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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI CHANDRA POOJARI
Per N.V. Vasudevan, Vice President IT(TP)A No.221/Bang/2016 is an appeal by the Revenue against the final order of assessment dated 21.12.2015 of ACIT, Circle 1(1)(1), Bangalore [hereinafter referred to as the Assessing Officer, (“AO” in short)] passed u/s. 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (the Act) in relation to assessment year 2011-12. The assessee has filed a cross- objection against the very same order of the AO.
The assessee is engaged in the business acting as distributors for surgical products of its parent company Alcon Inc., USA. The assessee also provides Software Development Services (SWD services) which has been referred to as IT Support Services in the order of the Transfer Pricing Officer (TPO). The assessee also provides Marketing and Sales Support Services (MSS) to its wholly owned holding company. In terms of the provisions of Section 92A of the Act, the assessee and its wholly owned company were Associated Enterprises (“AEs”). In terms of Sec. 92B(1) of the Act, the transaction of providing SWD Services and MSS were “international transactions” i.e., a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. In terms of Sec. 92(1) of the Act, any income arising from an international transaction shall be IT(TP)A No.221/Bang/2016 & CO No.33/Bang/2017 Page 3 of 25 computed having regard to the arm’s length price. In this appeal by the assessee, the dispute is with regard to determination of Arm’s Length Price (ALP) in respect of the aforesaid two international transaction of (i) rendering SWD services to the AE, and (ii) rendering of MSS to the AE. We shall deal each of the international transaction separately.
SOFTWARE DEVELOPMENT SERVICES SEGMENT
As far as the provision of Software Development services are concerned, the assessee did not file any Transfer Pricing Study (TP Study) to justify the price paid in the international Transaction as at ALP. The TPO adopted Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) of determining ALP. The TPO selected Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI) for the purpose of comparison. The OP/TC of the assessee was arrived at 7.84% by the assessee. The operating income was Rs. 1,97,39,622 and the Operating Cost was Rs. 1,83,03,341. The Operating profit (Operating income – Operating cost) was Rs. 14,35,681.
As already stated, the TPO, to whom the determination of ALP was referred to by the AO, accepted TNMM as the MAM and also used the same PLI for comparison i.e., OP/OC. The TPO identified 13 companies as comparable with the assessee company and worked out the average arithmetic mean of their profit margins as follows:-
IT(TP)A No.221/Bang/2016 & CO No.33/Bang/2017 Page 4 of 25 Comparables selected by TPO and arithmetic mean
The TPO computed the addition to total income on account of adjustment to ALP as follows:- Computation of arm's length price by TPO and the adjustment made Arm's Length Mean Margin on cost 24.82% Less: Working Capital Adjustment 1.63% Adjusted mean margin of the comparables 23.19% Operating Cost Rs. 1,83,03,341 Rs. 2,25,47,886 Arm's length Price (123.11% of Operating Cost) Price Received Rs. 1,97,39,022 Short fall being adjustment u/s. 92CA Rs.28,08,864 6. Thus a sum of Rs. 28,08,864 was added to the total income of the assessee on account of determination for ALP for provision of SWD services by the assessee to its AE.
IT(TP)A No.221/Bang/2016 & CO No.33/Bang/2017 Page 5 of 25 7. The assessee filed objections before the Disputes Resolution Panel (DRP) against the draft assessment order passed by the AO wherein the addition suggested by the TPO as adjustment to ALP was added to the total income of the assessee by the AO. The DRP excluded 10 comparable companies out of the 13 comparable companies chosen by the TPO and retained only the following three companies as comparable companies viz., (i) Persistent Systems Ltd., (ii) Sasken Communication Technologies Ltd., and (iii) Persistent Systems & Solutions Ltd., on the application of various filters. To the extent the assessee did not get relief from the DRP, the assessee has preferred CO before the Tribunal. The specific grounds of CO preferred for adjudication in SWD Services are contained in ground No.6(b) in which the assessee has projected grievance with regard to non- exclusion of the three companies by the DRP viz., Persistent systems Ltd., Persistent Systems & Solutions Ltd., and Sasken Communication Technologies Ltd. The assessee has also challenged exclusion of Evoke Technologies Ltd., and RS Software (I) Ltd., by DRP in ground No.7.
The Revenue is aggrieved by the order of the DRP by which the DRP directed exclusion of the following 7 comparable companies viz., (i) Acropetal Technologies Ltd., (ii) L&T Infotech Ltd., (iii) RS Software (I) Ltd., (iv) E-Infochips Ltd., (v) ICRA Techno Analytics Ltd., (vi) e-Zest Solutions Ltd. (vii) Infosys Technologies Ltd. and (viii) Tata Elxsi Ltd.
