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Income Tax Appellate Tribunal, ‘A’ BENCH, BENGALURU
Before: SHRI CHANDRA POOJARI & SHRI PAVAN KUMAR GADALE
order passed u/s 143(3) r.w.s. 144C(13) of the Income-tax Act,1961 ['the Act' for short] dated 29/01/2016 in pursuance of directions of DRP order. The assessee has filed revised grounds of appeal
. At the time of hearing, learned AR has not pressed the grounds No.1, 2, 3, 4, 5, 8, 10, 11 and 12. The only effective revised grounds are grounds No.6, 7 and 9 which are as under:
IT(TP)A No.644/Bang/2016 Page 2 of 7 “6. That the learned AO/ learned TPO erred in considering companies in the comparability analysis (for software development services segment and Information Technology enabled services segment) which do not satisfy the test of comparability. Information Technology: Acropetal Technologies Limited i. E-Infochips Limited ii. iii. I C R A Techno Analytics Limited Information Technology enabled Services: Accentia Technologies Limited i. Acropetal Technologies Limited ii. iii. E4e Healthcare Business Services Private Limited I C R A Online Limited iv. Jeevan Scientific Technology Limited v.
7. That the learned AO/ learned TPO erred in rejecting companies similar to the Appellant while performing the comparability analysis (for software development services segment and Information Technology enabled services segment). Information Technology: Akshay Software Technologies Limited i. Comp-U-Learn Tech India Limited ii. iii. LGS Global Limited Thinksoft Global Services Limited iv. Information Technology enabled Services: i. Informed Technologies India Limited 9. That the learned AO/learned TPO/ learned DRP erred in the computation of working capital adjustment. In addition, the learned AO/learned TPO/learned DRP erred in limiting the working capital adjustment instead of providing the actual adjustment for working capital differences based on the actual working capital position of the Appellant while determining the arm's length price.”
The brief facts of the case are that the assessee is in the business of software development and other services and filed the Return of income for the assessment year 2011-12 on 04/11/2011 declaring total income of Rs.2,60,284/- and also claimed deduction u/s 10A of the Act. The Return of income was processed u/s 143(1) of the Act. Subsequently the case was selected for scrutiny and notice u/s 143(2) and 142(1) of the Act
IT(TP)A No.644/Bang/2016 Page 3 of 7 were issued. In compliance, the learned AR appeared from time to time and submitted the details as called for. The AO, on perusal of the financial statements, found that the assessee has claimed deduction u/s 10A of the Act and the assessee has international transactions with its AE and with the prior approval of the CIT, the matter was referred to the Transfer Pricing Officer (TPO) and the TPO vide order u/s 92CA of the Act, dated 29/01/2015 made adjustments to the arm’s length price (ALP) to the extent of Rs.4,28,89,846/- in respect of international transaction entered with Associated Enterprises (AE) and the AO based on the directions of TPO has passed draft assessment order.
Aggrieved by the draft assessment order dated 29/01/2015 the assessee has filed objections before the Dispute Redressal Panel (DRP) and the assessee was not successful in respect of claim of deduction u/s 10A. The DRP passed orders with the directions on 23/11/2015 and the AO gave effect to the directions of the DRP and passed assessment order u/s 143(3) r.w.s.
144C(13) of the Act determining the total income at Rs.4,33,86,894/-.
Aggrieved by the order, the assessee has filed the appeal before the Tribunal. The learned AR submitted that the assessee is having two units being software development segment and IT Enabled Services (ITES) segment and required exclusion of IT(TP)A No.644/Bang/2016 Page 4 of 7 comparable in software development and ITES. Further, learned AR filed chart in respect of computation of ALP and exclusion and FAR analysis. The learned AR further emphasized that the order of the DRP lacks clarity on the disputed issue and referred to pages 13 & 14 of the DRP order and explained that the DRP has not made any analysis in respect of comparable which are applicable to the assessee and the observations of the DRP are only related on the findings of TPO. No independent analysis was made and prayed that an opportunity be provided before DRP to explain and file the details and further relied on the decision of Cochin Bench of Tribunal in the case of M/s.Navigant BPM(India)
Pvt. Ltd. Vs. ACIT in IT(TP)A No.57/Coch/2016 dated 23/10/2018 and prayed that the opportunity be provided to the assessee.
Contra, learned DR supported the order of the DRP.
