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From the Courts »
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 ITO vs. Vikram A. Pradhan (ITAT Mumbai)

M/s. ION Trading India Private Ltd., A-136, Defence Colony, New Delhi Vs. ITO, Ward 12(4), New Delhi.
December, 09th 2015
      IN THE INCOME TAX APPELLATE TRIBUNAL
          (DELHI BENCH `I - 1' : NEW DELHI)

   BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER
                       and
       SHRI A.T. VARKEY, JUDICIAL MEMBER

                   ITA No.1035/Del./2015
               (ASSESSMENT YEAR : 2010-11)

M/s. ION Trading India Private Ltd.,     vs.   ITO, Ward 12(4),
A-136, Defence Colony,                         New Delhi.
New Delhi

     (PAN : AAECA4325R)

     (APPELLANT)                         (RESPONDENT)

          ASSESSEE BY : Shri Manoj Pardasani, CA
        REVENUE BY : Shri Amrendra Kumar, CIT DR

                Date of Hearing          : 09.09.2015
                Date of Pronouncement    : 07.12.2015

                                ORDER

PER A.T. VARKEY, JUDICIAL MEMBER :

     This appeal arises from an order passed by Income Tax

Officer, Ward 12(4), New Delhi           dated 21.01.2015 u/s

144C(13)/143(3) of the Act in pursuance to directions of the DRP
                                     2                  ITA No.1035/Del./2015


dated 14.11.2014 u/s 144C(5) of the Act and relates to assessment

year 2010-11.

2.   The grounds raised by the appellant in this appeal are as

under:

     "1. On the facts and in law, the Learned Income Tax Officer,
     Ward 12(4), New Delhi ("Ld. AO") erred in passing the impugned
     assessment order dated 21 January 2015 pursuant to the directions
     of the Hon'ble Dispute Resolution Panel ("Hon'ble DRP") and
     computing the total income of the Appellant for Assessment Year
     ("AY") 2010-11 at Rs. 30,678,470 as against the returned income
     of Rs. 353,440, thereby making an adjustment of Rs. 30,325,034
     to the Officer-1 (2)value of the international transaction of
     provision of computer software development services by the
     Appellant to its Associates Enterprises ("AEs").

     2.     On facts and in law, the Ld. AO erred in making a reference
     to the Learned Additional Commissioner of Income Tax, Transfer
     Pricing Officer-1 (2), New Delhi ("Ld. TPO"), inter alia, since he
     has not recorded an opinion that any of the conditions in section
     92C(3) of the Income Tax Act, 1961 ("the Act"), were satisfied in
     the instant case. Accordingly, the order passed by the TPO is
     without jurisdiction.

     3.    On facts and in the circumstances of the case and in law, the
     Ld. TPO erred in not demonstrating that the motive of the
     Appellant was to shift profits outside India by manipulating the
     prices charged in its international transactions, which is a pre-
     requisite condition to make any adjustment under the provisions of
     Chapter X of the Act.

     4.     On facts and in law, the Ld. TPO/Ld. AO erred in
     conducting and the Hon'ble DRP further erred in allowing a fresh
     benchmarking analysis using "non contemporaneous" data and
     substituting the Appellant's analysis with the fresh benchmarking
     analysis on his own conjectures and surmises.
                                3                  ITA No.1035/Del./2015


5.    On facts and in law, the Ld. TPO/Ld. AO and Hon'ble DRP
erred in violating the provisions of Rule 10B(2) of Income Tax
Rules, 1962 ("the Rules") by introducing new companies without
considering the differences in the functions performed, assets
employed and risks assumed by such companies vis-à-vis the
Appellant, thereby resorting to unsubstantiated selection of
comparables.

6.     On the facts and in law, the Hon'ble DRP violated the
provisions of Rule 10B(2) of the Rules by rejecting CG-VAK
Software & Exports Limited, a comparable company selected by
the Appellant in the TP documentation by modifying the filter of
employee cost being less than 25% of turnover as proposed by the
Ld. TPO to employee cost of less than 75% of turnover; and
further erred in incorrectly computing the filter ratio at less than
75% instead of correct ratio of 79.69% of turnover.

7.    On the facts and in law, the Ld. AO/Ld. TPO and the
Hon'ble DRP erred, violating provisions of Rule 10B(2) by
considering E-Infochips Bangalore Limited as a comparable to the
Appellant.

8.     On the facts and in law, the Ld. AO/Ld. TPO and the
Hon'ble DRP erred, violating provisions of Rule 10B(2) by
considering Infinite Data System Private Limited as a comparable
to the Appellant.

9.    On the facts and in law, the Ld. AO/Ld. TPO and the
Hon'ble DRP erred, violating provisions of Rule 10B(2) by
considering Infosys Technologies Limited as a comparable to the
Appellant.

10. On the facts and in law, the Ld. AO/Ld. TPO and the
Hon'ble DRP erred, violating provisions of Rule 10B(2) by
considering Persistent Systems Limited as a comparable to the
Appellant.

11. On the facts and in law, the Ld. AO/Ld. TPO and the
Hon'ble DRP erred, violating provisions of Rule 10B(2) by
considering Sasken Communications Technologies Limited as a
comparable to the Appellant.
                                4                  ITA No.1035/Del./2015


12. On the facts and in law, the Ld. AO/Ld. TPO and the
Hon'ble DRP erred, violating provisions of Rule 10B(2) by
considering Thirdware Solutions Limited as a comparable to the
Appellant.

13. On the facts and in law, the Ld. AO/Ld. TPO and the
Hon'ble DRP erred, violating provisions of Rule 10B(2) by
considering Wipro Technology Services Limited as a comparable
to the Appellant.

14. On facts and in law, the Ld. TPO, the Ld. AO and the
Hon'ble DRP erred in contravening provisions of Rule
10B(1)(e)(i) by considering the unutilized rent and maintenance
expenses as expenses incurred in relation to the international
transaction of the provision of software development services.

15. On the facts and in law, the Ld. TPO/Ld. AO and the
Hon'ble DRP grossly erred in not allowing the risk adjustment
under Rule 10B(1)(e)(iii) and Rule 10B(3) to account for
differences in the risk profile of the comparable companies vis-à-
vis the Appellant.

16. On the facts and in law, the Ld. AO/Ld. TPO and the
Hon'ble DRP erred in not granting the benefit of
reduction/variation of 5 percent from the arithmetic mean while
determining the arm's length price to the Appellant as per the
proviso to section 92C(2) of the Act.

17. On the facts and in circumstances of the case, the Ld. AO
erred in levying tax at the rate of 40% on the assessed income vis-
à-vis applicable tax rate of 30%, given the fact that the Appellant
is a domestic company incorporated under the Companies Act,
1956.

18. On the facts and in the circumstances of the case, the Ld.
AO erred in computing interest under section 234B of the Act.

19. On the facts and in the circumstances of the case, Ld. AO
erred in demanding an amount of Rs. 162,976 in relation to tax
refunded earlier as this amount was never refunded and not
received by the Appellant.
                                     5                   ITA No.1035/Del./2015


     20. On the facts and in the circumstances of the case, the Ld.
     AO erred in levying interest under section 234A and 234D of the
     Act.

     21. On the facts and in law, the Ld. AO erred in initiating
     penalty proceedings under section 271(1)(c) of the Act."

3.   Grounds 1 to 15 relate to adjustment of Rs. 3,03,25,034/- to

the arm's length price of the international transaction of provision of

software development services provided by the appellant company

to its holding company M/s ION Trading UK Ltd.

4.   The factual matrix as emanating from the material on record is

that the appellant company is a wholly owned subsidiary company

of M/s ION Trading UK Ltd. It is engaged in the business of

providing computer software development services to its AE on a

captive basis. In the instant assessment year, the appellant furnished

a return of income on 11.10.2010 declaring an income of Rs.

3,53,440/-. During the year the appellant had entered into following

international transaction with its Associated Enterprise (AE):

      Sr.    Type of International          Method          Total Value of
      No.        Transaction               Selected          transaction
       1      Computer Software          Transactional      21,82,68,570
             Development Services         Net Margin
                                           Method
                                  6                 ITA No.1035/Del./2015


5.   In view of the above, AO made a reference u/s 92CA(1) to the

Transfer Pricing Officer (TPO) for determining the Arm's Length

Price (ALP). In course of proceeding before TPO, appellant

submitted a TP study report. In the TP analysis, appellant selected

Transactional Net Margin Method (TNMM) as the most appropriate

method for benchmarking the international transaction and for the

purpose of applying TNMM, the assessee company identified itself

as the tested party. Further, operating profit to operating cost

(OP/OC) was considered as the profit level indicator (PLI) to

demonstrate its adherence to the arm's length provisions contained

in the Act. The PLI of the assessee was calculated at 9.37%;

whereas average PLI of the comparables was arrived at 6.48%. The

calculation of the assessee's margin is as under:

              Particulars         As on March 2010 (Amt. in Rs.)
           Operating income               22,29,50,213
            Operating cost                20,38,55,648
            Operating profit               1,90,94,565
               OP/OC                          9.37%

It is to be noted here that while calculating the operating cost of

Rs.20,38,55,648/-, a deduction of Rs. 82,18,899/- on account of
                                        7                ITA No.1035/Del./2015


adjustment of cost relating to rent and maintenance charges for

under-utilization of capacity was claimed by the appellant.

