MWH INDIA P .LTD,MUMBAI vs. DCIT CIR 9(2), MUMBAI

Pertinently, the aforesaid appeal was disposed of earlier vide order dated 27-10-2017. However, while deciding the appeal, the Tribunal, inadvertently did not decide grounds 1 & 2. Therefore, while considering a miscellaneous application filed by the assessee, vide M.A. No.284/Mum/2018, the Tribunal, in order dated 11-03-2020, recalled the appeal order to the limited extent for deciding grounds 1 and 2. This is how the appeal came up before us for hearing.

Be that as it may, in ground 1, the assessee has challenged the addition of Rs.4,48,60,208/- on account of transfer pricing adjustment. 4. Briefly the facts are, the assessee is a resident company. As stated by the transfer pricing officer (TPO, hereinafter), the assessee is basically engaged in providing software consultancy and design services through its overseas associated enterprises (AEs). While providing such services to the AEs, assessee had earned revenue of Rs.19,11,81,023/-.To benchmark the aforesaid transaction, assessee selected transactional net margin method (TNMM) as the most appropriate method with operating profit/operating cost (OP/OC) as profit level indicator (PLI). After considering itself as the tested party, assessee proceeded to select comparables by applying certain filters. In such search and selection process, the assessee selected certain comparables having average PLI of 14.33%. The PLI of the assessee having been shown at 27.42%, the price charged for transaction with AE was claimed to be at arm’s length. Though, the TPO accepted TNMM as the most appropriate method with PLI of OP/OC; however, he did not accept the search and selection process of comparables adopted by the assessee as well as computation of its own margin. After rejecting the TP study report citing unreliability, the TPO proceeded to select comparables independently and in the process, he short listed nine companies as comparables with average PLI of 32.14%, whereas, he computed the PLI of the assessee at 13.65%. Applying PLI of the comparables, he computed the arm’s length price of the services provided to the AEs. The resultant shortfall of Rs.4,48,60,208/- was proposed as upward adjustment to the price charged. On the recommendations of the TPO, assessing officer added back the aforesaid adjustment to the income. Though, against the aforesaid addition assessee raised objections before learned DRP; however, it was unsuccessful. Accordingly, the addition was finalized in the assessment order.

Shri J.D. Mistry, the learned SeniorCounsel appearing for the assessee before us, has restricted his submissions against selection of three comparables and for allowing certain adjustments while computing the margin of another comparable. Therefore, for the purpose of the present appeal, we proceed to deal with the specific contentions of learned Senior Counsel and decide the issue relating to acceptability or otherwise of the following comparables:- I. CELESTIAL BIOLABS LTD 6. Objecting to the selection of this company, learned Senior Counsel submitted, the company is engaged in completely different kind of services, such as, bio-informatic services, software development services etc.Whereas, he submitted, the segmental information relating to the services are not available in the annual report. In this context, he drew our attention to the annual report of the comparable placed at page 35 of the paper book. Further, he submitted, this company is engaged in development of drug designing product which they deploy to provide customized solutions. He submitted, the company is also venturing into manufacturing of drugs and enzymes. He submitted, since the company is not involved in software development services, but, is primarily engaged in product development and sale of the developed products with some customization to its customers in the field of bio technology, pharmaceutical and health care industry, it is not a comparable to the assessee. To emphasise upon the fact that this company is in product development, he drew our attention to annual report of the company, wherein it has shown research and development (R&D) expenses. Thus, he submitted, the company cannot be a comparable to the assessee. In support of such contention, he relied upon the following decisions:- i. UCB India Pvt Ltd vs Addl.CIT (ITA No.7691/Mum/2012) dt 29.7.2016 ii M/s 3DPLM Software Solutions Ltd vs Dy.CIT I.T.(TP) A. No.1303/Bang/2012 dt. 28-11-2013

Drawing our attention to the annual report of the company, Shri A. Mohan, the learned Departmental Representative submitted, the company is engaged in clinical research and manufacture of by-products and other products, which are akin to the work of water treatment and sewage disposal undertaken by the assessee. He submitted, since this company is comparable to the assessee, it cannot be rejected. He submitted, the decision rendered in case of UCB India Pvt Ltd vs Addl. CIT (supra) being factually distinguishable, will not apply.

We have considered rival submissions and perused materials on record. Admittedly, the TPO, in his own words has stated that the assessee is providing software development and design services. Whereas, a perusal of the material on record, which also includes the annual report of Celestial Biolabs Ltd, it is noticed that this company is into product development. It is also to be noted, though this company is providing various kinds of services and also developing products; however, segmental details of the services provided and products developed are not available in public domain. Considering these aspects, the co-ordinate bench of this Tribunal in case of UCB India Pvt Ltd vs Addl.CIT (supra) has rejected this company as comparable to a software development service provider. The same view has again been expressed by the Tribunal in Dialogic Network India Pvt Ltd vs ACIT (supra). Even, in case of M/s 3DPLM Software Solutions Ltd vs Dy.CIT (supra), this company has been rejected as a comparable to a software development and design service provider. Considering the fact that there is no major factual difference between the cases referred to above and the instant appeal and further, the fact that the above referred decisions are for the very same assessment year, we are inclined to follow the view expressed in the decisions referred to above and reject this company from being treated as a comparable to the assessee. II. E-ZEST SOLUTIONS LIMITED 9. Objecting to this comparable, the learned Senior Counsel submitted, this company is engaged in providing information technology enabled services (ITES). Drawing our attention to various functions provided by this company as shown in its website, learned Senior Counsel submitted, none of the services provided by this company comes within the category of software development services. Therefore, it cannot be treated as comparable to the assessee. In support of such contention, he relied upon the following decisions:- i. Accenture Services Pvt Ltd vs ACIT IT(TP) A No.7686/Mum/2012 dt 20-07-2018

The learned Departmental Representative submitted, this company met the broad functional comparability; hence, should not be rejected. In this context, he drew our attention to the various services provided by the company.

