M/S MANN & HUMMEL FILTER PRIVATE LIMITED ,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-4(1)(2), BANGALORE

PER SHRI PAVAN KUMAR GADALE, JM :

3. At the time of hearing, the learned Authorised Representative submitted that the assessee is only praying for exclusion of 8 comparables and filed Chart and judicial decisions. The Brief facts of the case are that the assessee is wholly owned subsidiary of Mann Hummel Filter Technology (S.E.A) PTE Ltd., Singapore and is engaged in the business of manufacturing of and trading in air intake systems and filters for automotive and heavy engineering industry and rendered services to its Associated Enterprises (AEs) in the nature of services using CAD and computer aided manufacturing software tools and filed the Return of Income for Assessment Year 2011-12 on 28.09.2011 with a total loss of Rs.16,57,89,697. Subsequently, the assessee company filed Revised Return of Income with a total loss of Rs.15,43,98,328. The case was selected for scrutiny and Notice under Section 143(2) and 142(1) of the Act were issued. In compliance, the ld. AR appeared from time to time and furnished the details. The Assessing Officer on perusal of the Audit Report, Form 3CEB found that the assessee has entered into international transactions exceeding Rs.15 Crores. Hence the matter was referred with the prior approval of CIT for determination of Arm’s Length Price (ALP) to TPO. Whereas the TPO observed that the assessee had international transactions referred

4 of TPO order and the financial results with the Operating Profit / Operating Cost and Operating Profit / Operating Revenue are read as under :

The assessee's margin computed on OP/OC, is – 22.68%. The assesses is into Software Development Services segment and the TPO found that the Transfer

Pricing Document contains 9 comparables on software development activities with applied filters and TNMM is considered as MAM further assessee has selected the comparables engaged in the same industry verticals i.e. Aero Space, Rail and Defense industries. The TPO has rejected the TP Study and applied the filters on usage of current year data, the companies of software development with Revenue less than Rs.1 Crore are excluded, companies with Software Development Services and related services is less than 75% of operating revenue were excluded and companies who have more than 25% Related Party Transactions (RPT) of sales, companies who have precedent losses for the last three years upto and including Assessment Year 2010-11 are excluded and companies having different financial years are excluded and companies having a peculiar economic circumstances are excluded companies having less than 75% of export sales in software and with Employees Cost less than 25% of turnover were excluded and finally the TPO has rejected the comparables of Software Development Services segment selected by the assessee in para 6.1 as under :

Out of the 9 comparables selected by the assessee, the TPO has accepted one comparable Tata Elxsi Limited and rejected 8 comparables. Further on application

TPO has selected 13 comparables at para 9 as final set of comparables which are as under :

Further the TPO worked out Working Capital Adjustment and risk adjustment and computed the ALP of Software Development Services at para 12.4 of the order as under :

The TPO made Adjustments on the provision of Software Development Services to the extent of Rs.59,35,129 and passed order under Section 92CA r.w.s. 143(3) r.w.s. 144C dt.30.01.2015. Aggrieved by the draft assessment order, the assessee filed objections with DRP in Form 35A whereas the DRP has passed the order considering the objections of the assessee, the TP adjustment and TPO findings vide order dt.17.12.2015. Subsequently, the Assessing Officer passed final assessment order dt.19.01.2016 with TP adjustment to the extent of Rs.55,22,394. Aggrieved by the TPO order, the assessee has filed an appeal with the Tribunal in IT(TP)A No.586/Bang/2016 whereas the Tribunal remanded the matter to the file of DRP for fresh consideration by way of speaking and reasoned order vide order dt.8.9.2017. The DRP after considering the directions of the Tribunal and the submissions of the assessee has passed order dt.17.12.2018 partly allowing the assessee's objections. The TPO in pursuance to the directions of the DRP passed the final assessment order under Section 143(3) r.w.s. 254 on 28.12.2018. Aggrieved by the order, the assessee is in appeal before the Tribunal.

