Income Tax Appellate Tribunal - Delhi
Motorola Solutions India Pvt. Ltd., ... vs Dcit, Gurgaon on 27 April, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
Delhi Bench"I-2", New Delhi
BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER
AND
SMT. BEENA A PILLAI, JUDICIAL MEMBER
I.T.A. No. 1652/Del/2014
A.Y.: 2002-03
Motorola Solutions India Pvt. Ltd., Vs. Deputy Commissioner of Income
(Earlier known as Motorola India Tax, Circle-2, Gurgaon
Pvt. Ltd.) 415/2, Motorola
Excellence Centre, Sector-14,
Gurgaon
PAN: AAACM9343D
[Appellant] [Respondent]
I.T.A. No. 1663/Del/2014
A.Y. : 2002-03
Deputy Commissioner of Income Vs. Motorola Solutions India Pvt.
Tax, Circle-2, Gurgaon Ltd., (Earlier known as Motorola
India Pvt. Ltd.) 415/2, Motorola
Excellence Centre, Sector-14,
Gurgaon
PAN: AAACM9343D
[Appellant] [Respondent]
Department by: Sh. Manoneet Dalal, Advocate
Respondent by: Sh. Sanjay Kumar Yadav, Sr. DR
Date of Hearing: 16 04 2018
Date of Pronouncement: 27 04 2018
ORDER
PER P.M. JAGTAP, A.M:
These two appeals, one filed by the assessee being ITA No. 1652/Del/2014 and the other filed by the Revenue being ITA No. ITA No. 1652/Del/2014 2 1663/Del/2014, are cross appeals which are directed against the order of learned CIT(A)-2, Faridabad dated 10.1.2014.
2. In its appeal, the assessee has raised ground no. 1 to 7 relating to the corporate tax issues while ground no. 8 to 11 involve the issue relating to the transfer pricing adjustment.
3. Ground no. 1 to 7 raised by the assessee involving corporate tax issues read as under:-
1. That on the facts and in the circumstances of the case, the Ld. CIT (A) grossly erred in upholding the arbitrary additions made by the Ld. AO to the returned income of the appellant.
2. That the Ld. CIT (A) grossly erred on facts and in law in upholding the ad-hoc disallowance of Rs. 45,88,72,590 being 35% of the operating expenses on the ground that the appellant did not produce the books of accounts without appreciating that books of account were maintained at a different city and still negligible time was provided to it thereby violating the principles of natural justice.
3. That the Ld. CIT(A) grossly erred on the facts and in circumstances of the case and in law in rejecting the additional evidence submitted by the appellant by solely relying on the first remand report of the Ld. AO and by disregarding the subsequent remand reports of the Ld. AO wherein the additional evidence (extracts of books of accounts and supporting documents) of the appellant were examined, accepted and approved by the Ld. AO.
4. That the Ld. CIT (A) grossly erred on the facts and circumstances of the case and in law in upholding the disallowance of bad and doubtful debts written off amounting to Rs. 9,47,27,677 which was claimed against the provision created in the previous years(s). The Ld. CIT(A) erred in upholding the Ld. AO's contention that such a disallowance can be made on account of appellant's inability to file evidence without appreciating that a write-off of debt can be made unilaterally and no evidence is required to be furnished.
5. That the Ld. CIT (A) erred on facts and in law in upholding the actions of the Ld. AO in disallowing depreciation of Rs. 26,41,893 on account of alleged non-production of evidence by the appellant without appreciating that majority of the bills (constituting 80% of the value of bills called for) were produced by the appellant during assessment proceedings.
5.1 That without prejudice to the above grounds, the Ld. CIT (A) erred on facts and in law in upholding the disallowance of depreciation @ 60% made by the Ld. AO without appreciating that during the captioned year, appellant had claimed depreciation merely @ 30% on these assets.
6. That the Ld. CIT (A) grossly erred on the facts and in law in upholding the actions of the Ld. AO in disallowing the deduction of actual warranty cost of Rs. 4,53,34,551 ITA No. 1652/Del/2014 3 for which the provision was created in the earlier year(s) and duly disallowed for tax purpose in such year(s).
6.1 That without prejudice to the above, the Ld. CIT(A) and Ld. AO erred on facts and in law in making/upholding the afore-mentioned disallowance on the ground that the appellant had failed to file evidence in this respect as no such evidence was requisitioned by the Ld. AO/CIT(A) at any
7. That the ld. CIT(A) grossly erred on the facts and circumstances of the case and in law in upholding the disallowance of bad advances written off amounting to Rs.
