton Communictions, M/s.Infosys BPO Ltd., M/s.ICRA Online Ltd., and E4e Health Business from the list of comparables stands rejected and the assessee s request for including of M/s.R.Systems as comparable stands accepted. Working capital adjustments - As mentioned earlier the methodology applied herein is TNMM, no specific adjustments towards working capital is permitted, in so far as making only an adjustment of one item being working capital will make the financials of the comparable unworkable. What is comparable is the percentage of the margins, and obviously when arriving at the margins for each of the comparables, such comparables would have taken into consideration their cost of working capital. Therefore, any tinkering to that would have a negative impact, which could be many of the financials of comparables unworkable. It must be remembered that when arriving at margins, various components would go into its calculations, such as the cost of capital, the number of employees, number of working days, type of assets, cost of assets etc. If each of these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nted on behalf of the Revenue. 3. In this appeal, the assessee has raised the following grounds:- Grounds of Appeal The grounds of appeal listed below are without prejudice to each other. Ground of objection I - General ground The order of the learned Deputy Commissioner of Income Tax, Company Circle 2(2), Chennal ( Assessing Officer or AO ) passed pursuant to the order of the learned Transfer Pricing Officer-V, Chennal ( Transfer Pricing Officer or TPO ) and the directions issued by the Hon ble Dispute Resolution Panel - II (the DRP ), to the extent prejudicial to the Appellant, is erroneous, bad in law, and contrary to the facts and circumstances of the case. Issue I - Grounds relating to Transfer Pricing Matters Ground of objection 2 - Rejection of economic analysis of the Appellant without any cogent reasons The Ld. AO/ TPO and the Hon ble DRP have erred, in law and in facts by disregarding the economic analysis undertaken by the Appellant in accordance with the provisions of the Income tax Act, 1961 read with Income tax Rules, 1962 (the Rules) for determination of arm s length price of the 1- international transaction of the Appellant. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sh economic analysis conducted for identification of comparable companies, and thus have resorted to cherry picking of the companies undertaking noncomparable activities. Ground of objection 9- Erroneous treatment of expenses The learned AOITPO has erred in law and facts, by considering provision for bad and doubtful debts to be non-operating item. Ground of objection 10- Use of single year data (which was not available at the time of maintaining TP documentation) The Ld. TPO/ AO and the Hon ble DRP have erred in law and in facts, by determining the arm s length margin! price using only Financial Year 2012-13 data, as against multiple year data adopted by the Appellant without appreciating that multiple year data has an influence on the determination of transfer prices in relation to the international transactions and also not giving due cognizance to the rules notified by the CBDT vide Notification No. 83/2015 [F.No. 142/25/2015-TPOJ. Ground of objection 11- +/-3% tolerable range as provided in proviso to Section 92C(2) of the Act. The Ld. TPO/ AO and the Hon ble DRP have erred in law and in facts, in computing the arm s length price without giving ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essed. 4.4 It was a submission that Ground Nos.14 was consequential in nture in levying of interest under sections 234B 234C of the Act and Ground No.15 was against the initiation of penalty u/s.271(1)(c) of the Act. The grounds Nos.14 15 were not argued by ld.A.R. Consequently, the same is dismissed as not pressed. 5. In regard to the transfer pricing issues, it was submitted by ld.A.R that the assessee has three lines of business; i) Software Development Services, ii) Content Development Services and iii) on-line Tutoring services. It was a submission that when the assessee had done transfer pricing study, it had treated the software development services and the content development services as Information Technology Services (I.T.Services) and in respect of on-line tutoring services, the same was treated as Information Technology Enabled Services (I.T.E.S). It was a submission that the ld. Assessing Officer however treated the software development services as Information Technology Services, but treated the content development services and the on-line tutoring services as Information Technology Enabled Services. It was a submission that the software development services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arke Holding Software India Private Limited (Harland India) Before the Income Tax Appellate Tribunal - Chennai D Bench Summary of Key contentions - Assessment Year 2013-14 1. Background - Harland India was engaged in providing content development services and ITeS. 2. International transaction - The international transaction under dispute relates to provision of ITeS amounting to INR 6.62 Cr. 3. Issues Under Dispute - The issues under dispute are on selection of comparable companies and non-grant of economic adjustments viz, working capital and risk adjustment. 