6.   Furthermore, the appellant had computed the PLI of the

comparables by selecting a set of 6 comparables and the margin of

these was shown to be 6.48% using the current year data as under:

          Sr. No.         Name of the company          Margin for FY 2009-
                                                               10
            1         CG- Vak Software & Exports
                                                            -12.48%
                                  Ltd.
            2           Quintegra Solutions Ltd.             -9.42%
            3           R S Software (India) Ltd.             9.29%
            4                Tata Elxsi Ltd.                 20.60%
            5         Thinksoft Global services Ltd.         11.82%
            6            Zylog Systems Limited               19.08%
                                Average                       6.48%

7.   The TPO vide its order dated 22.01.2014, has observed that

appellant has selected 6 companies as comparables on the basis of

the search conducted in the public data base Prowess only. Further,

TPO applied the following filters:

     i)         Companies with RPT greater than 25% of revenue should have
                been excluded;
     ii)        Companies who have less than 75% of the revenue as export
                sales should have been excluded; and
     iii)       Companies whose employee cost to revenue ratio is less than
                25% should have been excluded.
                                   8                   ITA No.1035/Del./2015





8.   Pursuant to the above, final comparables out of comparables

selected by the appellant are as under:

      Sr. No. Name of the company                 Remarks
         i)   Quintegra Solutions This is a suitable comparable but
              Ltd.                   the PLI (OP/OC) is 0.75% as on
                                     31st March, 2010 and not -9.42%.
        ii)   R S Software (India) This is a suitable comparable,
              Ltd.                   hence accepted.
        iii)  Tata Elxsi Ltd.        This is a suitable comparable,
                                     hence accepted.
        iv)   Thinksoft       Global This is a suitable comparable,
              services Ltd.          hence accepted.
         v)   Zylog         Systems This is a suitable comparable,
              Limited                hence accepted.

9.   As a further step, based on the above stated filters, search on

the Capitaline database was also conducted by the TPO and further

18 comparables were identified and included in the final list of

comparables. As a result, 23 comparables were selected and, the

margin computed as under::

       Sr. No.           Name of the company               OP/OC with
                                                              Forex
         1       Accelya Kale Solutions Ltd.                12.51%
         2       Akshay Software Technologies Ltd.           -3.91%
         3       Allgo Embedded                              8.72%
         4       CTIL Ltd.                                  18.22%
         5       E-Infochips Bangalore Ltd.                 71.38%
         6       Evoke Tech                                 18.20%
         7       E-Zest Solutions                           18.38%
         8       Infinite Data System Pvt. Ltd.             72.67%
         9       Infosys Limited                            45.47%
         10      Kuliza Technologies Private Limited        12.94%
                                      9                   ITA No.1035/Del./2015


         11       Larsen & Toubro Infotech Ltd.                 19.76%
         12       Mindtree Limited (Segment)                    20.47%
         13       Persistent Systems Limited                    30.15%
         14       Persistent Systems & Solutions
                                                                11.37%
                  Limited
         15       Quintegra Solutions Ltd.                      -8.83%
         16       RS Software (India) Ltd.                      9.07%
         17       Sasken Communication Technologies
                                                                22.65%
                  Ltd.
         18       Sonata Software                               32.16%
         19       Tata Elxsi Ltd.                               17.08%
         20       Thinksoft Global services Ltd.                11.22%
         21       Thirdware Solutions Limited                   29.05%
         22       Wipro Technology Services Limited
                                                                63.27%
                  (Formerly Citi Technologies)
         23       Zylog Systems Limited                         19.08%
                  Average                                       23.99%


10. On the aforesaid basis, the TPO made an adjustment of Rs.

4,46,82,661/- in the manner as under:

      Sr. No.                 Particulars                   Amount (Rs.)
        1.               Total Operating Cost               21,20,74,547*
        2.        Arm's Length Price at a margin of         26,29,51,231
                             23.99%
        3.      Transfer Price received by the taxpayer     21,82,68,570
         4.      Shortfall of Transfer Price from ALP      4,46,82,661
     *by disallowing deduction of Rs. 82,18,889/- on account of adjustment
     of cost relating to rend and maintenance charges for under utilization of
     capacity.

11. DRP vide directions dated 14.11.2014 out of the set of 23

comparables adopted by the TPO directed for exclusion of one of

the comparables, namely, Sonata Software Ltd. and also to grant
                                  10                  ITA No.1035/Del./2015


working capital adjustment. After giving the effect of the aforesaid

directions, margin of comparables was re-determined at 17.22% on

a set of 22 comparables in the manner as under:

      Sr. No.          Name of the company               OP/OC with
                                                            Forex
         1      Accelya Kale Solutions Ltd.                 7.18%
         2      Akshay Software Technologies Ltd.          -6.83%
         3      Allgo Embedded                              2.18%
         4      CTIL Ltd.                                   7.47%
         5      E-Infochips Bangalore Ltd.                61.40%
         6      Evoke Tech                                14.60%
         7      E-Zest Solutions                          12.75%
         8      Infinite Data System Pvt. Ltd.            64.96%
         9      Infosys Limited                           39.83%
        10      Kuliza Technologies Private Limited         7.71%
        11      Larsen & Toubro Infotech Ltd.             15.51%
        12      Mindtree Limited (Segment)                14.46%
        13      Persistent Systems Limited                  4.80%
        14      Persistent Systems & Solutions
                                                           24.70%
                Limited
        15      Quintegra Solutions Ltd.                   -23.63%
        16      RS Software (India) Ltd.                    5.68%
        17      Sasken Communication Technologies
                                                           18.32%
                Ltd.
        18      Tata Elxsi Ltd.                            12.66%
        19      Thinksoft Global services Ltd.              4.53%
        20      Thirdware Solutions Limited                22.88%
        21      Wipro Technology Services Limited
                                                           56.61%
                (Formerly Citi Technologies)
        22      Zylog Systems Limited                      11.03%
                Average                                    17.22%

12. The Assessing Officer accordingly passed an order under

section 144C(13)/143(3) of the Act determining the adjustment at

Rs.3,03,25,034/- and as such, income of the appellant was finally
                                   11                  ITA No.1035/Del./2015


assessed at Rs.3,06,78,474/-. The said adjustment has been

computed in the manner hereunder:

       Sr.                   Particulars                  Amount (Rs.)
       No.
       1.    Operational Cost                              21,20,74,547
       2.    Arm's Length Price at a margin of 17.22%      24,85,93,784
       3.    Transfer Price received by the taxpayer       21,82,68,570
       4.    105% of International Transaction             22,91,82,188
       5.    Proposed Adjustment u/s 92CA                  3,03,25,034

13. Before us the learned counsel for the appellant made oral

arguments and also filed written submissions.           Both during the

course of oral arguments and in written submissions, no specific

submission have been made viz-a-viz grounds 1 to 5 of grounds of

appeal. It has been contended that ION Trading is engaged in

rendering generic, repetitive software development services to its

AE-ION Trading UK Limited and is therefore characterized as a

captive or low-risk service provider, compensated on a fixed fee

basis. It was further submitted that the TPO/DRP/AO have erred in

making an adjustment of Rs. 3,03,25,034/- to the value of the

international transaction of provision of computer software

development services by the appellant to its AE. In support of the
                                  12               ITA No.1035/Del./2015


above submission, it has prayed for inclusion of the comparable M/s

CG-Vak Software and Exports Limited (segmental) and exclusion

of (i) M/s E-Infochips Bangalore Ltd., (ii) M/s Infinite Data System

(P) Ltd. (iii) M/s Infosys Ltd., (iv) M/s Persistent Systems Ltd., (v)

M/s Sasken Communication Technologies Ltd. (vi) M/s Thirdware

Solutions Limited and (vii) M/s Wipro Technologies Services

Limited. in the final set of comparables. Apart from the above, it

was also prayed that AO/TPO/DRP erred in contravening provision

of rule 10B(1)(e)(i) by considering the unutilized rent and

maintenance expenses as expenses incurred in relation to the

international transaction of the provision of software development

services. It was also submitted that the authorities below have

grossly erred in not allowing the risk adjustment under Rule

10B(1)(e)(iii) and Rule 10B(3) to account for differences in the risk

profile of the comparable companies vis-a-vis the appellant. The

learned DR has supported the orders of DRP/TPO/AO and

contended that adjustment made should be sustained and, no

interference is warranted.
                                     13                  ITA No.1035/Del./2015


14. We have considered the rival submissions and perused the

material placed on record.         The first and foremost substantive

contention raised by the learned counsel vis-a-vis Ground 6 of

Grounds of Appeal is that DRP violated the provisions of Rule

10B(2) of the Rules by rejecting CG-VAK Software Exports

Limited, a comparable company selected by the appellant in the TP

documentation by modifying the filter of employee cost being less

than 25% of turnover as proposed by the ld. TPO to employee cost

of less than 75% of turnover and further erred in incorrectly

computing the filter ratio at less than 75% instead of correct ratio of

79.69% of turnover. The TPO had rejected the above comparable by

holding as under:

     "Rejection of CG-VAK as a comparable by the undersigned is
     valid for the reasons explained in the show cause notice. Further,
     the assessee has not submitted any detail to justify that each one of
     the identified filters are satisfied in this case. Since the assessee
     company has failed to discharge its onus, the undersigned is
     constrained, to reject the said company as comparable."

15. It is seen that the reasons mentioned in the show cause notice

vis-à-vis the said comparable was that the financials do not reflect

the details of related party transaction and the other important filters
                                     14                ITA No.1035/Del./2015


which have been ignored by the assessee from the final list of

comparable companies.