ACIT in IT(TP)A Nos.17 & 39/Bang/2016 Dt.21.09.2016 for the Assessment Year 2011-12. The Tribunal has observed at page 17 para 9.1.3 as under : “ 9.1.3 We have considered the rival submissions as well as the relevant material on record. We find that the assessee has raised objections against this company before the DRP. However the DRP did not adjudicate the objections raised by the assessee. The decision of this Tribunal in the case of M/s. Electronics for Imaging India Pvt. Ltd. Vs. DCIT (supra) relied upon by the learned Authorised Representative is based on two aspects. (i) The information received under Section 133(6) of the Act was considered by the TPO without sharing with the assessee and (ii) nature of the activity is KPO. It is pertinent to note that the question of BPO and KPO is relevant only in ITES segment and not for software development services segment. On the contrary, the decision in the case of Toluna India Pvt. Ltd. Vs. ACIT (supra), pertains to the Assessment Year 2007-08, therefore the facts of the different year cannot be applied without verification. Accordingly, we set aside this issue of comparability of E-Just Solution Ltd. to the record of the Assessing Officer / TPO for deciding the same after verification of the relevant facts as well as considering the objections of the assessee.”

(ii) Icra Techno Analytics Limited : This company is functionally different and significant RPT of 24.81% with margin of 24.83% and predominantly into Software Development Services and which is engaged in diversified activities and no segmental details are available and further concentrated in niche area of business intelligence and analytics space and has revenue from licensing activities. The ld. AR demonstrated Annual Report where the comparable company has significant growth in business intelligence and analytics space which are different from activities of the functional profile of the assessee and engaged in licensing activity. We found the said comparable was excluded by the co-ordinate Bench of Tribunal in the case of Applied Materials India Limited (supra) at pages 32 & 33 paras 17.1 & 17.2 as under : “ 17.1 We have heard the learned D.R. as well as learned A.R. and considered the relevant material on record. The DRP has rejected this company by recording the fact as under : “ We examined the annual report from which it is evident that the entire revenue has been shown under service segment which indicates that the revenue from software development, consultancy, licensing and sub-licensing, annual maintenance charges for software support. WEB development and hosting has been reported in one segment, thus in absence of segmental information, we concur with the view of the DRP in preceding year and accordingly direct the Assessing Officer to exclude this company from comparables.” 17.2 We further note that the Tribunal in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) has considered the comparability of this company in paras 14 to 16 as under : “ (1) ICRA Techno Analytics Ltd. (seg) 14. At the outset, we note that apart from having the related party revenue at 20.94% of the total revenue, this company was also found to be functionally not comparable with software development services segment of the assessee. The DRP has given its finding at pages 13 to 14 as under:- “Having heard the contention, on perusal of the annual report, it is noticed by us that the segmental information is available for two segments i.e., services and sales. However, it is evident from the annual report that the service segment comprises of software development, software consultancy, engineering services, web development, web hosting, etc. for which no segmental information is available and therefore, the objection of the assessee is found acceptable. Accordingly, Assessing Officer is directed to exclude the above company from the comparables.”

Nothing has been brought before us to show that the facts recorded by the DRP as well as by the co-ordinate bench of this Tribunal are not correct. Accordingly, in view of the decision of the co-ordinate bench of this Tribunal in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra), we do not find any error or illegality in the order of the DRP on this issue.”

(iii) Infosys Limited : The comparable company is functionally dissimilar as it is engaged in development of software products and has inventories, ownership and marketing intangibles and Intellectual Property Rights (IPR), with High brand value and incurred huge expenditure towards R & D to the extent of Rs.527 Crores and has high turnover and more than 50% of revenue are from on site services. We found that the co-ordinate Bench in the case of Applied Materials India Limited (supra) has dealt on this issue at page 34 para 18 as under and excluded the comparable : “18. We have heard the learned D.R. as well as learned A.R. and considered the relevant material on record. At the outset, we note that the co-ordinate bench of this Tribunal in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) has considered this issue in para 17 as under : “ (2) Infosys Ltd.

(iv) M/s. L & T Infotech Limited : The said comparable company has site revenues more than 50% of total revenue with three different segments being financial services, manufacturing and telecom as per the Annual Report of the company and further no segmental results are available and cannot be functionally comparable. The comparable company is a mrket leader and on account of ownership marketing, intangibles IPRs for the proprietary software products developed in House and during the year the company has acquired Canadian Transfer Agency business which has impact on the profitability of the company and has to be excluded being dissimilar to the assessee's functional profile. We found that the co-ordinate Bench of the Hon'ble Tribunal in the case of Applied Materials India Limited (supra) has dealt on the issue at page 35 para 19 as under :

“ 19. We have heard the learned D.R. as well as learned D.R. and considered the relevant material on record. The DRP rejected this company by recording the facts at page 15 as under :

We further find that the comparability of this company has been considered by the co-ordinate bench of this Tribunal in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) in paras 62 to 65 as under : “ 62. The assessee has raised objection against this company on the basis of high turnover in comparison to the assessee. It was also contended that related party transaction (RPT) of this company is 18.66%. The DRP rejected objections of the assessee on the ground that TPO has applied 25% filter of RPT and annual report of the company does not show any other services rendered other than software development services provided by this company. Thus the DRP held that software development segment is comparable to the assessee and therefore this company has to be retained as comparable.

