ASST.C.I.T., BANGALORE vs. M/S HERBALIFE INTERNATIONAL INDIA PVT. LTD.,, BANGALORE

PER BEENA PILLAI, JUDICIAL MEMBER : Present appeals are filed by revenue along with cross objection filed by assessee against order passed by Ld.DCIT Circle 3 (1) (2), under section 143 (3) read with section 144C of the Act, for assessment year 2011-12 on following grounds of appeal:

IT(TP)A No.579(B)/2016 & CO No.23(B)/2017 3 Whether Hon'ble DRP erred in fact in rejecting the v) company as a comparable on the ground that it is functionally different when the primary source of income of the comparable is from provision of software development services. Whether while seeking the exact comparability as vii) mentioned above the DRP was right in fact and in law in imposing condition beyond law whereas the requirement of law is to acknowledge only those differences that are likely to materially affect the margin. Whether the Hon'ble DRP is correct in fact and law in viii) disregarding the position of law that there could be differences between the enterprises compared under the TNMM method that are not likely to materially affect the price or cost charged or the profits accruing to such enterprises? For these and other grounds that may be urged at the ix) time of hearing, it is prayed that the directions of the Dispute Resolution Panel in so far as it relates to the above grounds may be reversed.- The appellant craves leave to add, alter, amend and /or delete x) any of the grounds mentioned above.

CO No.23/Bang/2016(In IT(TP)A No.579(B)/2016(AY: 2011-12)

On the facts and circumstances of the case and in law and without prejudice to the directions passed by the Dispute Resolution Panel:

IT(TP)A No.579(B)/2016 & CO No.23(B)/2017 4 1. The Dispute Resolution Panel ('DRP') has erred, in law and in facts, by not accepting the Respondent's plea in entirety and confirming the action of the learned Assessing Officer (A0')/Transfer Pricing Officer (TP0') of not accepting the transfer pricing ('TP') documentation maintained by the Respondent and rejecting the economic analysis undertaken by the Respondent in accordance with the provisions of the Income Tax Act, 1961 (The Act') read with the Income Tax Rules, 1962 (The Rules') and conducting a fresh economic analysis for the determination of the arm's length price in connection with the impugned international transaction.

2. The learned AO / TPO and the learned DRP have erred, in law and in facts, by rejecting the use of multiple year data for determination of arm's length margin/price and using financial year 2010-11 data only which was not available to the Respondent at the time of complying with the transfer pricing documentation requirements.

3. The learned AO/ learned TPO have erred, by not accepting the directions given by the DRP and by filing an appeal against the directions of DRP vide Ground No. 1 to 10.

4. The Hon'ble DRP/ learned TPO/ learned AO has erred, in law and in facts by: a) Rejecting certain other companies adopted by the assessee based on unreasonable comparability criteria and irrelevant filters. b) Accepting companies that are otherwise not comparable to the assessee based on unreasonable comparability criteria.

IT(TP)A No.579(B)/2016 & CO No.23(B)/2017 5 c) Rejecting certain comparable companies appearing in the search process of the learned TPO. The Leaned AO/learned TPO/Hon'ble DRP has erred, in law and in facts, for not allowing suitable adjustments to be made to account for differences in the risk profile of the Assessee vis-à-vis the comparables The ld. AO erred in making an erroneous computation of interest u/s 234B and 234C of the Act. The Respondent submits that each of the above ground is independent and without prejudice to one another.

The Respondent craves leave to add, alter, vary, omit, amend or delete one or more of the above grounds of Cross-objections at any time before, or at the time of, hearing of the appeal, so as to enable the Appellate Tribunal to decide this response according to law”.

IT(TP)A No.579(B)/2016 & CO No.23(B)/2017 7 Sl.No Company name Net margin as per TP . order 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 Larsen & Toubro Infotech Ltd 19.83% 8 Mindtree Ltd.(Seg.) 10.66% 9 Persistent Systems & Solutions Ltd. 22.12% 10 Persistent Systems Ltd. 22.84% 11 R S Software (India)Ltd. 16.37% 12 Sasken Communication Technologies Ltd. 24.13% 13 Tata Elxsi Ltd.(Seg.) 20.91% Average 24.82% Less: working capital adjustment 1.63% Adjusted operating margin 23.19% Ld.TPO thus proposed adjustment of Rs.98,32,574/- in respect of software service segment. It is submitted that Ld.TPO provided adjustment of 1.63% towards working capital. Ld.TPO rejected submission of assessee to consider adjustment of ALP if any, to be limited to lower end of 5% range as per proviso to section 92C (2) of the act.