1,19,10,539/- for which the provision was created in the earlier year(s) and also duly disallowed in such respective year(s)
4. The assessee in the present case is a wholly owned subsidiary company of Motorola Inc USA. It has been set up as a 100% captive design centre for Motorola Inc USA and provides designing services to its holding company. The return of income for the year under consideration was filed by it on 31.10.2002 declaring its total income at nil. The said return was selected for scrutiny and a notice under section 143(2) of the Act was initially issued by the AO on 10.1.2003. Thereafter the assessment proceedings were kept pending and notices under section 143(2) and 143(1) of the Act were issued only on 6.12.2004 after the transfer of the assessee's case from Bangalore to Delhi. During the course of assessment proceedings, the assessee company was called upon by the AO on 3.3.2005 to produce its books of accounts on 10.3.2005. The assessee company did not produce books of accounts on 10.3.2005 and filed written submission stating therein as under:-
"We refer to our hearing conducted on March 03, 2005 wherein honour had instructed the assessee to produce its books of account. In this connection and as submitted earlier, the books of account of the assessee company for the year under consideration were maintained at Bangalore and are still lying at Bangalore. Further, it is respectfully submitted that given the voluminous records, we request your honour to kindly specify the account head and the relevant period for which your honour would like to peruse, since it would not be practically possible to get the entire set of records for verification to Gurgaon."
On 16.3.2005, the assessee company was again required by the AO to produce its books of accounts on 18.3.2005 and since the assessee company ITA No. 1652/Del/2014 4 failed to comply with said requirement, the AO afforded one more opportunity to the assessee as the final opportunity to produce the books of account alongwith vouchers on 23.2.2005. On 22.3.2005, the assessee filed written submission stating therein as under:-
"At the outset, it is humbly submitted that your honour had indicated the heads of account for verification only on March 16, 2005 and thus the assessee wish to place to record that the time given is insufficient to produce the relevant heads of account for verification.
Be that as it may, it is most respectfully-submitted that the has left no stone unturned to ensure compliance with your honour's direction, however, on account of practical difficulty which are being explained below the assessee is not be able to procure the same for onwards production before your Honour. Like other multinational companies owing to the huge turnover the assessee has sought the services of Crown Worldwide Movers Private Limited at Bangalore to provide warehousing facilities and to maintain the records of the company. Immediately upon the communication of your direction, the assessee has made a request to the warehousing service provider for making the said records available However, we are constrained to say that the said records have not been yet made available to us and we are taking the necessary follow- up steps for ensuring compliance with your Honour's direction. We humbly prays that some more time may be granted to enable us to comply with your directions and also pray that no adverse interference may be drawn on this account as the inability to produce accounts is clearly on account of reasons beyond the control of the assessee."
The above submission of the assessee was not found acceptable by the AO. According to him, the assessee company was not taking the issue relating to production of books of account seriously and there was a complete failure on the part of the assessee to produce the books of account for verification despite reasonable opportunity given in this regard. He, therefore, proceeded to complete the assessment under section 143(3) vide an order dated 22.3.2005 on the basis of the material available on the record wherein he made inter alia the following additions to the total income of the assessee:-
Warranty Expenses:- Assessee has claimed warranty expenses amounting to Rs. 4,53,34,551/-. Assessee company vide letter dated 22.2.2005 & 16.3.2005 has explained that warranty costs have been charged against the provision for warranty. Since assessee has failed to produce books of accounts & vouchers in support of his claim meaning thereby, assessee has failed to establish beyond doubt that warranty ITA No. 1652/Del/2014 5 cost has actually been charged against the provisions for warranty, therefore, 'Warranty Expenses', are allowed.
Bad Debts Written off:- Assessee has claimed bad debts written off against the provision and also replied the same vide letter dated 22.2.2005 and 16.3.2005. It is to state here that the debts outstanding have to be actually written off as irrecoverable during the year under consideration in the books of accounts. This claim is not confirmed in the absence of books of accounts and vouchers/bills. Therefore, alleged claim of the assessee is not accepted, and an amount of Rs. 9,47,27,677/- is added back to the income of the assessee.
Bad Advances written off:- During the year under consideration, assessee has claimed an amount of Rs. 1,19,10,539/- been written off against the provisions for doubtful advances. Assessee vide letter dated 16.3.2005 has claimed that these advances were made in the ordinary course of business and list of sample parties was given. Assessee could not produce books of accounts in order to support its claim. The claim of the assessee is not confirmed in the absence of books of accounts hence, claim of bad advances written off against of provisions for doubtful advances is rejected and added back to the income of the assessee company. Fixed Assets:- Assessee was asked to produce and furnish a copy of fixed assets. Mr. Sandeep Puri failed to produce 7 bills of additions to fixed assets and kept on stating as under. 'The balance 7 bills are under compilation and would be furnished shortly'. He in fact does not possess bills of these additions and tacitly accepted that he will not be able to submit these bills. In view of these facts and circumstances depreciation on following assets is not allowed:-
Name of Assets Value of Assets and rate Depreciation not
of depreciation allowable
A Plant & Machinery 25,68,426 @ 25% 6,42,107/-
B Computers 33,32,977 @ 60% 19,99,786/-
Total not allowable 26,41,893/-
During the year under consideration assessee company has claimed Rs. 1,46,77,62,882/- under the head operating expenses.
