Income Tax Appellate Tribunal - Bangalore
Safran Engineering Services India ... vs Acit, Bangalore on 5 May, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL,
BANGALORE BENCH, 'C', BANGALORE
BEFORE SHRI A.K GARODIA, ACCOUNTANT MEMBER
SHRI LALIET KUMAR, JUDICIAL MEMBER
IT(TP)A No.67/Bang/2014 Asst. Year - 2009-10
IT(TP)A No.117/Bang/2014 Asst. Year - 2009-10
G.E India Exports Pvt. Ltd.,
(Formerly GE Power Controls India (P) Ltd.,
42/1 & 45/14, Electronic City, Phase II
Bangalore-561 229. . Appellant
PAN No.AABCG 1257B.
Vs.
The Dy. Commissioner of Income-tax,
Circle-11(3),
Bangalore. . Respondent
Appellant by : Shri Rajan Vora, C.A
Assessee by : Shri G.R Reddy, CIT
Date of Hearing : 13-02-2017
Date of Pronouncement : 5-05-2017
ORDER
PER LALIET KUMAR, JUDICIAL MEMBER
These appeals by the assessee as well as the Revenue are directed against the order passed by the Commissioner of Income-tax IT(TP)A No. 67 & 117/B/14 2 (Appeals) - IV, Bangalore dated 2/4/2013 for the assessment year 2009-10.
3. The GE India Exports Private Limited ("GEIE" or "Appellant" or "Assessee" or "Company"), formerly known as GE Power Controls (India) Private Limited, is a subsidiary of GE Mauritius Infrastructure Holdings Ltd and is engaged in the business of provision of development and engineering design services ("software development"), engineering consultancy services and customer support services(in the nature of IT Enabled Services ["ITES"]). The company is eligible for deduction under Section 10A of the Income-tax Act, 1961("the Act") in respect of its income from various units registered with the Software Technology Parks of India ("STPI").
4. GEIE provides ITES in accordance with specific directions, guidelines and criteria established by the Associated Enterprise ("AE"). The customer support services include handling the queries of credit card customers of AE through the call centre located at Hyderabad and providing other back end support to credit cardholders. The pricing for such services is done on the basis of actual cost plus mark-up. GEIE, through its 100% export oriented IT(TP)A No. 67 & 117/B/14 3 units, also provides software development services in accordance with the directions, guidelines and specifications provided by the AEs. Under this segment, GEIE also provides IT project management, IT infrastructure management, application management and other forms of support for IT operations to the AEs. The pricing for all the services is done on the basis of actual cost plus mark-up. Further, GEIE is characterized as captive service provider in respect of provision of ITES and software development services.
5. The Company filed its original return of income for the year under consideration on 30 September 2009 and subsequently revised its return of income on 30 March 2011 declaringg a total income of INR 18,27,37,463 after claimingg deduction u/s 10A of the Act of INR 49,39,60,861. The case selected for scrutiny assessment.
6. The learned Assessing Officer ("Ld. AO") obtained the approval of Commissioner of Income-tax, Bangalore and made a reference u/s 92CA(1) of the Act to the Additional Commissioner of Income Tax, (Transfer Pricing) - 1 ("TPO") for determination of Arm's Length Price ("ALP") of the international transactions entered by the Appellant with its AEs. 7. A notice was issued by the learned IT(TP)A No. 67 & 117/B/14 4 TPO calling for certain details such as profit & loss account, balance sheet, statement of income filed with the return of income, transfer pricing documents maintained, agreements entered into between the Appellant and its associated enterprises for AY 2009-10. In response, the Appellant furnished the required details. Subsequently, the learned TPO issued show-cause notice dated 26 November 2012, in response, submissions were filed with the TPO on 18 December 2012.
7. The TPO passed an order dated 29 January 2013 under Section 92CA of the Act making an adjustment of INR 17,54,08,846 in respect of the software development segment and INR 6,54,44,289 in respect of the ITES segment.
8. The learned Assessing Officer ("Ld. AO") passed the draft assessment order under Section 143(3) of the Act dated 13 March 2013 after assessing a total income of INR 48,29,05,430 under the normal provisions of the Act .
