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Income Tax Appellate Tribunal, “A” BENCH: KOLKATA
Before: Shri J. Sudhakar Reddy, AM & Shri A.T. Varkey, JM]
The assessee company has filed this appeal against the order of assessment passed by the Assessing Officer for Assessment Year 2012-13 by order dated 31.08.2016 after giving effect to the Dispute Resolution Panel (‘DRP’) order dated 30.06.2016.
2. The following grounds of appeal has been raised by the assessee:
“1. That the learned Deputy Commissioner of Income Tax, Circle - 7 (2), Kolkata (here-in-after referred to as ‘Assessing Officer’) has erred in law and on facts in determining the total income at Rs.1,33,62,076/-.
That the computation of total income as well as the mode of computation is bad in law and against the actual facts and evidence on record.
That the AO has erred in law and on facts and in the circumstances of the case in making reference to the Transfer Pricing Officer (TPO) mechanically without considering the merit of the case.
4. That the Hon’ble Dispute Resolution Panel (DRP) erred in directing the TPO to include certain companies in the list of comparables as being functionally similar, without appreciating the fact that these companies fail to qualify all the qualitative and quantitative filters applied by the TPO.
5. That on the facts and in the circumstances the TPO has erred in not properly interpreting the accounts/annual reports as well as the directions of the Dispute Resolution Panel for the exclusion/inclusion of the comparable companies while computing the Arm’s Length Price.
6. That the AO as well as the TPO, have erred on facts and in the circumstances of the case in making an upward adjustment of Rs.64,97,696/- in the price as per books of account.
7. That the TPO has grossly erred in computing the Arm's Length Price by taking into account the following in the list of comparables although these fail the accepted filters for comparison:- I. Spry Resources (India) Pvt. Ltd - fails the Employee Cost Filter of 50%
2 M/s. Orga Systems India Pvt. Ltd. Assessment Year: 2012-13
II. Lucid Software Limited - functionally different as its income from operations include sale of products and it fails the employee cost filter of 50% III. PreludeSys (India) Limited - functionally different and fails the employee cost filter of 50% IV. ASM Technologies Limited - fails the Related Party Transactions filter of 25% V. e-lnfochips Ltd - functionally different as its profile shows that it has sales of own products in addition to Software Services. VI. lnfosys Consulting India Limited - having turnover of their services and products as high as Rs.31,254 Crore compared with the Appellant having turnover of Software services to the extent of only Rs.10.83 Crore for the purposes of computing Arm's Length Price, totally disregarding thereby the volume of business filter of Rs. 1 Crore to Rs.200 Crore.
8. That on the facts and circumstances of the case the AO has erred in charging interest and the Appellant denies its liability for interests amounting to Rs.1,68,851 under section 234C and Rs.2,52,841/- under section 234D of the Income Tax Act, 1951.
9. That the Appellant craves leave to add, alter, amend, amplify or modify any or all of the above grounds of appeal on or before the time of hearing of appeal.”
3. At the outset itself, the ld. AR of the assessee brought to our notice that assessee is a company incorporated in India, engaged in performing functions related to information technology software services. So, it is a KPO and not BPO. It was brought to our notice that assessee is engaged in software development services as a captive unit for its Associates Enterprises (‘AE’) which is its holding company M/s. Orga Systems GmbH (‘OSGMBF’). During the relevant assessment year, the assessee undertook the following international transactions with AE in relation to which the additions were proposed by the Transfer Pricing Officer (‘TPO’):
Sl. No. Nature of International Transactions Amount (in Rs.) 1 Software Development Services 10,83,44,567
The DCIT(Transfer Pricing)-II, Kolkata vide his order passed u/s 92CA(3) of the I.T. Act, 1961 (‘Act’) dated 31.12.2015 has made total upward adjustment for Rs.1,05,57,733/- on account of the variation between the price charged by the assessee and the arm’s length price computed by him. So, TPO vide his order at Para 6.0 has given the computation of arm’s length price and adjustment as under:
3 M/s. Orga Systems India Pvt. Ltd. Assessment Year: 2012-13 Sl. No. Particulars Amount (in Rs.) 1 Total cost as per PLI computation of the assessee vide para 4.0 of the 9,44,19,360/- SCN reproduced 2 Arm’s length margin 25.93% 3 ALP OF OR (125.93% of 94419360/-) 11,89,02,300/- 4 Operational Revenue 10,83,44,567/- 5 Value of International Transaction (100% of OR) 10,83,44,567/- 6 ALP of International Transaction 11,89,02,300/- 7 Excess of ALP over value as per books of A/cs (6-5) 105,57,733/-
Considering the total upward adjustment made by the TPO at Rs.1,05,57,733/-, a draft assessment order was passed on 29.02.2016 as per the direction u/s 144C of the Act. Thereafter, the assessee company filed an objection before the ld. DRP against the draft order passed by the A.O incorporating the adjustment stated above. The DRP after hearing assessee’s contentions passed its directions dated 30.06.2016, made certain direction to the A.O/TPO to take action accordingly. Thereafter, the A.O received an order from the DCIT (Transfer Pricing)-II, Kolkata which was received by the A.O on 26.08.2016 wherein the TPO has given his order as follows:
