M/S CONTINENTAL AUTOMOTIVE COMPONENTS INDIA PVT LTD ,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-2(1)(1), BANGALORE

The interconnected issue raised by the assessee in ground numbers 1 to 13 is that the ld. DRP and the AO/TPO erred in making the upward adjustment of ₹ 8,09,48,991.00 with respect to the international transactions carried out with the associated enterprise. 3. The necessary facts as arising from the order of the authorities below are that the assessee in the present case is a wholly owned subsidiary of M/s

Being aggrieved by the order of ld. DRP/AO, the assessee is in appeal before us.

The learned AR before us filed a paper book running from pages 1 to 1403, case law compilation running from pages 1 to 201, synopsis of arguments running from 1 to 20 pages, additional synopsis of arguments running from pages 1 to 2 and contended that certain comparable selected by the TPO should be rejected based on the turnover filter. As per the ld. AR there were 6 companies selected by the TPO having turnover exceeding ₹ 200 crores whereas

Besides the above the ld. AR also submitted that the impugned companies/comparable as discussed above are also functionally dissimilar to the assessee. The ld. AR to this effect has made a detailed submission in the synopsis of arguments.

The ld. AR further submitted that the companies namely ICRA techno analytics Ltd and Kals information systems Ltd. should also be excluded from the list of the comparable as selected by the TPO. As per the ld. AR, the company namely ICRA provides diverse range of IT solutions and services. As such ICRA is not full-fledged in the activity of software development. It includes IT solution services such as Business analytics, IT engineering and business process outsourcing which is evident from the annual report and the website of the company. According to the ld. AR the activity of the assessee is confined to the software development services and therefore the same cannot be compared with the ICRA techno analytics Ltd. The ld. AR in support of his arguments drawn our attention on the order of ITAT in the case of DCIT versus Electronics for imaging India private limited. reported in 70 taxmann.com 299, ACIT versus Broadcom India Research Private Limited 72 Taxmann.com 77 and M/s Cerner Healthcare solutions private limited versus ITO in IT(TP)A No. 44/Bang/2015 and 69/Bang/2015.

Regarding Kals Information Systems Ltd, the ld. AR submitted that it is engaged in the development of software product and related services, also providing implementation and maintenance services of such products. As such Kals Information System develop verities of software products which can be verified from their website. On the other hand, the activity of the assessee is confined to software development services only. In addition, 27% current assets of Kals Information System are on account of inventories of software products. Further the segment details are not available which can be verified from their annual report. Hence, in view of above the comparable i.e. Kals Information System should be excluded.

The ld. AR further submitted that the TPO excluded the company namely M/s Quintegra Solutions Limited selected by the assessee as comparable on the ground that such company incurred a heavy loss during the previous year. In this regard, the ld. AR submitted that the loss was appearing in the comparable company on account of non-operating expenses and exceptional items. Furthermore, the company is functionally comparable to the activity of the assessee. Accordingly, the ld. AR submitted that the same should be included in the list of the comparable.

In view of the above the ld. AR submitted the final list of the comparable to be adopted for working out the ALP of the international transaction carried out by the assessee. The list of such comparable stands as under:

On the other hand, the ld. DR before us vehemently supported the order of the authorities below.

We have heard the rival contentions of both the parties and perused the materials available on record. The facts of the case have been elaborated in the preceding paragraph which are not in dispute, therefore for the sake of brevity and convenience, we are not inclined to repeat the same. The 1st controversy arises whether the companies having turnover exceeding ₹ 200 crores should be excluded while calculating the ALP of the assessee. In this regard, we find pertinent to refer the order of this tribunal in the case of Autodesk India Private limited (supra) wherein it was held as under: 17.7 We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt. Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of Pentair Water India (P.) Ltd. (supra) has