(i) Assessee has shown increase of 9.26% in the salaries, wages and bonus whereas there is decrease of 37.57% in the expenses under the head contribution to provident and other funds. It casts serious doubts on the claim of the assessee as there is increase in salaries and wages etc., but proportionately there should be increase in contribution to provident fund @ 12.50% and ESI @ 4.50% as per PF and ESI Acts.
(ii) The AR of the assessee vide order sheet entry dated 10.3.2005 was asked to explain the admissibility and justification of expenses claimed in the period relevant to A.Y. 2002-03.
On 22.3.2005 assessee company has replied as under:-
ITA No. 1652/Del/2014 6"As required by your honour, please find enclosed as annexure-C a comparative analysis of the various heads of income and expenditure with the corresponding figures as existing in the immediately preceding financial year i.e. FY 2000-01. A perusal of the chart would show that whereas the income has increased by 87% over the preceding year i.e. F.Y. 2000-01, the material cost have increased by 93% and operating expenses have increased only by 7%. Further, there has been a steep fall in the finance expense also which have reduced by 42%. We are also enclosing as annexure-DI an analysis of increase / decrease in various expense heads with the income shown for FY 20001-02 as compared to FY 2000-01.
It is to reiterate here that assessee company has failed to produce books of accounts and vouchers/bills. In view of this, assessee has failed to establish:-
(a) That expenditure incurred is not an expenditure of the nature described in section 30 to 36.
(b) That expenditure incurred is not a capital or personal expenditure of the assessee and that expenditure incurred is revenue in nature.
(c) That expenditure incurred is expended wholly and exclusively for the purpose of the business.
Therefore, all the prerequisites of allowing a claim under section 37(1) of the Act are not satisfied. Accordingly 35% expenses claimed under the head 'Operating Expenses' i.e. Rs. 45,88,72,550/- excluding already added back i.e. provisions for (i) bad and doubtful debts Rs. 78,708,470/- (ii) Loss on sale of fixed assets Rs. 28,146,992/- and (iii) Provision for doubtful advances Rs. 4,944,337/- are added back to the income of the assessee company."
5. Against the order passed by the AO under section 143(3), an appeal was preferred by the assessee before the learned CIT(A) challenging inter alia the various additions made by the AO to its total income as above. During the course of appellate proceedings before the learned CIT(A), additional evidence in support of its case on the issues relating to the said additions was filed by the assessee with a request to admit the same on the ground that proper and sufficient opportunity had not been granted by the AO during the course of assessment proceedings to file the same. The additional evidence filed by the assessee was forwarded by the learned CIT(A) to the AO for the later's ITA No. 1652/Del/2014 7 comments. In his remand report dated 20.9.2007 submitted to the learned CIT(A), the AO strongly objected to the admission of the additional evidence filed by the assessee on the ground that sufficient opportunity was already given to the assessee during the course of assessment proceedings to file the same. The learned CIT(A) accepted this stand of the AO and declined to admit the additional evidence filed by the assessee. He accordingly proceeded to decide the issues relating to various additions made by the AO without taking into consideration the additional evidence filed by the assessee and confirmed the said additions made by the AO substantially on merit. Aggrieved by the order of the learned CIT(A) confirming the said additions, the assessee has raised ground no. 1 to 6 in this appeal filed before the Tribunal.
6. The learned counsel for the assessee has raised a preliminary issue challenging the action of the learned CIT(A) in refusing to admit the additional evidence filed by the assessee before him. He submitted that the assessee company was requested by the AO to produce the books of account on 10.3.2005 vide an order sheet entry dated 3.3.2005 and for the failure of the assessee to produce the books of account, he proceeded to complete the assessment under section 143(3) vide an order dated 23.2.2005 making various additions to the total income of the assessee mainly for the want of books of account. He contended that a period of only 19 days thus was given by the AO to the assessee to produce the books of account which cannot be considered as a sufficient opportunity keeping in view the difficulties specifically expressed by the assessee in the written submissions filed before the AO. He contended that this position was specifically brought to the notice of the learned CIT(A) by the assessee while seeking the admission of additional evidence, but he failed to appreciate the same. He submitted that besides Remand report dated 26.9.2007 submitted by the AO to the learned CIT(A), there were two more ITA No. 1652/Del/2014 8 remand reports dated March 17, 2009 and March 09, 2011 that were submitted by the AO as per the direction of the learned CIT(A). He invited our attention to the copies of the said reports placed at page 129 and 124-125 of the paper book and submitted that the relevant books of account and other details furnished by the assessee were found to be in order by the AO. He contended that the learned CIT(A) however completely overlooked these two remand reports submitted by the AO and proceeded to refuse to admit the additional evidence by merely relying on the first remand report submitted by the AO. He contended that the action of the learned CIT(A) in denying to admit the additional evidence and deciding the relevant issues substantially against the assessee without considering the said additional evidence as well as the remand reports subsequently submitted by the AO thus is not justified.
