9911796707
TMI Blog2022 (12) TMI 526X X X X Extracts X X X X X X X X Extracts X X X X ..... icing Officer (TPO) in his order passed under section 92CA (3) of the Act and subsequently confirmed by the Hon'ble Dispute Resolution Panel (DRP). Each of the ground is referred to separately, which may kindly be considered independent of each other. On the facts and circumstances of the case and in law, the learned AO/TPO/ Hon'ble DRP have: General ground: 1. erred in determining the total taxable income of the appellant at INR 6,49,49,092 as against INR 1,09,25,800 as reported in the return of income filed by the appellant. Transfer Pricing Grounds: 2. erred in making an addition of INR 5.40,23,292 to the total income of the appellant in respect of international transaction pertaining to provision of contract software development services by the appellant to its associated enterprise (AE) (hereinafter referred to as 'impugned transaction'); Invalid reference made to TPO: 3. erred in making a reference to the TPO under section 92CA of the Act for determining the arm's length price ('ALP") of the international transactions in a mechanical manner, without demonstrating the necessity or expediency of doing so as mandated under sub-sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of TPO/AO to determine ALP by examining the functional profile of the appellant. Alternate benchmarking adopted by TPO: 11. erred in carrying out an alternate benchmarking analysis in respect of the impugned transaction, by selecting the following 4 engineering design service provider companies, which is contradictory to primary analysis so undertaken, in violation of provisions of law and lacks any cogent reasoning * Acropetal Technologies Limited (EDS Segment) * Holtec Consulting Private Limited * Mitcon Consultancy Services Limited * Cether Consulting Engineering Limited resulting in an arm's length margin of 38 33 percent for the impugned transaction, as against the Appellant's margin of 15.00 percent Working capital adjustment: 12. erred in not making suitable adjustments to account for differences in working capital deployed by the appellant vis-à-vis the comparable companies. Risk adjustment: 13. erred in not making suitable adjustments to account for differences in the risk profile of the appellant vis-à-vis the comparable companies, Interest under Section 234B: 14. erred in levying interest under Section 234B of the Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the detailed documentary evidence submitted by the appellant in the form of STPI forms, bug fixing activities in support of nature of activities being in the nature of software development carried out by it during relevant AY and making incorrect inferences merely on the basis of inter-company Erroneous characterization of the appellant as owner of intangible property: 5. erred in determining the appellant as the economic owner of the Intangible Property (IP) as a result of research and development services provided by the appellant to its Associated Enterprises Rejection of comparables selected by appellant in TP documentation: 6. erred in erroneously rejecting the comparable companies selected by the appellant in its TP documentation, maintained under Rule 10D(4) of the Income-tax Rules, 1962 (Rules) for the international transactions undertaken with the AEs; Cherry picking of comparables for benchmarking: 7. without prejudice to the above, also erred in not carrying out any search process based on any scientific approach as stipulated by the Act and the Rules and instead have resorted to cherry picking of companies by merely relying on the assessment order of earlier y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the segment and the value of the transaction was then stated to be only Rs. 20,36,94,379/-. 05. Assessee adopted the Transactional Net Margin Method as the most appropriate method and stated that its international transactions are at arm‟s length selecting 24 comparables, taking Profit level indicator of OP/OC of 9.80%, whereas the margin of the assessee is 15.03%. 06. However so far as the functions of the assessee are concerned, Assessee submitted that assessee is engaged in provision of contract software development services, whereas the ld Transfer Pricing Officer noted that assessee is engaged in R&D services. In T P Study Report transactions is treated as software development services, which is quite different from research and development services. But ld TPO characterized function of assessee as Contract research and Development service provider, and noted that assessee is falling in the domain of knowledge Processing Outsourcing Services (KPO). He therefore, rejected the TP study report of the assessee, selected fresh comparables, whose arithmetic mean of PLI of OP/TC was 45.50%, and assessee‟s margin was 15%. He also considered the alternative plea of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the ground no. 6 challenges that functions of assessee are characterized as contract research and development service provider, but Assessee is merely a contract software development service provider. The lower authorities have merely gone on the basis of nomenclature of the agreement and not on the functional profile of the assessee. He referred to page no. 66 of the Paper Book, which is the annexure no. 2 of the form no. 3CEB where assessee has given a description of the transaction of contract software development services. However, the learned Transfer Pricing Officer has classified the assessee as research and development service provider. He further referred to page no. 311 of the Paper Book, which is a "research and development service agreement‟. He submitted that though the agreement is titled as "research and development service agreement‟ but in fact, assessee is providing software development services. He also referred to the decision of the co-ordinate bench in assessee‟s own case for A.Y. 2009-10, wherein there is a dispute about the characterization of the nature of services provided by the assessee. He referred to paragraph no. 10 where the whole ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ell as the risk assumed by the assessee are clearly in dispute. As the learned Transfer Pricing Officer and the learned Dispute Resolution Panel without verifying, the actual functions performed by the assessee were guided only by the title of the agreement, characterizes assessee as research and development service provider. Lower authorities also without looking into the functional profile claimed by the assessee in form no. 3CEB have changed the characterization of assessee. As the functions performed by assessee is not verified and merely based on agreement , lower authorities have upheld the benchmarking of International Transactions. Decision of coordinate benches in assessee‟s own case for earlier years on this issue has also set aside benchmarking back to the ld AO/ TPO. In view of this, we set aside the whole of issue back to the file of the learned Transfer Pricing Officer with a direction to the assessee to substantiate that it is not a research and development service provider but a contract software development service provider. The assessee is at liberty to produce such documents as well as cost incurred in provision of the services, work force employed, certifi ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
