Income Tax Appellate Tribunal - Pune
Msc Software Corporation India Pvt. ... vs Acit, Circle 11(2), Pune on 22 March, 2017
आयकर अपील य अ धकरण पण
ु े यायपीठ "ऐ" पण
ु े म
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "A", PUNE
सु ी सुषमा चावला, या यक सद य एवं ी अ नल चतुव"द , लेखा सद य के सम%
BEFORE MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM
आयकर अपील सं. / ITA No.46/PUN/2013
नधा'रण वष' / Assessment Year : 2008-09
MSC Software Corporation India Pvt. Ltd.,
6th Floor, Amar Apex Building,
Near Baner Telephone Exchange,
Baner, Pune - 411045 .... अपीलाथ /Appellant
PAN: AAECM0862H
Vs.
The Asst. Commissioner of Income Tax,
Circle 11(2), Pune .... यथ / Respondent
अपीलाथ क ओर से / Appellant by : Shri Rajendra Agiwal
यथ क ओर से / Respondent by : Shri Sandeep Garg, CIT
सन
ु वाई क तार ख / घोषणा क तार ख /
Date of Hearing : 12.01.2017 Date of Pronouncement: 22.03.2017
आदे श / ORDER
PER SUSHMA CHOWLA, JM:
This appeal filed by the assessee is against the order of ACIT, Circle 11(2), Pune, dated 29.10.2012 relating to assessment year 2008-09 passed under section 143(3) r.w.s. 144C of the Income-tax Act, 1961 (in short 'the Act').
2. The assessee has raised the following grounds of appeal:-
On the facts and in the circumstances of the case and in law, the Hon'ble DRP and consequentially the learned Assessing Officer have:
1. General ground challenging the transfer pricing adjustment of Rs.2,70,62,939 2 ITA No.46/PUN/2013 MSC Software Corporation India Pvt. Ltd.
Erred in making transfer pricing adjustment to the international transactions of the Appellant in the nature of provision of software development services and payment for reimbursement of certain expenses and not accepting the comparability analysis documented in the Transfer Pricing study report for benchmarking analysis.
I Grounds of appeal in respect of transfer pricing adjustment relating to provision of software development services
2. Rejecting the transfer pricing documentation and not considering the comparability analysis as documented in the transfer pricing study report Erred in rejecting the transfer pricing documentation maintained by the Appellant and also not considering the data provided in the transfer pricing study report for benchmarking analysis.
3. Use of different turnover filter for identification of comparable companies and applying the modified range on cost base instead of turnover base.
Erred in applying turnover filter of INR 1 crore to INR 200 crores as a comparable selection criteria (i.e. using a turnover filter of INR 1 to 200 crores) as against the turnover filter of upto INR 100 crores applied by the Appellant for identifying the comparable companies (Appellant's turnover being INR 14.37 crores).
Further, erred in inappropriately considering the above range on cost basis instead of turnover basis (i.e. companies having cost in the range of INR 1 crore to INR 200' crores have been considered for analysis) resulting in companies having turnover even higher than INR 200 crores being taken as comparable (i.e. Helios and Matheson Information Technology Ltd identified as comparable even though the turnover of the said company is INR 213.37 crores)
4. Selecting inappropriate qualitative filters and applying certain filters on selective basis Erred in selecting following inappropriate qualitative filters, applying certain filters on selective basis for rejecting/accepting certain companies such as:
- Use of single year data for comparability analysis (as opposed to three years data used in the Transfer Pricing study report);
- Rejection of companies with less than 75% earnings from exports;
- Rejection of loss making companies;
- Rejection of companies with peculiar circumstances and
- Use of diminishing revenue filter
5. Rejection of certain comparable companies identified by the Appellant in the transfer pricing study report Erred in rejecting certain comparable companies from the comparable set identified by the Appellant in respect of international transaction pertaining to provision of software development services.
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6. Selecting certain additional companies as comparable for FY 2007-08 Erred in selecting certain additional companies as comparable to the Appellant in respect of international transaction relating to provision of software development services.
7. Selecting companies having super normal profits Erred in selecting companies having supernormal profits as comparable to the Appellant.
8. Following inconsistent approach for rejecting / selecting companies as comparable Erred in adopting an inconsistent approach while applying the functional comparability criteria for rejecting / accepting companies as comparable.