Regarding the exclusion of the comparable company namely ICRA Techno Analytics Ltd and Kals Information Systems Ltd., as such the learned AR for the assessee before us contended that the activity of the assessee is confined to Software Development Services only whereas, the above-mentioned companies are engaged in diversified activity of software development, consultancy, engineering services, web development and hosting etc as well as has developed verities of own software products. Hence these companies are functionally different. Accordingly, such companies cannot be taken as comparable for the purpose of computing ALP. In this regard, we note that the provision of Rule 10B(2) of the IT rule specified that while selecting comparable it is necessary to consider the specific characteristics of transactions carried out, the functions performed, amount of assets employed, risk taken etc and these factors should be similar. As in the case present case, the business activity of the assessee and the said comparable companies are dissimilar, therefore these companies cannot be included in the comparability analysis. At this juncture, it is also pertinent to note that this tribunal in the case of DCIT vs. Electronics for Imaging India (P) Ltd. reported in 70 taxmann.com 299 held that these two companies namely ICRA Techno Analytics Ltd and Kals Information Systems Ltd are not comparable with the assessee which is engaged in software

Regarding the inclusion of the company namely Quintegra Solution Limited as one of the comparable, we note that the basis adopted by the revenue authorities for not including the impugned company as comparable is not appropriate. As such, we note that the impugned company has earned profit in the financial year 2007-08 which is evident from page 225 of the appeal memo. Likewise, we note that the impugned comparable is not incurring the losses as far as operating income is concerned. The losses were shown on account of exceptional items claimed by the assessee as deduction in the profit and loss account. Thus, the view of the TPO/DRP is not fully true that the impugned company is incurring losses. Furthermore, we note that the Bombay High Court in the case of CIT versus Welspun Zucchi textiles Ltd in ITA No. 1286 of 2014 vide order dated 6 January 2017 reported in 77 taxmann.com 137 (Bombay) wherein the facts are somewhat identical has observed as under: The revenue itself had accepted SEL and VTI as comparables for the immediate preceding assessment year i.e. assessment year 2007-08. Before instant court also, it is not disputed that the two companies are otherwise comparable as they satisfy the FAR analysis for comparison with the respondent assessee. Further, rule 10B(2) of the rules itself sets out that for the purposes of determining the ALP, the comparison between an international transaction and an uncontrolled transaction would be judged with reference to the aspects specified therein preceded by the word 'namely'. From the reading of rule 10B(2), it would be clear that the bench marks for comparison as specified being preceded by the word 'namely' is exhaustive. Therefore, it is not permissible to include new reference point while making comparison. The aforesaid rule does not require exclusion of a company from comparability analysis only because it had suffered a loss in a particular year. However, it must be clarified that in the facts of a particular case, a loss could be a symptom to enquire/examine whether it is on account of any of the reference point referred to in rule 10B(2) of the rules would get attracted. In any case, the impugned order records a finding that the revenue has not shown that the two companies are consistent loss making concerns, which would require examination to ascertain, if it is hit by one of the reference points mentioned in rule 10B(2) of the rules. Moreover, the revenue has itself accepted SEL and VTI as comparables for the earlier assessment years. Therefore, if the revenue were of the view that only because of the losses in the subject assessment year the two companies are not comparable, then

The next issue raised by the assessee in ground No. 14 and 15 is that the learned DRP/AO erred in not providing the adjustment towards the working capital while calculating the ALP with respect to the transactions carried out by the assessee with the associated enterprises.

The assessee before the TPO in pursuance to the provision contained in Rule 10B(3) of Income Tax Rules sought adjustment on account of working capital difference between the assessee being tested party and comparable companies in order to compute appropriate ALP. However, the same was rejected by the TPO.

The assessee preferred to raise objection before the learned DRP. It was reiterated that according to rule 10B(3) of the IT Rules, appropriate adjustment

The learned DRP found that the assessee only contended that there is difference in payable and receivable position with the comparable but failed to demonstrate how these differences impacting the price, cost, and profitability. As such only the year end balance of working capital based on final balance sheet has been provided and based on the same, the assessee contended to make an adjustment which could not enable to compute the impact on the price, cost, and profitability of entities throughout the year. Further yearend balance is not able to reflect whether the working capital balances are arising out of revenue transaction or only of capital transactions or both. Therefore, the learned DRP in absence of necessary materials suggesting there is any impact on the transaction being controlled and uncontrolled which requires appropriate adjustment rejected the objection of the assessee.

Being aggrieved by the direction of learned DRP and final assessment order, the assessee is in appeal before us.

The learned AR of the assessee before us submitted that the assessee company is funded by its AE. Therefore, it is running its business without

On the other hand, the learned DR before us vehemently supported the order of the authorities below.