The grounds of appeal
raised by the Revenue reads as follows:- “Software development services segment
3. The DRP erred in directing the AO/TPO to exclude M/s. Acropetal Technologies Ltd., M/s. L&T Infotech Ltd., and M/s. R.S. Software (India) Ltd., from the list of comparables, holding them to be functionally dissimilar as they are having significant onsite revenues, thereby seeking exact comparability while searching for comparable companies of the assessee under TNMM method, whereas requirement of law and international IT(TP)A No.221/Bang/2016 & CO No.33/Bang/2017 Page 6 of 25 jurisprudence require seeking similar comparable companies. Also, the nature of activity, ie., software development remains the same, irrespective of the company engaged in providing onsite or offshore services.
4. The DRP erred in directing exclusion of M/s. R.S. Software Pvt. Ltd., M/s. L&T Infotech Ltd., and M/s. Acropetal Technologies Ltd., on the ground that they have significant onsite revenue, without appreciating the fact that onsite development of software entails more cost and thereby results in lower profit margins.
5. The DRP erred in directing the AO to exclude M/s. Acropetal Technologies Ltd., from the list of final comparables also for the reason that clear segmental information of the employee cost and export earning filter was not available without appreciating that proper segmental information was available on Prowess database as well as audited financials.
6. The DRP erred in directing to exclude E-infochips Ltd., from the list of comparables holding that-no segmental information is available and that it fails 75% service revenue filter," by not acknowledging the fact that entire revenue of the company comes from provision of services, and service income being 100% of its sales, the company qualifies the filter.
7. The DRP erred in directing exclusion of M/s. M/s. ICRA Techno Analytics Ltd., from the list of comparables on the ground that it is into diversified activity and no segmental data is available, without appreciating that the basic function of the company is developing software solutions in those and other verticals. The company's business of analysis of statistical data of its clients before providing software solutions does not render the services to be functionally uncomparable.
8. The DRP erred in directing to exclude M/s.E-Zest Solutions Ltd., from the list of comparables holding it to be functionally uncomparable, thereby seeking exact comparability by imposing condition beyond law whereas requirement of law is to acknowledge only those differences that are likely to materially affect the margin. The DRP ought to have appreciated that the comparable qualified all the qualitative and quantitative IT(TP)A No.221/Bang/2016 & CO No.33/Bang/2017 Page 7 of 25 filters applied by the TPO and in a computer software services, if considered as a sector of business, the 15 different lines prevailing in the business cannot be considered functionally different from each other.
9. The DRP erred in directing exclusion of M/s. Infosys Technologies Ltd., from the list of comparables holding it to be functionally uncomparable, without appreciating that the primary source of income of the comparable is from provision of software development services. Also, the DRP erred in imposing a condition beyond law in seeking exact comparability, whereas requirement of law is to acknowledge only those differences that are likely to materially affect the margin.
10. The DRP erred in disregarding the position of law that there could be differences between the enterprises compared under TNMM method that are not likely to materially affect the price or cost charged or the profits accruing to such enterprises.
11. The DRP erred in directing the AO to exclude M/s. Tata Elxsi Ltd., from the list of comparables, holding it to be functionally uncomparable, without appreciating the fact that the comparable qualified all the qualitative and quantitative filters applied by the TPO and it is a similar comparable company and moreover, the requirement of law and international jurisprudence require seeking similar comparable companies while searching for comparable companies under TNMM. The DRP has also not appreciated that there have been no projects in visual computing labs during the relevant previous year.
12. The DRP erred in directing the AO/TPO to exclude M/s. R.S. Software (India) Ltd., from the list of comparables merely to maintain consistency, even in the absence of objection with respect to inclusion of the said comparables in the list.”