9. Assessee submitted that the major international transaction of the Appellant with its AEs during the captioned AY is as under:
IT(TP)A No. 67 & 117/B/14 5 Nature of International Transaction Amount in INR Provision of customer support services (ITES) 97,80,20,852 Provision of engineering consultancy services (clubbed with ITES by the 81,85,825 TPO) Provision of software development and engineering design services 3,09,49,89,192
10. Assessee in its TPO study for ITES selected 13 comparable companies with average operating profit/operating cost of 8.72% before performing working capital and risk adjustments. List of comparables selected by the Appellant in the TP Study for ITES:
Operating Accepted/reject
Sl No. Comparable
Margins (%) ed by TPO
1. Aditya Birla Minacs Worldwide Ltd. -1.53% Accepted
2. Allsec Technologies Ltd. -14.60% Accepted
3. Cameo Corporate Services Ltd. 6.42% Rejected
4. H C L Technologies Ltd. 36.82% Rejected
5. Hinduja Global Solutions Ltd. 21.14% Rejected
6. Maple Esolutions Ltd. 17.33% Rejected
7. Optimus Global Services Ltd. 0.52% Rejected
8. R Systems International Ltd. 16.97% Rejected
9. Religare Technova Ltd. 12.65% Rejected
10. Shreejal Info Hubs Ltd. 0.00% Rejected
11. Spanco Ltd. 8.24% Rejected
12. Sparsh B P O Services Ltd. 7.22% Rejected
13. V & K Softech Ltd. 2.19% Rejected
Arithmetic Mean 8.72%
IT(TP)A No. 67 & 117/B/14
6
11. Assessee in its TPO study for software development selected 11 comparable companies with average operating profit/operating cost of 8.81% before performing working capital adjustment and risk adjustment. List of comparables selected by the Appellant in the TP study for software development.
Operating Accepted/reject
Sl No. Comparable
Margins (%) ed by TPO
1. 3 K Technologies Ltd. 28.93% Rejected
2. Geometric Ltd. 3.16% Rejected
3. Mindtree Ltd. 4.19% Accepted
4. Persistent Systems Ltd. 18.17% Accepted
5. Prithvi Information Solutions Ltd. 10.39% Rejected
6. R S Software (India) Ltd. 6.49% Accepted
7. R Systems International Ltd. 11.57% Rejected
8. S I P Technologies & Exports Ltd. -33.44% Rejected
9. Saksoft Ltd. 10.83% Rejected
10. Sonata Software Ltd. 18.41% Rejected
11. Zylog Systems Ltd. 18.17% Accepted
Arithmetic Mean 8.81%
13 The learned TPO has not accepted the economic
analysis undertaken by the Appellant and conducted a fresh economic analysis. The learned TPO selected the following companies as comparable:
IT(TP)A No. 67 & 117/B/14 7 ITES segment:
Sl. No. Net margin as
Company name
per TP order
1 Infosys BPO Limited 24.41%
2 Aditya Birla Minacs Worldwide Ltd 23.86%
3 Microland Limited 1.53%
4 Allsec Technologies Limited -16.63%
5 Accentia Technologies Limited 46.40%
6 Informed Technologies India Limited 22.61%
7 Cosmic Global Limited 40.61%
8 Eclerx Services Limited 57.50%
Average 25.04%
Working capital adjustment (restricted to 0.91%) 0.91%
Adjusted operating margin 24.13%
Software development segment:
TP study Net margin as
Sl. No. Company name
comparable? per TP order
1 Akshay Software Technologies ltd No 8.11%
2 Bodhtree Consulting Ltd No 62.27%
3 Infosys Ltd No 45.61%
4 KALS Information Systems Ltd No 13.89%
5 Larsen & Turbo Infotech No 24.72%
6 Mindtree Ltd (seg.) Yes 5.52%
7 Persistent Systems Limited Yes 41.40%
8 R S Software (India) Limited Yes 9.97%
Sasken Communication Technologies
9 No 27.91%
Limited
10 Tata Elxsi Limited (Seg.) No 20.28%
11 Zylog Systems Ltd. Yes 7.81%
IT(TP)A No. 67 & 117/B/14
8
TP study Net margin as
Sl. No. Company name
comparable? per TP order
Average 24.32%
Working capital adjustment (restricted to 1.51%) 1.51%
Adjusted operating margin 22.81%
14. TPO made an adjustment of INR 17,54,08,846 in respect of the software development segment and INR 6,54,44,289 in respect of the ITES segment. The AO passed draft order based on the order of TPO.