IT(TP)A No.579(B)/2016 & CO No.23(B)/2017 8 Net margin as per Sl.No Company name TP order . 1 Persistent Systems & Solutions Ltd. 22.12% 2 Persistent Systems Ltd 22.84% 3 Sasken Communication Technologies Ltd. 24.13% 4 Mindtree Ltd.(Seg.) 10.66% Average 19.94% 3.1 DRP further allowed working capital adjustment to assessee but rejected risk adjustment. As margin earned by assessee was within +/-5% range, no adjustment was called for. Based upon DRP directions, Ld.AO passed final assessment order making addition.

by revenue becomes academic Decisions relied upon by Ld. CIT DR of Delhi Tribunal in case of DCIT vs Vertex customer services in (supra) and Aircom International India Pvt. Ltd., (supra) does not deal with on-site revenue filter as has been admitted by Ld. CIT DR.

9. On merits, Ld.CIT DR regarding functional similarities/ dissimilarities of these companies with assessee, relied upon decision of coordinate bench of this Tribunal in case of Mercedes- Benz Research and Development India Private Limited vs ACIT reported in (2018) 90 Taxmann.com 300, and submitted that, these comparables were sent back to Ld.TPO for re-examination. She thus submitted that, view taken by coordinate bench of this Tribunal in Mercedes-Benz Research and Development India Pvt Ltd. vs ACIT (supra) may be followed.

10. We have perused view of coordinate bench of this tribunal in case of Mercedes-Benz Research and Development India Pvt. Ltd (supra) in respect of M/sAccropatel Technologies Ltd and M/s L&T Infotech IT(TP)A No.579(B)/2016 & CO No.23(B)/2017 12 Ltd. It is observed that these comparables were sent back to Ld.TPO by observing as under: 13. Acropetal Technologies Ltd. ('Acropetal') …….. 13.3.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncements cited. We find that the DRP has observed that this company, 'Acropetal', operates in three segments and the segmental results are available; while on the contrary the assessee contends that 'Acropetal' operates in four segments. Further, it is seen that even though the assessee has raised the other issues before the DRP, as laid out in para 13.1 of this order, the DRP has not rendered any finding thereon. We find that the co-ordinate bench of this Tribunal in the case of AMD India (P.) Ltd. (supra) relied on by the assessee has excluded 'Acropetal' on the ground that it fails the service income filter of 75%; a ground apparently not put forth by the assessee before the authorities below. 13.3.2 Considering the facts and circumstances of the case, as discussed above; that the DRP has not rendered findings on some of the issues raised by the assessee before it and there is a contradiction in the number of segments that this company 'Acropetal' operates in, we are of the opinion that it is necessary to remand the issue of comparability of this company back to the file of the DRP for examining and adjudication of the issues raised by the assessee, after affording the assessee adequate opportunity of being heard in the matter and to file details /submissions in this regard, which shall be duly considered. We hold and direct accordingly. ……………………. 16.2 During proceedings before us, the learned Authorised Representative for the assessee stated that the assessee does not wish to press the ground related to exclusion of Sasken Communication Technologies Limited; therefore this ground is dismissed as not pressed and consequently Sasken Communication Technologies Ltd. is retained in the final list of comparables.