We have heard the rival contentions of both the parties and perused the materials available on record. In the present case, the issue revolves whether the adjustment on account of working capital be made while calculating the ALP of the assessee. In this regard, we note that rule 10B(3) of the IT Rules provides appropriate adjustment to be made on account of differences in tested party and comparable companies which may affect the price and profitability. The Delhi Tribunal in the case of Mentor Graphics (Noida) Pvt Ltd vs. DCIT reported in 109 ITD 101 which was subsequently confirmed by the Hon’ble Delhi High Court has observed as under: 27. After the selection of the comparables, best method of determining Arm’s Length Price is selected. Thereafter, func- tional analysis is carried to identify functions, risk and assets of uncontrolled transactions and comparison is carried with characteristics of the controlled transaction. This is necessary to find whether comparable selected are really comparable and reliable. Comparison based on functional analysis include economically significant activities and responsibilities undertaken or to be undertaken by the independent and associated enterprises. The structure and organization of the group and more particularly the judicial relationship between different entities of same group are to be seen. The function that need to be identified while carrying comparison as per OECD guidelines include design, manufacturing, assembling, research and development, servicing, purchasing, distribution, marketing, advertising, transportation, financial and management activities. It is also necessary to examine as to what is the principal function of the entities. The analysis of comparison should consider total assets employed and assets used to earn profit. The risk assumed by respective parties is a very important consideration. It is a simple principle of economics that the greater the risk, the greater the expected return (compensation). If there are material and significant differences in the risk involved, then the comparable identified are not correct as appropriated adjustments for differences in such cases are not possible. Therefore, while performing searches for potential comparable companies, not only turnover and operating profit but functions performed and risk profile are also to be considered. However, it can always be shown on the given facts of the case that comparable found are similar or almost similar to the controlled transaction and no adjustments are needed. It is useful to see the level of intangible assets in comparable to

The next interconnected issue raised by the assessee in ground No. 16 to 22 is that the learned DRP and the AO erred in treating the royalty expenses as capital in nature which is otherwise incurred as percentage of sales and therefore the same represents revenue expenses.

The assessee in the year under consideration has claimed a deduction of Rs. 11,51,74,904/- treating the payment towards royalty as revenue in nature.

The learned AR before us contended that the ITAT in the own case of the assessee for the earlier assessment year 2012-13 on the issue of royalty expenses being revenue in nature has set aside to the AO for fresh adjudication. The AO in the set aside proceedings for the assessment year 2012-13 has accepted the royalty expenses as revenue in nature.

The learned AR also submitted that the AO in the remand report furnished under Rule 46A of Income Tax Rule to the ld. Commissioner appeal for the assessment year 2015-16 has also treated royalty payment as revenue in nature and therefore submitted that such expenses are allowable under section 37 of the Act. Accordingly, the learned AR contended that the royalty expenses should be allowed as deduction as there is no change in the facts and circumstances.

On the other hand, the learned DR vehemently supported the order of the authorities below.

We have heard the rival contentions of both the parties and perused the materials available on record. At the outset we note that the revenue in the own case of the assessee in the earlier assessment year 2012-13 and in the assessment year 2015-16 held the royalty expenses as revenue in nature. Therefore, we hold that such expenses cannot be treated as capital in nature in the year under consideration. The copy of the assessment order framed for the assessment year

The next issue raised by the assessee in ground No. 23 and 24 is that learned AO erred in granting the short interest under section 244A of the Act and furthermore erred in computing interest under section 234D of the Act erroneously.

At the outset learned AR before us contended that a direction can be issued to the AO for calculating the interest under section 234D and 244A of the Act as per the provisions of law. The learned DR raised no objection if such direction is issued to the AO for fresh calculation of interest under section 244A and 234D of the Act as per the provisions of law. Accordingly, we direct the AO to calculate the amount of interest under the provisions of section 234D and 244A of the Act as per the provisions of law. Hence the grounds of appeal of the assessee are allowed for the statistical purposes.

In the result, the appeal filed by the assessee is partly allowed for the statistical purposes. Order pronounced in court on 20th day of August, 2024 Sd/- Sd/- (GEORGE GEORGE K) (WASEEM AHMED) Vice President Accountant Member Bangalore, Dated, 20th August, 2024 / vms /