“In view of the directions and the compliances, the final list of comparables and the simple arithmetic mean for the re-computation of Arm’s Length Price appear to be as given below:
Sl. No. Comparables O.P/Total Cost % 1. Akshay Software Technologies Ltd. 9.71% 2. Cat Technologies Limited 9.23% 3. CG-VAK Software & Exports Limited -13.31% 4. CTIL Ltd. 11.47% 5. Datamatics Consulting (India) Ltd. 14.09% 6. Infosys Consulting (India) Ltd. 17.05 % 7. Spry Resources (India) Pvt. Ltd. 35.12% 8. Lucid Software Ltd. 13.42% 9. PreludeSys (India) Ltd. 56.38% 10. ASM Technologies Ltd. 16.41% 11. e-Infochips Ltd. 74.97% 12. Onward Technologies Ltd. 13.61% 13. Thirdware Solutions (P) Ltd. 25.24% 14. E-Zest Solutions Pvt. Ltd. 16.06% 15. Saven Technoligies Ltd. 25.58% 16. Acropetal Technologies Limited (Segmented) 20.67% 17. Indium Software India Ltd. 23.06% Arithmetic Mean of the Comparables 21.63% Assessee’s OP/TC 14.75%
Thus, the mean PLI of the comparables exceeded the PLI of the assessee and accordingly the above mean PLI (21.63%) of the comparables is taken as arm’s length margin in this instant case.
4 M/s. Orga Systems India Pvt. Ltd. Assessment Year: 2012-13
The amount of adjustment is computed as under:
1 Total cost as per TPO’s original order 9,44,19,360/- 2 Arm’s length margin 21.63% 3 Arm’s length price of ORGA 21.63% of total cost 11,48,42,268/- 4 Operational revenue 10,83,44,567/- 5 Value of revenue from AE 10.83,44,567/- 6 Percentage of international transaction 100% 7 Arm’s length price of international transaction 11,48,42,268/- 8 Shortfall being adjustment (7-5) 64,97,696/- Thus the revised upward adjustment is Rs.64,97,696/-.
Thereafter, the AO passed the final order incorporating the total upward adjustment made by the TPO at Rs.64,97,696/- which was added back to the total income. Aggrieved by the aforesaid upward adjustment of Rs.64,97,696/- and consequent assessment of total income at Rs.1,33,62,080/-, the assessee is before us.
The main grievances of the assessee are in respect of the Ground No.7. According to the ld. AR, the TPO had adopted and applied quantitative filters which have been reproduced by the ld. DRP at Page 4 & 5 of its order which is reproduced as under:
“I) Adopted new search criteria and applied the following modified quantitative filters:
• Companies having software services income exceeding Rs.1 crore but below Rs.200 crore have been considered • Companies where revenue from services is less than 75% of the total operating income are rejected • Companies having the employee’s costs to sales less than 50% were rejected • Companies who have RPT sales/purchase than 25% of turnover/sales/purchase in aggregate are selected • Companies who have persistent losses for the period or negative net worth for two consecutive years including the year under consideration were excluded • Companies having different FY ending (i.e. not March 31,2012) or that of the company does not fall within 12 months period i.e. 01.04.2011 to 31.03.2012 were rejected • Companies that are functionally different from that of taxpayer or working peculiar economic circumstances, after giving valid reasons, were excluded.”
It was pointed out by the ld. AR that TPO has benchmarked the employee’s cost to sales less than 50% as one of the filters to reject the comparables and another filter was that the related party transaction (RPT) sales/purchase must be more than 25% of the turnover/sales/purchases in 5 M/s. Orga Systems India Pvt. Ltd. Assessment Year: 2012-13 aggregate are to be only selected from comparables. The ld. AR drew our attention to the chart prepared in respect of Statement of Discrepancies with DRP Directions wherein coming to the first comparable company (i) M/s. Spry Resources (India) Pvt. Ltd., the assessee pointed out to the ld. DRP that this company does not clear the employee’s cost filter of 50% benchmarked by the TPO. Though the DRP directed the TPO to examine whether this company passes the filter of employee’s cost, according to Ld. AR, the TPO has not implemented the direction of the ld. DRP. It was brought to our notice that employee’s cost of this company was only 27.5% and, therefore, it would not pass the filter of employee’s cost as benchmarked by the TPO. Since the TPO has himself applied the filter to exclude companies having employee’s cost to sale less than 50% from the comparables and the assessee’s contention that M/s. Spry Resources (India) Pvt. Ltd. employee’s cost to sales comes to 27.33% as is evident from the annual report, then the said company should not be included. We note that the Ld. DRP has also directed the TPO to verify this fact which has not been carried out by the TPO, which action of TPO cannot be countenanced. In any case, we set aside this issue back to TPO to verify the contention of Ld. AR that M/s. Spry Resources (India) Pvt. Ltd. does not clear the employee’s cost to sales bench marked by TPO at 50% need to be examined afresh and in case the contention of the assessee is correct then the said company should be excluded from the list of comparables. We, therefore, set aside this comparable included by the TPO to examine as directed by us. With this direction, the ground taken in respect of M/s. Spry Resources (India) Pvt. Ltd. is disposed of.