IT(TP)A No.579(B)/2016 & CO No.23(B)/2017 13 16.3 According to the learned Authorised Representative, the other two companies were chosen as comparables by the assessee in its TP Study itself. The learned Authorised Representative however submits that the assessee seeks exclusion of L & T Infotech Limited and Persistent Systems Limited, due to more details being now available in the public domain which render these two companies as not comparable to the assessee and therefore prays that they be excluded from the list of comparable companies. 16.4 Per contra, the learned Departmental Representative for revenue objected to the admission of this additional ground stating that when the assessee itself has selected these two companies, the authorities below had no occasion to consider the objections now raised by the assessee before the Tribunal. 16.5 After having heard both parties and perused and considered the material on record, we find that the functional comparability of these two companies i.e. (i) L & T Infotech Limited and (ii) Sasken Communication Technologies Limited have been considered by benches of this Tribunal in various cases, including those cited by the ld.AR. By way of this additional ground, the assessee is raising objections to the inclusion of these companies on the issue of functional dissimilarity and other grounds. In our considered view, the assessee cannot be precluded from raising an objection against inclusion of a company even if the said company was selected by the assessee in its TP Study. This view was taken by the Special Bench of ITAT, Chandigarh in the case of Dy. CIT v. Quark Systems (P.) Ltd.[2010] 38 SOT 307. As per the principles laid down in the aforesaid decision of the Special Bench (supra), we admit this additional ground raised by the assessee seeking exclusion of these two companies (i) L & T Infotech Limited (ii) Sasken Communication Technologies Limited without commenting on the merits of the case and remit the matter of their comparability analysis to the file of the TPO/A.O. for examination of the assessee's claim and to adjudicate thereon after providing the assessee adequate opportunity of being heard, which shall be duly considered. We hold and direct accordingly.”

IT(TP)A No.579(B)/2016 & CO No.23(B)/2017 14 11. On perusal of aforestated observations by coordinate bench of this Tribunal, it is very clear that comparables were remanded for the reason that, in case of Acropetal, DRP rendered finding that segmental details were available which was contrary to materials placed on record. In case of L & T, coordinate bench sent back comparable for reason that financial details which were initially not available on public domain was subsequently available for consideration. 11.1 In the facts of present case there is no such dispute between parties and observations regarding financials of these companies by DRP are concurrent with annual reports placed in paper book filed before us. Thus, in our considered opinion, these comparables cannot be held to be functionally similar with of assessee, who is a contract service provider, working on a cost plus business model. It is observed that RS software (India) Ltd, has been excluded by DRP on application of ‘on-site revenue filter’. Both parties do not have objection for inclusion of this company. We are therefore of the view that this company should be included in the list of comparables. Accordingly, Ld.TPO is directed to consider this comparable in the list. Accordingly grounds raised by revenue stands partly allowed.

12. Ground No. (iv) is for excluding M/s.E-Infochips, by DRP as comparable on the ground that it fails service income filter.

IT(TP)A No.579(B)/2016 & CO No.23(B)/2017 15 Ld. CIT DR submitted that Ld.TPO while analysing comparables observed that, this company has revenue from software development up to 88%, whereas DRP observes that revenue earned by this company is less than 75%, and therefore cannot be included. She submitted that basis of DRP to hold that revenue is less than 75% has not been demonstrated and therefore needs to be reconsidered.

IT(TP)A No.579(B)/2016 & CO No.23(B)/2017 16 24. As far as ground No. 4 raised by revenue is concerned, the said ground of appeal is weak and any event comparability of companies that were excluded by the DRP were on valid grounds contemplated by the relevant statutory provisions of the act and rules. As far as ground No. 5 in revenue’s appeal is concerned, the revenue seeks to challenge the exclusion of AE Infotech Ltd. On the ground that it failed direct software service income filter at 75%. At the outset, the assessee submits that E Infotech Ltd was excluded by the DRP on the ground that: (i) no segmental information is regarding its diverse functions is available; (ii) it failed the software service income filter and 75%; (iii) there were major fluctuations in profit and turnover every years which seems to be influenced by extraordinary/peculiar circumstances; and (iv) there is a presence of inventory (page 10 and 11 of the DRP’s directions). The revenue, in its appeal has challenged its exclusion only on the 2nd ground. In other words, the revenue has not challenged its exclusion on the other grounds stated hereinabove and thus its exclusion on these grounds have attained finality and cannot be disturbed by this Hon’ble Tribunal. Even otherwise, we are of the view that the DRP rightly arrived at the finding that companies software development service revenue for FY 2010-11 was less than 75% of its total operating revenue for the year. Thus the above action of the DRP in rejecting the above companies correct.” From the above, it is observed by this Tribunal consistently in various decisions for AY:2011-12 held that this company does not satisfy service income filter being 7.5%. We therefore, do not see any reason to set aside this company to Ld.TPO.