We heard rival submissions and perused material on record.
Learned AR has argued ground 1 for exclusion of comparable and ground No.7 for inclusion of comparable by the assessee. We found that the assessee has raised these issues before the DRP and the DRP in para. 8.2.1 held as under:
8.2.1 The TPO selected a final list of comparables and worked out the ALP as indicated above both in respect of software development and ITES sectors. The assessee strongly objected to the TPO’s grounds for rejection.
IT(TP)A No.644/Bang/2016 Page 5 of 7 6. Similarly, in the case of rejection of comparable and working capital adjustment, DRP has rejected the assessee’s claim whereas in respect of economic analaysis of assessee’s comparables rejected by the TPO, the DRP has dealt on this issue and observed at para. 11.1 as under:
“11. Discussion and decision
One of the objections of the assessee is that the TPO has riot considered the turnover and size of the comparables selected by it. Similar objection was raised by the assessee for AY 2010-11 before DRP and in its order DRP had followed the decision of Hon’ble Bangalore ITAT in the case of Genisys Integrating Systems (1714 No.2231(Bang.)/2010) where a guideline in the matter of turnover filter was suggested and that the categorization of software companies in the Dun & Brad Street Study be adopted as a method of classification of companies k size. According to this study, 3 categories of firms were identified i.e. small with turnover less than Rs.200 crore, 'medium' with turnover Rs.200 to Rs.2000 crore and 'large' with turnover greater than Rs.2,000 crore. On this issue a detailed finding has been given by the TPO in his order, justifying that there is no correlation between high turnover and profit margins of a company. Further, the ITAT Mumbai in the case of the Capgemini India Put Ltd us ACLU (ITA No. 7861/Mum/2011 for AY 2007-08) had held that the concept of economy of scale cannot he applied to service delivering companies and that there is no empirical evidence to suggest that margins are related to turnover, however following the decision of the jurisdictional ITAT the objection (2.5) of the assessee is accepted. The taxpayer company would fall in the category of a 'small' sized firm, as per the Dun & Brad Street categorization. Companies with a turnover lower than Rs 1 crore and higher than Rs. 200 crores, therefore, should be excluded from the comparability analysis.”
The learned AR referred to the chart and explained without going into the merits has mentioned that there are comparables which are to be excluded due to various filters and certain comparables have to be included. Learned AR has not envisaged
IT(TP)A No.644/Bang/2016 Page 6 of 7 argument on this ground as he prayed that an opportunity be provided before the DRP, as the DRP order could not emanate a clear picture on issues. We found on perusal of the orders and the submissions of the learned AR that there is no clarity in respect of testing of comparables for inclusion and exclusion and the DRP has relied only on TPO finding and no independent observations are given. As rightly pointed out by the learned AR, the matters requires further clarification and the decision, relied by the learned AR, to which one of us viz., the Accountant Member is a party, supporting on this issue is applicable. We find that in the case of M/s.Navigant BPM(India) Pvt. Ltd. (supra) in para. 7.4 it was observed as under:
7.4 We have heard the rival submissions and perused the material on record. We find that the objections raised by the assessee have been disposed off by the DRP without passing a speaking order. The assessee has raised various contentions why the abovementioned companies are not comparable companies. The objections with regard to non-availability of segmental account details for the above comparables, presence of intangibles for above mentioned companies and failure to satisfy certain filters adopted by the TPO himself were not discussed in TPO's order nor in DRP's order. The DRP on its part has merely confirmed the TPO's order without passing a speaking order. Therefore, we deem it appropriate to restore this issue to the files of the TPO. The assessee shall raise all the contentions raised before us and shall place necessary evidence to prove its case that the abovementioned companies should not be adopted as comparable companies.
IT(TP)A No.644/Bang/2016 Page 7 of 7 8. We, having considered the arguments of the learned AR, provisions of law, judicial decisions and the comparable chart filed by the assessee and the decision of the Tribunal, are of the opinion that the revenue shall not be at loss if an opportunity be provided to the assessee therefore in the interest of substantial justice and principles of natural justice we restore the entire disputed issue to file of the DRP to consider the assessee’s submissions and adjudicate afresh and pass a reasoned and speaking order and we order accordingly.
In the result, the assessee’s appeal is allowed for statistical purposes.
Order pronounced in the open court on 31st January, 2019.