4. Transfer pricing ( TP ) adjustment - INR 58.81 lacs Key Objections on comparable companies Name of company Companies to be Excluded Ground No.3 Support from judicial pronouncements-covered judgements Hartron Communications Ltd (harton) Significant fluctuations in the turnover Where revenue has increased 350% compared to previous years (Page 6 of paper book 3) High fluctuation in margins -The margins of Hartron has highly fluctuated which is as follows: Year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5) ICRA Online Limited lCRA - Functionally different- KPO services High-end. (Page 112 of PB 3) Pg. 435-437 of paper book for objections before DRP Pg. 322-323 of paper book for objections before TPO - Delhi High court in Evalueserve SEZ (Gurgaon) Pvt. Ltd. (Page 3 in para 6) - Delhi High Court in Rampgreen Solutions Private Limited E4e Health Business (E4e) Functionally different - KPO services High end (Page 136 of PB 3) - Absence of Segmental information - Varied services no segment. Pg. 448 of paper book for objections before DRP Delhi High court in Evalueserve SEZ (Gurgaon) Pvt. Ltd. (Page 3 in para 6) - Bangalore ITAT in Nvidia Graphics Private Limited R Systems (additionally identified by assessee before TPO) Different Financial year Data Extrapoltion can be obtained. Pg. 349-351of paper book for objections before DRP Pg. 451-452 of paper book for objections before TPO Delhi High Court in Mckinsey Knowledge Centre India Pvt Ltd. (Page 11) Delhi ITAT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Visual Professional 2-May-12 9,01,602 Microsoft Visual Studio Professional 2-May-12 4,55,107 Minitab 16 for windows license 9-May-12 79,111 SPSS Statistic License 18-May-12 1,28,605 8 to 16 partition license 14-Jun-12 61,619 Vmware License 1-Jul-12 6,71,153 Access 2010 lifetime license 10-Jul-12 8,231 Net Software 25-Oct-12 97,801 Vmware License 4-Dec-12 1,48,926 ReSharper 7.0 C# Edition Commercial License 13-Dec-12 14,106 ReSharper 7.0 Edition Commercial License 18-Feb-13 15,380 Total 25,81,641 Remarks made by the learned AO The learned AO has relie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed services. It was a submission that as KPO services were specific services and hired services, the same cannot be compared to the services rendered by the assessee. 6.3 In respect of fourth comparables being M/s.E4e Health Business, It was a submission that the said comparable was again in the KPO services and there was no segmented information available in respect of the same. It was a prayer that this company was to be excluded as incomparable. 6.4 In respect of fifth comparables being M/s.R.Systems, it was submitted by ld.A.R that this company was liable to be treated as one of the comparables, but the same had been rejected by the TPO and the DRP on the ground that the financial year was different. It was a submission that M/s.R.Systems was following financial year from January to December, whereas the assessee was following financial year from April to March. It was a submission that the assessee had re-worked the account sof the said comparable and had taken average of the quarterly results and placed the same before the TPO and the DRP. It was a submission that this comparable was liable to be considered. In respect of M/s.R.Systems, ld.A.R placed reliance in the dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thod had been applied herein, is TNMM i.e. Transactional Net Margin Method, whether the turnover is high or not, would not make a different nor would be the question working capital adjustments be required, what is being compared as a percentage of profitability. It is very much open to the assessee to point out how the percentages as disclosed by the comparables are higher on account of from specific reasons as long as the products deal with the comparables and the assessees are comparable, then it is only a net margin, which is being compared. It would not lead to the requirements of the exclusion of any particular comparable. In the case of M/s.Hartron communication Ltd., no such specific reason for exclusion has been pointed out. In the circumstances, we are of the view that the comparables taken by the ld. Assessing Officer /TPO representing M/s.Hartron communication Ltd., does not call for exclusion. The same also goes for the case of M/s.Infosys BPO Ltd. It is the TNMM method, which is being applied and the margins are in the percentage and no way such margins are effected substantially on account of the turnover. In fact, from the Note of the assessee, the assessee itself s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as mentioned earlier the methodology applied herein is TNMM, no specific adjustments towards working capital is permitted, in so far as making only an adjustment of one item being working capital will make the financials of the comparable unworkable. What is comparable is the percentage of the margins, and obviously when arriving at the margins for each of the comparables, such comparables would have taken into consideration their cost of working capital. Therefore, any tinkering to that would have a negative impact, which could be many of the financials of comparables unworkable. It must be remembered that when arriving at margins, various components would go into its calculations, such as the cost of capital, the number of employees, number of working days, type of assets, cost of assets etc. If each of these is to be adjusted, then there would be no comparison. Basically, TNMM what is being looked at, is the margin that normally comparable business would generate. This being so, the working capital adjustments applied for stand rejected. 11. Coming to the issue of Corporate Tax being depreciation on the software, the list of the software on which the assessee is claiming depr ..... 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