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Income Tax Appellate Tribunal, DELHI BENCH: ‘I-2’ NEW DELHI
Before: SH. R. K. PANDA & MS SUCHITRA KAMBLE
ORDER PER SUCHITRA KAMBLE, JM
This appeal is filed by the Revenue against the order dated 30.12.2015 passed by Income Tax Officer, Ward – 25(3), New Delhi under section 143(3) of the Income Tax Act, 1961 for Assessment Year 2011-12.
2. The Grounds of appeal are as under:- “On the facts and in the circumstances of the case, the DRP-2 erred 1. in directing AO to complete the assessment as per observations made by DRP in the order which resulting in reducing the addition to NIL in place of original recommended ALP of Rs.2,08,50,458/- for the International Transactions undertaken the assessee company with its associate/parent enterprises. 2. “The Hon’ble DRP has erred in law and on facts in rejecting Infosys of Technologies Ltd. By placing misplaced reliance on the judgment of Hon’ble High Court of Delhi in the case of Aginty Technology Ltd.” 3. “The Hon’ble DRP has erred in law and on facts in carrying out arbitrary analysis while examining the filters by the TPO without verifying into the facts of the case”.
4. The Hon’ble DRP has erred in law and facts in carrying out arbitrary analysis while examining the functional differentiability of the comparables.”
5. On the facts and in the circumstances of the case, the DRP-II erred in directing TPO to exclude below mentioned companies from the final set of comparables: Acropetal Technologies Ltd. (i) E-Infochips Ltd. (ii) E-zest Solutions Ltd (iii) Infosys Ltd (iv)
6. “The appellant craves, leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal”
3. The assessee-company is engaged in the business of survey programming, data processing, contract software, help desk, account management and project management. Return declaring income of Rs.20,44,920/- under the normal provisions of Act and Rs. 4,19,37,130/- under the provisions of Section 115JB was e-filed on 30.11.2011. The case was selected for scrutiny and statutory notice u/s 143(2) has issued and served on the assessee. Further, notice u/s 142(1) was also issued and in response, CA & AR of the assessee attended the proceeding from time to time details called for by the Assessing Officer was filed. Books of accounts were produced by the assessee company before the Assessing Officer. During the year under consideration, the assessee had undertaken international transactions with its associated enterprises. As the value of the international transactions was more
than Rs.15 crore, the international transactions entered into by the assessee with the associated enterprises were referred to the Transfer Pricing Officer for determining the Arm’s Length Price on 28.01.2013. The Transfer Pricing Officer passed order u/s 92CA of the Income Tax Act dated 22.01.2015 wherein he made an adjustment of Rs. 2,08,50,458/- u/s 92CA arrived at after making cumulative adjustment to the case. In view of the above, addition of Rs. 2,08,50,458/- was made in the income of the assessee being difference between the Arm’s Length Price and draft order u/s 144C of the I.T. Act which was passed on 03.03.2015. The Assessee filed objection before Dispute Resolution Panel (DRP) against the Draft Order. The DRP directions u/s 144C(5) on 05.11.2015 for which the order giving effect was issued by the Assessing Officer on 09.12.2015. The Assessing Officer after following the directions of the DRP as well as the order giving an effect dated 09.12.2015 passed assessment order dated 30.12.2015 thereby making nil adjustments to the margin of the assessee company by observing that as the margin of the assessee company is within the range of +/- 5% of the mean margin of the comparables the adjustment remains nil. Being aggrieved by the assessment order, the Revenue filed appeal before us.
4. The Ld. DR submitted that the DRP erred in directing Assessing Officer to complete the assessment as per the observations made by the DRP in the order which resulted in reducing the addition to Nil in place of original recommended ALP of Rs.2,08,50,458/- for the International transactions undertaken by the Assessee company with its associate enterprises. The Ld. DR further submitted that the DRP erred in rejecting Infosys Technology Limited as well as excluding other three comparable companies which are Acropetal Technologies Ltd., E-Infochips Limited and E-Zest Solutions Ltd. The Ld. DR submitted that these comparable companies passed the filters set out by the TPO himself, in the original orders and relied upon the order of the Transfer Pricing Officer. The Ld. DR further submitted that all these comparables are functionally similar.
