You are on page 1of 42

IN THE INCOME TAX APPELLATE TRIBUNAL

"C"BENCH:BANGALORE

BEFORE SHRI ARUN KUMAR GARODIA, ACCOUNTANT MEMBER AND


SHRI LALIET KUMAR, JUDICIAL MEMBER

IT(TP)A No.1616/Bang/2017
Assessment Year :2013-14

M/s. Tecnotree Convergence Pvt. Ltd.,


No. 65/2, B-Block, 6th Floor, The Deputy
Level-7, BagmaneTridib, Commissioner of
Bagmane Tech Park, CV Raman Nagar, VS. Income Tax,
Byrasandra, Circle - 7 (1) (1),
Bangalore - 560 093. Bangalore.
PAN: AAACL7345L
APPELLANT RESPONDENT

Shri Bharadwai Sheshadri, CA


Shri D. Sudhakara Rao, CIT {DR

Date of hearin 14.05.2018


Date of Pronouncement 27.06.2018

ORDER
Per Shri A.K. Garodia, Accountant Member
This appeal is filed by the assessee and the same is directed against the
assessment order dated 29.05.2017 for Assessment Year 2013-14 passed by
the AO u/s. 143(3) r.w.s. 144C(13) of IT Act, 1961 as per the directions of DRP.

2. The grounds raised by the assessee are as under.


"I. General
1.1 The assessment order dated 29 May 2017 passed by the Ld.
Deputy Commissioner of Income-tax Circle 7(1) (1) ['Ld. AO'}
under section 143(3) read with section 144C (13) of the Income-tax
Act, 1961 ( 'Act') is not in accordance with the law and is contrary
to the facts and circumstances of the present case and is in any
case violative ofprinciples of equity and natural justice.

GROUNDS OF APPEAL ON TRANSFER PRICING ISSUES


2. Assessment and reference to Transfer Pricing Officer are bad in
law
2.1 The Ld. AO has erred in law in making a reference to the
IT (TP) A No. 1616/Bang/2017
Page 2 of 42

learned Deputy Commissioner of Income Tax (Transfer Pricing) -


2(2)(2) ['Ld. TPO'], inter alia, since he has not recorded an
opinion that any of the conditions in section 92C(3) of the Act,
were satisfied in the instant case.

3. The Ld. TPO has erred in justifying the motive of shifting of


profits
3.1 On the facts and in the circumstances of the case and in law,
the Ld. TPO I AO erred in not demonstrating that the motive of the
Appellant was to shift profits outside of India by manipulating the
prices charged in its international transactions which is a pre-
requisite condition to make any adjustment under the provision of
Chapter X of the Act.

4. Comparability Analysis and Determination of Arm's


Length Price
Grounds of Appeal for reiection of comparables selected by
the Ld. TPO in the order issued u/s 92CA of the Act
4.1 The Ld AO/ TPO grossly erred on facts in benchmarking the
transactions of the captive information technology services ('IT
services') of the Appellant with companies operating as full-fledged
entrepreneurs without considering the differences in the functions
performed, assets employed and risk undertaken by the Appellant vis-
a-vis comparable companies.

4.2 The Ld. TPO erred in selecting CG-VAK Software Exports


Limited as comparable in the order uls 9 2CA of the Act, despite the
business of the company being functionally not comparable to the
IT services rendered by the Appellant. CG-VAK Software Exports
Limited is involved in product development during the Financial
Year ('FY') 2012-13. It is also involved in the business ofproviding
Software Development and BPO services and there is no
segmentation available in respect of revenue earned by the said
company on account of rendering of software development and
BPO services. Accordingly, the said company cannot be compared
to the Appellant, being a risk insulated captive IT service provider.