16. Before the DRP the appellant contended as under:

     "CG-VAK Software & Exports Ltd. was incorporated in 1995.
     The company specializes in consulting services and offshore
     software development. It is engaged in providing outsourced
     software product services (product lifecycle, product maintenance,
     product migration, product testing, tech writing/documentation);
     custom software services (e-commercie application, website
     design, client servicer application); testing services; and
     professional services. The company has three business segments
     namely software services; BPO services and training. The
     software services segment has been considered for the purpose of
     our analysis.

     Further, it is submitted that CG-VAK Software & Exports Ltd.
     does not fall the 25% related party filter applied by the learned
     TPO. A working of the same was provided to the TPO vide
     submission dated 15.1.2014 and has been provided below based
     on the details available in the Annual Report for FY 2010-11:

     The detailed computation of the related party percentage is as
     under:

      Nature of related party transaction                Amount (in
                                                            INR)
      Purchase of assets                                    27,07,672
      Interest receipts                                      7,28,390
      Interest BPO                                             10,979
      Salary                                                33,00,000
      Rent                                                  13,20,000
      Interest paid on FD                                    4,36,429
      Total related party transactions (A)                  85,03,470
      Total income as per Annual Report (B)               6,19,81,460
      RPT as a % of sales (A/B)                              13.72%"
                                        15                  ITA No.1035/Del./2015


17. However the DRP upheld the exclusion on the following

basis:

     "Having considered the above and the material placed on record,
     we are of the opinion that the said company does not satisfy the
     filter applied by the TPO of employee cost less than 75% of
     turnover and therefore the same cannot be taken as comparable. In
     view of the above, action of the TPO is upheld."

18. Before us it was submitted that DRP incorrectly applied

employee cost filter which was never proposed by the TPO. It was

submitted in the profit and loss account, CG-VAK has reported

certain "Cost of Services", however, the breakup of the same is not

known (to ascertain whether the same includes any employee cost

or not). It was further submitted that from the annual report for

financial year 2010-11 and financial year 2011-12, it is can be seen

that the employee cost was disclosed as cost of services.                    The

relevant extracts from the annual report is given below:

           PROFIT & LOSS STATEMENT FOR THE YEAR ENDED 31ST MARCH
                                            2012
         Note                                     31.3.2012    31.3.2011 (Rs.)
          No.                                       (Rs.)
          III     Expenditure:          3.03     5,33,80,368    4,73,01,685
                  Employee     Benefit
                  Expenses
             PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31.3.2011
                                       Schedul 31.3.2011 (Rs.) 31.3.2010 (Rs.)
                                          e
         Expenditures                    135     4,73,01,685    4,73,59,185
         Cost of services
                                       16                  ITA No.1035/Del./2015




19. It was also submitted that the company has followed "different

nomenclature" in the FY 2009-10, wherein the employee cost is

shown as cost of services. The relevant extract from the annual

report of the company is reproduced below:

                                            Schedule   31.3.2010    31.3.2009
                                                         (Rs.)        (Rs,)
      Income:
      Income     from      Software
      Development,    Services   &
      Products
      - Overseas                              12       5,74,87,587 7,16,87,088
      - Domestic                              13         19,40,663    6,52,093
                                                       5,94,28,250 7,23,39,181
      Other Income                            14         25,53,210   72,26,721
                                                       6,19,81,460 7,95,65,902
      Expenditure:
      Cost of Services                        15       4,73,59,185 5,88,05,074
      Administrative Expenses                 16       1,32,67,939 1,04,53,160
      Interest                                17         19,16,993   30,47,952
      Depreciation                                       63,65,886   59,23,335
                                                       6,89,10,003 7,72,29,521
      Net Profit/(Loss) for the year                   (69,28,543)   23,36,381

20. It was submitted that since the cost of service/employee cost

(i.e. Rs.4,73,59,185) is 79.69% of turnover (i.e. Rs.5,94,28,250) it

satisfies the filter applied by the Hon'ble DRP and thus, CG-VAK

should be accepted as a comparable to the appellant. Reliance was

placed on the following judgments:
                                  17                ITA No.1035/Del./2015


     -   Lam Research India (P) Ltd. vs. DCIT [TS 203-ITAT-2015 (Bang)]

     -   Yodlee Infotech (P) Ld. vs. ITO [TS-465-ITAT-2014 (Bang)]

     -   Cisco System India (P) Ltd. vs. DCIT [TS-246-ITAT-2014 (Bang)]

21. We have considered the submission of the ld. counsel for the

assessee and have considered the argument of the ld. DR that the

assessee is not producing any product, however, we find that CG-

Vak Software and Exports Limited is not only into computer

software but it is a product manufacturer too. Since assessee is not

into product manufacturing and the segmental details cannot be

bifurcated from the financial details, we find that the assessee and

the CG-Vak Software and Exports Limited are not comparables.

Therefore, we are inclined to uphold the orders of the authorities

below in rejecting this company as a comparable. We direct

accordingly.

22. Now taking up Grounds No.7 to 13 of Grounds of Appeal, the

learned counsel made his submission for exclusion of comparables

selected by TPO. We will now consider the merits of the arguments

of the parties with regard to selection of the these companies as

comparables by TPO.
                                  18               ITA No.1035/Del./2015


23. E-Infochips Bangalore Limited
24. The learned AR contended that DRP/TPO have erred both in

law and on facts by considering E-Infochips Bangalore Limited as a

comparable to the appellant. The learned counsel for the assessee

contended that the DRP, however has ignored the submissions

made by the assessee and upheld the action of the Assessing

Officer/TPO to include M/s. E-Infochips Bangalore Ltd. in the list

of final comparables. The appellant has objected to the inclusion of

the comparable on the ground of functionally not comparable and,

abnormal deviation in profit margin. The appellant submitted that

the functional profile of M/s. E-Infochips Bangalore Ltd. is different

from that of the assessee company. In this regard, he pointed out

that the said company is a product engineering services provider

having a technical expertise in software, firmware, hardware,

FPGPA, ASIC, Quality testing etc. Its key focus area in product

engineering services includes conceptualization, Architecture and

Design, Sustenance and Support, Development, Production and

Quality testing. Further it focuses on wide array of industries

including aerospace, security and surveillance, semiconductor,
                                 19               ITA No.1035/Del./2015


medical devices, consumer devices, software and retail & E-

commerce. It also has its IPs and accelerators in software domain

namely "Automated Quality Assurance TestBorg (Aqua TestBorg)

and the same was supported by the screenshot taken from the

company's website (https://www.einfochips.com/software-ips). He

thus contended that M/s. E-Infochips Bangalore Ltd. thus is liable to

be excluded, besides due to functional differences, even on the basis

of insufficient information available in the public domain from the

list of comparables.

25. We have considered the rival submissions and also perused the

relevant material on record. The contention raised by the learned

counsel for the assessee is that the entity M/s. E-Infochips

Bangalore Ltd. taken by the Assessing Officer/TPO as comparable

should be excluded from the list of final comparables for the

purposes of transfer pricing analysis on the ground of functional

differences as well as on the ground of insufficient information

available in respect of the said entity in public domain. In order to

support and substantiate his contention of functional dissimilarity,

the learned counsel for the assessee has heavily relied on the
                                 20               ITA No.1035/Del./2015


contents of the website www.einfochip.com., the print out of

relevant portion of which is placed on record before us. On the basis

of the said contents, he has made an attempt to point out that M/s.

E-Infochips Bangalore Ltd. is functionally different form the

assessee company in as much as the said company is mainly into

development of new products whereas the assessee company is

mainly providing software development services. It is seen that

reference to the website of company is not of much help as it may

not have information which pertained to FY 2009-10. It is possible

that these services were provided by E-Infochips Ltd. instead of E-

Infochips Bangalore Ltd. Also, it is possible that provision of these

services is a subsequent development. Further, many of these

services like software, FPGA, ASIC, QA & Testing require

software engineers only. Hence, the services and personnel required

are not entirely different. The reference made by the taxpayer is in

respect of website of E-Infochips Ltd. and not that of E-Infochips

Bangalore    Ltd.   After   having    gone   through   the    website

www.einfochip.com., we however find that the same is in respect of

the entire group of E-Infochips, of which M/s. E-Infochips
                                  21               ITA No.1035/Del./2015


Bangalore Ltd. is only a part. The functional profile given on the

said website thus is that of the entire group and not just of the M/s.

E-Infochips Bangalore Ltd. The content of the said website in our

opinion, therefore, cannot be relied upon to ascertain the functional

profile of M/s. E-Infochips Bangalore Ltd., especially when the

nature of functions/services given there are materially different from

the functions/services stated to be rendered by M/s. E-Infochips

Bangalore Ltd. in its annual report. Even the details of services

stated to be rendered by M/s. E-Infochips Bangalore Ltd. at

different places in its Annual Report are very sketchy and it is very

difficult to ascertain from the same, exact nature of services

rendered by the said entity.

26. A perusal of the order of the DRP/TPO however, shows that

no finding/observation has been recorded by them on the ground of

functional differences as well as insufficient data/information

available in the public domain. It is also worthwhile to note here

that the profit margin of M/s. E-Infochips Bangalore Ltd. is

abnormally high and although the said entity cannot be excluded

from the list of final comparables merely on the ground of high or
                                 22               ITA No.1035/Del./2015


abnormal profits, as held by in the case of Maersk Global Centres

(India) (P.) Ltd. v. Asstt. CIT 147 ITD 83 and by jurisdictional High

Court in the case of Chryscapital Investment Advisors (India) (P)

Ltd. It should trigger further investigation in order to establish

whether it can be taken as comparable or not. As further held by the

Special Bench in the case of Maersk Global Centres (India) (P.) Ltd.

