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TMI Blog2024 (1) TMI 648X X X X Extracts X X X X X X X X Extracts X X X X ..... on the facts and circumstances of the case and in law. General grounds 1. Impugned order passed by the Ld. CIT(A) and the Learned Assessing Officer ('Ld. AO") pursuant to the order of the Transfer Pricing Officer - 3(1)(1), Bengaluru ("Transfer Pricing Officer" or "Ld. TPO") are based on incorrect appreciation of facts and incorrect interpretation of law, and therefore, bad in law. 2. The Ld. AO/ TPO, erred in assessing the total income of the Appellant at INR 2,01,56,28.070, as against returned income of INR 72,23,42,710. Grounds relating to transfer pricing matters: 3. The Ld. AO/ TPO. erred in making an addition of INR 1,29,32,85,364 to the total income of the Appellant on account of adjustment in the Arm's Length Price ("ALP") for the international transaction of software development services undertaken by the Appellant with its Associated Enterprises (`AEs"). The Ld. CIT(A) has erred in law and in facts by upholding the action of the Ld. AO/ TPO in: 4. Not accepting the economic analysis undertaken by the Appellant in accordance with the Act read with the Income- tax Rules, 1962 ("the Rules"), conducting a fresh economic analysis by applying new fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Applying persistent loss filter for rejecting companies that have incurred loss for any 2 out of preceding 3 years. 8. Rejecting companies while carrying out the comparability analysis without evaluating comparability based on the financial data for the year preceding the current year in accordance with Rule 10B(5) of the Rules. 9. Collecting selective information of the companies by exercising power granted under Section 133(6) of the Act that was not available to the Appellant in the public domain and relying on the same for comparability purposes in denial of natural justice. 10. Rejecting certain functionally comparable companies based on unreasonable comparability criteria for the software development service segment. i. Melstar Information Technologies Limited ii. Tera Software Limited iii. Sasken Communication Technologies Limited (seg) iv. Akshay Software Technologies Limited v. Yudiz Solutions Private Limited vi. Smartcloud Infoservices Private Limited vii. Benchmark IT Solutions India Private Limited 11. Rejecting certain functionally comparable companies based on unreasonable comparability criteria for the IT service segment - i. Kell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and in law in rejecting Persistent Systems Limited on the ground of functional dissimilarity by seeking exact comparability, while searching for comparable companies of the assessee under TNMM whereas the requirements of law and international jurisprudence require seeking similar comparables companies? 2. Whether the CIT(A) was right in fact and in law in rejecting, Infosys limited as comparables on the ground of functional dissimilarity and high turnover by seeking exact comparability, while searching for comparable companies of the assessee under TNMM whereas the requirements of law and international jurisprudence require seeking similar comparables companies? 3. Whether the CIT(A) was right in fact and in law in rejecting Aspire Systems India Put Ltd. as a comparable on the basis of extraordinary event viz; amalgamation without considering the turnover of the comparable and the value of the net assets taken over by it while holding that amalgamation would impact its profits. 4. Whether while seeking the comparability as mentioned above the CIT(A) was right in fact and in law in imposing conditions beyond law whereas the requirement of law is to acknowledge only those di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital requirement is itself based on various assumptions." Brief facts of the case are as under: 2. HTIPL, the assessee before us having its registered office at Bangalore was incorporated in India with limited liability on 04.09.2000 and is a subsidiary of Huawei Tech Investment Company Ltd., Hong Kong ("Huawei Hong Kong"), which is in- turn a subsidiary of Huawei Technologies Company Ltd. ("Huawei China"). The assessee is registered under the Software Technology Parks of India Scheme at Bangalore with effect from 27.03.2001. During the year under consideration, assessee rendered software development ("SWD") services and IT services in the field of telecommunications to its AE's. 2.1 It is submitted that under the SWD services segment, the assessee develops and supplies computer software and tests the existing programs. And under the technical support services (ITeS), the assessee provides the following services. * Network Operation Support Service ("NOS"): Under NOS, HTIPL provides services such as real-time network monitoring, fault management, proactive management, network change management, service fulfilment support with quality assurance in order to comply with ke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12% 2 Allied Digital Services Ltd. - Infrastructure Management Services 1.62% 3 Take Solutions Ltd. - Sale Of IT Infrastructure Et Support services 3.64% 4 D C M Ltd. - I T Business 6.12% 5 Net Access India Ltd. 9.97% 6 P C S Technology Ltd. 10.65% 7 Accel Frontline Ltd. - IMS 17.55% 8 Kellton Tech Solutions Ltd. 24.31% No of comparables 8 35th Percentile 3.64% Median 8.05% 65th Percentile 10.65% 2.5 The Ld.TPO noted that assessee computed its margin at 13.03% for SWD segment and 13% for ITeS segment and the comparables under SWD segment, the average margin was computed at 15.57% and 8.04% for ITeS segments. The assessee had thus treated its transaction to be at arms length. 