15. Being aggrieved by the adjustments made in the draft assessment order by the Ld. AO, the appellant filed objections before the Hon'ble DRP on 12 April 2013. Pursuant to the hearing, the DRP issued directions dated 10 November 2013 wherein:
a) The AO was directed to exclude the expenditure incurred by the Appellant towards telecommunication expenses in foreign currency from both export turnover and total turnover for the purpose of computation of deduction under Section 10A of the Act.
b) The AO/TPO was directed to allow working capital adjustment as per the actual figures without any restriction;
IT(TP)A No. 67 & 117/B/14 9
c) In respect of software development services, FCS Software Solutions Limited and Thinksoft Global Services Limited have been directed to be considered as comparable. As a result, the operating margin for software development segment would lie within arm's length range.
d) The AO was directed to provide full credit for tax deducted at source, after due verification
16. Accordingly, the Ld. AO has passed the final assessment order dated 30 December 2013 ("the Order"), providing partial relief by reducing the TP adjustment to INR 6,28,16,669. Being aggrieved by the Order, the assessee as well as revenue filed appeals before us.
17. First we shall take up the appeal in IT(TP)A No.840/Bang/2013 for the assessment year 2008-09.
IT(TP)A No.67/Bang/2014 (Revenue's appeal)
18. The grounds raised by the Revenue are as under:
IT(TP)A No. 67 & 117/B/14 10
19. Ground No.1 is general therefore it is dismissed being not pressed .
20. Ground No.2 is regarding working capita adjustment.
21. In this regard, the TPO at page 36 and 37 of its order has held as under:-
In the case of wholly owned subsidiary, it is observed that the tested party receive lot of advances from their Holding company for whom they are rendering services on contract basis. Therefore, in their cases mostly there are neither IT(TP)A No. 67 & 117/B/14 ' 11 debtors nor any inventory and therefore, the working capital is zero. Even if they are receiving lot of advances from the Holding company, the cost of working capital is zero because there are neither debtors nor inventory in their case. In such circumstances the issue that arises is as to whether we should find out the cost of working capital when there are neither debtors nor inventory. In Transfer Pricing, we reduce creditors from the total sum of debtors and inventory to find out the net working capital and cost thereof to recover the same by factoring it in the sales price. Therefore, in the absence of debtors as well as inventory, the creditors should not be taken into consideration as even if the creditors are there in the balance sheet, they are not being used for the operating revenues. For the academic discussion in a case where the taxpayer is receiving lot of advances but no debtors or inventory, if the cost of capital is computed for the advances received from the Holding company, then it is quite likely that it may result into abnormal adjustment in the sales price of the taxpayer on a standalone basis that even if no operating profit is earned, the adjusted profit margin may become comparable because of cost of capital computed on the basis of creditors alone. It IT(TP)A No. 67 & 117/B/14 12 can be understood by the following example.
Thus, the profit margin which was nearly 2% of the tested party before working capital adjustment has increased to 10% as against profit margin of 8% in the case of the uncontrolled comparables reduced to 6% after the working capital adjustment. Accordingly, it should be accepted because adjusted profit margin is better than that of the uncontrolled comparables. In this manner, because of finding out working capital adjustment even on negative working capital the operating profit of the taxpayer may be accepted wrongly.
Therefore, in a particular kind of business even the arm's length price of working capital can be found out by computing the same in the case of uncontrolled comparables by finding the average mean of the cost of net working capital. Therefore, in the case of wholly owned subsidiaries (WOS) receiving huge advances the right approach would be to reduce the average IT(TP)A No. 67 & 117/B/14 13 mean of cost of capital of the comparables from their average profit margins and in the case of the tested party, reducing the cost of capital on the net working capital computed as follows:
Net working capital of the tested party= (Debtors + Inventory) -
(Payables/ advances received to the extent of debtors plus inventory The Balance payables not considered in calculation of net working capital of the tested party is due to the fact that they are invested either in fixed assets or in the current assets having no cost, whereas in Transfer Pricing those receivables are taken into consideration that reduce the working capital requirement and accordingly the cost of working capital that must be recovered from the customers by factoring in the sales price. Any excessive advance which is received from the Holding company by the WOS cannot be factored in reducing the sales price and less sales price cannot be defended on the ground that due to negative cost of capital it is managing to have arm's length profit margin even if it is having low profit margin on operating activity as discussed in the example given above. In a IT(TP)A No. 67 & 117/B/14 14 related party scenario, the entire payables/advances cannot be considered in working capital adjustment as in any business there is an optimum working capital that can be found out only on the basis of comparison with third parties as third parties alone represent the optimum working capital requirement.
22. The TPO in paragraph 4.6 of the order has mentioned that working capital adjustment is restricted to average cost of capital computing at 0.91% in case of uncontrolled comparable selected by the TPO and, therefore, the actual adjustment in the case of tax payer as per annexure - C of the order.