7. The learned DR, on the other hand, submitted that the case of the assessee for the year under consideration was selected for scrutiny on 10.1.2003 and the assessee company thus was aware that its books of accounts would be required to be produced for the verification of the AO. He submitted that even the second notice under section 143(2) alongwith the notice under section 142(1) was issued by the AO on 6.12.2004 and the assessment having been completed on 22.3.2005, the assessee had enough opportunity to produce its books of account for the verification of the AO. He contended that the assessee however failed to produce its books of accounts either during the course of assessment proceedings and even during the remand proceedings for the verification of the AO. He contended that there was thus a clear failure on the part of the assessee to produce its books of account for the verification of the AO despite sufficient opportunity afforded in this regard and the learned CIT(A) therefore, was fully justified in rejecting to admit the additional evidence filed by the assessee before him.
ITA No. 1652/Del/2014 98. We have considered the rival submissions and also perused the relevant material available on record. It is observed that even though the case of the assessee for the year under consideration was selected for scrutiny initially by issuing a notice under section 143(2) on 10.1.2003, the proceedings were kept pending till the second notice under section 143(2) alongwith a notice under section 142(1) was issued by the AO on 6.12.2004 after the case of the assessee was transferred from Bangalore to Delhi. Moreover, the assessee company was asked to produce its books of account specifically by the AO vide order sheet entry dated 3.3.2005 and keeping in view that the assessment under section 143(3) was completed by him on 22.3.2005, we find merit in the contention of the learned counsel for the assessee that proper and sufficient opportunity cannot be said to have been given to the assessee by the AO to produce its books of account. The assessee company in fact had expressed its difficulties in producing the books of account vide the written submissions filed before the AO and keeping in view the said written submission as well as all the relevant facts of the case, we are of the view that the learned CIT(A) ought to have admitted the additional evidence filed by the assessee during the course of appellate proceedings before him especially when the same was relevant for deciding the issues involved in the assessee's case and there was no proper opportunity afforded by the AO to the assessee to produce the same during the course of assessment proceedings. It is relevant to note here that even after receiving the first remand report dated 26.9.2007 from the AO objecting to the admission of the additional evidence, the learned CIT(A) again sought remand reports from the AO in March, 2009 as well as in March, 2011 with specific comments on the relevant issues raised in the appeal of the assessee after due verification from the books of account and in the remand reports submitted to the learned CIT(A), the AO specifically reported that the relevant details and books of accounts produced by the ITA No. 1652/Del/2014 10 assessee were found to be in order. It clearly shows that the learned CIT(A) himself was convinced with the relevance of the additional evidence filed by the assessee for deciding the relevant issues and accordingly had sought comments of the AO after due verification of the same. However, while finally disposing of the appeal of the assessee vide his impugned order passed in January, 2014, he declined to admit additional evidence filed by the assessee completely ignoring the second and third remand reports submitted by the AO apparently because of laps of time in between during the course of which there was a change in the incumbent CIT(A). We, therefore, set aside the impugned order of the learned CIT(A) refusing to admit the additional evidence filed by the assessee and restore the matter to the file of the AO to decide the relevant issues afresh after giving proper and sufficient opportunity to the assessee to produce the relevant books of account and other record. We also direct the assessee to produce the books of account and other record as may be required by the AO for the purpose of completing the assessment afresh on the relevant issues and extend full cooperation to him. The relevant grounds of the assessee's appeal are accordingly treated as allowed for statistical purposes.
9. Ground no. 8 to 11 of the assessee's appeal and ground no. 1 to 3 of the Revenue's appeal involve a common issue relating to the addition of Rs. 2,66,00,617/- made by the AO on account of transfer pricing adjustment which is sustained by the learned CIT(A) to the extent of Rs. 1,97,98,335/-.