10. We shall first take up revenue’s appeal for consideration. The ld. counsel for the assessee brought to our notice the decision of Bangalore ITAT in the case of M/s LG Soft India Pvt. Ltd. Vs. DCIT in IT(TP)A No. 52/Bang/2016 f\or AY 2011-12 order dated 05.08.2020. In the aforesaid decision the assessee was also a SWD service provider and the very same IT(TP)A No.221/Bang/2016 & CO No.33/Bang/2017 Page 8 of 25 comparable companies were chosen as comparable companies in that case. The Tribunal ruled on the comparability of 7 out of 8 comparable companies which were excluded by the DRP with a SWD service provider such as the assessee and which exclusion has been challenged by the Revenue in ground No. 3 to 12 of its appeal. The following were the relevant observations of the Tribunal for excluding the aforesaid 7 companies out of 8 comparable companies listed in paragraph 8 above. “10. With regard to the other 7 comparable companies, whose exclusion is challenged by the revenue in ground No.2 of its appeal, we find that exclusion of these comparables from the list of companies selected by the TPO had come up for consideration before the Bangalore ITAT in the case of Electronic for Imaging (I) Pvt. Ltd. v. DCIT [2017] 85 taxmann.com 124 [Bang. Trib]. ; Symantech Software & Services (I) Pvt. Ltd. v. DCIT, DCIT v. Ikanos Communication Pvt. Ltd. in ITA 137/Bang/2015; Ness Technologies (I) Pvt. Ltd. v. DCIT in ITA No.696/Mum/2016 which are also decisions rendered in relation to AY 2011-12 in the case of a companies providing SWD services such as the assessee in the present appeal. It is also relevant to point out that the very same comparable companies chosen by the TPO in the present appeal had been chosen by the TPO as comparable companies in the case of Electronic for Imaging (I) Pvt. Ltd. (supra). The Tribunal in its order dated 14.7.2017 in the aforesaid case dealt with the comparability of these companies.
11. As far as Acropetal Technologies Ltd. is concerned, vide para 8 of the order of Tribunal in Electronics for Imaging (I) Pvt. Ltd. (supra), exclusion of Acropetal was upheld on the ground that this company was into development of computer products. The Tribunal also held that L&T Infotech Ltd. had RPT at 18.66% and since the RPT was beyond the threshold limit of 15%, this company was directed to be excluded from the list of comparable companies. The Tribunal further excluded Tata Elxsi Ltd. from the list of comparables on the ground that this company was engaged in diversified activities and was not a pure SWD services provider such as the assessee. In para 9 of the aforesaid order, the Tribunal held e-Infochips Ltd., was earning revenue IT(TP)A No.221/Bang/2016 & CO No.33/Bang/2017 Page 9 of 25 both from the software services and software products and though the break-up of revenue from the two segments were available, but the break-up of Operating Cost and Net Operating revenue and segmental details were not available.
12. As regards e-Zest Solutions Ltd., in the case of Symantech Software & Services (I) Pvt. Ltd. v. DCIT, this company was held to be engaged in Knowledge Process Outsourcing (KPO) and cannot be regarded as a SWD services company.
The Tribunal in the case of DCIT v. Ikanos Communication Pvt. Ltd. in ITA 137/Bang/2015 excluded the company, ICRA Techno Analytics Ltd., on the ground that it was engaged in engineering and consulting services, besides licensing and sub-licensing and no segmental information was available to compare the margins of SWD services segment.
The Mumbai Tribunal in the case of Ness Technologies (I) Pvt. Ltd. v. DCIT in ITA No.696/Mum/2016 held Infosys Ltd. to be not comparable for the reason that this company was engaged in manufacturing of software products and was a giant company assuming various risks. As far as Larsen & Toubro Infotech Ltd., is concerned, vide paragraph-8 page-16 of the order in the case of Electronics for imaging India Pvt. Ltd., (supra) this tribunal excluded this company on the ground of presence of onsite revenue of more than 50% and that the related party transaction was more than 15% (18.66%).
15. Respectfully following the aforesaid decisions, we uphold the exclusion of the aforesaid 7 companies from the list of comparable companies and ground No.2 raised by the assessee to this extent is dismissed. We may add that the other grounds raised
by the revenue in its appeal are purely supportive of ground No.2 and are general grounds with no specific reference to instances of comparables excluded and hence dismissed.”
11. Respectfully following the aforesaid decision, we uphold order of DRP excluding the aforesaid 7 companies from the list of comparable companies.
IT(TP)A No.221/Bang/2016 & CO No.33/Bang/2017 Page 10 of 25 12. As far as exclusion of RS Software (I) Ltd. from the list of comparable companies is concerned, we find that in ground No.7 of CO, the assessee has also sought inclusion of this company in the list of comparable companies. The ITAT Bangalore Bench in the case of Applied Materials (I) Pvt. Ltd. Vs. ACIT in IT(TP)A No.17 & 39/Bang/16 (AY 2011- 12) order dated 21.09.16 vide para 14.1 took the view that both assessee and Revenue do not seek exclusion of this company, the DRP ought not to have suo motu applied onsite revenue filter to exclude this company. Facts being identical in this appeal, following the aforesaid decision, we hold that this company shall be retained as a comparable company. The relevant grounds of appeal of Revenue and assessee are accordingly allowed.
