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TMI Blog2020 (11) TMI 1082X X X X Extracts X X X X X X X X Extracts X X X X ..... Bang/2016 is an appeal by the Revenue against the final order of assessment dated 21.12.2015 of ACIT, Circle 1(1)(1), Bangalore [hereinafter referred to as the Assessing Officer, ( AO in short)] passed u/s. 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (the Act) in relation to assessment year 2011-12. The assessee has filed a crossobjection against the very same order of the AO. 2. The assessee is engaged in the business acting as distributors for surgical products of its parent company Alcon Inc., USA. The assessee also provides Software Development Services (SWD services) which has been referred to as IT Support Services in the order of the Transfer Pricing Officer (TPO). The assessee also provides Marketing and Sales Support Services (MSS) to its wholly owned holding company. In terms of the provisions of Section 92A of the Act, the assessee and its wholly owned company were Associated Enterprises ( AEs ). In terms of Sec. 92B(1) of the Act, the transaction of providing SWD Services and MSS were international transactions i.e., a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Adjusted mean margin of the comparables 23.19% Operating Cost Rs. 1,83,03,341 Arm's length Price (123.11% of Operating Cost) Rs. 2,25,47,886 Price Received Rs. 1,97,39,022 Short fall being adjustment u/s. 92CA Rs.28,08,864 6. Thus a sum of Rs. 28,08,864 was added to the total income of the assessee on account of determination for ALP for provision of SWD services by the assessee to its AE. 7. The assessee filed objections before the Disputes Resolution Panel (DRP) against the draft assessment order passed by the AO wherein the addition suggested by the TPO as adjustment to ALP was added to the total income of the assessee by the AO. The DRP excluded 10 comparable companies out of the 13 comparable companies chosen by the TPO and retained only the following three companies as comparable companies viz., (i) Persistent Systems Ltd., (ii) Sasken Communication Technologies Ltd., and (iii) Persistent Systems Solutions Ltd., on the application of various filters. To the extent t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the list of comparables holding that-no segmental information is available and that it fails 75% service revenue filter, by not acknowledging the fact that entire revenue of the company comes from provision of services, and service income being 100% of its sales, the company qualifies the filter. 7. The DRP erred in directing exclusion of M/s. M/s. ICRA Techno Analytics Ltd., from the list of comparables on the ground that it is into diversified activity and no segmental data is available, without appreciating that the basic function of the company is developing software solutions in those and other verticals. The company's business of analysis of statistical data of its clients before providing software solutions does not render the services to be functionally uncomparable. 8. The DRP erred in directing to exclude M/s.E-Zest Solutions Ltd., from the list of comparables holding it to be functionally uncomparable, thereby seeking exact comparability by imposing condition beyond law whereas requirement of law is to acknowledge only those differences that are likely to materially affect the margin. The DRP ought to have appreciated that the comparable qualified all the q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee and which exclusion has been challenged by the Revenue in ground No. 3 to 12 of its appeal. The following were the relevant observations of the Tribunal for excluding the aforesaid 7 companies out of 8 comparable companies listed in paragraph 8 above. 10. With regard to the other 7 comparable companies, whose exclusion is challenged by the revenue in ground No.2 of its appeal, we find that exclusion of these comparables from the list of companies selected by the TPO had come up for consideration before the Bangalore ITAT in the case of Electronic for Imaging (I) Pvt. Ltd. v. DCIT [2017] 85 taxmann.com 124 [Bang. Trib]. ; Symantech Software Services (I) Pvt. Ltd. v. DCIT, ITA No.614/Mds/2016; DCIT v. Ikanos Communication Pvt. Ltd. in ITA 137/Bang/2015; Ness Technologies (I) Pvt. Ltd. v. DCIT in ITA No.696/Mum/2016 which are also decisions rendered in relation to AY 2011-12 in the case of a companies providing SWD services such as the assessee in the present appeal. It is also relevant to point out that the very same comparable companies chosen by the TPO in the present appeal had been chosen by the TPO as comparable companies in the case of Electronic for Imaging ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e aforesaid 7 companies from the list of comparable companies and ground No.2 raised by the assessee to this extent is dismissed. We may add that the other grounds raised by the revenue in its appeal are purely supportive of ground No.2 and are general grounds with no specific reference to instances of comparables excluded and hence dismissed. 11. Respectfully following the aforesaid decision, we uphold order of DRP excluding the aforesaid 7 companies from the list of comparable companies. 12. As far as exclusion of RS Software (I) Ltd. from the list of comparable companies is concerned, we find that in ground No.7 of CO, the assessee has also sought inclusion of this company in the list of comparable companies. The ITAT Bangalore Bench in the case of Applied Materials (I) Pvt. Ltd. Vs. ACIT in IT(TP)A No.17 39/Bang/16 (AY 2011- 12) order dated 21.09.16 vide para 14.1 took the view that both assessee and Revenue do not seek exclusion of this company, the DRP ought not to have suo motu applied onsite revenue filter to exclude this company. Facts being identical in this appeal, following the aforesaid decision, we hold that this company shall be retained as a comparable comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that this company was found to be not comparable with the software development services provider. He has further pointed out that in assessee's own case for the Assessment Year 2010-11, the DRP vide its order dt.24.11.2014 has excluded Persistent Systems and Solutions Ltd. from the list of comparables by holding that this company is not comparable to the assessee. 