9. Adjustment for differences on account of functional and risk profile of comparable companies vis-a-vis the Appellant Erred in comparing full-fledged risk bearing entities with the Appellant's captive operations without making any risk adjustment for differences between the functional and risk profile of comparable companies vis-a-vis the risk profile of the Appellant.
10. Applicability of +/-5% range Erred in applying the amended proviso to section 92C(2) of the Act and accordingly, making the transfer pricing adjustment from the arm's length price without giving the benefit of the option available to the Appellant under erstwhile proviso to section 92C(2) of the Act of adopting as arm's length price, a price which varies by not more than 5 per cent from the arm's length price.
II. Grounds of appeal in respect of international transactions relating to payment for meeting expenses, travel cost, stay cost, etc
11. Adjustment on account of payment for reimbursement of certain expenses Erred in making transfer pricing adjustment by disallowing genuine operating expenses of the Appellant to the amount of INR 14,88,134 pertaining to payment for meeting expenses, travel cost, stay cost, etc and valuing above expenses as NIL by wrongly concluding that such expenses incurred represents expenditure for shareholders activity. III. Other grounds of appeal
12. Initiation of penalty proceedings under sec 271(1)(c) of the Act Erred in initiating penalty proceedings under section 271(1)(c) without considering the fact that transfer pricing adjustments has been made on account of difference of opinion pertaining to selection criteria adopted for identifying the comparable companies, interpretation of provisions of law, etc and not due to concealment of or furnishing of inaccurate particulars of income.
13. Erroneous levy of interest under section 234B of the Act 4 ITA No.46/PUN/2013 MSC Software Corporation India Pvt. Ltd.
Erred in levying interest under section 234B of the Act to the extent addition is made to the total income of the Appellant on account of transfer pricing adjustments related matters without considering the fact that shortfall in advance tax resulted due to the proposed additions to total income, which are unanticipated in nature.
3. Briefly, in the facts of the case, original return of income was filed on 15.10.2008 declaring total income of Rs.39,54,550/-. Thereafter, the assessee filed revised return of income declaring total income of Rs.42,18,320/- on 31.03.2010. The case of the assessee was taken up for scrutiny. Since the assessee was engaged in the business of software development, the Assessing Officer made reference under section 92CA(1) of the Act for determination of arm's length price of international transactions with associate enterprises. The assessee had applied TNNM method for benchmarking the international transactions of provision of software development services at Rs.14,37,01,094/-. The Transfer Pricing Officer (in short 'the TPO') agreed that the TNNM method was most appropriate method. The assessee had selected 12 companies as comparables for benchmarking the international transactions by adopting weighted average margin of earlier two years. The TPO directed the assessee to apply the data of contemporaneous period and revised PLI of the comparables was filed by the assessee. The arithmetic mean of PLI of comparables worked out at (-) 6.53% as against PLI of the assessee at 3.53%. The TPO noted that as against its turnover of Rs.14.37 crores, the assessee had applied upper turnover of Rs.100 crores but the majority of comparables selected by the assessee were highly loss making companies. The TPO was of the view that the assessee had applied subjective approach while selecting the comparables. On going through accept / reject matrix adopted by the assessee, the TPO detected certain defects in the approach followed by the assessee. The TPO also noted that in certain cases the assessee had selected companies which were actually not suitable as comparable and in some cases, the assessee had omitted to select certain cases which were more suitable after appropriate FAR analysis. In this regard, show 5 ITA No.46/PUN/2013 MSC Software Corporation India Pvt. Ltd.
cause notice was issued to the assessee. The first filter applied by the TPO was to exclude the companies with less than 75% earning from exports. Secondly, the companies with different accounting year were rejected. The third filter was the companies with income from software development services having 75% of operating revenue or segmental revenue were selected. The companies which were persistently loss making were also rejected and companies with less than 25%, related party transactions were selected. Certain companies with peculiar circumstances were also rejected. The TPO noted that the assessee had applied turnover filter of Rs.25 crores to Rs.100 crores, whereas the turnover of assessee in SW segment was Rs.178 crores. After considering the explanation of assessee, the TPO was of the view that the turnover range of Rs.1 to Rs.200 crores was acceptable in assessee's case. The PLI was to be determined with respect to operating cost and not the sales. The super profit making companies were to be rejected. However, the companies which were selected by the assessee in the TP report but were sought to be rejected being super profit companies, was not accepted by the TPO and the contentions of assessee were rejected. Thereafter, the TPO considered the companies selected by the assessee and the comparables selected by him and finally selected eight companies to be comparable and after allowing the working capital adjustment as provided by the assessee, the arithmetic mean of PLI was worked out at 31.92% and after working capital adjustment at 27.32%. The TPO also verified the working PLI submitted by the assessee and extraordinary expenses on account of rent paid for premature termination of leave and license agreement was excluded while working PLI. Similarly, miscellaneous income was found to be included in the operating income and Fringe Benefit Tax was held to be considered for the said working. The PLI of assessee was thus, re-worked and revised to 4.12% by applying the indicator of operating profit / operating cost. In view thereof, the TPO proposed an adjustment of Rs.3,21,60,400/-. The assessee sought risk 6 ITA No.46/PUN/2013 MSC Software Corporation India Pvt. Ltd.