23. The AR for the Assessee submitted that TPO's approach of restricting the working capital adjustment on an adhoc basis to the average cost of capital of comparable companies has been rejected by the Hon'ble DRP. AR submit that the extent to which companies extend and receive credit in the form of accounts payable and receivable affects their sales and cost of sales which has an impact on the profit marginl. Hence, for the differences in working capital between the tested party and the comparable companies, an IT(TP)A No. 67 & 117/B/14 15 appropriate adjustment which includes adjustments for accounts receivables, inventory and accounts payables should be made to ensure that the absolute levels of the relevant balance sheet items are normalised, by measuring them against cost.
24. We have heard the rival contentions of the parties and perused the record. We have sent back the entire TP issue to the file of the ld TPO while adjudicating the appeal of assessee as new comparable viz. Thinks Soft FCS are directed to be included in the list of comparables. Further we have also held that R Systems is required to be considered as comparable and it cannot be excluded on account of different financial year. On account of inclusion of the fresh comparables, new TP study is required to be undertaken by ld TPO. Therefore, we are not adjudicating the issue of working capital adjustment at this juncture. However, we would like to note that ld TPO while adjudicating the working capital shall keep in mind the various parameters relevant for determining the working capital which may be necessary for brining the comparable at par with that of the assessee. Needless to say that it is for the assessee to show that the working capital had effected margins and adjustment of the companies and working capital adjustments are necessary to IT(TP)A No. 67 & 117/B/14 16 minimize the difference in the profile of the both. With respect to the grounds raised by the Revenue, it would be suffice that the working capital adjustment shall be worked out by the TPO after finalizing the list of comparables and thereafter calculate the average working capital of the finally selected comparables on the actual working capital adjustment basis. We deem it appropriate to direct the assessee to provide necessary data in respect of working capital in the form of receivable, payable, and inventory of the comparable as well as the assessee. Therefore, the matter is remitted back to the file of the assessee with the direction to examine as to whether or not the working capital requirement constitute an item of difference so as to require adjustment as per the parameters laid down by Rule 10B(1)(e)(iii) r.w.s 10B(3) of the rules for the purpose of analyzing the comparable of the comparability uncontrolled transaction with the international transaction of the assessee. Needless to say this exercise has to be carried out by the TPO after finalizing the comparables. In the result the revenue ground of Appeal is allowed for statistical purposes.
IT(TP)A No. 67 & 117/B/14 17 Ground No. 3: The DRP erred in directing the inclusion of FCS Software Solutions and Thinksoft Global Services Limited as comparables without appreciating the fact that the TPO had excluded the companies as Rule 10B(3) requires that not only the transactions but the enterprises should also be comparable in TNMM.
25. The ld AR has submitted that the TPO has wrongly excluded these 2 comparable on the premises that the working capital is more than 4%. The DRP has allowed these comparable to be taken as comparable as effect of working capital adjustment has been given in the order. This Tribunal in the matter of Logica Pvt. Ltd., in ITA No.1621/Bang/2014 dated 18/3/2016 for the asst. year 2009-10 has held as under:-
11.4 Assessee seeks to include two companies Thinksoft Global Services Private Limited ('Thinksoft' for short) and FCS Software Solutions Private Limited ('FCS Software' for short). The said two companies were initially proposed as comparables by the TPO in her show cause notice dt. 14-11-2012 (page 789 of the Paper Book), but were subsequently not included as comparables by the TPO despite assessee having accepted the said companies as comparables. The TPO having accepted that the said companies are IT(TP)A No. 67 & 117/B/14 18 functionally similar to assessee, excluded them on the sole ground that when their respective working capital adjustment is coming to more than 4%. It is submitted that the ad hoc rejection of the said companies on the ground of working capital impact of more than 4% on profit has no basis in law and is, therefore, liable to be set aside as the said companies satisfied all the filters applied by the TPO and there having been no filter applied by the TPO to the above effect, their exclusion is unsustainable. The workingcapital adjustment has been arrived at on the basis of a scientific calculation and by adopting the methodology prescribed by the OECD Guidelines. Thus, once a working capital adjustment is arrived at in the manner prescribed by law, the consequences of such an adjustment on a comparable's profit margin cannot be a reason for its exclusion. It is submitted that in case of a third party comparable, the working capital funding is lent from a bank, for which the company pays interest and the costs related to such finding is also passed on to the third party customers. In case of assessee, however, AEs had provided the funds for operations and thus assessee did not have to rely on workingcapital funding from banks. In any event, merely because of IT(TP)A No. 67 & 117/B/14 19 a working capital impact of over 4%, the said companies cannot be characterized as being engaged in the provision of financing activities, as has been held by the TPO in her order. It is submitted that Thinksoft and FCS Software are comparable companies which ought not have been excluded from the list of comparables. Moreover, the TPO has, vide the TP order, accepted that they are functionally comparable to assessee. Since they are comparables which were proposed by the TPO herself, it is evident that the said companies have passed all the filters applied by the TPO in her study. Thus, for the foregoing reasons, it is submitted that the said companies ought to be considered as comparables to assessee.