We have considered rival submissions and perused materials on record. As we find from the annual report of this company, it appears that it provided high- end ITES to its AEs and segmental information regarding various services provided are not available in public domain. Considering the fact that the aforesaid company is engaged in providing high-end ITES or knowledge process outsourcing (KPO) services, it has been rejected as a comparable to a software development service provider in the above referred decisions. Since, the aforesaid decisions cited before us pertain to the very same assessment year and there is no major change in the factual position, following these decisions, we reject this comparable. III. ACROPATEL TECHNOLOGIES LIMITED 12. Objecting to selection of this comparable, the learned Senior Counsel for the assessee submitted, this company does not pass certain quantitative filters applied by the TPO himself. He submitted, the total revenue earned from information technology segment is less than 75%, employee cost as a percentage of total expenses is less than 25% and the on-site development expenses as a percentage of total expenses is more than 60%. To substantiate this claim, learned Senior Counsel drew our attention to the annual report of the company placed in the paper book. Thus, he submitted, since the company does not qualify the filters applied by the TPO, it cannot be selected as a comparable. In support of such contention, he relied upon the following decisions:-

The learned Departmental Representative submitted, if the objection of the assessee is with regard to non-qualification of certain filters by the company, it can be restored back to the AO/TPO for verification and ascertaining the true nature of receipt credited in the P&L Account. Further, drawing our attention to the decision of ITAT,Bangalore Bench in the case of M/s E4E Business Solutions Pvt Ltd vs Department of Income-tax in IT(TP)A No.1765/Bang/2013 dated 04-11- 2015, he submitted, the company provides engineering design services and software development services. Therefore, it is functionally comparable to the assessee.

We have considered rival submissions and perused materials on record. As could be seen from the order of the TPOin case of the present assessee, while selecting comparable companies, he has applied certain filters, which include the following:- I. Income from software development services more than 75% of the operating revenue; II. Employee cost to operating revenues more than 25%. 15 On perusal of the annual report of the company placed in the paper book, the contention of learned Senior Counsel appears to be correct. Further, it is observed, while considering similar objections raised on behalf of the assessee in case of Accenture Services Pvt Ltd vs ACIT (supra), the Tribunal has excluded this company from being treated as comparable as it does not qualify the aforesaid filters. The same view has been re-iterated by the co-ordinate bench in case of Dialogic Networks (India) Pvt Ltd vs the ACIT (supra). Following the aforesaid decisions of the co-ordinate bench, we direct the assessing officer to exclude this company from the list of comparables. IV. SOFTSOL INDIA LTD 16. Though,learned Senior Counsel for the assessee has no objection against retaining this company as a comparable; however, he submitted, certain adjustment has to be made while computing the margin of the company. He submitted, the rental income earned by this company being non-operating revenue should be excluded while computing the margin. Further, he submitted, another two items, being excess provision written back and miscellaneous receipts, have to be excluded while computing the margin of the company. He submitted, if the aforesaid three items are excluded, the margin of the company would be 15.00% as against 42.30% computed by the TPO. Further, he submitted, in case of Dialogic Networks (India) Pvt Ltd vs the ACIT (supra), the Tribunal accepting assessee’s claim had allowed the aforesaid adjustments to be made while computing the margin of the company. 17. The learned Departmental Representative submitted, the assessee did not raise this issue either before the TPO or before the learned DRP. Therefore, he cannot be allowed to raise this issue at this stage. Further, he submitted, as long as cases are comparable and pass the filters, further adjustment, unless it abnormally affects the margin, cannot be allowed. He submitted, when TNMM would apply, broad functional comparability is only required to be seen.

We have considered rival submissions and perused materials on record. In our considered opinion, assessee’s contention that certain adjustments have to be made in computing the margin of this company, requires consideration. In case of Dialogic Networks (India) Pvt Ltd vs the ACIT (supra) which is for the very same assessment year, the Tribunal while accepting similar claim made by the assessee, has directed the assessing officer to compute the margin of this company at 15%. Therefore, following the aforesaid decision of the co-ordinate bench, we direct the assessing officer to compute the margin of this company at 15%.

In course of hearing, it has been submitted before us by learned Senior Counsel for the assessee that with removal of Celestial Biolabs Ltd, E-Zest solutions limited, Acropatel technologies limitedas comparables and computing the correct margin of Softsol India Ltd, the PLI of the assessee computed by the TPO would be within the acceptable range of the average PLI of the rest of the comparables, requiring no further adjustment.

In view of the aforesaid submission of learned Senior Counsel assessee, we refrain from adjudicating any other issue relating to the transfer pricing adjustment which is the subject matter of this ground. Ground is partly allowed.

In ground 2, assessee has challenged the TP adjustment made to the payment of management charges.

The learned Senior Counsel appearing for the assessee submitted, though the TPO has proposed the adjustment, however, in the final assessment order the assessing officer has not made any separate addition to the total income in respect of the aforesaid adjustment. Therefore, he submitted, on the instructions from the assessee the ground is not pressed.

In view of the aforesaid submission of learned Senior Counsel for the assessee, this ground is dismissed as not pressed.

In the result,appeal is partly allowed. Order pronounced on 11/03/2021. Sd/- sd/- (RAJESH KUMAR) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dt : 11/03/2021 Pavanan Copy to : 1. Appellant 2. Respondent 3. The CIT concerned 4. The CIT(A) 5. The DR, ITAT, Mumbai 6. Guard File By Order