adjustment which was not allowed to the assessee. Further, the TPO observed that expenditure of Rs.14,88,134/- was reimbursed to the Singapore company for business meetings. Since the assessee had not only borne the expenses on travel, etc. for its employees but also borne the expenses on organizing such meetings by the group, the TPO was of the view that the same cannot be considered at arm's length and sum of Rs.14,88,134/- was proposed as an adjustment. The Assessing Officer issued draft assessment order to the assessee in this regard, against which the assessee filed objections to the Dispute Resolution Panel (in short 'DRP'). The DRP in its directions under section 144C(5) of the Act vide order dated 27.08.2012 issued certain directions, as per which, revised working of adjustment had to be made under section 92CA(3) of the Act. Accordingly, the TPO excluded FCS Software Solutions Ltd. from the final set of comparables having functionally different and also follow the directions of DRP in reducing the intra services group cost of Rs.14,88,134/- from the operating cost. Since the TPO had treated arm's length price of group company at Nil, the revised PLI working of the assessee was thus, re-computed by the TPO and the PLI indicator i.e. OP/OC was determined at 5.25%. Further, following the directions of DRP, revised margins of final set of comparables was worked out which comprised of seven companies as comparable and the arithmetic mean of margins after working capital adjustment worked out to 23.90%. The TPO thus, proposed an adjustment over operating income at Rs.2,55,74,805/- on account of software development services and Rs.14,88,134/- on account of cost allocation. The revised total adjustment as per directions of DRP was Rs.2,70,62,939/- which was added to the income of the assessee.
4. The assessee is in appeal against the order of Assessing Officer passed under section 143(3) r.w.s. 144C of the Act.
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5. The grounds of appeal No.1 and 2 raised by the assessee being general, are dismissed.
6. The issue in ground of appeal No.3 raised by the assessee is the application of turnover filter of Rs.1 to Rs.200 crores as comparables selection criteria, as against the turnover filter up to Rs.100 crores applied by the assessee for identifying the comparable companies. The first part of the issue raised by way of ground of appeal No.3 is against the application of turnover filter of Rs.1 to Rs.200 crores and not Rs.100 crores as applied by the assessee. The learned Authorized Representative for the assessee pointed out that the first limb of ground of appeal No.3 is not pressed, hence, the same is dismissed as not pressed.
7. Now, coming to the second limb of ground of appeal No.3. The assessee is aggrieved by the order of Assessing Officer / TPO in considering the turnover range on cost basis instead of turnover basis and hence, the inclusion of Helios and Matheson Information Technology Ltd., which was identified as comparable even though its total turnover was Rs.213.37 crores. The grievance of assessee in considering the turnover range on cost basis merits to be allowed. Various Benches of the Tribunal including the Pune Bench of Tribunal in series of cases have held that the turnover basis is to be adopted range for the selection of companies. The total turnover of the assessee was Rs.14.37 crores, as against which we hold that the turnover filter of Rs.1 to Rs.200 crores merits to be applied. Since the turnover of Helios and Matheson Information Technology Ltd. was more than Rs.200 crores i.e. Rs.213.39 crores, then the same merits to be excluded from the final list of comparables. Accordingly, we hold so. The ground of appeal No.3 raised by the assessee is thus, partly allowed.