11.5 Inclusion of these two companies on similar submissions was already considered in the decision of ARM Embedded Technologies (P.) Ltd. [IT Appeal No. 1659 (Bang) 2014, dated 31-08-2015] for the same assessment year as under:
"20. Coming to the ground for inclusion of M/s. Thinksoft Global Solutions Ltd and FCS Software Solutions Ltd, we find that TPO herself had suggested these in the show cause notice, but had thereafter come to a conclusion IT(TP)A No. 67 & 117/B/14 20 that working capital adjustment required for these two companies exceeded 4% of profits and could not be therefore taken as proper comparables. Reasons given by the TPO for excluding these two companies, appear at paras 3.6.5.1, of her order which reads as under :
(b) Two companies proposed in the show-cause notice are functionally similar to the taxpayer.
However, when the working capital of these companies is considered, the profit margin gets distorted. It may not be out of context to mention that our search for comparable is primarily focus on those companies whose profit margin is predominantly from operating business and not from financial activities. This prerequisite is not different in case of software development companies as they do not need any interest bearing funds to manage their workingcapital requirement. Therefore, with the purpose to identify only those uncontrolled comparables who are having profit margin from core operating activities and not from financial activities, the following two companies having working capital impact of more than 4% on profit have been excluded.
IT(TP)A No. 67 & 117/B/14 21
21. TPO has accepted that these companies were functionally similar to that of the assessee. However, according to her, the margins of these companies had not come from its core operating activities but from financial activities. Profit and Loss account of M/s. Thinksoft Global Solutions for the relevant previous year is placed at paper book page. 247. Software service revenues of the said company came to Rs. 920921452/-. Other income of the said company came to Rs.
35,738,801/-. Break-up of the other income as given at schedule 10 placed at paper book page. 256 show that out of such amount Rs.
26,536,978/- was exchange gain. Interest received from deposits with banks and others came to Rs. 29,15,080/- only. For better clarity this break-up is given hereunder :
Other income Interest received on deposits with banks .. 2,371,740 Interest received from others .. 543,310 Profit on sale of fixed assets .. 6,276,773 Exchange gain (Net) .. 26,536,978 Miscellaneous income .. 10,000 35,738,801 We cannot say that the 'other income' arose out of any financial services done by the assessee and would take away the sheen of its software services IT(TP)A No. 67 & 117/B/14 22 income. The amount, in our opinion, was insignificantly small and not enough to warrant a conclusion that its operating margins had come not from its core operational activities.
22. Coming to FCS Software Solutions Ltd, profit and loss account placed at paper book page 321 shows that its revenue from software development and other services was Rs. 1902547907/-. As against this, miscellaneous income was only Rs.
7875588/-. Break-up of such miscellaneous income as given at schedule M, placed at paper book page. 328 reads as under :
Interest .. 2,875,685
Rent income .. 4,515,000
Amount W/Back .. 484,902
7,875,588
23. Compared to the software development services income, interest received by M/s. FCS Software Solutions Ltd, was in our opinion, insignificantly small. Thus the reasoning given by TPO for rejecting these two companies as proper comparables, was in our opinion, incorrect. We set aside the orders of the lower authorities in this regard and direct these two companies to be included in the list of comparables for working out the average PLI".
IT(TP)A No. 67 & 117/B/14 23 Respectfully following the above decision we direct the TPO to include them in the list of comparable companies for working out average PLI.
26. Respectfully following the coordinate Bench in the matter of Logica Pvt. Ltd., we dismiss the ground of Revenue.
27. Ground Nos.4 and 5 are regarding exclusion of telecommunication expenses from the total turnover also while computing the deduction u/s 10A of the IT Act.