Coming to the next ground of M/s. Lucid Software Limited, it was brought to our notice that this company also fails in the employee’s cost to sales of the company and was only 39.17% whereas the TPO has benchmarked this filter at more than 50%. Therefore, this company should have been excluded. In the aforesaid scenario, we set aside the inclusion of this comparable company and remand this issue back to the file of TPO to verify the contention as to whether the said company passes the filter of employee’s cost to sales as bench marked by TPO. In case, if the assessee succeeds then this comparable company has to be excluded.
Coming to the next ground, that is pertaining to M/s. PreludeSys (India) Ltd. In respect to this company, the ld. AR brought to our notice that TPO has applied the RPT filter of 25%. Since,
6 M/s. Orga Systems India Pvt. Ltd. Assessment Year: 2012-13 the PreludeSys (India) Ltd. was having related party transaction of Rs.11.33 crores which amount to 67.97% of the total income from operations. And since the related part transactions being more than 25%, this company should have been excluded. The aforesaid contention of the assessee needs to be verified by the TPO in the light of the benchmark fixed by the TPO in respect of RPT filter. Therefore, we set aside the comparable included by the TPO and direct the TPO to verify as to whether the said company clears the RPT filter fixed by TPO and in case this company does not clear the benchmark in respect of RPT transaction filter then this company should be excluded.
Coming to the next ground to the M/s. ASM Technologies Ltd., it was brought to our notice that this comparable fails the RPT filter adopted by the TPO. It was brought to our notice that this company had related party transaction as verified from the published annual report of the said company comes to 36.59% and despite this fact being brought to the notice of the ld. DRP it had not directed the TPO to verify as to whether this comparable fails RPT filter adopted by the TPO. In the light of the aforesaid specific contention of the ld. AR, we set aside the adoption of this comparable company and direct the TPO to verify as to whether this comparable fails RPT filter adopted by the TPO and if it fails RPT filter as bench marked by the TPO (supra), this company should be excluded from the list of comparables.
Coming next to M/s. e-Infochips Ltd., it was brought to our notice that related party transactions of the entity amount to 27.76 crore which is 26.84% of the income from operations and as such it fails RPT filter of 25%. It was also brought to our notice that the employee’s cost of the entity is 35.53% which is less than 50% and as such the entity fails the employee’s cost filter also. It was also brought to our notice that extraordinary activities happened i.e. the amalgamation of this company has happened because of the order of the Hon’ble High Court and, therefore, this company cannot be taken as a comparable. It was brought to our notice that despite the aforesaid data was available on record still the ld. DRP did not bother to give any specific finding on the aforesaid contentions raised before it. We note that main grievance of the ld. AR of the assessee is that this company does not pass the RPT filter as well as employee’s cost filter adopted by the TPO which has not been addressed by TPO/DRP. Therefore, we set aside the inclusion of this company as a comparable by the TPO and direct the TPO to verify and adjudicate afresh the contention of 7 M/s. Orga Systems India Pvt. Ltd. Assessment Year: 2012-13 the assessee and in case if the company fails in the employee’s cost filter or RPT filter or the amalgamation of the company in this FY has resulted in not making this company eligible to be considered as comparable, then it should be excluded. So, we remand the matter back to the file of the TPO for fresh consideration.
Coming next to M/s. Infosys Consulting (India) Ltd., it was pointed out to us that the assessee has turnover of Rs.10 crore whereas the M/s. Infosys Consulting (India) Ltd. has more than Rs. 31,000 crore. Therefore, it was brought to our notice that M/s. Infosys Consulting (India) Ltd. was functionally different from assessee company as it has huge volume of income from sales, services and products. It was pointed out that the employee’s cost of this company comes to 49.45% whereas the filter adopted by the TPO is more than 50%, therefore, this company cannot be compared with that of the assessee company. We find force in the argument of the ld. AR that Infosys Consulting (India) Ltd. should have been excluded. We note that the turnover of the assessee company is Rs.10 crore whereas the turnover of M/s. Infosys Consulting (India) Ltd. is Rs. 31,000 crore so it cannot be compared since equals should be treated equally and unequals can never be treated equally. Not only that the ld. AR had brought to our notice that this company has failed to pass the employee’s cost filter adopted by the TPO to be more than 50% and the Infosys Consulting (India) Ltd. employee’s cost to sales is 49.45%. Therefore, we direct exclusion of this company. We dispose of this appeal with the aforesaid directions to the TPO/A.O. In view of the aforesaid discussion on each of the comparable companies, the A.O is directed to complete the assessment after the TPO does the exercise as directed above and adjudicate on the issues as discussed above.
In the result, the appeal of the assessee is allowed for statistical purposes.
Order pronounced in the Court on 21.08.2018.