13. As far as the CO of the assessee is concerned, the ground of appeal in the CO relevant to SWD Software segment which was pressed for adjudication is ground No.6 (b) and 7 which reads as follows:- “TP GROUNDS (IT SUPPORT SEGMENT) 6(b) :- Adopting turnover filter of Rs.1 crore to infinity without appreciating that companies having large turnover are not comparable to the Respondent. ……..
7. The Hon’ble DRP has erred in rejecting Evoke Technologies Ltd. and R.S. Software India Ltd. as comparables on unjustified grounds and without appreciating that they pass all filters applied by the TPO.”
14. As for the plea of assessee to exclude the following 3 companies which were chosen as comparable companies by the TPO and retained by the DRP viz., Persistent Systems Ltd., Persistent Systems & Solutions Ltd., and Sasken Communication Technologies Ltd., the ld. counsel for the assessee has brought to our notice a decision of ITAT Bangalore in the case of Applied Materials (I) Pvt. Ltd. (supra) wherein on identical facts the IT(TP)A No.221/Bang/2016 & CO No.33/Bang/2017 Page 11 of 25 Tribunal excluded Persistent Systems Ltd. and Persistent Systems & Solutions Ltd. as comparable companies and remanded for fresh consideration comparability of Sasken Communication Technologies Ltd. The following are the relevant observations of the Tribunal:- “(ii) Persistent Systems and Solutions Ltd. (iii Persistent Systems Ltd. 9.2.1 These two companies were part of the TP Study analysis however the assessee raised objections against these companies before the TPO as well as DRP. 9.2.2 Before us, the learned Authorised Representative of the assessee has submitted that these companies are functionally not comparable to the assessee as these are engaged in diversified activity i.e. rendering of software development services and licensing, royalty of software products. Thus without having the separate segmental details and data these diversified activities cannot be compared with the assessee. He has further pointed out that the company Persistent Systems Ltd. also engaged in developing products and therefore the activities are not comparable with that of the assessee. In support of his contention, he has relied upon the decision of this Tribunal dt.24.2.2016 in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) and submitted that this company was found to be not comparable with the software development services provider. He has further pointed out that in assessee's own case for the Assessment Year 2010-11, the DRP vide its order dt.24.11.2014 has excluded Persistent Systems and Solutions Ltd. from the list of comparables by holding that this company is not comparable to the assessee. 9.2.3 On the other hand, the Id. DR has submitted that the TPO as well as DRP has examined the functional comparability of these companies and found that these companies are comparable with the assessee. These two companies have satisfied all the filters applied by the TPO and DRP therefore the minor variation in the activity would not render these companies non-comparable when a comparable price is considered under TNMM.
IT(TP)A No.221/Bang/2016 & CO No.33/Bang/2017 Page 12 of 25 9.2.4 We have considered the rival submissions as well as the relevant material on record. At the outset we note that the functional comparability of these two companies have examined by the co-ordinate bench of this Tribunal in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) in para 60 and 61 & paras 24 to 26 as under : " Persistent Systems & Solutions Ltd.
The assessee has the grievance against rejection of this company by the DRP. The Id. AR has submitted that assessee did not raise any objection against this company, however, the DRP has rejected the said company. Therefore, the said company should be retained in the list of comparables.
Having considered the rival submissions as well as relevant material on record, at the outset, we note that the DRP has examined the functional comparability of this company by considering the relevant details as given in the annual report of this company. The DRP has given the finding that the entire revenue has been earned by this company from the sale of software services and products and in the absence of segmental details, it cannot be considered as comparable with software services segment. We find that this company has shown the income from sale of software services and products to the tune of Rs.6.67 crores. We further note that as per Schedule 11, the entire revenue has been shown under one segment i.e., sale of software services and products. Therefore, no separate segment has been given in respect of software services. Accordingly, the composite data of revenue as well as margins of this company pertaining to the sale of software services and products cannot be considered as comparable with the software development services segment of the assessee. In view of the above facts and circumstances, we do not find any error or illegality in the directions of the DRP in excluding this company from the list of comparables. This ground of CO is dismissed. (4) Persistent Systems Ltd.
We have heard the Id. DR as well as Id. AR and considered the relevant material on record. The assessee raised objections against selection of this company on the IT(TP)A No.221/Bang/2016 & CO No.33/Bang/2017 Page 13 of 25 ground that this company is functionally not comparable as engaged in the product development. The segmental information for services and product is not available. Further, the assessee has also pointed out that there was an acquisition and restructuring during the year under consideration.