(supra), such investigations should be to ascertain as to whether

earning of super profits reflects normal business condition or

whether it is the result of some abnormal condition prevailing in the

relevant year. The profit margin of such entity in the immediately

preceding year(s) may also be taken into consideration and the FAR

analysis in such cases may be reviewed to ensure that the potential

comparable earning higher profit satisfies the comparability

condition. Since this exercise has not been done either by the

AO/TPO or the DRP in the present case, we are of the view that the

matter should go back to the Assessing Officer/TPO for fresh

consideration. This, in our opinion, will also take care of the

grievance of the assessee relating to the lack of sufficient

information in respect of M/s. E-Infochips Bangalore Ltd. available
                                      23             ITA No.1035/Del./2015


in the public domain in as much as the TPO can obtain such

information in the form of relevant schedules of the Profit & Loss

Account of the said entity as well as the segmental details, if any,

directly from the said entity.

27. Following the above judgments, we therefore, set aside the

impugned order of the Assessing Officer as well as the direction

given by the DRP on this issue and restore the matter to the file of

the Assessing Officer/TPO for deciding the same afresh after giving

the assessee proper and sufficient opportunity of being heard.

28. Infinite Data System Private Limited

29. The learned counsel for the assessee further contended that the

DRP, has completely ignored the submissions made by the assessee

and upheld the action of the Assessing Officer/TPO to include

Infinite Data System Private Limited in the list of final

comparables. The appellant objected to the inclusion of the

comparable before TPO on the following grounds:

     i)     Functionally not comparable
     ii)    Abnormal/Supernormal profits
     iii)   Significant intangibles
     iv)    Accepted as a non comparable in previous year by TPO
                                     24                 ITA No.1035/Del./2015



30. The DRP upheld the order of TPO as under:

     "The TPO has dealt the issue in para 8,4, of the order and held that
     the company is providing software development services which is
     parimaterial with the functions carried on by the assessee. Having
     considered the material placed on record we find that the company
     is mainly involved in software services. Therefore we hold that
     TPO is right in including the same for the purpose of
     comparability analysis."

31. Before us the learned AR of the appellant has contended as

under:

     "Substantially Related Party Transactions

     -     Company's operations relates to providing services to its
     sole customer-Fujitsu Services Ltd." (substantially related) which
     can be substantiated as per the news letter and annual report.

     As per the News Letter

     Fujitsu entered into a BOT (Built, Operate & transfer) contract
     with Infinite Computer Solutions (India) Ltd. holding company of
     Infinite for development of offshore centre in India.

     The contract was signed in July 2008 for period of three years.
     Infinite have been set up as a separate entity for BOT the Indian
     Offshore centre of Fujuitsu

     (Source-http:/www.Indianofline.com/article/newsinfite-computer-
     solutions-india-suffessfull completes-bot-contract-with fujitsu-
     services-4020499021_1.html)

     As per the Annual report

     The company's operations are predominantly related to providing
     software technical consultancy services to us sole customer Fujitsu
     "services Ltd."
                                   25                 ITA No.1035/Del./2015


     (Refer page 689 of the Paper Book Volume II)

     b)    Functionally not comparable

     As per Annual Report S(chedule 17)

     It provides solutions that encompass technical consulting, design
     and development of software, maintenance, system integration,
     implementation, testing and infrastructure management services.

     As per Annual Report (Revenue recognition section)

     It generates revenue primarily from Technical Support &
     Infrastructure Management services

     (Refer Page 685 of Paper Book Volume II)

     -Segmental information not available for software design and
     development.

     -Further, the financial state that more than 10% of the
     administration expenses & other expenses are towards project
     implementation expenses, which are different from software
     development

     (Refer Page 683 of the Paper book Volume II)

     c)    Ld. TPOs approach of using data from Infinite's website as
     on the current date and drawing comparison thereof with FY
     2009010 i.e. 4 years prior to the current year is incorrect.

     (Refer page 70 of the Paper book for TPO's observation)"

32. On the other hand, the learned DR supported the order of the

lower authorities regarding the inclusion of the same in the list of

comparables. He reiterated the contents of the TPO's order which

states as under:
                                     26                  ITA No.1035/Del./2015


     "It is seen that Infinite is providing following services:- technical
     consulting, design & development of software, maintenance,
     systems integration, implementation, testing and infrastructure
     management services. These services except infrastructure
     management services have also been refereed as `technical support
     services' in Revenue Recognition portion and as `software
     technical consultancy services' in Segment Reporting portion of
     the annual report. All these services are in the nature of software
     development services.

     .......It can be seen that all the services have been referred
     primarily as IT services. The objection of the assessee is mainly
     on verticals of the company. Under TNMM the standards of
     comparability are relatively relaxed and only broad similarity of
     functions is required. It is further stated that TNMM can be used
     with data for companies that are broadly comparable to the
     taxpayer, as functional differences are likely to be reflected in the
     level of operating expenses incurred by each company. These
     expenses are deducted in the calculation of operating profit and
     are accordingly taken account of in the comparability analysis. It
     is further seen that this company has been chosen as it is engaged
     in providing software development, which is broadly similar to the
     services being provided by the assessee. Since, the assessee is also
     providing similar services, so this company can be used as a
     comparable."

33. We have heard the rival submissions and considered the facts

and materials on record. After considering the submissions, we are

in agreement with the conclusion of TPO/DRP held that Infinite is

providing following services: technical consulting, design &

development of software maintenance, systems                     integration,

implementation, testing and infrastructure management services.

These services except infrastructure management services have
                                27               ITA No.1035/Del./2015


been referred as "technical support services in revenue recognition

portion and as `software technical consultancy services' in segment

reporting portion of the annual report and thus services are in the

nature of software development services and having regard to the

above it is concluded that the Infinite is a functionally similar

company to the appellant company.

34. We have gone through the annual report of the appellant

company. The said company provides solutions that encompass

technical consulting, design and development of software,

maintenance, system integration, implementation, testing and

infrastructure management services which is functionally similar to

the appellant company.     There is no RPT transaction of the

comparable and transaction with a sole customer does not constitute

a RPT transaction.

35. Having regard to the above and for the reasons stated above,

we uphold the conclusion of TPO for inclusion of Infinite Data

System Private Limited since it is comparable to appellant

company.
                                  28                ITA No.1035/Del./2015


36. Infosys Limited

37. The learned counsel for the assessee contended that the DRP

has completely ignored the submissions made by the assessee and

upheld the action of the Assessing Officer/TPO to include Infosys

Limited in the list of final comparables and submitted that Infosys

Limited cannot be considered as a comparable as it is engaged in

diversified activities as it has wide spectrum of services such as

business services, technology services and outsourcing services. It

was contended that Infosys Limited is engaged in significant

Research & Development (R&D) that has led to creation of

significant Intellectual property. It has been further pointed out that

as per Annual Report of FY 2009-10, the company claims itself as

the most reputed and admired company in India (Pg. 18 of

Director's Report). Further assessee contended that Infosys Limited

has a turnover of Rs 21,140 crores, which is even more than 968

times of that of the assessee. The Ld. Counsel for the appellant has

placed reliance upon the various decisions, in which Infosys

Limited has been rejected as a comparable considering the same not
                                     29                    ITA No.1035/Del./2015


only as a giant company but is also engaged in development of

various niche products, which are as follows:

     i)     35 taxmann.com 421 (Hyd) Intoto Software India Pvt. Ltd. vs.
            Asst. CIT
     ii)    40 taxmann.com 173 (Hyd) NTT Data India Enterprise
            Application Services (P.) Ltd. vs. Asst. CIT
     iii)   38 taxmann.com 306 (Del) Agnity India Technologies (P.) Ltd.
            vs. DCIT
     iv)    38 taxmann.com 166 (Hyd) Virtusa (India) (P.) Ltd. vs. DCIT

38. The TPO has observed as under:

     "The brand name may have helped Infosys in increasing its
     number of clients & retention of existing clients and this an
     increase in its market share, but it has not necessarily resulted in
     better profit margins. Brand may bring more revenues but not
     necessarily higher margins....a brand may generate revenue but
     with a cost compensating any extra benefit, if any derived from
     such efforts."

     "Assessee had objected on the high turnover of this comparable
     company which is already discussed in the order. However, TPO
     has made an analysis in respect of influence of scale of operations
     on the profitability in the case of Infosys Technologies Ltd. From
     the year 1997 to 2012 based on the information extracted from the
     Capitaline Plus database, which shows that there is no positive
     correlation between the two... Although the turnover of the
     company has increased 183 times from the year 1997 to 2012, the
     operating margins has more or less remained the same i.e. ranging
     between 35% to 51%.... Hence, the taxpayer's argument that
     companies having large scale of operations have better margins is
     without any basis, and is therefore liable for rejection."
                                    30                  ITA No.1035/Del./2015


39. The DRP supported the action of the TPO in including this

company in the final list of comparables by holding as under:

     "The TPO has dealt the issue in para 8.5 of the order and held that
     the company is providing software development services which is
     parimateria with the functions carried on by the assessee."

     Having considered the material placed on record we find that the
     company is mainly involved in software services"
     Therefore, we hold that TPO is right in including the same for the
     purpose of comparability analysis."