28. The case of the Revenue is that the telecommunication expenses should be excluded from the export turnover but should not be excluded from total turnover. On this issue, the judgment of Hon'ble Karnataka High Court rendered in the case of Tata Elxsi, 349 ITR 98 supports the case of the assessee because in this case, it was held by Hon'ble Karnataka High Court that the total turnover is sum total of export turnover and domestic turnover and, therefore, if an amount is excluded from export turnover, the total turnover is also IT(TP)A No. 67 & 117/B/14 24 reduced by the same amount as a consequences of deduction from export turnover. In this view of the matter, we find no infirmity in the order of the learned CIT(A) on this issue. Regarding the contention of the Revenue that the Revenue has not accepted the judgment of Hon'ble Karnataka High Court and has filed appeal before the Hon'ble Apex Court, we would like to observe that it is not the case of the Revenue that the judgment of Hon'ble Karnataka High Court has been stayed by Hon'ble Apex Court, and therefore, the judgment is valid and we are bound to follow the same. Accordingly ground Nos. 4 and 5 of the Revenue are rejected.
29. In the result, the appeal filed by the Revenue is dismissed. IT(TP)A No.117/Bang/2014
30. The grounds raised by the assessee are as under:
1. Ground No. 1: That the order of the learned Deputy Commissioner of Income Tax, Circle -
11(3), Bangalore pursuant to the directions given by the Hon'ble Dispute Resolution Panel, is erroneous on facts and bad in law and liable to be quashed.
IT(TP)A No. 67 & 117/B/14 25
2. Ground 2: That the learned AO/ DRP erred in upholding the rejection of Transfer Pricing ("TP") documentation by the learned TPO.
3. Ground 3: That the learned AO erred in considering the adjustment of Rs. 24,08,53,035 in the software development segment and in the Information Technology Enabled Services ("ITES") Segment and the EA & SE segment as against Rs. 23,55,17,755 thereby ignoring the rectified transfer Pricing Order passed by the learned TPO dated 3 April 2013.
4. Ground 4: That the learned AO / DRP erred in upholding the adjustment to the engineering consultancy services segment of the Appellant made by the learned TPO and in doing so grossly erred in;
4.(a). Re-characterising the engineering consultancy services rendered by the Appellant to be Information Technology Enabled Services,
4.(b). Upholding the act of the learned TPO of collecting information of the companies by exercising power granted to him under section 133(6) of the Act IT(TP)A No. 67 & 117/B/14 26
4.(c). Completely disregarding the benchmarking analysis undertaken in the TP documentation for the FY 2008-09
5. Ground 5: That the learned AO / DRP erred both in facts and in law in making an adjustment of Rs. 6,28,16,669 in respect of ITES segment and EA & SE segment of the Appellant.
6. Ground 6: That the Learned AO / DRP erred both in facts and in law in holding that the international transactions in these segments do not satisfy the arm's length principle envisaged under the Act and in doing so grossly erred in :
6.(a) Upholding the rejection of comparability analysis of the Appellant in the TP documentation and confirming the fresh comparability analysis as adopted by the learned TPO in the TP Order and application of certain arbitrary filters in determining the arm's length price in connection with the international transaction.
6.(b) Upholding the rejection of TP documentation by invoking the provisions of section 92C(3) of the act contending that the information or data used in the computation of the arm's length price is not reliable or correct;
IT(TP)A No. 67 & 117/B/14 27
6.(c) Disregarding the application of prior year data as used by the Appellant in the TP documentation and holding that current year (i.e., Financial Year 2008-09) data for comparable companies should be used;
6.(d) Using the data as at the time of assessment proceedings instead of that available as on the date of preparing the TP documentation for comparable companies while determining the arm's length price, ignoring the fact that this data was not available at the time of complying with the TP documentation requirements;
6.(e) Including additional companies in the comparability analysis which do not satisfy the test of comparability;
6.(f) Rejecting the companies similar to the Appellant while performing the comparability analysis
6.(g) Ignoring the limited risk nature of the services provided by the Appellant as detailed in the TP documentation and in upholding the conclusion of the learned TPO that no adjustment on account of risk differential is required while determining the Arm's Length Price of the international transactions of the Appellant.
IT(TP)A No. 67 & 117/B/14 28
7. Ground No. 7: That the Ld. AO erred in providing short grant for taxes deducted at source to the extent of Rs. 5,48,377.
8. Ground No. 8: That the Ld. AO erred in consequently levying interest under section 234D of Rs. 46,10,878.
9. Ground 9: Without prejudice to Ground No. 7above, the learned Assessing Officer ("AO") has erred, in law and on facts, by not granting additional tax deducted at source ("TDS") credits amounting to INR 46,82,059 received from GE Money Financial Services Limited.