The DRP has noted the fact that this company has reported the entire receipt from sales and software services and product. Therefore, no segmental information was found to be available for sale of software services and product. Further, the DRP has noted that as per Note 1 of Schedule 15, this company is predominantly engaged in outsource software development service. Apart from the revenue from software services, it also earns income from licence of products, royalty on sale of products, income from maintenance contract, etc. These facts recorded by the DRP has not been disputed before us.
26. Therefore, when this company is engaged in diversified activities and earning revenue from various activities including licencing of products, royalty on sale of products as well as income from maintenance contract, etc., the same cannot be considered as functionally comparable with the assessee. Further, this company also earns income from outsource product development. In the absence of any segmental data of this company, we do not find any error or illegality in the findings of the DRP that this company cannot be compared with the assessee and the same is directed to be excluded from the set of comparables." We further find from the Annual Report that there is no change in the activity and functions of these companies during the year under consideration in comparison to the Assessment Year 2010- 11. Accordingly, following the decisions of the co-ordinate benches of this Tribunal (supra), we direct the A.O./TPO to exclude these two companies from the set of comparables.'
IT(TP)A No.221/Bang/2016 & CO No.33/Bang/2017 Page 14 of 25 (iv) Sasken Communication Technologies Ltd. 9.3.1 The Id. AR of the assessee has submitted that this company is engaged in the development of software products as it has inventories, intangible assets as well as high expenditure on R&D. Therefore this company is functionally not comparable to the assessee. The Id. AR has referred to the Annual Report of this company and submitted that it derives income from software products specifically new products launched called 'Vyaparaseva' during F.Y. 2010-11. Thus this company is engaged in product development cannot be compared with the assessee when segmental details are not available. He has relied upon the decision dt.24.2.2016 of the co-ordinate bench of this Tribunal in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra). 9.3.2 On the other hand, the learned Departmental Representative has submitted that the inventory shown at page 70 of the report is very negligible. The product launched is for future period and not generated any revenue during the year under consideration. He has relied upon the orders of authorities below. 9.3.3 We have considered the rival submissions as well as the relevant material on record. The co-ordinate bench of this Tribunal in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) has considered the comparability of this company in paras 27 to 29 as under: “(5) Sasken Communication Technologies Ltd 27. The assessee raised objection that this company has revenue from software services, software products and other services. The DRP has come to the conclusion that this company earned revenue from 3 segments. However, no segmental information is available. Accordingly, the DRP directed the AO to exclude this company from the comparables.
We have heard the Id. DR as well as Id. AR and considered the relevant material on record. The DRP has IT(TP)A No.221/Bang/2016 & CO No.33/Bang/2017 Page 15 of 25 reproduced the break-up of revenue in the impugned order as under:- Amount in Rs. Lakhs ___________________________________________ Year ended Year ended March 31, 2010 March 31, 2019 -------------------------------------------------------------------------- Software Services 37,736.22 40,531.20 Software products 2,041.00 6,146.43 Other services 372.77 1,297.05 ___________________________________________ 29. Thus, there is no dispute that this company earns revenue from 3 segments. However, the segmental operating margins are not available. Therefore, in the absence of segmental relevant data and particularly operating margins, this composite data cannot be considered as comparable with the assessee for software development services segment. Accordingly, we do not find any error or illegality in the findings of the DRP." We further note that the DRP has not adjudicated the objections of the assessee whereas for the assessment year 2010-11, the DRP rejected this company as comparable. Accordingly, we set aside this issue to record of the A.O./T.P.O. to verify the relevant facts and compare with the facts recorded by the Tribunal in the case of DCIT Vs. Electronics for Imaging India Ltd. (supra) for the Assessment year 2010-11 and then decide the issue after giving an opportunity of hearing to the assessee.”
Respectfully following the aforesaid decision rendered on identical facts, we direct exclusion of Persistent Systems & Solutions Ltd. and Persistent Systems Ltd. from list of comparable companies. We direct re- examination of comparability of M/s Sasken Communication Technologies Ltd. to TPO/AO for fresh consideration on the lines indicated in the aforesaid decision.
IT(TP)A No.221/Bang/2016 & CO No.33/Bang/2017 Page 16 of 25 16. As far as inclusion of Evoke Technologies Ltd. as comparable company sought by assessee in ground No.7 of CO is concerned, the ld. counsel for assessee has drawn our attention to decision of ITAT, Bangalore Bench in the case of Applied Materials(I) Pvt. Ltd., (supra) wherein vide para 14.1 the Tribunal directed retaining Evoke Technology Pvt. Ltd. as comparable company for the reason that when both assessee and revenue wanted this company as comparable company, the DRP ought not to have excluded this company as comparable company. Following the said decision, we direct inclusion of this company as a comparable company.