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8. The issue raised by way of ground of appeal No.4 is against selection of qualitative filters and applying certain filters on selective basis for rejecting / accepting certain companies as comparables. The learned Authorized Representative for the assessee pointed out that the grounds of appeal No.4 to 8 are against selection / rejection of companies while benchmarking the international transactions. The TPO in the final analysis had selected eight companies as comparable and allowed working capital adjustment and computed the arithmetic mean of comparables at 27.32%. Pursuant to the directions of the DRP, revised final list of comparables was as under:-
Sr. Name of the comparable OP/TC Working capital adjusted No. in the case of assessee 1 Bodhtree Consulting Ltd. 19.14 15.68 2 E-Infochips Ltd. 30.32 25.37 3 eZest Solutions Ltd. 28.58 26.78 4 Goldstone Technologies 27.03 19.88 5 Helios and Matheson Information Tech 36.05 30.59 6 Kals Information System 30.92 26.91 7 LGS Global Ltd. 26.26 22.06 Arithmetic Mean 28.33 23.90
9. The assessee points out that Goldstone Technologies was applied by the assessee and accepted by the TPO, hence, there is no dispute about the said concern. However, the assessee is aggrieved by inclusion of all the other concerns as comparable. Further, the assessee is also aggrieved by the order of TPO in not including the following concerns as comparable:-
Sr No. Name of the company
1 Akshay Software Technologies Ltd.
2 Indium Software (India) Ltd.
3 Maars Software international Ltd.
4 Quintegra Solutions Ltd.
5 S I P Technologies and Exports Ltd.
6 R S Software (India) Ltd.
10. First, we shall take up the objections of assessee and the submissions of the learned Departmental Representative for the Revenue in respect of 9 ITA No.46/PUN/2013 MSC Software Corporation India Pvt. Ltd.
companies which were finally selected by the Assessing Officer / TPO / DRP in the final set of comparables. The first concern is Bodhree Consulting Ltd. The learned Authorized Representative for the assessee pointed out that the said concern merits to excluded from the final list of comparables as the said concern was product company and was also engaged in ITES segment. Further, there was re-structuring during the year and the year under consideration was an exceptional year.
11. The learned Departmental Representative for the Revenue on the other hand, pointed out that the assessee was engaged in engineering and product development, which was more akin to ITES segment. Where the assessee was providing mixed set of services i.e. product and engineering services, then the same is comparable to Bodhtree Consulting Ltd. Reliance placed upon by the assessee on the ratio laid down by the Pune Bench of Tribunal in John Deere India Pvt. Ltd. Vs. ACIT in ITA No.2236/PN/2012, relating to assessment year 2008-09, vide order dated 18.11.2015, it was held to be distinguishable since Bodhtree Consulting Ltd. was not providing data cleaning services and hence the data referred to does not pertain to the assessment concerned.
12. On perusal of record, we find that the concern Bodhtree Consulting Ltd. was considered by the TPO to be functionally comparable despite the submissions of assessee that it was functionally different, wherein the said concern was also engaged in software products. Since no segmental details were available and the concern Bodhtree Consulting Ltd. being software product development company as well as providing services, can the same be held to be functionally comparable with the assessee which is providing software development services to its associate enterprises. While benchmarking any international transactions undertaken by the assessee, endeavour should be made to compare the results shown by the assessee with such concerns which 10 ITA No.46/PUN/2013 MSC Software Corporation India Pvt. Ltd.
are functionally comparable. Where the margins of concerns picked up are from different segments of operation i.e. software development product as well as ITES services and in the absence of any segmental details available, then such concern cannot be treated as comparable. Another aspect is the year of operation being an exception year, wherein Bodhtree Consulting Ltd. had undertaken major business re-structuring i.e. hiring of e-paper business to another concern. We find that the Pune Bench of Tribunal in John Deere India Pvt. Ltd. Vs. ACIT (supra) had held that the said concern to be not comparable to the assessee therein, which was engaged in the business of software development services. Following the same we hold that Bodhtree Consulting Ltd. is to be excluded from the final set of comparables.
13. Now, coming to the next concern E-Infochips Ltd. The plea of the assessee in this regard was that the said concern was a product company and also in ITES segment. Our attention was drawn to the financial statements for the year under consideration placed at pages 618, 619, 625 and 630 of the Paper Book and the learned Authorized Representative for the assessee pointed out that there was decrease in inventories in the case of E-Infochips Ltd. establishing the contention of assessee that it was product company. He stressed that where the comparable was not purely a software development company, the results of such concern could not be compared with the assessee which was purely engaged in the software development. The second issue of it being a super profit making company was not pressed during the course of hearing.
