PALRED TECHNOLOGIES LIMITED ,HYDERABAD vs. DY. COMMISSIONER OF INCOME TAX , CIRCLE-16(2), HYDERABAD

Selection of incomparable

3. Determining the TP adjustment on the transactions with Non-AEs.

Incorrect working capital adjustment

Mark-up on reimbursement transactions

5. Determining the Arm's Length Mark up of 5% on the following reimbursements by AEs (Rs 7,40,60,178) for payments made on behalf of AEs despite specific directions by the Hon'ble Tribunal:

• Payroll and related cost of deputed employees and other miscellaneous Rs 6,79,17,541; and • Travel- Rs 58,34,419; • Other miscellaneous - Rs 3,08,218.

Levy of interest under section 234B

6. Imposing interest under section 234B of the Act on the transfer pricing adjustments;

7. Initiating the penalty proceedings u/s 271 (1 (C) of the Act.

The Appellant craves, to consider each of the above grounds of appeal without prejudice to each other and craves leave to add, alter, delete or modify all or any of the above grounds of appeal”.

2. We notice at the outset that the assessee’s former twin substantive grounds regarding selection of comparables are no more res integra in view of the fact that the tribunal’s first round of remand directions in decided on 28.9.2016 had observed as under: “9. Aggrieved with the above order, assessee is in appeal before us raising the following grounds of appeal: TRANSFER PRICING MATTERS - Relating to determination of Arm's Length Price (" ALP ") in respect of provision of software services to Associated Enterprises (" AEs") Based on the facts 'and circumstances of the case and in law, the learned Assessing Officer (" AO") I learned Transfer Pricing Officer ("TPO") and the Hon'ble Dispute Resolution Panel ('DRP') erred in the following: Rejection of transfer pricing documentation maintained and undertaking fresh search of comparables:

1. Rejection of the transfer pricing documentation maintained by the assessee in accordance with the provisions of the Act read with the Income Tax Rules, 1962 ('Rules') and undertaking a fresh economic analysis during the course of assessment proceedings and accordingly making an adjustment of Rs 9,48,05,292 to the international transactions relating to provision of software services to its AE. Rejection of use of multiple year data

2. Rejecting the use of multiple year data and using data for the FY 2007-08 only; Eligibility under section 10A

3. Not appreciating that the Company is eligible for tax holiday benefit u/s 10A of the Act, and there is no incentive for shifting of profits; Rejection of internal comparable transactions

4. Not considering the internal uncontrolled transactions of the Appellant for determining the ALP. Information obtained under section 133(6) 5. a) Using information/ documents obtained by exercising powers u/ s 133(6) of the Act which are not available in public domain; and b) Further not providing any opportunity to Appellant to crossexamine the same. Use of additional filters

6. Inter-alia use of the following additional filters in undertaking the comparative analysis to reject comparable companies having a) Diminishing revenue/Loss making companies; b) Different financial year-end. c) Onsite revenue in excess of 75%; Selection of companies earning abnormal high margins

7. Selection of companies earning abnormal high margins as comparable to the Appellant; Selection of uncomparables

8. Not undertaking an objective comparative analysis and inter alia selecting the following companies as comparable to the software services of the Appellant: a) Avani Cincom Technologies; b) Bodhtree Consulting Ltd (Seg); - c) E-Zest Solutions Ltd; d) LGS Global Ltd; e) Persistent Systems Ltd; f) Quintegra Solutions Ltd g) Softsol India Ltd; h) Thirdware Solutions Ltd; i) Infosys Technologies Limited; j) Kals Information Systems Ltd; k) Tata Elxsi Limited (Seg); and i) Wipro Limited (Seg). Rejection of comparables 9. Not undertaking an objective comparative analysis and interalia rejecting the following comparable companies: a) Aditya Birla Minacs IT Services Ltd; b) Aditya Birla Minacs Technologies Ltd; c) CG-VAK Software Exports Ltd (Seg); d) Goldstone Technologies Ltd; e) Indium Software India Ltd; f) Thinksoft Global Services Ltd; g) Larsen & Toubro Infotech Ltd; h) V M F Softech Ltd. TP adjustment on transactions with Non-AEs 10. Determining the TP adjustment on the transactions with NonAEs. Incorrect working capital adjustment 11. Computation of working capital adjustment by allocating the total receivables and payables of the Appellant to the international transactions with AE and making a negative working capital adjustment to the arithmetic mean margin of the comparables selected. Inclusion of certain amounts in operating cost 12. Including the following reimbursements by AEs (Rs 7,40,60,178) for payments transactions relating to provision of software services: • Payroll and related cost of deputed employees and other miscellaneous Rs 6,79,17,541; and • Travel- Rs 58,34,419; • Other miscellaneous - Rs 3,08,218. Adjustment for risk differences 13. Not adjusting the net margins of the comparable companies selected taking into account the functional and risk differences between the international transaction of the Appellant and the comparable companies in accordance with the provisions of Rule 10B(1)(e); Applicability of proviso to Section 92C(2) 14. Not allowing the option under the proviso to section 92C(2) of the act in limiting the adjustment at a variation of 5 percent to the arm's length price; Corporate guarantee provided to the AEs 15. a) Applying the Transfer Pricing provisions to the corporate guarantee provided to ICICI Bank in relation to the loan taken by its wholly owned subsidiary for acquisition of companies in Europe; b) Determining the ALP on the corporate guarantee @ 3.75% p.a. on the guarantee amount without undertaking any economic analysis for the same; and c) No appreciating that the acquisition was in the same business as that the Appellant and accordingly beneficial to the Appellant; Non-discrimination under India - Netherlands tax treaty 16. Discriminating its Netherlands subsidiary in determining the ALP for corporate guaranteed provided vis-a-vis similar corporate guarantee provided by companies on behalf of their Indian subsidiaries resulting in violation of Article Levy of interest under section 234B 17. Imposing interest under section 234B of the Act on the transfer pricing adjustments; 18. Initiating the penalty proceedings u/ s 271(1(C) of the Act. The Appellant craves, to consider each of the above grounds of appeal without prejudice to each other and craves leave to add, alter, delete or modify all or any of the above grounds of appeal.”