40. We have considered the rival submission and perused the

material placed on record.        The said comparable was recently

considered by the decision of ITAT in the case of Mentor Graphics

(Noida) (P) Ltd. 60 taxmann.com 164 wherein following the

judgment of Jurisdictional High Court in the case of Agnity India

Technologies vs. ITO ITA No. 3856/2010 (Del), it was held as

under:

     "15. We find that Ld. CIT(A) after considering the facts of the
     case and the submission of the AR observed that with regard
     to Infosys Technologies Ltd. it was evident from the Annual
     Report of the company that Infosys Technologies provides much
     wider range of services, performs extensive functions, undertakes
     diversified business activities and assumes significant risks
     as compared to routine software development service providers
     like the assessee. Further, the company undertakes substantial
     R&D activities and derives majority of its revenues the sale of
     proprietary products unlike the assessee. Also, the turnover of the
     company is significantly higher than that of the appellant and in
     no manner is comparable to the size/operations of the assessee.
                                 31                  ITA No.1035/Del./2015



16. We      note    that   all    the    above   facts     highlight
that Infosys Technologies Ltd. is a product owner, undertakes
substantial advertising/sales promotion and brand-building
activities and is engaged in significant R&D activities, and is very
huge in size/volume as compared to the assessee. Hence, it cannot
be said to be comparable with the assessee. The said proposition
has also been confirmed by Delhi Tribunal in Agnity
India Technologies v. ITO [IT Appeal No.3856 (Delhi) of 2010]
wherein the Coordinate Bench held as follows :

"Various arguments, as stated earlier, were taken before the DRP
which inter-alia included rejection of comparable cases;
application of arbitrary filter of wage to sales ratio; ignoring that
the assessee is a limited risk company; inclusion
of Infosys Technologies Ltd.; and inclusion of Sat yam Computers
Services Ltd. in spite of the fact that its data is not reliable as
publicly known. On the basis of these arguments, the DRP
excluded the case of Sat yam Computers Services Ltd., thereby
reducing the arm's length margin to 25.6%. It is argued that the
case               of             the           assessee            is
not comparable with Infosys Technologies Ltd., the reason being
that the latter is giant in the area of development of software and it
assumes all risks, leading to higher profit. On the other hand, the
assessee is a captive unit of its parent company in the USA and it
assumes only limited currency risk. Having considered these
points, we are of the view that the case of aforesaid Infosys and
the assessee are not comparable at all as seen from the financial
data etc. of the two companies mentioned earlier in this order.
Therefore, we are of the view that this case is required to be
excluded. Once that is done, it is the accepted position of both the
parties that the results of the assessee are in line with the mean
margin of comparable cases even if no adjustment is made on
account of capital etc. Therefore, it is held that no adjustment was
required to be made to the results declared by the assessee
company."





11.5 The aforesaid order was upheld by the Hon'ble Delhi High
Court after taking note of the chart as given below:
                                      32               ITA No.1035/Del./2015


Basic Particular      Infosys Technologies Ltd.      Assessee
Risk Profile          Operate as full-fledged risk Operate at minimal
                      taking entrepreneurs         risks as the 100 percent
                                                   services are provided
                                                   to AEs
Nature of services Diversified-consulting,        Contract     software
                   application           design, development services
                   development,               re-
                   engineering               and
                   maintenance            system
                   integration,         package
                   evaluation                and
                   implementation            and
                   business              process
                   management, etc. (refer
                   page 117 of the Paper Book)
Turnover              20,264 crores                  209.83 crores
Ownership          Develops/owns proprietary
branded/proprietar products                 like
y products         Finacle, Infosys Actice
                   Desk, Infosys iProwe, Infosy
                   s Connect.       Also     the
                   company derives substantial
                   portion of its proprietary
                   products     (including    its
                   flagship banking product
                   suite ,,Finacle)
Onsite v. Offishore As much as half of the           The appellant provides
                    software        development      only offshore services
                    services     rendered      by    (i.e. remotely from
                    Infosys are    onsite    (i.e.   India)
                    services performed at the
                    customer's           location
                    overseas). And offshore
                    (50.20 per cent) Refer p.
                    117 of the Paper Book) than
                    half of its service, income
                    from onsite services
Expenditure        on Rs. 80 crores                  Rs. Nil (as the 1-
                                    33                 ITA No.1035/Del./2015


   advertising/sales                                percent services are
   promotion       and                              provided to AEs)
   brand building
   Expenditure     on Rs. 236 crores                Rs. Nil
   Research       and
   Development
   Other                                            100 per cent offshore
                                                    (from India)

     11.6 On the basis of the above chart, the Hon'ble High Court
     affirmed    the    conclusion    that   a captive       unit of
     acomparable company which assumed only a limited risk cannot
     be compared with a giant company in the area of development of
     software who assumes all types of risks leading to higher profits.
     The facts of the appellant are akin and therefore, do not warrant
     any different conclusion. The assessee is also captive service
     provider to its AE and as such, M/s. Infosys Ltd. is not a
     valid comparable with the assessee
     17. Accordingly, Ld. CIT(A) proposed to exclude this company
     from comparable set of companies. Therefore, the ld. CIT (A) has
     rightly ordered exclusion of the Infosys Technologies Ltd. from
     the comparable and this impugned order is upheld."

41. Having regard to the above regard to the above judicial

pronouncement, we hold that Infosys Limited cannot be considered

as comparable for the purpose of benchmarking international

transaction of the assessee.

42. Persistent Systems Limited

43. The assessee has sought exclusion of the aforesaid company

on the ground that this company is a technology company into

software product development services and is focused mainly on
                                   34                ITA No.1035/Del./2015


three industries i.e. Infrastructure & Systems, Telecom & Wireless,

Life Science and Healthcare, whereas the assessee is operating in

finance domain which is totally different. It was further submitted

that on economy of scales, the company Persistent Systems Limited

is very large in comparison with that of the assessee. It was also

submitted that the company has revenue from sale of products as

well with the software services. It has been submitted that

segmental break of sales on sale of products and services has not

been given by the company as the pricing consequently the margin

would differ that on sale of products and sale of services. Per contra,

the learned Departmental Representative supported the action of the

TPO in including this company in the list of comparables.

44. The TPO has held as under:

     "The company does have some products but as has been brought
     out above, the product revenue (from IP led businesses) are only
     7.2%. Hence, the company is predominantly a software service
     provider and will be taken as a comparable. Under TNMM, the
     standards of comparability are relatively relaxed and only broad
     similarity of functions is required."


45. The DRP supported the action of the TPO in including this

company in the final list of comparables by holding as under
                                    35                  ITA No.1035/Del./2015


     "The TPO has dealt the issue in para 8.6 of the order and held that
     the company is providing software development services which is
     paramateria with the functions carried on by the assessee.

     Having considered the material placed on record we find that the
     company is mainly involved in software services.
     Therefore, we hold that TPO is right in including the same for the
     purpose of comparability analysis."

46. We have heard the rival submissions and perused and

carefully considered the material on record. It is seen from the

details on record that this company i.e. Persistent Systems Ltd., is

engaged in product development and product design services while

the assessee is a software development services provider. We find

that, as submitted by the assessee, the segmental details are not

given separately. A Coordinate Bench in the case of Agnity India

Technologies (P) Ltd. vs. ITO 154 ITD 293 (Del) regarding the said

comparable has held as under:

     "11. So far as exclusion of three comparables i.e. Larsen and
     Tourbo Infotech Ltd., Persistent Systems Ltd. and Mindtree Ltd.,
     it is noted that before the CIT(A) the assessee contended that
     during the financial year 2008-09, it has a turnover of approx. Rs.
     14.45 crores which cannot be compared with certain companies
     having turnover of more than 200 crores. Support was drawn from
     the following decisions :

     (a) Decision of ITAT in the case of appellant for A.Y. 2006-07
     ITA No. 3856/D/2010 A.Y. 2006-07;
                                36                 ITA No.1035/Del./2015


(b) Genisys Integrating Systems (India) (P.) Ltd. v. Dy. CIT
[2012] 20 taxmann.com 715/53 SOT 159 (Bang.)

(c) Centillium India (P.) Ltd. v. Dy. CIT [2012] 23
taxmann.com 34/53 SOT 145 (Bang.)

(d) Kodiak Networks (India) (P.) Ltd. v. Asstt. CIT [2012] 18
taxmann.com 32/51 SOT 191 (Bang.)

(e) Actis Advisers (P.) Ltd. v. Dy. CIT [IT Appeal No. 5277
(Delhi) of 2011]

13. Having considered the rival submissions and perused the
material on record. We find this issue is no longer res-integra. The
Hon'ble High Court upholding the decision of Tribunal in the case
of the appellant for A.Y. 2006-07 has held in an order dated
10.7.2013 in ITA No. 1204/2011 in [CIT v. Agnity India
Technologies (P.) Ltd.[2013] 36 taxmann.com 289/219 Taxman
26 (Delhi)] that a giant company in the area of development of
software which assumed all risks leading to higher profits is not
comparable with the assessee which was a captive unit of the
parent company and assumed only a limited risk.