14. The learned Departmental Representative for the Revenue on the other hand, pointed out that the concern was engaged in embedded software development services. He further pointed out that the quantum of hardware sale had to be seen. Since the assessee and also the Assessing Officer / TPO had selected the companies with export filter of 75% turnover, then the concern E- 11 ITA No.46/PUN/2013
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Infochips Ltd. is to be included in the final set of comparables. He referred to the decision of Hon'ble High Court of Gujarat in the case of Allscripts (India) (P.) Ltd. (2016) 72 taxmann.com 305 (Guj) had reversed the decision of Tribunal to exclude E-Infochips Bangalore Ltd. He stressed that where the assessee was also engaged in sale of software products and ITES, then the assessee was functionally comparable to E-Infochips Ltd.
15. We have heard the rival contentions. The assessee while carrying out its transfer pricing analysis had applied certain filters to select the concerns by applying the filter of accept / reject matrix, the concerns which they do not have significant (less than 25%) foreign exchange earning were held to be reason for rejection of companies as comparable. The perusal of financial reporting of the concern E-Infochips Ltd. at page 625 of the Paper Book reflects that the income from software services at Rs.21.03 crores with consulting services at Rs.2.16 crores and hardware sales were at Rs.82.61 lakhs. The consultancy services were linked to the software services provided by the assessee and the hardware sales undertaken by the said concern were less than 4% of the total turnover. Where the assessee had itself applied the turnover filter of 75% of the sales for software development services, then the said concern qualifies the filter as it was predominantly providing software development services. The next objection of the assessee that E-Infochips Ltd. was engaged in sale of software products and ITES thus has no reasoning once turnover of products is less than 4% of total turnover. Further, the Hon'ble High Court of Gujarat has set aside the issue of exclusion of E-Infochips Bangalore Ltd. on the ground that it was not clear as to whether the said concern was engaged in any services other than software development services. However in the present case, financial details are available and applying the filters adopted by assessee, we hold that E-Infochips Bangalore Ltd. is to be included in final set of comparables. 12 ITA No.46/PUN/2013
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16. The next concern against inclusion of which the assessee is aggrieved is E-zest Solutions Ltd. which was engaged in software services as well as sale of software products. The assessee pleaded that no separate revenue breakup was available for provision of services and sale of software and hence, the said concern being engaged in diversified business and also being engaged in ITES such as products engineering services, consulting services, enterprises solutions, BPO / KPO services, etc., the same is to be excluded. Reliance was placed on the decision of Pune Bench of Tribunal in John Deere India Pvt. Ltd. Vs. ACIT (supra).
17. On the other hand, the learned Departmental Representative for the Revenue pointed out that where the assessee is also providing mixed bag of services, so it cannot be pleaded that it is not comparable being providing mixed services.
18. On perusal of record and the order of Tribunal in John Deere India Pvt. Ltd. Vs. ACIT (supra), we find that the concern E-zest Solutions Ltd. is a product company and is engaged in both the provision of software services and sale of software services. On the other hand assessee is engaged in Software development services where the segmental details are not available, accordingly, E-zest Solutions Ltd. is functionally not comparable. Accordingly, we hold that the said concern is to be excluded from the final set of comparables.
19. The next concern is KALS Information Systems Ltd., wherein the plea of assessee is that the same is product company as in the case of E-zest Solutions Ltd. and the same is to be excluded from the final set of comparables. 13 ITA No.46/PUN/2013
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20. The learned Departmental Representative for the Revenue also stated that the same arguments as in the case of E-zest Solutions Ltd. are raised against exclusion of KALS Information Systems Ltd.
21. We find that the concern KALS Information Systems Ltd. is functionally not comparable to the assessee as it is engaged in software services as well as software products and has reported inventory and work in progress in annual report. Reference is made to pages 719 and 720 of the Paper Book. Even the website of KALS Information Systems Ltd. states that the company has developed two products i.e. Virtual Insure and La-Vision. Since the revenue breakup is not available, then the margins of said concern cannot be applied to benchmark the international transactions undertaken by the assessee of provision of software development services to its associate enterprises. Similar proposition has been laid down by the Pune Bench of Tribunal in John Deere India Pvt. Ltd. Vs. ACIT (supra). Further the Hon'ble Bombay High Court in the case of CIT Vs. PTC Software (I) Pvt. Ltd. in Income Tax Appeal No.732 of 2014 judgement dated 26-09-2016 has held that Kals Information Systems Ltd. was engaged in Software products not comparable to concern providing software services. Applying the same, we hold that the said concern is to be excluded from the final list of comparables.