10. The business of the assessee company was organised under six different divisions and one of such divisions namely Semi Conductor Product Centre, International Transactions of providing Chip design / software development services were entered into with associated enterprises aggregating to Rs. 22,99,51,995/-. A reference was made by the AO to the TPO ITA No. 1652/Del/2014 11 in order to determine the arms length price inter alia in respect of these international transactions. The assessee company had maintained segmental financial details and in the transfer pricing study report, TNMM was adopted as the most appropriate method to determine the arms length price of the international transactions entered into with its AE of providing software development services. The assessee company was taken as tested party and operating profit / total cost (OP / TC) was taken as the profit level indicator (PLI). Five entities were taken as comparables and since their average OP / TC as worked out at 11.06% was within the permissible variance range of 5% as against the OP / TC shown by the assessee, at 5.81% the consideration received for software development services from AE was claimed to be as at arm's length.
11. The five entities taken as comparables in the TP study report submitted by the assessee with their margins were as under:-
Name of the company Profit margin on costs (weighed
average for the f. Yrs 2000 and 2001)
in % terms
1. Kushagra Software Ltd. -.47
2. Saroh Infotech Ltd. 4.95
3. Zigma Software Ltd. 14.69
4. Visu Cybertech Ltd. 16.98
5. VJIL Consulting Ltd. 19.13
Arithmetic Mean 11.06
12. The TPO for the reasons given in his order rejected the first three comparables selected by the assessee. He accordingly selected a set of two comparables arrived at by applying the strict norms of comparability on the set of comparables furnished by the assessee in the TP study report with their average OP / TC at 18.05%. He also selected a second set of 60 companies that ITA No. 1652/Del/2014 12 were a degree functionally closure to the assessee in quantitative terms with average OP / TC at 19.17%. He further selected a third set of four companies which were much closure to the assessee in qualitative terms with average OP / TC at 34.21%. According to the TPO, it was quite fair to expect that the assessee company should atleast earn a mark up of 18.05% on the total cost being the least of three margins worked out by him in case of three different set of comparables. He accordingly adopted the OP / TC of 18.05% as benchmark for determining the arm's length price of the international transactions of providing software development services entered into by the assessee company as against the OP / TC of 5.81% shown by the assessee and since the remuneration so worked out was Rs. 25,65,52,612/- as against Rs. 22,99,51,995/-, he recommended a transfer pricing adjustment at Rs. 2,66,0,617/-. Accordingly, in the assessment made under section 143(3), an addition of Rs. 2,66,00,617/- was made by the AO to the total of assessee on account of transfer pricing adjustment.
13. The addition of Rs. 2,66,00,617/- made by the AO on account of TP adjustment was challenged by the assessee in the appeal filed before the learned CIT(A). Before the learned CIT(A), two major contentions were raised on behalf of the assessee. Firstly, it was contended that the two entities namely Zigama Software Limited and Saroh Infotech Limited selected as comparables having functional similarity with the assessee were wrongly rejected by the TPO. After having considered the functional profile of the said two entities vis a vis., the assessee company, the learned CIT(A) however, found that both these entities were functionally different from the assessee company. He accordingly upheld the action of the TPO in excluding the same from the final set of comparables. The second contention raised on behalf of the assessee company before the learned CIT(A) was that the average profit ITA No. 1652/Del/2014 13 margin of two entities finally selected as comparables was worked out by the TPO at 18.05% on the basis of financial data of earlier two financial years i.e. 1999-2000 and 2000-01. By relying on the various judicial pronouncements, it was contended on behalf of the assessee that the data used for comparison purposes should be relating to the same financial year in which the international transaction had been entered into. It was also contended on behalf of the assessee that if the financial data of the said two entities for the financial year i.e. 2001-02 was taken into consideration, the average operating profile of the said two entities would come 1.27% and the assessee's operating profile at 5.81% being more than the same, the relevant international transactions were entered into with its AE at arm's length. Although learned CIT(A) did not dispute the average profit margin of two entities finally taken as comparables by the TPO at 1.27% as worked out by the assessee on the basis of financial data for the relevant financial year, he held that a set of two comparables could not properly determine the arm's length price. Relying on the various judicial pronouncements, he held that arm's length price should be computed by using a broader set of comparables. Accordingly, he adopted the set of 60 comparables selected by the TPO in supplementary search and required the assessee to furnish the FAR analysis to show as to whether the said entities could be considered as comparables or not. Accordingly, a detailed analysis was furnished by the assessee on consideration of which the learned CIT(A) found that out of total 60 entities, 44 entities were comparables. Accordingly, he worked out the average profile margin of the said 44 comparables at 14.92% and by applying the same to the total costs of the assessee, he determined the arm's length price of the services rendered by the assessee to its AE representing international transactions at Rs. 24,97,50,330/- as against the price charged by the assessee at Rs. 22,99,51,995/-. Accordingly, the addition of Rs. 2,66,00,617/- made by the AO ITA No. 1652/Del/2014 14 / TPO on account of transfer pricing adjustment was restricted by the learned CIT(A) to Rs. 1,97,98,335/-. Aggrieved by the same, the assessee has raised the following grounds in this appeal on the issue of transfer pricing adjustment:-
"8. That on the facts and circumstances of the case and in law, the ld. Transfer pricing Officer ("TPO") / AO and ld. CIT(A) have erred in re-determining the Arm's Length Price ("ALP") of the international transactions of the Appellant. Thus, the order of ld. TPO / AO determining the arm's length price at Rs. 2,66,00,617 and ld. CIT(A) re-determining the arm's length price at Rs. 1,97,98,335/- are bad in law.