The TPO is directed to compute the ALP in SWD Services Segment directions contained in this order after affording assessee opportunity of being heard. MARKETING SUPPORT SERVICES SEGMENT (MSS) 18. As far as the provision of MSS is concerned, the assessee filed a Transfer Pricing Study (TP Study) to justify the price paid in the international Transaction as at ALP by adopting the Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) of determining ALP. The assessee selected Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI) for the purpose of comparison. The OP/OC of assessee was 7.84%. The assessee chose a set of comparable companies whose average profit margin was 9%. Since the assessee’s profit margin was within permitted variation of the profit margin of the comparable companies, the assessee claimed that the price charged in the international transaction was at Arm’s Length. The TPO to whom the determination of ALP was referred to by the AO, accepted TNMM as the MAM and also used the same PLI for comparison i.e., OP/OC. The TPO rejected all companies chosen as comparable company by the assessee IT(TP)A No.221/Bang/2016 & CO No.33/Bang/2017 Page 17 of 25 and on his own chose three companies and worked out the average arithmetic mean of their profit margins and adjustment to ALP as follows:
The TPO computed ALP and consequent addition to the total income as follows:- Computation of arm's length price by TPO and the adjustment made Arm's Length Mean Margin on cost 18.25% B Rs.2,81,69,256 Operating Cost Arm's length Price (118.25% of C=B*118.25% Rs.3,33,10,145 Operating Cost)
Price Received D Rs.3,03,78,801 Rs. 29,31,344 Short fall being adjustment u/s. E=C - D 92CA
The assessee filed objection before the DRP against the draft order of assessment wherein the addition suggested by the TPO was added to IT(TP)A No.221/Bang/2016 & CO No.33/Bang/2017 Page 18 of 25 the total income of the assessee. The DRP excluded ICC International Agencies Ltd. from the list of comparable companies. Before the Tribunal, the assessee seeks exclusion of one out of the three comparable companies chosen by the TPO viz., Asian Exhibition & Conferences Ltd., and the Revenue is aggrieved by the exclusion of ICC International Agencies Ltd. from the list of comparable companies. The relevant ground of appeal
of assessee in CO is Ground No. 4 which reads as follows:- “2. The DRP-1, Bangalore has erred in confirming the selection of Asian Business Exhibitions and Conferences Ltd as a comparable, even though it is functionally different from the Respondent.”
21. The relevant ground of Revenue is Ground No.2 which is reproduced below:- “2. The DRP erred in directing to exclude M/s. ICC International Agencies Ltd., holding it to be functionally dissimilar on the ground of non-availability of information regarding nature of services, when the primary activity of the comparable involves processing orders including for its principal concern also the DRP erred in imposing conditions beyond the scope of law and business reality by rejecting all close comparables on one or the other ground, without appreciating that no two companies can ever be the same.”
22. As far as exclusion of ICC International Agencies Ltd. by the DRP is concerned, it was brought to our notice by the learned counsel for the assessee that in the case of AMD India Pvt. Ltd., Vs. ACIT in IT(TP)A No.1487 & 1496/Bang/2015 order dated 06.04.2017 ITAT Bangalore Bench for the very same segment for AY 2011-12 was pleased to hold that this company was not comparable with MS Services providing company. The relevant observations are as follows:-
IT(TP)A No.221/Bang/2016 & CO No.33/Bang/2017 Page 19 of 25 “2. ICC International Agencies Ltd : The assessee submitted before the DRP that this company is functionally not comparable since it is engaged in trading activity and thereby functionally different. The DRP rejected this company for the reason that this company is functionally dissimilar and for incorrect margin computation made by the TPO. The Revenue is on appeal . The assessee pleaded that this is functionally different and relies on this Tribunal decision in ITO v Interwoven Software Services(India) P Ltd [TS -723-ITAT - 2016 -Bang-TP ay 2010-11. The relevant portion of the order IT(TP)A.1487 & 1496/Bang/2015 Page - 36 from ITO v Interwoven Software Services (India) P Ltd [IT(TP)A.No.461/Bang/2015 dt 26.8.2016 for a y 2010-11 is extracted as under : "28. For this segment, the assessee is seeking exclusion of two comparables i.e. M/s Acentia Technologies Ltd., and M/s ICC International Agencies Ltd., The claim of assessee regarding exclusion of M/s Acentia Technologies Ltd. is also covered in favour of the assessee by the same Tribunal order rendered in the case of M/s Electronics for Imaging India (P)Ltd.,(Supra) and respectfully following the same Tribunal order, we direct the AO/TPO to exclude this company from the list of final comparable because the ld. DR of the revenue could not point out any difference in facts.