The Hon'ble High Curt has held as under :

"8. It is a common case that Satyam Computer Services Ltd.
should not be taken into consideration. The Tribunal for valid and
good reasons has pointed out that Infosys Technologies Ltd.
cannot be taken as a comparable in the present case. This leaves
L&T Infotech Ltd. which gives us the figure of 11.11%, which is
less than the figure of 17% margin as declared by the respondent-
assessee. This is the finding recorded by the Tribunal. The tribunal
in the impugned order has also observed that the age had furnished
details of workables in respect of 23 companies and the mean of
the comparables worked out to 10%, as against the margin of 17%
shown by the assessee. Details of these companies are mentioned
in para 5 of the impugned order. 9. In view of the aforesaid
position, we do not think that any substantial question of law
arises for consideration. The appeal is dismissed."

16. When considering the exclusion of persistent system Ltd, we
find no need to interfere in the order of the Ld CIT(A) because it
                                     37                  ITA No.1035/Del./2015


     is engaged in development of software product; and this company
     was excluded by the Tribunal in assessment year 2006-2007,
     which has been up held by the Hon'ble High Court, thus the issue
     about exclusion of persistent system Ltd, while making TP
     adjustments in it's case stands settled in view of these decisions in
     its own case. Therefore we do not find any necessity to interfere
     this company's exclusion.

     17. Having regard to the factual position and respectfully
     following the judgment of the Hon'ble High Court we partly allow
     the ground raised by the revenue and uphold the exclusion of
     persistent system Ltd, and direct inclusion of Larsen & Toubro
     Infotech Ltd and Mind tree Ltd."

47. Similar view has also been expressed in the case of Fiserv

India (P) Ltd. vs. DCIT 60 taxmann.com 345 (Del), it was held as

under:

     "12.2 We have considered the rival submission and perused the
     material on record. The counsel for the assessee has contended
     that Persistent Systems Ltd. is functionally different from the
     assessee as the company is into software development services as
     well as software products unlike the assessee who is a captive
     service provider. Moreover, no segmental details are available in
     the annual report. It can be thus derived that the prices may have
     been influenced. The rationale of applying a related party filter is
     defended.

     12.3 The Bangalore Bench of the Tribunal in the case of CSR
     India (P.) Ltd . v. ITO [2013] 31 taxmann.com 265 , has held as
     under:

     '(i) Turnover Filter

     3.3 We have heard the rival submissions and perused the materials
     on record. The TPO had, while selecting the above 26
     comparables, applied a lower turnover filter of Rs.1 crore but
     preferred not to apply any upper turnover limit. The size of the
     comparable is an important factor in comparability. The ICAI TP
                               38                  ITA No.1035/Del./2015


guidance note has observed that the transaction entered into by a
Rs.1000 crores company cannot be compared with the transaction
entered into by a Rs.10 crores company and the two most obvious
reasons are the size of the two companies and related economies
of scale under which they operate. The TPO's range had resulted
in selection of companies as comparable such as Infosys which
was 277 times bigger than that of the assessee. The Bangalore
Bench of the Tribunal in the case of M/s. Genisys Integrating
Systems (India) Pvt. Ltd. v. DCIT - ITA No.1231/Bang/2010
relying on Dun and Bradstreet's analysis had held that turnover
range of Rs.1 crore to 200 crores is appropriate. The said
proposition has followed by the earlier Benches of this Tribunal in
the following cases: (i) M/s. Kodiak Networks (I) Pvt.
Ltd. v. ACIT - ITA No.1413/Bang/2010; (ii) M/s Genesis
Microchip (I) Pvt. Ltd. DCIT - ITA NO.1254/Bang/2010; (iii)
Electronic for Imaging India Pvt. Ltd - ITA NO.1171/Bang/2010;
& (iv) M/s. Trilogy E-Business Software India Private Ltd .
v. DCIT - ITA No.1054/Bang/2011 dated 23.11.2012.

3.3.1 In the case of M/s.Genisys Integrating Systems (India) Pvt.
Ltd . v. DCIT (supra ), relying on Dun and Bradstreet', has
observed as under:

"9. .............we find that the TPO himself has rejected the
companies which are making losses as comparables. This shows
that there is a limit for the lower end for identifying the
comparables. In such a situation, we are unable to understand as to
why there should not be an upper limit also. What should be upper
limit is another factor to be considered. We agree with the
contention of the learned counsel for the assessee that the size
matters in business. A big company would be in a position to
bargain the price and also attract more customers. It would also
have a broad base of skilled employees who are able to give better
output. A small company may not have these benefits and
therefore, the turnover also would come down reducing profit
margin. Thus, as held by the various benches of the Tribunal,
when companies which are loss making are excluded from
comparables, then the super profit making companies should also
be excluded. For the purpose of classification of companies on the
basis of net sales or turnover, we find that a reasonable
classification has to be made. Dun & Bradstreet is more suitable
and reasonable. In view of the same, we hold that the turnover
                                39                  ITA No.1035/Del./2015


filter is very important and the companies having a turnover of
Rs.1 crore to 200 crores have to be taken as a particular range and
the assessee being in that range having turnover of 8.15 crores, the
companies which also have turnover of 1.00 to 200 crores only
should be taken into consideration for the purpose of making TP
Study."

3.3.2 The above view has been followed in the recent order of the
Tribunal in the case of Trilogy E -Business (supra ). The relevant
findings of the Tribunal are extracted as under:

20. In this regard we find that the provisions of law pointed out by
the ld. counsel for the assessee as well as the decisions referred to
by the ld. counsel for the assessee clearly lay down the principle
that the turnover filter is an important criteria in choosing the
comparables. The assessee's turnover is Rs.47,46,66,638. It would
therefore fall within the category of companies in the range of
turnover between 1 crore and 200 crores (as laid down in the case
of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA
No.1231/Bang/2010) . Thus, companies having turnover of more
than 200 crores have to be eliminated from the list of comparables
as laid down in several decisions referred to by the ld. counsel for
the assessee. Applying those tests, the following companies will
have to be excluded from the list of 26 comparables drawn by the
TPO viz. Turnover Rs. (1) Flextronics Software Systems Ltd.
848.66 crores (2) iGate Global Solutions Ltd. 747.27 crores (3)
Mindtree Ltd. 590.39 crores (4) Persistent Systems Ltd. 293.74
crores (5) Sasken Communication Technologies Ltd. 343.57
crores (6) Tata Elxsi Ltd. 262.58 crores (7) Wipro Ltd. 961.09
crores. (8) Infosys Technologies Ltd. 13149 crores"..

In view of the above said reasoning and the orders of the Benches
of Bangalore Tribunal cited supra, the following 8 companies will
have to be eliminated from the list of comparables selected by the
TPO, namely: · Flextronics Software Systems Limited; · iGate
Global Solutions Limited; · Mindtree Limited; · Persistent
Systems Limited; · Sasken Communication Technologies Limited;
· Tata Elxsi Limited; · Wipro Limited; & · Infosys Technologies
Limited. It is ordered accordingly.'

12.4 Following the aforesaid decision of the Tribunal and the
judgment of Hon'ble High Court of Delhi in the case of Aginity
                                   40                 ITA No.1035/Del./2015


     Technologies (supra ) we hold that Persistent Systems Ltd. should
     not be regarded as a comparable."


48. Therefore, following the above judgments we hold that this

company i.e. Persistent Systems Ltd. ought to be omitted from the

set of comparables for the year under consideration. It is ordered

accordingly.


49. Sasken Communication Technologies Limited (Sasken)

50. The assessee has sought exclusion of the aforesaid company

on the ground that this company has different business model and

there is presence of intangibles. It has also submitted that, as per

Annual Report, the company derives revenue from software

products, which suggests that the company is a product company

unlike the assessee. It was further submitted that the company has

inventories amounting to Rs. 166.55 lakhs and being a software

service company, it was also provided that should not be holding

any inventory in the books of accounts. The assessee also contended

that company is also actively engaged in product development and

earns revenue also from sale of software products, there were also
                                     41                 ITA No.1035/Del./2015


peculiar economic circumstances as it underwent restructuring

during the year which inflated its profit by Rs. 1,519.70 lakhs in

addition to other factors affecting its sales and margins. Further, the

turnover of the company is more than 19 times of the appellant.

The TPO has held as under:

     "It is seen that this cost (contract staff cost) is insignificant in
     comparison to employee cost of Rs. 213.46 cr."

     "All software companies have software in their fixed assets. It is
     only when it is significant and developed by them and is being
     amortized on sale of software products exceeding 25% of total
     income, it can be said to be resulting in different income which
     changes the profile from pure software developer to a company
     also selling products. It is further seen that this company has been
     chosen as it is engaged in providing software development, which
     is broadly similar to the service being provided by the assessee.
     Since, the assessee is also providing similar services, so this
     company can be used as a comparable."

51. The DRP supported the action of the TPO in including this

company in the final list of comparables by holding as under:

     "The TPO has dealt the issue in para 8.8 of the order and held that
     the company is providing software development services which is
     parimateria with the functions carried on by the assessee.

     Having considered the material placed on record we find that the
     company is mainly involved in software services.
     Therefore, we hold that TPO is right in including the same for the
     purpose of comparability analysis."
                                     42                 ITA No.1035/Del./2015


52. We have considered the submission and perused the material

placed on record. A Coordinate Bench of Tribunal in the case of

Tibco Software (India) (P) Ltd. vs. DCIT ITA No. 94/PN?2014

dated 10.4.2015, it was held as under:

     "32. By way of Ground of Appeal No.4.5, the appellant has
     assailed the action of the TPO in excluding Sasken
     Communications Technologies Ltd. from the final set of
     comparables. As per the discussion in para 11(viii) of the order of
     the TPO, it is noticed that the said concern has been excluded on
     the ground that during the year under consideration it has
     undertaken business restructuring. The Ld. Representative also
     pointed out that in the show-cause notice dated 31.10.2012 issued
     by the TPO another reason has been advanced which is to the
     effect that the said concern fails the export turnover filter of 75%
     of the total turnover."

53. Having regard to the above judgment and since it is evident

from record that Sasken Communication Technologies Limited is

functionally not similar to the appellant and also having gone

through restricting in the instant year, it cannot be treated as

comparable to assessee. We order accordingly.

54. Thirdware Solutions Limited (Thirdware)

55. The assessee has objected to the inclusion of the said

comparable on the following ground that the aforesaid company is

focused on solutions and services in the Enterprise Allocation Space
                                    43                 ITA No.1035/Del./2015


(EAS) in the Transaction, Analytics, and Collaborative Solution

Layers. This includes ERP, customer relationship management

(CRM), SCM, BI/DW, BPM etc. Thirdware offers Application

Implementation Services (AIS), Application Development Services

(ADS) and Application Management-support Services (AMS). It

was further submitted that it is engaged in development of own

software-PAPA and has incurred expenses towards import of

software service, evidencing outsourcing of software services unlike

the Applicant company. The TPO has not provided any reason for

holding Thirdware as a company comparable to the Appellant

whereas, The DRP while upholding Thirdware as comparable to the

Appellant company observed as under:

     "The audited report of the company reveals that company is
     mainly engaged in software development. The majority of income
     is from software development.

     Having considered the material placed on record we find that the
     company is mainly involved in software services.
     Therefore, we hold that TPO is right in including the same for the
     purpose of comparability analysis."

56. We have heard the rival submissions and perused and

carefully considered the material on record. It is seen from the

details on record that the functions of Thirdware are in contrast with
                                  44               ITA No.1035/Del./2015


the assessee which only provides software development in the

finance domain as per the instruction of its AE. Also, Thirdware has

incurred expenses towards import of software services, evidencing

outsourcing of software services unlike the assessee. Since it is also

engaged in outsourcing its activities as it has incurred expenses

towards imports of software services, evidencing outsourcing of

software services unlike the appellant company. Hence, it is

functionally not comparable and cannot be treated as a comparable

to assessee. We order accordingly.

57   Wipro Technology Services Limited (Wipro)

58. As far as this company is concerned, the arguments of the

assessee were not only on account of functional dissimilarity but the

assessee also raised the other objection that there was an

extraordinary event during the year. Wipro provides program

management and third party information security assessment

services to businesses that outsource technology and operations to

third party vendors in India, the Philippines, China and the Russian

Federation. It also offers software quality management, quality

assurance, and business process management services as well as
                                 45               ITA No.1035/Del./2015


technology infrastructure support, development and deployment for

strategic software applications to information technology and

business professionals. During the year, Wipro Limited (Wipro) has

reached an agreement with Citigroup Inc. for acquiring all of

Citigroup interest in CTS w.e.f. 21 January 2009. On 21 January

2009, Wipro signed a master service agreement (MSA) with

Citigroup Inc. for the delivery of technology infrastructure services

and application development and maintenance services for the

period of six years. Without prejudice, it was submitted that before

20.01.2009, the Company was part of the Citi group and rendered

services to various entities of the Citi group worldwide. With effect

from 21.01.2009, the Company was acquired by Wipro Ltd.

however, in order giving effect to the directions of Hon'ble DRP,

Ld. TPO has held that "In the case of M/s Wipro Technology

Services Ltd., assessee is submitting that the transaction of

rendering services by Wipro Technology to Citi Group are

construed as deemed international transactions as per section 92B(2)

of the Act. However, Annual Report of the company has been

perused and it is seen from the audited Financial that in RPT
                                    46                 ITA No.1035/Del./2015


schedule it is not considered as an Associated Enterprise. The TPO

has not provided any reason for holding Wipro as a company

comparable to the Appellant whereas The DRP while upholding

Wipro as comparable to the Appellant company observed as under:

     "The audited report of the company reveals that company is
     mainly engaged in software development. The majority of income
     is from software development.

     Having considered the material placed on record we find that the
     company is mainly involved in software services.

     However, the assessee has brought to the notice that Wipro
     Technologies Service Ltd has RPT of more than 25%. The AO is
     directed to verify the computation provided by the assessee and if
     RPT is more than 25% than it should not be included for the
     purpose of comparability analysis."

59. We have considered the rival submissions, perused the

material on record. In our view, Companies that are affected by

factors like persistent losses, declining sales, extraordinary Income

or expense, mergers and acquisitions or other such factors which

affect the operations of the company substantially should not be

used as comparables as they will not prove to be good benchmarks.

Further, while repelling the objection regarding extra-ordinary event

taking place for this comparable, but for a different reason, i.e. the

relevant extra ordinary event took place in the preceding Financial
                                  47                ITA No.1035/Del./2015


Year i.e. FY 2008-09. However, we concur with the submissions

advanced by Ld AR that the Director's Report and Notes to Account

for this comparable are not available in public domain. Ld. DR has

not been able to controvert this fact. Since sufficient information for

this comparable is not available, we direct exclusion of this

company as a comparable.

60. Now taking up Ground No. 14, which relates to adjustment of

unutilized rent and maintenance expenses as expenses incurred in

relation to the international transaction of the provision of Software

development services. The assessee contended that as per the rule

10B(1)(e)(i) of Income Tax Rules, 1962 which details transactional

net margin method provides "the net profit margin realized by the

enterprise from an international transaction entered into with an

associated enterprise is computed in relation to costs incurred or

sales effected or assets employed or to be employed by enterprise or

having regard to any other relevant base". In view of the above, for

computing margin from an international transaction adjustment

claim ought to be allowed.
                                     48                  ITA No.1035/Del./2015


61. The TPO has rejected the contention of the assessee by

holding that:

     "The contention of the assessee company is not acceptable on
     account of the following reasons:-

     a)    The assessee has admitted that the expansion was at the
     behest of the AE only. Since the assets for the anticipated increase
     in business had allegedly gone unutilized, the compensation
     thereof should have been borne by the AE and in no case should
     be charged on the assessee company.

     b)     Expenditure on enhancement of business is a routine
     operating expenditure which is undertaken with the intention of
     gaining more business. The assessee has done just the same in its
     case by taking the step of hiring more space. This expenditure
     cannot be taken to be extra ordinary in nature for the simple
     reason that it was expended in the hope of gaining business as is
     done by millions of businesses worldwide and every failure cannot
     be written off by the tax authorities as being extra ordinary. In
     this case the assessee has over reached itself in the hurry to get
     business by committing a sum of money in terms of rental and
     maintenance charges.

     c)     The assessee is required to support its claim for any
     adjustment with robust data and full details and evidences so as to
     enable the TPO to examine the claim. The burden is on the
     assessee whenever it makes a claim and in this case, it has not
     discharged the burden of proof. These adjustments are being
     claimed in an adhoc manner. Further, according to assessee since
     fixed cost remain constant irrespective level of operation and
     therefore such costs could not be optimally utilized to low level of
     capacity utilization. In view of this office capacity adjustment in
     service industry is not applicable as the business model I s cost
     plus so there is no question of idle capacity in terms of fixed costs
     assets.

     d)   If the taxpayer had seen a sudden spike in the volume o f its
     work during the year, it would have reaped the benefits of
     advance planning and foresight. This would have resulted in
                                   49                ITA No.1035/Del./2015


     greater profits and better margins owing to its smart moves.
     However, when the volume of work did not grow as anticipated,
     it is seeking an adjustment due to the same smart business move.
     It cannot cut both ways.

     e)    Moreover, the method of computing the adjustment is also
     not correct. Any comparability adjustment in transfer pricing
     analysis has to be carried out in respect of the comparable
     companies. In the instant case, the taxpayer has reduced its own
     employee costs to achieve the desired goal.


62. We have considered the rival submissions, perused the

material on record. We uphold the order of Hon'ble DRP, as it has

rightly held that as there is no objective basis led by the assessee to

support its claim; mere submission that there was underutilization

does not discharge the burden upon the assessee. Moreover, the

assessee has not given any cogent basis to satisfy the reasons for

under utilization. Once the assessee is a software service provider

to its AE then there can be no claim on account of under utilization

of capacity as it was AE who initiates such expansion. Hence, we

reject the ground raised by the assessee.

63. The next issue raising in Ground No. 15 of Grounds of Appeal

relates to the risk adjustment under Rule 10B(1)(e)(iii) and Rule

10B(3) to account for differences in the risk profile of the

comparable companies vis-à-vis the Appellant.
                                 50               ITA No.1035/Del./2015


64. The assessee contended that since it is a captive unit, it does

not bear any entrepreneurial risks. However, while proposing the set

of comparables in the notice, the Ld. TPO has not understood the

risk-free nature of the assessee and has failed to consider the full-

risk taking profiles of the companies selected as comparables.

65. The AR has highlighted the significance of comparing the

level of risks between independent comparables and the taxpayer. It

was submitted that TPO should consider the risk free nature of the

taxpayer's operations while adjudicating on the transfer prices.

Based on the above, ignoring the risk profile of the Assessee would

be unjust on the part of the revenue. He contended that TPO/drip

should have appreciated that the intent of the transfer pricing

legislation in India is to avoid tax evasion and not to cause any

hardship to the assessee.