2.6 The Ld.TPO dissatisfied with the approach adopted by assessee aggregated the ITeS and SWD segment into one single segment being SWD services. The Ld.TPO considered the functions performed by the assessee under ITeS service segment to be similar to that of SWD service segment and computed the margins of the assessee for the entity as a whole and recomputed the operating margin of assessee at 7.2%. 2.7 The Ld.TPO then undertook the selection of fresh comparables consisting of 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recomputation of operating margin of the assessee and that of the comparables. 2.11 Regarding the inappropriate selection of certain comparables challenged by the assessee, the Ld.CIT(A) accepted the exclusion of 3 companies being Infosys Ltd., Aspire Systems India Pvt. Ltd. and Persistent Systems Ltd. In respect of remaining comparables, the Ld.CIT(A) upheld the action of the Ld.AO. The Ld.CIT(A) also dismissed the grounds wherein assessee sought inclusion of certain comparables engaged in similar activities as that of assessee. Aggrieved by the order of the Ld.CIT(A), assessee and revenue are in appeal before this Tribunal. Assessee's appeal: 3. At the outset, the Ld.AR has submitted that assessee do not wish to press Ground nos. 6-9. Accordingly, these grounds are dismissed as not pressed. It is submitted that Ground nos. 1 & 2 are general in nature and therefore do not require adjudication. The Ld.AR has submitted that Ground nos. 3-5 are effective grounds in respect of the transfer pricing adjustment made. It is also submitted that Ground nos. 16 and 17 are consequential in nature that does not require any adjudication. Ground nos. 3-5: 3.1 The Ld.AR submitted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e nature of providing Network Operating Services (NOS) covering real-time network monitoring, fault management, proactive maintenance etc. According to Rule 10TA(m) "software development services" means,- (i) Business application software and information system development using known methods and existing software tools; (ii) Support for existing systems; (iii) Converting or translating computer languages; (iv) Adding user functionality to application programmes; (v) Debugging of systems; (vi) Adaptation of existing software; or (vii) Preparation of user documentation, but does not include any research and development services whether or not in the nature of contract research and development services.] The taxpayer's NOS (Network Operating Service) falls within the categorization of (ii) Support for existing systems; (v) Debugging of systems; (vi) Adaptation of existing software. 1. It is also evident from Form 3CEB that the company is engaged in Software Development Services. 2. Further the taxpayer himself has submitted in the TP study as well as in the response to show cause notices that the categorizations of above mentioned services w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uided by Huawei Group policies. 3.8 On analysis of the functions performed by the assessee under both segments, it is clear that the assessee has provided services to its AE under SWD segment as well as ITeS segment. It is noted that the Ld.TPO also has observed that the services rendered by the assessee are under two segments, but still holds the services of the assessee under SWD segment to be similar to that of the functions performed by the assessee under ITeS segment. We also note that the reasoning by the assessee Ld.TPO to aggregate both these segments are not justifiable and therefore cannot be upheld. 3.9 We under such circumstances inclined to remand both these segments back to the Ld.TPO/Assessing Officer to reverify the services rendered by assessee under both the segments vis-à-vis the specific functions performed by it. The Ld.AO shall not forget that, the assessee has admittedly made a statement in respect of ITeS services being rendered by the assessee for the first time in the financial year relevant to Assessment Year under consideration. Accordingly, grounds 3 to 5 are remanded back to the Ld.TPO/AO for denovo consideration. The Ld.AO/TPO is directed to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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