9. That on the fact and circumstances of the case and in law, ld. CIT(A) has erred in not appreciating the fact that the set of two comparables constitute a valid set to determine the ALP of international transactions of the Appellant.
10. That on the facts and circumstances of the case and in law, ld. CIT(A) is not justified in conducting an inappropriate search and selecting comparables companies which are functionally not comparable to the Appellant in terms of their functions, assets and risk employed."
14. Ground no. 8 raised in this appeal is general in nature and does not require any specific adjudication.
15. As regards the issue involved in ground no. 9, the learned counsel for the assessee has contended only two companies were selected by the TPO as final comparables for arriving at arm's length price and the learned CIT(A) is not justified in rejecting the said comparables adopted by the TPO by holding that a set of only two comparables was not appropriate to determine the arm's length price. By relying on the decision the Delhi Bench of this Tribunal it the case of Howarth India Private Limited vs. DCIT (ITA No. 5341/Del/2010) and that of Mumbai Bench of ITAT in the case of J.P. Morgan Advisors India Private Limited vs. DCIT (ITA No. 7979/Mum/2010), he contended that even one company could be selected as comparable for bench marking a transaction. We are unable to accept this contention of the learned counsel for the assessee. In the two cases cited by him in support of the assessee's case on this issue, a sizable number of comparables was initially selected by the TPO and after the process of exclusion, only one comparable was finally left. The ITA No. 1652/Del/2014 15 situation thus had arisen where there was not more than one comparable left for consideration and under these compelling circumstances, the Tribunal held that one comparable company could be taken for bench marking the arm's length price. The Tribunal, however, observed specifically in the case of J.P. Morgan India Private Limited (supra) that if there are more than one comparables then various comparability factors can be examined and it may lead to a proper examination of ALP because many factors and differences get weed out making bench marking the margin of nearest comparables. It is pertinent to note here that in the present case, three different sets of comparables were selected by the TPO and since the first set of five comparables selected by him was finally left with only two comparables, we find no infirmity in the action of the learned CIT(A) to adopt the second set of comparables selected by the TPO for consideration as the same provided vide base for determining the appropriate arm's length price by following the transactional net margin method. Ground no. 9 of the assessee's appeal is accordingly dismissed.
16. In ground no. 10, the assessee has challenged the inclusion of certain entities by the learned CIT(A) in the final list of comparables. In this regard, the learned counsel for the assessee has filed a summary giving the relevant details in respect of 7 entities, the inclusion of which by the learned CIT(A) in the final set of comparables is being challenged by the assessee. He has also made a detailed submission in support of the assessee's case seeking exclusion of the said entities from the final list of comparables by referring to the relevant portion of their annual reports placed in the paper book. He has also relied on the various judicial pronouncements in support of the assessee's case on these issues. The learned DR, on the other hand, has strongly objected to the exclusion of the said entities from the list of final comparables as sought by ITA No. 1652/Del/2014 16 the assessee. He has made a detailed submission to support and substantiate the action of the learned CIT(A) in including the said entities in the final list of comparables. He has referred to the functional profile of the said entities vis a vis., the functional profile of the assessee company in an attempt to show that there is a functional similarity. After taking into consideration all these submissions made by the learned representatives of both the sides in the light of the material placed on the record, we now proceed to consider and decide the issue relating to inclusion or exclusion of each of the concerned 7 entities from the list of final comparables.
17. Rolta India Limited:- The learned counsel for the assessee has submitted that this entity is not functionally comparable to the assessee company. He has invited our attention to the relevant portion of the Chairman's speech placed at page no. 2055 and 2056 of the paper book to point out that the said entity is pioneer in the field CAD/CAM/GIS and derives majority of its income from CAD/CAM/GIS Solutions and Services. The learned DR, on the other hand, has contended that the services rendered by Rolta India Limited are nothing but high end software development services which are similar to the assessee company. He has contended that the same therefore is rightly selected as comparable being functionally similar to the assessee company. It is, however, observed from the Chairman's report that the said entity is not regarded as another I.T. Company keeping in view the domain expertise established by it in the area of operation, creation of the required infrastructure and building of strong and efficient business process to offer a strong value proposition. Moreover, it is specialised in weaving its solutions into customer environments with the ability to extract learning from one business and create speciality in another. It is pioneer in CAD/CAM/GIS providing I.T. Solutions which address customers' total requirement of ITA No. 1652/Del/2014 17 engineering and their e-enablement. The assessee company, on the other hand, is a captive service provider which generally operates on cost plus mark up basis. Rolta, also has a wide base of customers in India as well as outside India for whom I.T. Solutions are provided by Rolta. In our opinion, Rolta therefore, cannot be said to be functionally similar to the assessee company. Moreover, as mentioned in the Chairman's report, Rolta's Human Resources were valued at Rs. 19.28 billion while the Rolta brand was valued at 15-23 billion and its knowledge bank delivered specialised solutions that armour the Rolta reputation and brand. The fact that it earned more than 90% of its Revenue only from CAD/CAM/GIS Solutions and Services further supports the view that it is not functionally comparable to the assessee company. We, therefore, direct the TPO to exclude Rolta India Limited from the list of final comparable.
18. Infosys Technology Limited:- It is observed that Infosys Technology Limited was selected as comparable by the TPO in assessee's own case for A.Y. 2007-08, but the tribunal (ITA No. 5637/Del/2011) directed exclusion of the same on the ground that it was owning brand and proprietary products. As submitted by the learned counsel for the assessee, the relevant position has remained the same inasmuch as Infosys has now high brand value of Rs. 7,256 Crores. Moreover, it is not functionally comparable to the assessee company inasmuch as it is mainly engaged in Software Development Services and generates substantial Revenue from the sale of its own software products. In the case of CIT vs. Agnity India Technologies Private Limited (ITA No. 1204/Del/2011 dated 10th July, 2011) cited by learned counsel for the assessee, Hon'ble Delhi High Court has also upheld the exclusion of Infosys Technologies Limited from the list of final comparables after taking into consideration that it's operation as full fledged risk taking enterprise the nature of services ITA No. 1652/Del/2014 18 rendered by it in diversified filed such as application design, development re- engineering and maintenance integration etc, huge operating Revenue generated by it of more than 9,000 Crores, branded and proprietary products owned by it and substantial expenditure incurred on development, sales promotion, brand building and research and development. Since all these distinguishing features exist even in the year under consideration, we direct the TPO to exclude M/s Infosys Technology Limited from the final list of comparables.
19. Infotech Enterprises Limited:- The main contention raised by the learned counsel for the assessee for exclusion of this entity from the list of final comparables is that it is engaged in diversified business of which providing Software Development Services is only one segment which generates only 24% of the total Revenue. On the query raised by the Bench, he however, has admitted that segmental details are maintained by Infotech and the same are provided at page no. 2015 of the paper book. A perusal of the said details shows that net margin of 7.80% is shown by Infotech Enterprises from the segment of Software Development Services. Since the functions of this segment are similar to the assessee company, we do not find merit in the case of the learned counsel for the assessee for exclusion of the same from the set of final comparables. The alternative contention of the learned counsel for the assessee for consideration of the segmental margin however is accepted and the TPO accordingly is directed to consider only the net margin of the relevant segment which is comparable to the assessee company for comparability analysis.
20. Quintegra Solutions Limited (Sofia Software Limited):- The learned counsel for the assessee has contended that this entity is also engaged in diversified business. He has also contended that this entity is engaged in ITA No. 1652/Del/2014 19 Software Product Development and owns branded software products. The relevant portion of the annual report of the said company placed at page no. 2042 to 2050 of the paper book shows that it has its own product which provides the user with a framework to record the document movement both inward and outward, track technical drawing, provide works allocation and receive feed backs respectively. The said product meant mainly for architects is stated to be fitted with comprehensive features that completely take care of the architect's requirement. As further mentioned in the annual report, the emphasis on R & D efforts during the financial year had yielded a new product "TDS SOFT". It is also mentioned that the company improved and invented leading edge technology tools, intellectual property and engineering techniques that were applied to commercial projects all over the world. Total revenue from software development of this entity was 43.29 Crores out of which Revenue from export of Software Development Services and products constituted 33.93 Crores. It is, thus, clear that this entity is engaged mainly in software development having its own product and the same, therefore, cannot be considered as functionally comparable to the assessee company. We, therefore, direct the TPO to exclude this entity from the final list of comparable.
21. Federal Technologies Limited:- The learned counsel for the assessee has contended that this entity is mainly engaged in designing set top boxes which are not comparable with the functions of the assessee company. As pointed out by the learned DR, the said entity however has generated major part of Revenue from designing development and services. There is nothing to show that the said entity is mainly in the development software and it has developed its own software products. The main functions of the said entity are that of rendering a design and development services which are similar to that ITA No. 1652/Del/2014 20 of the assessee company being in the nature of I.T. enabled services. Although there is a mention that products designed and licensed by the said entity during the current year included set top boxes, portable hand held multimedia recorders and players, it is clearly stated that the said entity continued a design house. It is also mentioned that the said entity during the year had continued its business of developing and licensing ready to manufacture reference designs in digital television products and technologies predominantly for set top boxes in the global market. Keeping in view this description given in the annual report as well as the main source of its Revenue generation, we are of the view that this company is functionally similar to that of the assessee company and it is rightly selected as comparable by the TPO.