22. The learned Authorized Representative for the assessee while putting forward its submissions pointed out that the issue of exclusion of Lanco Global Systems Ltd. from the final list of comparables is not pressed and hence, the same may be included in the final list of comparables. Accordingly, we hold so. Thus, the margins of following concerns are to be applied to benchmark the international transactions of assessee:-
a) Goldstone Technologies
b) E-Infochips Ltd.
c) Lanco Global Systems Ltd.
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23. Now, coming to the second argument of the assessee i.e. exclusion of concerns which were selected by the assessee in its TP analysis. The first concern is Akshay Software Technologies Ltd., which as per the assessee is functionally comparable to the assessee. However, the said concern is engaged in on-site development and hence, the margins of said concern are not comparable to the assessee which is off-site developer. The Pune Bench of Tribunal in TIBCO Software (India) Pvt. Ltd. Vs. DCIT in ITA No.2536/PN/2012 relating to assessment year 2008-09, order dated 11.02.2015 had held that both Akshay Software Technologies Ltd. and Maars Software International Ltd. were to be rejected being on-site developers while comparing the margins with off-site developers. The said proposition was again applied by the Pune Bench of Tribunal in BMC Software India Pvt. Ltd. Vs. DCIT in ITA No.1425/PN/2010, relating to assessment year 2006-07, order dated 16.03.2016. Applying the said principle, we hold that Akshay Software Technologies Ltd. is to be excluded from the final list of comparables as done by the TPO. Applying the said principle, we further hold that the concern at serial No.3 i.e. Maars Software International Ltd. being on-site developer is also to be excluded from the final set of comparables. Similarly, the concern at serial No.6 i.e. R S Software (India) Ltd. is on-site developer and the same is to be excluded from the final list of comparables.
24. Now, coming to the concern at serial No.2 i.e. Indium Software (India) Ltd. The said concern was picked up by the assessee as comparable. However, the same was rejected by the TPO and excluded from the final list of comparables on two grounds; first the company was loss making company and secondly, the export turnover of the said concern was less than 75% of the operating revenue. The learned Authorized Representative for the assessee pointed out that the said 15 ITA No.46/PUN/2013 MSC Software Corporation India Pvt. Ltd.
concern was not persistent loss making and following the decisions of various Benches of Tribunal, the same should be included in the final set of comparables.
25. The learned Departmental Representative for the Revenue on the other hand, strongly objected to its inclusion as the filter applied by the assessee that the concern with export turnover less than 75% should be excluded, has been applied by the TPO also. He pointed out that the said concern was excluded on two accounts i.e. it was loss making company and it failed in export turnover filter. The learned Departmental Representative for the Revenue placed reliance on the ratio laid down by the Bangalore Bench of Tribunal in Trilogy E-Business Software India (P.) Ltd. Vs. DCIT (2013) 29 taxmann.com 310 (Bangalore - Trib.), wherein it was held that the said concern Indium Software (India) Ltd. to be not comparable to the concern engaged in software development services.
26. On perusal of record and after considering the submissions made by both the learned Authorized Representatives, we hold that since the concern Indium Software (India) Ltd. does not fulfill the export filter which has been applied by the assessee itself, that the concern whose software development services were greater than 75% are to be included as comparable, then Indium Software (India) Ltd. is to be excluded from the final list of comparables. The said filter is to be applied first before applying the next filter as whether it is persistent loss making concern or not. Reliance placed upon by the learned Authorized Representative for the assessee on series of decisions of different Benches of Tribunal is on the issue of loss making concern and persistent loss making concern. We do not make any reference to the said decisions as we are deciding the issue on preliminary ground of not fulfilling the export turnover filter. Accordingly, we uphold the order of TPO.
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27. The next concern is at serial No.4 Quintegra Solutions Ltd., which was rejected on the ground that the said concern had tangibles.
28. We find that the issue of exclusion of the said concern, which having intangibles has already been decided by the Pune Bench of Tribunal in Barclays Technology Centre India (P.) Ltd. Vs. ACIT, relating to assessment year 2008-09 reported in (2015) 56 taxmann.com 386 (Pune - Trib.) and the same is to be excluded from the final list of comparables.
29. Now, coming to the last concern S I P Technologies and Exports Ltd., which the assessee wants to be included in the final set of comparables. The said concern was rejected on the ground that it was loss making and had shown loss of (-) 33.20%; the profits of the company were diminishing from year to year.
30. The contention of the assessee was that in case the said concern is to be excluded, then super profit companies also should be excluded.
31. We find no merit in the plea of the assessee since the assessee is captive service provider and is being reimbursed on cost plus basis, hence, the said loss making concern declaring operating loss of (-) 33.20% merits to be excluded. Accordingly, we hold that it is to be excluded from the final list of comparables. The Assessing Officer is directed to compute the margins of comparables and make suitable adjustments, if any, to the international transactions undertaken by the assessee.
32. The ground of appeal No.9 raised by the assessee is against non- allowance of risk adjustment.
33. The assessee is captive service provider to its Associated Enterprises and claims to be risk free and hence desires risk adjustment in the margins of its 17 ITA No.46/PUN/2013 MSC Software Corporation India Pvt. Ltd.
finally selected comparables. We have already decided similar issue in Honeywell Turbo Technologies (India) Pvt. Ltd. Vs. DCIT in ITA No.2584/PUN/2012 order dated 10-02-2017 wherein it was held as under :
"32. Under the TP provisions, where in the facts of the present case, the assessee is risk mitigating entity, wherein all the risks are taken care of by the associate enterprises, then adjustment on account of difference in the risk profile of comparable companies merits to be allowed while benchmarking the international transaction of assessee. The Bangalore Bench of Tribunal in the case of Philips Software Centre Pvt. Ltd. Vs. ACIT reported in 26 SOT 226 has upheld that the adjustment of risk to be computed as difference between the PLR and the risk free rate of turn. The assessee prepared a summary computation considering the aforesaid rule, which reads as under:-
33. Further, the Delhi Bench of Tribunal in the case of Sony India Pv t. Ltd.
reported in 114 ITD 448 has allowed 20% risk adjustment considering the fact that it may not be possible to quantify risk adjustments. The assessee applying the said ratio in the case of Sony India Pvt. Ltd. (supra) has worked out the risk adjustment on the operating margins of comparables to be allowed when computed @ 20%."
34. Following the said ratio, we direct the Assessing Officer to allow the risk adjustment and re-compute the margins of comparables by applying the ratio laid down by Delhi Bench of Tribunal in the case of Sony India Pvt. Ltd. (supra) and compute the TP adjustment, if any, in the hands of assessee.
35. The ground of appeal No.10 raised by the assessee is against applicability of +/- 5% and the benefit can be allowed if the adjustment is within such range and hence, no adjustment is to be made in case it is not more than 5% from the arm's length price. We hold so.
36. Another ground of appeal, i.e. Ground of appeal No.11 which is being raised by the assessee is in relation to the international transactions of payment made for meeting expenses, travel cost, stay cost, etc.
37. The learned Authorized Representative for the assessee pointed out that the said expenditure was part of operating cost and was recovered @ 7%. The factual aspects of this issue are not clear and the Assessing Officer/Transfer 18 ITA No.46/PUN/2013 MSC Software Corporation India Pvt. Ltd.
Pricing Officer is directed to redecide the same after allowing reasonable opportunity of hearing to the assessee. We hold so.
38. The ground of appeal No.12 against initiating penalty proceedings is premature and hence, the same is rejected.
39. The ground of appeal No.13 against levy of interest under section 234B of the Act is consequential and hence, the same is dismissed.
40. In the result, the appeal of assessee is partly allowed.
Order pronounced on this 22nd day of March, 2017.
Sd/- Sd/-
(ANIL CHATURVEDI) (SUSHMA CHOWLA)
लेखा सद य / ACCOUNTANT MEMBER या यक सद य / JUDICIAL MEMBER
पुणे / Pune; दनांक Dated : 22nd March, 2017
GCVSR
आदे श क) * त+ल,प अ-े,षत/Copy of the Order is forwarded to :
1. The Appellant;
2. The Respondent;
3. The DIT (IT), Pune;
4. The DRP, Pune;
5. The DR 'A', ITAT, Pune;
ु ार/ BY ORDER, आदे शानस स या!पत "त //True Copy// सहायक पंजीकार / Assistant Registrar, आयकर अपील य अ&धकरण, पुणे / ITAT, Pune