5. The Ld. AR submitted that the DRP has taken a proper cognizance of each and every comparable and thereafter has rightly directed to execute these comparables from the final set of comparables.
We have heard both the parties and perused all the relevant materials available on record. The DRP has given following directions as relates to comparables:
“DRP Directions: The TPO has included the following comparables Comparable TPO Assessee DRP 1. Acropetal Functionally Fails the employee To be excluded in Technologies comparable cost to sales filter: view of failing the Limited Employee cost TPO filter of incurred by employee cost. Acropetal to the total operating cost is 13.74% which is less than 25% limit as adopted by the Ld. TPO. Functionally dissimilar: 2. E-Infochips Functionally Fails the service To be excluded in Limited comparable revenue filter: E- view of failing the Infochipsfails Ld. TPO filter of TPO’s own filter of service revenue. service revenue to total revenue less than 75% (Service revenue to total revenue is 74%). Functionally Different: E- Infochips is engaged in provision variety of IT services like Application Software, E- Commerce; Mobility; BI and Vissualisation; Firmware and System Software; Board Design; ASIC / SOC / FPGA Services; Mechanical and Industrial design; etc.
E-Zest Functionally Functionally To be excluded in Solutions comparable Dissimilar : E- Zest view of different Limited is engaged in the functionality. provision of product engineering services / outsourced product development services; enterprise application development; IT services and technology expertise.
Infosys Functionally Scale of To be excluded Limited comparable operations: The being the sectoral turnover of Infosys giant with for FY 2010-11 is economic INR 25,385 crores, advantage. The Brand profits and order of Delhi significant High Court in intangible assets: case of Agnity Significant R & D India ITA expenses: Product No.1204/2011 Development: shall apply in this case.
Persistent Functionally Functionally This is a good Systems comparable Dissimilar : comparable in Limited Persistent Systems view of similar is engaged in functionality. The rendering high margins or Outsourced Product high turnover are Development not valid factors services as against and have been software rejected by development Hon’ble Delhi services High Court in case of Chryscapital.
6. Sasken Functionally Functionally This is good Communication comparable Dissimilar : Sasken comparable in Technologies engaged in providing view of similar Limited services in relation functionality. The to the applications in high margins or the high turnover are telecommunications not valid factors industry and is also and have been engaged in providing rejected by software products. Hon’ble Delhi High Court in case of Chryscapital.
Sankhya Functionally Functionally This is a good Infotech comparable Dissimilar : comparable in Limited Sankhya Infotech is view of similar a leading provider of functionality and simulation and FAR. The high training solutions. It margins or high helps corporate turnover are not organizations and valid factors and institutions with a have been robust end-end rejected by enterprise wide Hon’ble Delhi training solution. High Court in They provide case of targeted training Chryscapital. solutions and consultancy services to meet the organizational objectives and business needs to the Assessee.
8. Wipro Functionally Turnover Filter: This is a good Technology comparable During the year, the comparable in Services turnover of WTS was view of similar approx. INR 346.87 Limited functionality. The Crores, which is high margins or over 10.37 times the high turnover are turnover of the not valid factors Assessee of INR and have been 25.15 crores. rejected by Abnormally Hon’ble Delhi volatile profit High Court in margin : case of Related Party Chryscapital. Transactions 3.7 including certain companies in the final set of comparables, which have a significantly high turnover as compared to the Assessee;”
During the hearing, the assessee also demonstrated that these comparable companies were functionally dissimilar as well as failed the various filters set out by the TPO himself. Therefore, the DRP is right in excluding these comparables. There is no need to interfere with the findings of the DRP. Therefore, appeal of the revenue is dismissed.
In result, the appeal of the revenue is dismissed.
Order pronounced in the Open Court on 25th day of November, 2019.
Sd/- Sd/- (R. K. PANDA) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 25/11/2019 Priti Yadav, Sr. PS * Copy forwarded to: 1. Appellant
Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT