Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI B.R. BASKARAN & SMT. BEENA PILLAI
O R D E R PER BEENA PILLAI JUDICIAL MEMBER Present appeals have been filed by assessee as well as revenue against final assessment order dated 28/01/16 passed by Ld. DCIT circle 5 (1) (1), Bangalore for assessment year 2011-12. Brief facts of the case are as under: 2. Assessee is a company and is engaged in business of software development and filed its return of income for year under consideration on 30/11/11 declaring income of Rs.18,38, 27,713/-. Return was processed under section 143 (1) of the Act and statutory notices under section 143 (2) along with questionnaire was issued to assessee. 2.1. Ld.AO observed that, assessee had international transactions with its associated enterprises for more than Rs.15 crores.
ITA No. 306/B/2016 A.Y:2011-12 Accordingly, reference to Ld.TPO was made for determination of correct arms length price. 2.2. On receipt of reference, Ld.TPO called for economic details of international transaction entered into by assessee with its associated enterprises. As per TP documentations filed by assessee, it caters to four technology areas-Radio-Frequency Identification Device (RFID) and multifunctional devices. Ld.TPO observed that assessee had entered into following international transaction:
Particulars Amount Received Amount Paid (in rupees) (in rupees) Software development 1,03,76,57,721/- services Order gathering 10,38,72,357/- services Receipt of services 22,32,80,160/- 2.3. Ld.TPO observed that assessee computed arm’s length price by using following 22 comparables involved in software development services by applying TNMM as most appropriate method. Assessee used OP/OC as PLI. Assessee computed its margin at 6.36%. S.No. Name of Comparables Margine 1. Akshay Software Technologies Ltd 1.30% 2. CG-Vak Software and Exports Ltd -4.21% 3. Goldstone Technologies Ltd -10.67% ITA No. 524/B/2016 A.Y:2011-12 4. Halios Matheson Information 9.24% Technology Ltd 5. LGS Global Ltd 6.45% 6. Ascent Software International Ltd -9.66% 7. R.S Software (India) Ltd 8.65% 8. R Systems International Ltd 6.56% 9. Aztecsoft Ltd 1.75% 10. Calibrepoint Business Solutions Ltd -5.42% 11. Cat Technologies Ltd 16.72% 12. KPIT Cummins Infosystems Ltd 7.34% 13. Larsen and Toubro Infotech Ltd 12.82% 14. Marverick Systems Ltd 7.02% 15. Mindtree Ltd 6.25% 16. Persistent Systems Ltd 18.97% 17. Savan Technologies Ltd 12.80% 18. Thinksoft Global Services Ltd 6.64% 19. Thirdware Solutions Ltd 16.29% 20. Zylog Systems Ltd. 12.08% 21. Sasken Communications Ltd. 19.09% 22. Evoke Technologies Pvt. Ltd. 16.61% Arithmetic mean 7.15% As average margin of comparables was 7.15%, assessee held the international transaction to be at arms length.
ITA No. 306/B/2016 A.Y:2011-12 2.4. Ld.AO rejected most of the comparables selected by assessee by applying various filters and shortlisted following final set of comparables with 13 comparables having an average margin of 22.82%. S.No. Name of Comparables Margine 1. Acropetal Technologies Ltd 31.98% 2. e-zest Solutions 21.03% 3. E-Infochips Ltd 56.44% 4. Evoke 8.11% 5. ICRA techno analytics Ltd 24.83% 6. Infosys Ltd 43.39% 7. R.S Software (India) Ltd 8.65% 8. Mindtree Ltd (SEG) 10.66% 9. Persistent systems and solutions Ltd 22.12% 10. Persistent systems Ltd 22.84% 11. SaskenCommunications Technologies 24.13% Ltd 12. Tata Elxi Ltd (SEG) 20.91% 13. Larsen and Toubro Infotech Ltd 19.83% Arithmetic mean 24.82% Ld.TPO, thus computed proposed adjustment at Rs.29,89,22,549/-. 2.5. Ld.AO restricted working capital adjustment to 1.63%. He also denied any risk adjustment for the reason that assessee failed to ITA No. 306/B/2016 ITA No. 524/B/2016 A.Y:2011-12 establish the difference in risk level of the tested party and uncontrolled comparables and that no reasonably accurate adjustments could be made for want of a scientific method for computing the quantum of risk adjustment. Aggrieved by proposed adjustment, assessee raised objections before DRP. 2.6. Assessee raised objections regarding filters applied by Ld.TPO; • companies with different accounting period were not considered • companies with employee cost less than 25% were rejected; • companies with export sales less than 75% of operating revenue was rejected. DRP upheld these filters.
DRP while considering the objections raised by assessee excluded comparables being E-Zest Solutions, Infosys Ltd., Persistent Systems, Tata Elxsi Ltd. As regards the working capital adjustment restricting it to 1.63%, DRP upheld the same. However, as regards risk adjustment, DRP directed Ld.TPO to provide 1% adjustment to the average margin towards risk differential. DRP further disallowed provision of doubtful advances created by assessee’s amounting to Rs.4,93,66,601/- to be not in accordance with accounting principles. DRP also disallowed sum of Rs.15,77,76,840/-being provision for doubtful advances (that is provision on service tax refund receivable) created by assessee as not qualifying for expenditure under section 37 of the Act. 6 ITA No. 306/B/2016 A.Y:2011-12 4. On receipt of DRP directions, Ld.AO passed final assessment order determining arms length price of international transaction from AE after making adjustment of Rs.27,56,53,609/-. Ld.AO also added provision of doubtful advances created by assessee to the extent of Rs.4,93,66,601/- and Rs.15,77,76,840/- being excess of service tax liability which was anticipated to be refunded by service tax authority, by holding it to be not in accordance with principles of accounting. Aggrieved by additions made by Ld.AO in impugned assessment order, assessee as well as revenue filed appeal before this Tribunal.
At the outset, Ld.AR submitted that DRP failed to adjudicate Objection No. 9 raised by assessee, wherein assessee objected to action of Ld.TPO in considering operating margin and cost, by taking into consideration entity level revenue, instead of segmental level operating revenue and operating cost. He submitted that the only disputed segment by Ld.TPO was in respect of software development services for which the revenue received by assessee was Rs.1,03,76,57,721/-, whereas, Ld.TPO considered operating cost at Rs.1,16,92,93,471/-, which is the entity level cost, as is clear from page 4 of order passed by Ld.TPO. Ld.AR also submitted that while selecting the comparables, Ld.TPO considered segmental information and compared it with assessee on an entity level. This has been upheld by DRP without adjudicating the objection raised by assessee.
ITA No. 306/B/2016 A.Y:2011-12 6.1. Ld.AR also submitted that upholding working capital adjustment being restricted at 1.63% is against view taken by various decisions of this Tribunal. He submitted that Ld.TPO is duty bound to give adjustment based on difference in economic, geographical condition, compared with that of assessee in actual is without any. He has placed reliance upon various decisions of coordinate benches of this Tribunal where, TPO has been directed to provide working capital adjustment by taking actual data, without putting any upper limit. 6.2. Also, Ld.CIT.DR submitted that, DRP while excluding certain comparables did not carry out FAR analysis. She also submitted that DRP provided risk adjustment at 1% on ad hoc basis without having a scientific approach. She submitted that there are various factors that needs to be considered for providing risk adjustment which assessee has to establish in its case having regards to the comparables finally selected. She submitted that, order passed by DRP on all these issues are very cryptic.
We have perused submissions advanced by both sides in light of records placed before us. We have perused order passed by Ld.TPO and DRP in great detail. The contentions raised by both sides are found to be true. It is observed that Ld.TPO has considered entity level revenue as well as cost for computing margin of assessee which was compared with the segmental margin of comparables. This is in total contradiction to transfer pricing law laid down by legislature. DRP failed to 8 ITA No. 306/B/2016 A.Y:2011-12 adjudicate this objection raised by assessee having to transfer pricing rules envisaged in the Act/Rules. DRP in a cryptic manner upheld action of Ld.TPO to be justified. 7.1. It is also observed that comparables that were objected by assessee has not been dealt with independently. As regards the comparables though DRP excluded certain comparables as well as upheld inclusion of remaining comparables, has not given proper reasoning for its exclusion/inclusion. It is observed that certain comparables cannot be considered in case of a captive service provider like assessee. From the Transfer Pricing document placed in the paper book at page 614, it is observed that assessee is not involved in any of the strategic functions and is only undertaking preliminary tactical managerial functions. Assessee also does not undertake any marketing/business development activity. Further it is observed that assessee do not undertake any key risks. Based upon the above in our view the comparables needs to be revisited. We also note that working capital adjustment has been restricted by Ld.TPO and upheld by DRP at 1.63% which is contrary to provisions of transfer pricing rules. As held by various decisions of coordinate benches of this Tribunal, we direct Ld.TPO to recompute working capital adjustment in actual, and to consider the same for purposes of computing arm’s length margin. 7.2. As regards the risk adjustment on ad hoc basis at 1%, it is observed that there is no scientific manner which has been applied by DRP. Assessee is a low risk bearing company and therefore while 9