(v) Persistent Systems and solutions Limited : The company is functionally not comparable as it is engaged in diversified activities of rendering Software Development Services, License and Royalty of software products and also has abnormal increase in turnover from year on year, the company is growing over ten times the industry average and functionally dissimilar and has invested in IPR solutions and created several Intellectual Properties (IP) such as Chem, LMS, Viewmor and during the F.Y. 2010-11 and the company earns 8.8% of its total revenues related to activities of IPs and also engaged in Information Technological services and no segmental information available. We support our view relying on the decision of the co-ordinate Bench of the Hon'ble Tribunal in the case of Applied Materials India Limited (supra) has dealt on the issue at pages 20 & 21 para 9.2.4 which read as under : “ 9.2. (4) Persistent Systems Ltd.

(vi) Sasken Communication Technology Limited : The company is engaged in software products and presence inventory and intangible assets, with High expenditure on R & D and no segmental details are available, income from sale of products amounting to 9.4% of total revenue of software services include net work services. We support our view based on the decision of the co-ordinate Bench of the Hon'ble Tribunal in the case of Applied Materials India Limited (supra) has dealt on the issue at page 23 para 9.3.3 which read as under : “ 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.

However, no segmental information is available. Accordingly, the DRP directed the AO to exclude this company from the comparables.

(vii) Tata Elxsi Limited : This company is functionally dissimilar and engaged in provision of niche products and development services which are dissimilar to assessee's services and has substantial R & D, and failed the export revenue filter at 75% and has incurred an amount of Rs.12.65 Crores towards R & D expenditure and incurred significant expenditure in foreign currency to the extent of 21.26% of total sales with High turnover. We support our view relying on decision of the co- ordinate Bench of the Hon'ble Tribunal in the case of Applied Materials India

Limited (supra) which has dealt on the issue at pages 37 to 39 para 20 which read as under : “ 20. We have heard the learned Departmental Representative as well as learned Authorised Representative and considered the relevant material on record. The DRP has rejected this company by discussing the fact at page 16 as under :

We further note that the DRP has also recorded the fact that export revenue of this company is 73.30% which is less than 75% applied by the TPO. Therefore this company does not qualify the export earning filter applied by the TPO. Further the co-ordinate bench of this Tribunal in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) has considered this issue in paras 30 to 33 as under : 30. The assessee has raised objections against this company on the ground that the company is functionally different from the assessee. Though the TPO has considered the software development and services segment of this company as comparable to that of assessee, however, the assessee contended that even within the software segment, this company is engaged in diverse activities. The assessee placed reliance on the information in the annual report under the Directors Report and submitted before the DRP that even under the software development services segment, this company is engaged in various diversified activities including product design service, innovation design, engineering service, visual computing labs, etc. The assessee also placed reliance on the decision of Mumbai Bench of the Tribunal in the case of Telcordia Technologies Pvt. Ltd. v. ACIT, 137 ITD 1 (Mum).

We considering the dissimilarities of the comparable companies which are functionally different from assessee's profile and rely on the judicial decisions and direct the following comparables to be excluded by the TPO from the final list of comparables selected for determination of ALP. i) E-zest Solutions Ltd. ii) ICRA Techno Analytics Limited iii) Infosys Limited iv) Larsen & Toubro Infotech Ltd. v) Persistent Systems & Solutions Ltd.

Sasken Communication Technologies Ltd. vii) Tata Elxsi Limited 6. The learned Authorised Representative argued that the Working Capital Adjustment computed by the TPO at 4.23% but was restricted to 1.63% without any basis. We found that the TPO has dealt on the Working Capital Adjustment in order at page 241 to 243 para 10 and finally at page 243, the TPO has restricted the Working Capital Adjustment at 1.63% which read as under :

The contention of the learned Authorised Representative that there is no clarity and the basis of rationality computing the Working Capital Adjustment and restricting it to 1.63%. The learned Authorised Representative supported his argument relying on the judicial decisions. We found that the similar issue was dealt by the co-ordinate Bench of Tribunal in the case of ARM Embedded Technologies Pvt.

Ltd. Vs. DCIT in IT(IT)A No.1560 & 1659/Bang/2014 dt.31.08.2015 observed at paras 24 & 25 as under :