10.Ground 10: Without prejudice to Ground No. 7 above, the learned AO has erred in law and in facts, by not granting due credit for TDS in accordance with the provisions of Section 199 of the Act and as per the credit available in Form 26AS and TDS certificates provided
11.Ground 11: The learned AO/DRP/TPO has erred in treating foreign exchange fluctuation gain / loss as non-operating in nature while computing the operating margin of the comparable companies for the software development segment and ITES segment IT(TP)A No. 67 & 117/B/14 29
12.Ground 12: The learned AO/DRP/TPO has failed to appreciate the fact that the following companies are not functionally comparable to the ITES segment of Appellant, therefore has erred in law and facts in considering them as comparable companies:
a) Cosmic Global Limited;
b) eClerx Services Limited;
c) Accentia Technologies Limited;
d) Infosys BPO Limited;
13.Ground 13: The learned AO/DRP/TPO has failed to appreciate the fact that the following companies are not functionally comparable to the Software development segment of Appellant, therefore has erred in law and facts in considering them as comparable companies:
Bodhtree Consulting Limited;
Infosys Technologies Limited;
Persistent Systems Limited
14.Ground 14: The learned AO/DRP/TPO erred in rejecting R Systems International Limited as a comparable for software and ITES segment by stating that it fails different year ending filter.
15.Ground 15: The learned AO/DRP/TPO erred, IT(TP)A No. 67 & 117/B/14 30 in law and in facts, by rejecting certain comparable companies considered by the Appellant in the TP documentation, in respect of software development segment and ITES segment by applying / modifying different quantitative and qualitative filters.
16.Ground 16: The learned AO/DRP/TPO has erroneously computed the operating margin for Larsen & Toubro Infotech Limited.
31. Ground No.1 is general.
32. Ground Nos. 2 to 6 are not pressed by the ld AR of the assessee before us and therefore these grounds are dismissed as non pressed.
18. With respect to ground No.7, the assessee before us submitted that the ld AO has not considered the TDS to the extent of Rs.548347/- while taxable income of the assessee. It was submitted that the AO should be directed to provide due TDS credit to the assessee and for that purpose, the assessee relies upon the judgment of the Punjab & Haryana High Court in the matter of Mercer Consulting India Pvt. Ltd.
IT(TP)A No. 67 & 117/B/14 31
33. With respect to ground No.8 it is consequential relief in respect of interest wrongly levied by the ld AO by indicating sec. 234D of the Act.
34. With respect of ground No.9 and 10, the ld AR has submitted that assessee inadvertently not claimed TDS amounting to Rs.4,68,20,591/- received from GE Money Financial Services while filing the return of income. The ld AR submitted that the assessee was not granted such TDS credit for the asst. year 2009-
10. It was submitted that the income corresponding to the TDS was already offered by the assessee to tax and the ld AO has considered the same while passing the order under consideration. He submitted that rectification application was also filed before the AO with a view to claim additional TDS due to the assessee and for that purpose, the assessee has also submitted the form 26AS and TDS certificates before the ld AO but despite that, no action was taken by the AO in respect of rectification application.
35. The ld DR relied upon the order of CIT (A) and has submitted that for the mistake of the assessee, the AO cannot be blamed.
IT(TP)A No. 67 & 117/B/14 32
36. We have gone through the records and perused the submissions made by the respective parties before us. In our view, the assessee is entitled to get the adjustment for the TDS deduction made by the GE Money Finance Services Ltd., as the corresponding income for the said TDS was duly accounted by the assessee and was considered by the AO while passing the asst. order. In view thereof, we deem it appropriate to direct the AO to grant the benefit of TDS certificate submitted by the assessee though not claimed in the original return of income in accordance with Boards Circular dated 5 of 20013 and also in view of the judgment of Delhi High Court in WPC No.2659/2012 dated 14/3/2013. Accordingly this issue is restored to the A.O. for a fresh decision as per law.
37. Now, we will take up ground No.14 - R-Systems The ld counsel for the assessee held R-System International Ltd., as comparable to the Software Development Segment and ITES Segment respectively. However, the ld TPO rejected the R-System for both the segment that the company is not comparable as its financial year ends in December. It was submitted by the ld AR that though the financial year adopted by the company was January IT(TP)A No. 67 & 117/B/14 33 to December, however, the segmental financial statement of R- Systems for the quarter ending on 31/3/2009 and 31/3/2008 both audited were available in public domain, therefore, it is possible to derive the credible financial information for the financial year 2008-09 by including result of quarter ending on 31/3/2009 and excluded results of quarter ending 31/3/08 to the information. In this regard, reliance was placed by the ld AR on the judgment passed by the Punjab and Haryana High Court in the case of Mercer Consulting India Pvt. Ltd., 101/2015 dated 24/8/2016.