10. The ld. AR of the assessee submitted that the TPO has adopted various filters to select comparables out of which one of the filters are comparable companies should have at least 75% of its revenue from the software development services considering the fact that the assessee company is predominantly service company as the majority of the revenues are derived by the assessee from the software development services. Considering this filter, TPO should have selected only those companies which have 75% of its revenues from the services and excluded those companies in which segmental informations are not available. It is pertinent to note that the TPO has selected eight comparables in which there is no segmental information available, which are as under:

1. 1. Avani Cincom Technologies Ltd. 2. Bodhtree Consulting Ltd. (Seg.) 3. E-zest Solutions Ltd. 4. LGS Global Ltd. 5. Persistent Systems Ltd. 6. Softsol India Ltd. 7. Thirdware Solutions Ltd.

8. Kals Information Systems Ltd. When there is no segmental information available on the financial reports, it is difficult to determine the revenue from services and other revenues properly. It is hereby submitted that these comparable should be eliminated. Further, AR of the assessee submitted that apart from segmental information is not available, there are other aspects which also functionally different and the same also should be excluded from comparables. However, he submitted that assessee has no issue if the TPO adopts the above filter of 75% of revenue from software services to all the comparables by collecting the relevant information from the respective comparables u/s 133(6) of the Act.

3. Case records further indicate that the assessee thereafter filed M.A. No.19/Hyd/2017 which was allowed by the learned coordinate bench on 27.07.2017 as under: “2. In the M.A., the assessee stated that among the other grounds, the following grounds on determination of Arm’s length price (ALP) under Transaction Net Margin Method (TNMM) in respect of the software development services transactions of the assessee were raised for consideration before the Tribunal, which have not been adjudicated by the Tribunal: “4. Rejection of internal comparable transactions: Not considering the internal uncontrolled transactions of the appellant for determining the ALP.

10. TP Adjustment on transaction with Non-AE’s Determining the TP adjustments on the transactions with Non-AE’s.

11. Incorrect working capital adjustment Computation of working capital adjustment by allocating the total receivables and payables of the appellant to the international transactions with AE and making a negative working capital adjustment to the arithmetic mean margin of the comparables selected.”

3. Referring to the above factual background, the ld. AR of the assessee submitted that the Tribunal has not adjudicated the aforesaid grounds while adjudicating the other grounds in the order passed on 28/10/2016. He submitted that the said grounds were covered by the decision of the coordinate bench of this Tribunal in assessee’s own case for AYs 2006-07 and 2007-08. He, therefore, submitted that the above grounds may be adjudicated by modifying the said order.

4. The ld. DR, on the other hand, conceded to the submissions of ld. AR.

by the Assessee. Therefore, the said grounds are being adjudicated as under after taking into consideration the arguments advanced during the course of hearing of the appeal.

6. We find that the said grounds are squarely covered by the decision of the coordinate bench of this Tribunal in assessee’s own case for AY 2006-07 and 2007-08. In AY 2007-08 in vide its order dated 28/03/2014, the coordinate bench has held as under: “10. We have heard the parties and perused the material on record. On perusal of the TP order it is to be seen that in para 2.4.1 the TPO has admitted that the assessee has submitted segmental financials separately in respect of AE and non-AE transactions. As per the aforesaid segmental financials (reproduced at page 4 of TP order), the margin in respect of transactions with AEs is 39.26% as against margin of 6.30% in respect of non AE transactions. Therefore, when segmental details have been furnished by the assessee the TPO should have considered them properly instead of rejecting them with broad and sweeping allegations. It seems, the TPO has not properly allocated the segmental expenditures. If the bad debts etc. are not related to AE transactions they cannot be considered as part of operating cost for determining ALP of the transactions with AE. Similarly, reimbursement on cost to cost basis also cannot be included in the operating cost. Unfortunately, the DRP without dealing with this issue at depth has finished its job by simply commenting that TPO has dealt with the issue appropriately. In this context, it is to be noted that when identical issue was agitated by the assessee before the Tribunal for the assessment year 2006-07, a coordinate bench of this Tribunal in ITA No. 1495/Hyd/10 dt. 09/09/2011 held as under: “15. We have considered the rival submissions and perused the material on record. First, we will take up the issue relating to the adjustments made by the assessing officer in respect of the international transactions with its associated enterprises in the software development services. It is the contention of the assessee that bad debts incurred by the assessee company are in respect of transactions, which are not related to associated enterprises. This contention of the assessee has not been controverted by the Revenue by bringing any material on record before us. It is the contention of the learned counsel for the assessee that such bad debts cannot be taken into account for computing the margin of the assessee from the transactions with the associated enterprises in respect of software development services. The learned counsel for the assessee has also filed before us a comparative chart explaining the computation of Net Margin, excluding the bad debts and clearly demonstrated before us that if the bad debts/reimbursements are excluded for the purpose of computing the margins on the transactions relating to the associated enterprises, the net margin comes to 19.07%, which is well comparable with the Arms Length Margin of 19% determined by the Transfer Pricing Officer. In our considered view, for computing the net margin of the assessee for the purposes of transfer pricing, only the cost related to the transaction with the Associated Enterprises has to be considered and accordingly, we approve that segmental financials is to be considered for the purpose of arriving at the net margin on the international transaction with the assessee's enterprise in respect of software development services. In that process, bad debts/reimbursements has to be excluded and segmental profitability has to be adopted. We find support in this behalf from various decisions of the Tribunal relied upon by the learned counsel for the assessee duly filing copies thereof in the paper-book, which have been noted hereinabove. That being so, the TPO should have determined the Arms Length Price for the international transactions with associated enterprises considering only the operating cost allocable to the Associated Enterprises segment. Since the assessing officer had no occasion to verify the veracity of the segmental financials prepared by the assessee company, for limited purpose, we direct the assessing officer to verify the segmental financials prepared by the assessee company and adopt the same for arriving at the net margin on the international transaction with AEs in respect of software development services. We direct accordingly.”

Respectfully following the aforesaid observation of the coordinate bench in assessee’s own case, we remit this issue back to the file of the Assessing Officer/TPO to determine the ALP in terms with the direction of the coordinate bench extracted hereinabove. Another contention of the ld. AR is while making TP adjustment and computing working capital adjustment under TNMM, the TPO has considered margins at the entity level. It was therefore contended that the TP adjustment has to be restricted only to transactions with AE. We find force in the contentions of the ld. AR. The Assessing Officer/TPO is directed to determine the ALP only considering the receivables and payables in respect of transactions with AEs only.” Respectfully following the aforesaid observation of the coordinate bench in assessee's own case, we remit this issue back to the file of the Assessing Officer/TPO to determine the ALP in terms with the direction of the coordinate bench extracted hereinabove. Another contention of the Id. AR is while making TP adjustment and computing working capital adjustment under TNMM, the TPO has considered margins at the entity level. It was therefore contended that the TP adjustment has to be restricted only to transactions with AE. We find force in the contentions of the Id. AR. The Assessing Officer/TPO is directed to determine the ALP only considering the receivables and payables in respect of transactions with AEs only." 6.1 From the above order of the coordinate bench in assessee's own case for the previous years, we find that the bench has observed that 1. When segmental details have been furnished by the assessee with regard to AE and non AE transactions the same should be considered for the purpose of assessment. Though, there is no specific direction by the Tribunal, we are of the opinion that the assessee’s contention that where there are comparable transactions from AE as well as non AEs and when their segmental information is available, Internal TNMM has to be applied for the purpose of benchmarking needs consideration by the AO.

2. Further, Transfer Pricing provisions are applicable only to transactions with AEs and hence, for computing the net margin of the assessee for the purposes of transfer pricing, only the cost related to the transaction with the AE has to be considered;

Viz., 4, 10 & 11 are allowed for statistical purposes”.

4. It is therefore, clear that the learned coordinate bench had already made it clear in the said former round that the TPO had to apply internal TNMM only for the purpose of impugned benchmarking. We therefore, find no merit in the Revenue’s arguments supporting comparables enlisted in “a to h”. The TPO is therefore, directed to compute the assessee’s ALP only on the basis of assessee’s internal segmental comparables. This former substantive ground is accepted in above terms.

5. Learned counsel is fair enough in not pressing for assessee’s third ground in view of our preceding directions.

No other ground has been pressed before us.