9.2.3 On the other hand, the Id. DR has submitted that the TPO as well as DRP has examined the functional comparability of these companies and found that these companies are comparable with the assessee. These two companies have satisfied all the filters applied by the TPO and DRP therefore the minor variation in the activity would not render these companies non-comparable when a comparable price is considered under TNMM. 9.2.4 We have considered the rival submissions as well as the relevant material on record. At the outset we note that the functional comparability of these two companies have examined by the co-ordinate bench of this Tribunal in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) in para 60 and 61 paras 24 to 26 as under : Persistent Systems Solutions Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... antly engaged in outsource software development service. Apart from the revenue from software services, it also earns income from licence of products, royalty on sale of products, income from maintenance contract, etc. These facts recorded by the DRP has not been disputed before us. 26. Therefore, when this company is engaged in diversified activities and earning revenue from various activities including licencing of products, royalty on sale of products as well as income from maintenance contract, etc., the same cannot be considered as functionally comparable with the assessee. Further, this company also earns income from outsource product development. In the absence of any segmental data of this company, we do not find any error or illegality in the findings of the DRP that this company cannot be compared with the assessee and the same is directed to be excluded from the set of comparables. We further find from the Annual Report that there is no change in the activity and functions of these companies during the year under consideration in comparison to the Assessment Year 2010- 11. Accordingly, following the decisions of the co-ordinate benches of this Tribunal (supra), we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6,146.43 Other services 372.77 1,297.05 29. Thus, there is no dispute that this company earns revenue from 3 segments. However, the segmental operating margins are not available. Therefore, in the absence of segmental relevant data and particularly operating margins, this composite data cannot be considered as comparable with the assessee for software development services segment. Accordingly, we do not find any error or illegality in the findings of the DRP. We further note that the DRP has not adjudicated the objections of the assessee whereas for the assessment year 2010-11, the DRP rejected this company as comparable. Accordingly, we set aside this issue to record of the A.O./T.P.O. to verify the relevant facts and compare with the facts recorded by the Tribunal in the case of DCIT Vs. Electronics for Imaging India Ltd. (supra) for the Assessment year 2010-11 and then decide the issue after giving an opportunity of hearing to the assessee. 15. Respectfully following the aforesaid decision rendered on identical facts, we direct exclusion of Persistent Systems Solutions Ltd. and Persistent Systems Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18.25% Operating Cost B Rs.2,81,69,256 Arm's length Price (118.25% of Operating Cost) C=B*118.25% Rs.3,33,10,145 Price Received D Rs.3,03,78,801 Short fall being adjustment u/s. 92CA E=C - D Rs. 29,31,344 20. The assessee filed objection before the DRP against the draft order of assessment wherein the addition suggested by the TPO was added to the total income of the assessee. The DRP excluded ICC International Agencies Ltd. from the list of comparable companies. Before the Tribunal, the assessee seeks exclusion of one out of the three comparable companies chosen by the TPO viz., Asian Exhibition Conferences Ltd., and the Revenue is aggrieved by the exclusion of ICC International Agencies Ltd. from the list of comparable companies. The relevant ground of appeal of assessee in CO is Ground No. 4 which reads as follows:- 2. The DRP-1, Bangalore has erred in confirming the selection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... direct the AO/TPO to exclude this company from the list of final comparable because the ld. DR of the revenue could not point out any difference in facts. 29. Regarding exclusion of second company, it was submitted by the learned AR of the assessee that i.e. M/s ICC International Agencies Ltd., (Supra) this is the claim of the assessee that annual report of this company available on page 1100 1104 of the paper book. As per the same, we find that this company is deriving income from trading activity and also maintaining inventories. Both these arguments are supported by annual report of this company available on page 1100 1104 of the paper book. Since the assessee is not engaged in trading activity, in our considered opinion, this company cannot be considered as good comparable in the present case and hence we direct the AO/TPO to exclude his company from the list of final comparable. 23. Following the said decision, we direct exclusion of the aforesaid company ICC International Agencies Ltd., from the list of comparable companies. The ld. DR submitted that ICC International Agencies Ltd., was accepted by assessee himself as comparable before the TPO. We find that befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd marketing services is only software/information technology products. Therefore Asian Business- Exhibition Conference Ltd. which is mainly engaged in the organization of exhibitions and events as well as conducting conferences on behalf of the various clients for their various products and businesses. The functions of this company are entirely different from the assessee who is providing sales and marketing support services to its AE for software/IT products. The Mumbai Bench of the Tribunal in the case of RGA Services India (P.) Ltd. (supra) while considering the functional comparability of this company has held at paras 11 and 12 as under:- 11. We have considered the submission of the parties and perused the relevant material on record. On perusal of the order passed by the TPO it is noticed that the TPO while dealing with assessee's objection with regard to selection of Asian Business Exhibition and Conferences Limited as a comparable has admitted that the nature of function performed by this company is event management. It is further relevant to observe, on perusal of annual report of this company it is seen that as per directors report, the main operation is organi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision of the Mumbai Bench of the Tribunal, this company cannot be considered as a good comparable with the assessee. 55. Accordingly, we direct the AO/TPO to recompute the ALP in marketing support services segment by excluding Asian Business Exhibition Conference Ltd. from the comparables. We heard the rival submissions and gone through relevant material. Following the above decision, the assessee's plea is allowed. The AO/TPO is directed to exclude this comparable. 25. Following the said decision, we direct exclusion of the aforesaid company from the list of comparable companies. 26. We direct the TPO to compute the ALP in accordance with the directions contained in this order after allowing opportunity of being heard to the assessee. 27. In ground No.13, the Revenue has projected its grievance against the order of the DRP whereby the DRP deleted addition made by the AO u/s 40A(7) of the Act. The relevant ground of appeal reads as follows: Corporate Issue 13. The DRP erred in directing the AO to delete the addition made u/s 40(7) by relying on its own direction in assessee s own case for A.Y. 2010-11, without appreciating the fact that the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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