38. On the other hand, the ld DR submitted that as sufficient comparables were available therefore this company with different financial year was excluded by the ld TPO.
39. We have gone through the records and perused the submissions made by the respective parties before us. The Hon'ble Punjab and Haryana High Court in the matter of Mercer (supra) while dealing with the issue in respect of financial year under consideration in respect to R-Systems has held that from data relating to financial year under consideration can be derived as pre and post financial year (1april2008 to 31 march 2009) is available from the audited account of R-Systems and this cannot be held as IT(TP)A No. 67 & 117/B/14 34 not passing the test of sub Rule of 4 of Rule 10B. Hon'ble court in the matter of Mercer Consulting (India) (P.) Ltd. 2016] 76 taxmann.com 153 (Punjab & Haryana) held as under
29. As noted by the Tribunal, the audit accounts of R System International Ltd. for the year ending 31.12.2008 had been given under one column and the data for the quarter ending 31.03.2009 and 31.03.2008 (both audited) had been given in two other columns. Thus, as rightly held by the Tribunal, if from the yearly data ending 31.12.2008, the results of the quarter ending 31.03.2008 are excluded and if the results for the quarter ending 31.03.2009 are included, it is possible to obtain the data for the financial year 01.04.2008 to 31.03.2009.
30. This view is not contrary to Rule 10(B)(4) which reads as under:--
"10B(4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into".
31. The Rule does not exclude from consideration the data of an entity merely because its financial year is different from the financial year of the assessee. What IT(TP)A No. 67 & 117/B/14 35 the Rule requires is that the data to be used in analyzing the financial results of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. Thus so long as the data relating to the financial year is available, it matters not, if the financial year followed is different. In the case before us the data relating to the relevant financial year of R. Systems International Limited is available.
32. We are, therefore, entirely in agreement with the decision of the Tribunal that if the data relating to the financial year in which the international transaction has been entered into is directly available from the annual accounts of that comparable, then it cannot be held as not passing the test of sub-rule(4) of rule 10B.
40. In view thereof, we hold that R-Systems International Ltd., is required to be considered for both the segments i.e. for Software Development Segment and ITES segment respectively. We direct TPO/AO to consider R-Systems International Ltd as good comparable for Software Development Segment and ITES segment respectively. In view thereof this ground of the assessee is allowed for statistical purposes.
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41. In view thereof once have we allow inclusion of comparable with different financial year i.e. the R-Systems International Ltd., as comparable , on the same analogy and principle various other companies with different financial year will become eligible to be compared as comparable with that of the assessee company for the purposes of bench marking the international transaction . In view thereof, we deem it appropriate to remand the entire TP issue to the file of AO/TPO with a direction to consider the companies with different financial year subject to fact that the financial settlement of the corresponding years are deducible from the audited accounts of the said comparable company.
42. In view thereof since new comparable on account of different financial year would be available for bench marking , the entire exercise undertaken by the TPO became redundant and therefore, we deem it appropriate to remand back the entire TP issue to the file of the AO/TPO to undertake the fresh TP studies and for bench marking the ALP of the assessee in respect of both the segments on the basis of the above said principle and also in accordance with the judgment passed by the Tribunal.
IT(TP)A No. 67 & 117/B/14 37
43. We are not adjudicating ground Nos.11 to 13 since we are remanding the matter back to the file of the AO/TPO, it is however made clear that while examining other comparable, the TPO to compare the profile of the assessee derived on the basis of the agreement the assessee is having with its AE and compare the profile of the assessee with that of the comparable companies .Mere reliance on the TP study or on the profile given in the audited books of accounts or on the company's profile of the transaction under consideration is not correct. Therefore, it is incumbent upon the TPO to examine the agreement the assessee is having with its AE so as to ascertain the exact profile of the assessee. With these observations the entire TP issue is remanded back to the file of the AO.
44. In the result, appeal of the assessee is partly allowed for statistical purposes.
45. In the result, the appeal of the Revenue is dismissed and the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 5th May, 2017.
Sd/- Sd/-
(A.K GARODIA) (LALIET KUMAR)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Bangalore
Dated : 5/5/2017
Vms
IT(TP)A No. 67 & 117/B/14
38
Copy to :1. The Assessee
2. The Revenue
3.The CIT concerned.
4.The CIT(A) concerned.
5.DR
6.GF By order
Asst. Registrar, ITAT, Bangalore.