66. In view of and taking due cognizance of all the differentiating

factors cited above, the assessee contended that an adjustment with

regard to the risk premium earned by comparable uncontrolled

companies is imperative for a fair and judicious comparison of the
                                    51                 ITA No.1035/Del./2015


transfer prices of the international transactions of the Assessee with

the arm's length price.

67. The TPO in its order dated 22.01.2014 has held as under:

     "The assessee hasn't claimed raised Risk Adjustment in its
     submission. However, it may claim at later stage on account of
     adjustment commensurate to the risk profile of the assessee. After
     carefully considering the facts of the case and the submissions of
     the taxpayer, I am not inclined to accept the assessee's future
     claim of risk adjustment. Risk adjustment as a general rule cannot
     be allowed unless it is clearly shown that the comparables had
     actually undertaken such risk and how the same materially
     affected their margins. The revised OECD guidelines of 2010 has
     also stated in Para 3.54 as under:-

     "Ensuring the needed level of transparency of comparability
     adjustments may depend upon the availability of an explanation of
     any adjustments performed, the reasons for the adjustments being
     considered appropriate, how they were calculated, how they
     changed the results for each comparable and how the adjustment
     improves comparability. Issues regarding documentation of
     comparability adjustments are discussed in Chapter V."

     From the above guidelines it can be seen that unless it is shown
     that how the risk adjustment would change the result of each
     comparable and how the same would improve the comparability
     and unless adequate reasons are given for such adjustment, no
     adjustment can be allowed to the taxpayer. In the present case,
     except giving proportion of various risks borne, the taxpayer has
     not shown with evidence as to whether each of the risk was
     actually undertaken or not by the comparables and if so, how these
     risks affected each of them and whether such adjustment would
     improve the comparability. Mechanical adjustment cannot be
     made to the margins of the comparables without knowing which
     risk was taken by the entity concerned and how its profitability
     was affected. Probability of risk and certainty of risk are two
     different aspects and cannot be equated for the purpose of
     adjustment. In my view assessee cannot be compared to a risk free
     security. Even other methodology, whether adhoc adjustment as in
                                    52                  ITA No.1035/Del./2015


     case of Sony India, CAPM or Sharpe Ratio (which is a measure of
     the excess return on risk undertaken by an entity investing in a
     particular asset), as applied by Hyderabad ITAT in the case of
     ADP Private Ltd, are based on return of capital which is not the
     PLI adopted by the assessee and the TPO. All this requires robust
     and reliable data, both for the assessee and the comparables in the
     absence of which risk adjustment cannot be considered for
     enhancing comparability."




68. Further, DRP upheld the view of Ld. TPO by holding as

under:

     "We have carefully considered the facts of the case and the
     submissions of the assessee. As per Rule 10B(2) and 10B(3) of
     Income Tax Rules, 1962, Indian Transfer pricing provisions
     prescribe only for "reasonable accurate adjustment" and further
     adjustment to the margins of comparables can be made only if
     they enhance comparability. But at the same time the data for the
     same must be relevant reliable and robust. Risk adjustment as a
     general rule cannot be allowed unless it is clearly shown that the
     comparables had actually undertaken such risk and how the same
     materially affected their margins. The revised OECD guidelines of
     2010 has also stated in para 3.54 as under:-

     "Ensuring the needed level of transparency of comparability
     adjustments may depend upon the availability of an explanation of
     any adjustments performed the reasons for the adjustments being
     considered appropriate, how they were calculated how they
     changed the results for each comparable and how the adjustment
     improves comparability. Issues regarding documentation of
     comparability adjustments are discussed in Chapter V."

     Even the various judicial decisions on the issue of adjustments and
     even OECD guidelines, impresses upon time and again that the
     adjustment should be "reasonable accurate adjustment".

     13.10 From the above guidelines, it can be seen that unless it is
     shown that how the risk adjustment would change the result of
     each comparable and how the same would improve the
     comparability and unless adequate reasons are given for such
                                53                  ITA No.1035/Del./2015


adjustments, no adjustment can be allowed to the assessee. In the
present case, except pointing out various risks, the assessee has
not shown with evidence as to whether each of the risk was
actually undertaken or not by the comparables and if so, how these
risks affected each of them and whether such adjustment would
improve the comparability.

13.11 Mechanical adjustment cannot be made to the margins of
the comparables without knowing which risks were taken by the
entity concerned and how its profitability was affected. Probability
of risk and certainty of risk are two different aspects and cannot be
equated for the purpose of adjustments. The significant of risk
depends on its economic significance, likelihood of its realization
and predictability. All these requires robust and reliable data, both
for the assessee and the comparables in the absence of which tax
adjustments cannot be considered for enhancing comparability.
Thus the objection is rejected.

13.12 In the various judicial pronouncements the risk adjustment
has not been allowed by the ITATs. Some of these decisions are
discussed below:

(a) Vedaris Technology 2010-TII-10-ITAT-Del-TPL: No risk
adjustment to be allowed even on ad hoc basis particularly when
the same has not been quantified;

(b) Marubeni India Private Ltd. (2010-TII-36-ITAT-Del-TP) in
which it was held that as the assessee failed to bring any evidence
on record to show that there was any difference in risk profiles of
comparable companies and since the assessee failed to file the
details exhibiting risk borne by comparables, no risk adjustment
can be given, even on ad hoc basis.

(c) ADP Private Limited (2011-TII-44-ITAT-Hyd-TP) wherein
the ITAT held that there is no thumb rule for allowance of risk
adjustment.


(d) Symantec Software Solutions Pvt. Ltd. (2011-TII-60-ITAT-
Mum-TP): The ITAT held that;
                                      54                  ITA No.1035/Del./2015


     (i)   Until and unless it is shown that the difference in function
     and risk results in deflation or inflation of financial results of the
     comparables, it is not a general rule to grant it as a standard
     adjustment.

     (ii) The assessee could not show how such difference in risk
     and functions affected the results of the comparables.

     (e) ST Micro Electronics (2011-TII-63-ITAT-Del-TP): The
     assessees claim that it was a risk free captive service provider and
     hence cannot be compared with comparables who were full
     entrepreneurs was not accepted by the ITAT.

     (f)   Exxon Mobil Company India Pvt. Ltd. (2011-TII-68-ITAT-
     Mum-TP): The ITAT held that since working capital adjustment
     has been given and the assessee has not worked out the risk
     adjustment, no adjustment can be granted on this account.

     13.13 Therefore, for the reasons mentioned above, we decline to
     interfere with the action of TPO in this regard."


69. We have considered the rival submissions and perused the

material placed on record. In our view, where the assessee succeeds

in ably demonstrating that the comparables finally selected bore

relatively more risk than it, then there should be no denial of the risk

adjustment. If, however, the assessee fails in specifically pointing

out the extra risks undertaken by the comparables, then, of course,

there cannot be any question of granting risk adjustment. Under the

transfer pricing regime, onus is always on the assessee to show the

reasons for claiming any separate adjustment by pointing out the
                                   55                 ITA No.1035/Del./2015


differences between it and the comparables. Risk adjustment can be

allowed provided the assessee places on record some appropriate

material to demonstrate that the risk undertaken by the comparable

companies were relatively more than it, warranting downward

adjustment in their profit rates. Further, the variation in such risks, if

any, should be capable of quantification on some reasonable and

logical basis. Since the ld. AR has failed to objectively demonstrate

the relatively higher risks undertaken by the comparables on an

overall basis, we are disinclined to grant any risk adjustment.

69.1 In view of the foregoing discussion, we set aside the impugned

order and remit the matter of determination of ALP of the

international transaction of `Provision of IT enabled data conversion

services' to the file of TPO/AO for a fresh decision in accordance

with our above observations/directions.         Apart from the issues

discussed in this order, the decision of the TPO on all other aspects

of the determination of the ALP of this international transaction

should be considered as final, as no other issue has been agitated

before us.
                                 56              ITA No.1035/Del./2015


70. Ground No. 16: On the facts and in law, the Ld. AO/Ld. TPO

and the Hon'ble DRP erred in not granting the benefit of

reduction/variation of 5 percent from the arithmetic mean while

determining the arm's length price to the Appellant as per the

proviso to section 92C(2) of the Act.

71. This issue has been dealt at great length by the TPO/DRP.

Both have referred to the relevant provisions, circulars and

judgments on the issue. Accordingly, We do not find any infirmity

in the order of the TPO/ DRP in this respect and the same is

therefore upheld.

72. In Grounds No. 18 assessee has challenged the levy of interest

u/s 234B. Since the chargeability of interest u/s 234B will

ultimately depend upon the income to be determined in accordance

with our directions contained hereinabove, at this stage it is

premature to dwell upon this issue. It is open for assessee to raise

the issue at the appropriate stage. Similarly, Ground Nos. 19 and 20

are consequential in nature.
                                  57               ITA No.1035/Del./2015


73. Ground No. 21 not connected on merits since the issue

emerges when the proceedings under section 271(1)(c) are

independently initiated. Therefore this ground is rejected.

74. In the result, the appeal is disposed off as above.


Order pronounced in open court on this 07th day of December, 2015.


             -sd-                                   -sd-
        (R.S. SYAL)                           (A.T. VARKEY)
     ACCOUNTANT MEMBER                      JUDICIAL MEMBER

Dated the 07th day of December , 2015
TS


Copy forwarded to:
    1.Appellant
    2.Respondent
    3.CIT
    4.CIT(A)
    5.CIT(ITAT), New Delhi.
                                                       AR, ITAT
                                                      NEW DELHI.

 
 
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