22. Geodesic Information Systems Limited:- The learned counsel for the assessee has submitted that this entity is engaged in diversified business and besides rendering Software and Development allied Services, it is also carrying on the business of trading / hamara shop. He has also contended that this entity has developed various products and it is, therefore, not entirely engaged in software development services. However, as rightly pointed out by learned DR from the relevant portion of the annual report of the said entity on page no. 2005 of the paper book, the relevant financial details in respect of the concerned segment of software development and allied services are available in public domain and since the said segment is functionally similar to the assessee company, the same can be considered for comparability analysis. Accordingly, we find no justifiable reason to exclude this entity from the list of final comparables and upholding the action of the TPO to select the same as comparable, we direct him to consider the operating margin of software development and allied services for the purpose of determining the average profit margin of the comparables.
ITA No. 1652/Del/2014 2123. Mindteck (India) Limited:- The learned counsel for the assessee has submitted that this entity is specialised in high margin I.T. segments of e- business application and embedded technologies. He has also submitted that this entity has developed its own products such as insurance products and CRM products. He has contended that this entity thus is not functionally similar to the assessee company. A perusal of the relevant portion of the annual report of the said entity at page no. 2028 and 2029 however shows that although Mindteck is stated to have developed insurance product, it is clearly mentioned in the segment wise and product wise performance given in the annual report that Mindteck has evolved as a leading international I.T. Services with key focus in the area of embedded systems and business application. There is also nothing on record to show that this entity has generated any significant revenue from the sale of products. The learned counsel for the assessee has also contended that the said entity has successfully acquired M/s Infotech Holdings IMC as a result of which its Revenues were bound to be multiplied. However, as rightly pointed out by the learned DR, the said acquisition was completed by Mindteck in the year 2000-01 and there is nothing to show as to how the same has affected on the operating Revenue's or operating profit of Mindteck for the year under consideration. As regards the objection raised by the learned counsel for the assessee on the basis of year ending of this entity on 30th June. We are of the view that the reliable financial data for the financial year ending 31st March, 2002 is required for the comparability analysis and if the same can be obtained by the TPO, this entity can be retained in the list of final comparable.
24. Zigma Software:- As rightly pointed out by the learned counsel for the assessee from the relevant portion of the impugned order of the learned CIT(A), this entity was found to be functionally different from the assessee ITA No. 1652/Del/2014 22 company by the learned CIT(A) himself while upholding the action of the TPO in excluding the same from the set of comparables. It appears that the learned CIT(A), however inadvertently, included this entity in the final list of 44 comparables. We, therefore, direct the exclusion of the said entity from the list of final comparables.
25. Keeping in view our decision rendered above on the issue of selection of the final list of comparables, we direct the AO / TPO to re- determine the arm's length price of the international transactions entered into by the assessee company with its AE as well as to re-compute the transfer pricing adjustment, if any, to be made in the case of the assessee.
26. As regards the Revenue's appeal, the main grievance of the Revenue as projected in the grounds raised therein is that the learned CIT(A) has erred in adopting the arm's length margin at 14.92% as against 18.5% adopted by the TPO. As already noted by us, the arm's length margin of 18.5% was worked out by the AO on the basis of first set of two comparables arrived at by him by applying the strict norms of comparability on the set of comparables furnished by the assessee in the TP study report. As pointed out by the assessee before the learned CIT(A), the said profit margin of 18.5% however was wrongly worked out by the TPO on the basis of financial data of earlier two financial years i.e. 1999-2000 and 2000-01. The learned CIT(A), therefore, rejected the computation of arm's length margin of 18.5% made by the TPO erroneously on the basis of financial data of earlier two financial years and proceeded to determine the arm's length margin afresh on the basis of second set of comparables selected by the TPO. While disposing of the appeal of the assessee, we have already approved this approach adopted by the learned CIT(A) in principle. Consequently, we find no merit in the appeal of the Revenue and dismiss the same.
ITA No. 1652/Del/2014 2327. In the result, the appeal of the assessee is partly allowed while the appeal of the Revenue is dismissed.
Pronounced in the open court on 27.04.2018.
Sd/- Sd/-
[BEENA A PILLAI] [P.M. JAGTAP]
Judicial Member Accountant Member
DATED: 27.04.2018
SH
Copy forwarded to:-
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
Assistant Registrar