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TMI Blog2024 (12) TMI 804X X X X Extracts X X X X X X X X Extracts X X X X ..... asoning that the impugned company has shown loss on account of extraordinary deduction. Accordingly, we direct the AO/TPO to include such company namely Quintegra Solution Limited as on of the comparable. Adjustment on account of working capital difference between the assessee being tested party and comparable companies in order to compute appropriate ALP - We note that rule 10B(3) of the IT Rules provides appropriate adjustment to be made on account of differences in tested party and comparable companies which may affect the price and profitability. The Delhi Tribunal in the case of Mentor Graphics (Noida) Pvt Ltd. [ 2007 (11) TMI 339 - ITAT DELHI-H] no ambiguity that the adjustment in the working capital is required to be made in determining the ALP of the tested party. But the onus lies upon the assessee to justify the stand for claiming the adjustment towards working capital based on the documentary evidence. In the present case, the learned DRP has categorically observed that the assessee has failed to furnish the necessary details for claiming the adjustment with respect to the working capital. AR before us contended that the assessee being hundred percent working for the hol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he present case is a wholly owned subsidiary of M/s Continental Automotive Holdings Netherlands, BV and engaged in manufacturing of components and systems for vehicles. The assessee in the year under consideration has carried out certain international transactions with its AE which was claimed to be carried out at the arm length price based on TNMM after selecting certain comparable as elaborated in the order of the TPO. However, the TPO was not satisfied with the transfer pricing study of the assessee with respect to the international transaction carried out with the AE. Accordingly, the TPO rejected the comparable selected by the assessee and conducted a fresh TP study. The TPO in the fresh TP study selected 11 comparable for working out the ALP using the TNMM and operating profit/ operating cost as profit level indicator. The arithmetic mean calculated by the TPO was 22.71% of the comparable companies and thus proposed an upward adjustment of ₹ 8,81,19,940.00 to the total income of the assessee. The assessee raised the objection before the ld. DRP which dismissed the objections of the assessee with the direction to include one more comparable namely M/s Akshay Software Tec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AT in the case of DCIT versus Electronics for imaging India private limited. reported in 70 taxmann.com 299, ACIT versus Broadcom India Research Private Limited 72 Taxmann.com 77 and M/s Cerner Healthcare solutions private limited versus ITO in IT(TP)A No. 44/Bang/2015 and 69/Bang/2015. 8. Regarding Kals Information Systems Ltd, the ld. AR submitted that it is engaged in the development of software product and related services, also providing implementation and maintenance services of such products. As such Kals Information System develop verities of software products which can be verified from their website. On the other hand, the activity of the assessee is confined to software development services only. In addition, 27% current assets of Kals Information System are on account of inventories of software products. Further the segment details are not available which can be verified from their annual report. Hence, in view of above the comparable i.e. Kals Information System should be excluded. 9. The ld. AR further submitted that the TPO excluded the company namely M/s Quintegra Solutions Limited selected by the assessee as comparable on the ground that such company incurred a heav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of Pentair Water India (P.) Ltd. (supra) has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n excluding companies by following the ratio laid down in the case of Genisys Integrating (supra). 12.1 Based on the above finding of the ITAT, we are inclined to exclude the companies having turnover exceeding ₹ 200 crores as comparable while calculating the ALP for the transactions international transactions carried out by the assessee with the AE. As per the assessee the list of such companies having turnover exceeding Rs. 200 crore stands as under: (i) Mindtree Ltd (ii) Persistent System Ltd (iii) Larsen and Toubro Infotech (iv) Infosys Limited (v) Tata Elxsi Ltd (vi) Sasken Communication Technologies Ltd. 12.2 Hence, we direct the TPO/AO to exclude the companies stated above from comparable while calculating the ALP with respect to the international transaction carried out by the assessee if they are having turnover exceeding Rs. 200 crores after necessary verification. 13. Regarding the exclusion of the comparable company namely ICRA Techno Analytics Ltd and Kals Information Systems Ltd., as such the learned AR for the assessee before us contended that the activity of the assessee is confined to Software Development Services only whereas, the above-mentioned companies a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gaged in diversified activities of software development and consultancy, engineering services, web development hosting and substantially diversified itself into domain of business analysis and business process outsourcing, then the same cannot be regarded as functionally comparable with that of the assessee who is rendering software development services to its AE. 16. In view of the above facts, we do not find any error or illegality in the findings of the DRP that this company is functionally not comparable with that of a pure software development service provider. (3) KALS Information Systems Ltd. 21. The assessee raised objections against this company on the ground that this company is engaged in the development of software and software products. Further, this company consists of STPI unit and also having a training centre engaged in training of software professionals on online products. Thus, when this company is having revenue from software services as well as software product, the same cannot be considered as comparable with software development service providing company. 