Regarding exclusion of second company, it was submitted by the learned AR of the assessee that i.e. M/s ICC International Agencies Ltd., (Supra) this is the claim of the assessee that annual report of this company available on page 1100 & 1104 of the paper book. As per the same, we find that this company is deriving income from trading activity and also maintaining inventories. Both these arguments are supported by annual report of this company available on page 1100 & 1104 of the paper book. Since the assessee is not engaged in trading activity, in our considered opinion, this company cannot be considered as good comparable in the present case and hence we direct the AO/TPO to exclude his company from the list of final comparable.”
IT(TP)A No.221/Bang/2016 & CO No.33/Bang/2017 Page 20 of 25 23. Following the said decision, we direct exclusion of the aforesaid company ICC International Agencies Ltd., from the list of comparable companies. The ld. DR submitted that ICC International Agencies Ltd., was accepted by assessee himself as comparable before the TPO. We find that before the DRP in the objections, the assessee has objected to inclusion of ICC International Agencies Ltd., as comparable company on several counts at page 05 of the written submission filed before the DRP on 04.12.2015. The Special Bench of the Hon’ble Tribunal in the case of DCIT v. Quark Systems (P) Ltd. ([2010] 38 SOT 307 (CHD.) (SB) has held that an assessee cannot be precluded from seeking exclusion of a company selected by it in its TP study, when the company is otherwise not comparable to the assessee. We therefore reject that argument of the learned DR in this regard.
24. As far as the plea of the assessee to exclude Asian Business Exhibition and Conference Ltd., is concerned, the ld. counsel for assessee has brought to our notice a decision of ITAT in the case of AMB (I) Pvt. Ltd. (supra) wherein this Tribunal directed exclusion of this company with the following observation:- “12. In respect of marketing support segment, the gist of the AR's submissions are extracted as under : 1. Asian Business Exhibition & Conferences Ltd : The assessee submitted before the DRP that this company is functionally not comparable since it earns income from exhibitions and events, sponsorship income, income and delegate fee and entry charges as per Annual Report. Further, the company operates in a single segment i.e., income from exhibitions and events. The DRP did not accept the assessee's plea. Before us, the assessee submitted that this company be rejected as it is functionally not comparable based on :
IT(TP)A No.221/Bang/2016 & CO No.33/Bang/2017 Page 21 of 25 • DCIT v. Electronics for Imaging India P. Ltd [IT(TP)A.No.212/Bang/2015 -AY.2010-11] • DCIT v. Aruba Networks India P. Ltd [TS-820-ITAT- 2016(Bang)-TP AY 2010-11] • ACIT v. RGA Services India P. Ltd [TS-580-ITAT-2015 (Mum)-TP-AY.2010-11] 13. The relevant portion of the order from DCIT v. Electronics for Imaging India P. Ltd [IT(TP)A.No.212/Bang/2015 -AY.2010- 11 is extracted as under : "53. We have considered the rival submissions and considered the relevant material on record. As it is clear that the assessee is providing sales and marketing services to its AE which includes identifying potential customers by conducting road shows, presentation and the like, the working also includes educating potential users of the benefit and features of the AEs range of products. However, products for which the assessee is providing sales and marketing services is only software/information technology products. Therefore Asian Business— Exhibition & Conference Ltd. which is mainly engaged in the organization of exhibitions and events as well as conducting conferences on behalf of the various clients for their various products and businesses. The functions of this company are entirely different from the assessee who is providing sales and marketing support services to its AE for software/IT products. The Mumbai Bench of the Tribunal in the case of RGA Services India (P.) Ltd. (supra) while considering the functional comparability of this company has held at paras 11 and 12 as under:- "11. We have considered the submission of the parties and perused the relevant material on record. On perusal of the order passed by the TPO it is noticed that the TPO while dealing with assessee's objection with regard to selection of Asian Business Exhibition and Conferences Limited as a comparable has admitted that the nature of function performed by this company is event management. It is further relevant to observe, on perusal of annual report of IT(TP)A No.221/Bang/2016 & CO No.33/Bang/2017 Page 22 of 25 this company it is seen that as per directors report, the main operation is organizing exhibition and events. Further, schedule 12 of the profit and loss account as well as notes to the accounts reveals, revenue earned by the company is from sponsorship, delegates attending conferences, events and entry fees charged from visitors for visiting exhibition, sale of stall place etc.
Thus, on overall analysis of facts and materials placed on record it is very much clear that the business model of the assessee and Asian Business Exhibition and Conferences Limited are totally different. While assessee undoubtedly is providing support services to its overseas AE's, Asian Business Exhibition and Conferences Limited is primarily and fundamentally engaged in event management. Thus, under no circumstances it can be considered as a comparable to the assessee. Therefore, for the aforestated reasons the DRP, in our view, was justified in excluding this company as a comparable. As far as the contention of learned DR that reasons on which this company was excluded equally applies to other comparables retained by the DRP, we may observe, such argument of learned DR is not at all relevant as the issue raised by the department in the present appeal is confined to exclusion of Asian Business Exhibition and Conferences Limited as a comparable. As far as objection of learned departmental representative that assessee itself has selected this company as a comparable, we may observe, that cannot be the sole criteria to reject assessee's objection with regard to selection of a comparable. At the time of preparing T.P. Study report assessee had selected some comparables by considering multiple year data and information available at the relevant time. However, if subsequently on the basis of information available in public domain it is found on the basis of functionality or some other reason a company is not at all comparable, assessee cannot be precluded from objecting to selection of the company as a IT(TP)A No.221/Bang/2016 & CO No.33/Bang/2017 Page 23 of 25 comparable. This legal proposition is fairly well settled by the decision in case of DCIT v. Quark Systems (P.) Ltd. (2010) 132 TTJ (Chd) (SB) 1 as well as decisions relied upon by the counsel for the assessee. In view of the aforesaid, we do not find any infirmity in the directions of DRP in excluding Asian Business Exhibition and Conferences Limited as a comparable. The ground raised
is therefore dismissed."
54. In view of the above facts as well as decision of the Mumbai Bench of the Tribunal, this company cannot be considered as a good comparable with the assessee.
55. Accordingly, we direct the AO/TPO to recompute the ALP in marketing support services segment by excluding Asian Business Exhibition & Conference Ltd. from the comparables." We heard the rival submissions and gone through relevant material. Following the above decision, the assessee's plea is allowed. The AO/TPO is directed to exclude this comparable.”
25. Following the said decision, we direct exclusion of the aforesaid company from the list of comparable companies.
We direct the TPO to compute the ALP in accordance with the directions contained in this order after allowing opportunity of being heard to the assessee. 27. In ground No.13, the Revenue has projected its grievance against the order of the DRP whereby the DRP deleted addition made by the AO u/s 40A(7) of the Act. The relevant ground of appeal
reads as follows: “Corporate Issue
13. The DRP erred in directing the AO to delete the addition made u/s 40(7) by relying on its own direction in assessee’s own case for A.Y. 2010-11, without appreciating the fact that the IT(TP)A No.221/Bang/2016 & CO No.33/Bang/2017 Page 24 of 25 assessee company had failed to communicate the changes/ alterations made to the fund, as required under Rule 4(2) of the Fourth Schedule of IT Act and the contribution to fund is only a provision and not an actual expense under the purview of section 37(1) of the Act”.
28. At the time of hearing, it was agreed by the parties that identical issue arose in assessee’s own case for AY 2010-11 in IT(TP)A No. 391/B/15 and this Tribunal by its order dated 21.11.2017 upheld the action of the DRP in deleting the addition made by AO with the following observations:- “13. Regarding the corporate tax issue as per ground no. 5 of the appeal of revenue, Learned DR of the revenue supported the draft assessment order passed by the AO. Learned AR of the assessee supported the order of DRP. He also submitted that after passing of the order by DRP, on 17.05.2016, CBDT has passed an order u/s 119, copy on pages 437 to 439 of the paper book and as per the same, delay committed by the assessee's trust in filing the relevant information with jurisdictional CCIT/CIT was condoned and thereafter, as per order dated 27.10.2016, copy on pages 440 & 441 of the paper book, approval was granted to M/s Alcom laboratories (India) Private Limited Employees Gratuity Fund Trust w.e.f. 01.01.2006 and therefore, now the relevant trust stands approved and therefore, the order of DRP is proper. 14. In this regard, we find that although the basis of the order of DRP is different but in view of this subsequent development, the objection of the AO for which, he made this disallowance does not survive and therefore. we decline to interfere in the order of DRP on this issue also.”
29. Respectfully following the aforesaid decision, we uphold the order of DRP and dismiss ground No.13 of the Revenue.