22. The DRP has directed the AO to exclude this company from the list of comparables by taking note of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e preceding assessment year i.e. assessment year 2007-08. Before instant court also, it is not disputed that the two companies are otherwise comparable as they satisfy the FAR analysis for comparison with the respondent assessee. Further, rule 10B(2) of the rules itself sets out that for the purposes of determining the ALP, the comparison between an international transaction and an uncontrolled transaction would be judged with reference to the aspects specified therein preceded by the word 'namely'. From the reading of rule 10B(2), it would be clear that the bench marks for comparison as specified being preceded by the word 'namely' is exhaustive. Therefore, it is not permissible to include new reference point while making comparison. The aforesaid rule does not require exclusion of a company from comparability analysis only because it had suffered a loss in a particular year. However, it must be clarified that in the facts of a particular case, a loss could be a symptom to enquire/examine whether it is on account of any of the reference point referred to in rule 10B(2) of the rules would get attracted. In any case, the impugned order records a finding that the reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ropriate ALP. However, the same was rejected by the TPO. 17. The assessee preferred to raise objection before the learned DRP. It was reiterated that according to rule 10B(3) of the IT Rules, appropriate adjustment should be made on account of differences in tested party and comparable companies which may affect the price and profitability. Therefore, the adjustment on account of difference in working capital should be made as there is differences in payable and receivable position. The OECD in annexure to chapter III of its guidelines also explains the need and process of working capital adjustment. Identical process of working capital adjustment is also provided in UN Practice Manual for Developing Countries Model Convention. The assessee in support of its contention also placed reliance on Delhi Tribunal order in the case of Mentor Graphics (Noida) Pvt Ltd vs. DCIT reported in 109 ITD 101 which was subsequently confirmed by the Hon ble Delhi High Court. 18. The learned DRP found that the assessee only contended that there is difference in payable and receivable position with the comparable but failed to demonstrate how these differences impacting the price, cost, and profitabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es undertaken or to be undertaken by the independent and associated enterprises. The structure and organization of the group and more particularly the judicial relationship between different entities of same group are to be seen. The function that need to be identified while carrying comparison as per OECD guidelines include design, manufacturing, assembling, research and development, servicing, purchasing, distribution, marketing, advertising, transportation, financial and management activities. It is also necessary to examine as to what is the principal function of the entities. The analysis of comparison should consider total assets employed and assets used to earn profit. The risk assumed by respective parties is a very important consideration. It is a simple principle of economics that the greater the risk, the greater the expected return (compensation). If there are material and significant differences in the risk involved, then the comparable identified are not correct as appropriated adjustments for differences in such cases are not possible. Therefore, while performing searches for potential comparable companies, not only turnover and operating profit but functions perform ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he finding of the AO with the direction to allow the depreciation. Being aggrieved by the order of the learned DRP/AO, the assessee is in appeal before us. 25. The learned AR before us contended that the ITAT in the own case of the assessee for the earlier assessment year 2012-13 on the issue of royalty expenses being revenue in nature has set aside to the AO for fresh adjudication. The AO in the set aside proceedings for the assessment year 2012-13 has accepted the royalty expenses as revenue in nature. 26. The learned AR also submitted that the AO in the remand report furnished under Rule 46A of Income Tax Rule to the ld. Commissioner appeal for the assessment year 2015-16 has also treated royalty payment as revenue in nature and therefore submitted that such expenses are allowable under section 37 of the Act. Accordingly, the learned AR contended that the royalty expenses should be allowed as deduction as there is no change in the facts and circumstances. 27. On the other hand, the learned DR vehemently supported the order of the authorities below. 28. We have heard the rival contentions of both the parties and perused the materials available on record. At the outset we note tha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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