4.3 The Ld. TPO erred in selecting Larsen & Toubro lnfotech
Limited, Mindtree Limited (Seg.) and Persistent Systems Limited as
comparables in the order uls 92CA of the Act, despite their
turnover being more than ten times of the turnover of the Appellant
for the FY 2012-13. The said companies are functionally not
comparable to the IT services rendered by the Appellant. The said
companies have significant profitability on account of their brands,
own intangibles and incur significant onsite expenses. Larsen &
Toubro Infotech Limited and Persistent Systems Limited have
significant related party transactions for the FY 2012-13.
Accordingly, the said companies cannot be compared to the
Appellant, being a risk insulated captive IT service provider.
IT (TP) A No. 1616/Bang/2017
Page 3 of 42

4.4 The Ld. TPO erred in selecting ICRA Techno Analytics Limited as
comparable in the order uls 92CA of the Act, despite the said
company having significant related party transactions for the FY
2012-13. Accordingly, the said company cannot be compared to the ·
Appellant, being a risk insulated captive IT service provider.

Grounds of Appeal for inclusion of combarables selected by the


Appellant in the Transfer Pricing Study, reiected by the Ld. TPO in
the order issued u/s 92CA of the Act
4.5 The Ld. TPO erred on facts in rejecting the comparable
companies arrived at in the Transfer Pricing Study without
considering the functional and risk analysis of the Appellant.

4. 6 The Ld. TPO erred on facts in rejecting A ks hay Software


Technologies Limited, selected by the Appellant as comparable
in its transfer pricing study, despite the said company being
functionally comparable and qualifying all the filters applied by the
Ld. TPO in the order uls 92CA of the Act. The Honorable Dispute
Resolution Panel ('Honorable DRP') further erred in rejecting Akshay
Software Technologies Limited in the absence of segmental
information whereas the said company is engaged in rendering
software development services and earns majority of its revenue from
rendering such services.

4. 7 The Ld. TPO erred on facts in rejecting Helios and


Matheson Information Technology Limited and R Systems
international Ltd., selected by the Appellant as comparable in
its transfer pricing study, despite the said companies being
functionally comparable.

Ld. AO/ TPO erred in computing a negative working capital


adiustment on the margins of the comparable companies
4.8 The Ld. TPOI AC) erred on facts and in law. and the
Honorable DRP further erred in upholding I confirming the
action of the Ld. TPOI AO in computing a negative working
capital adjustment on the margins of the comparable companies
wherein the IT services segment of the Appellant operates as a
captive service provider.

Non-allowance of appropriate adiustments to the


comparable companies by the Ld. AOITPO
4.9 The Ld. AO I TPO erred in law and on facts in not allowing
appropriate adjustments under Rule I OB to account for, · inter alia,
differences in (a) accounting practices. (b) marketing expenditure, (c)
research and development expenditure, and (d) risk profile between
the Appellant and the comparable companies.

Variation of 3% from the arithmetic mean


4.10 Without prejudice to the other grounds of appeal, the Ld. AO/
IT (TP) A No. 1616/Bang/2017
Page 4 of 42

TPO erred in law in not granting the variation as per the proviso to
Section 92C(2) of the Act.

Erroneous data used by the Ld. AO I TPO


4.11 The Ld. AO/ TPO has erred in law in using data, which was
not contemporaneous and which was not available in the public
domain at the time of conducting the transfer pricing study by
the Appellant.

4.12 The Ld. AO/ TPO erred in law and on facts in disregarding
the application of multiple-year data while computing the
margins of alleged comparable companies as such data had an
influence in determining the pricing policy of the Appellant.

5. Other General Grounds of Appeal


5.1 The Ld. TPO erred on facts and in law in conducting a fresh
benchmarking analysis using non contemporaneous data and
substituting the Appellant's analysis with fresh benchmarking
analysis on his own conjectures and surmises. Thus the Appellant
prays that the fresh benchmarking analysis conducted by the Ld TPO
is liable to be quashed

5.2 The Ld. AO/ TPO erred in law in applying arbitrary filters to
arrive at a fresh set of companies as comparables to the Appellant,
without establishing functional comparability.

5.3 The Ld. AO/ TPO grossly erred in law in deviating from the
uncontrolled party transaction definition as per the Income-tax Rules
and arbitrarily applying a 25% related party criteria in accepting I
rejecting comparables.

5.4 The Ld. AO/ TPO also erred on facts and in law in arbitrarily
rejecting companies with different year ending (i.e. other than 31
March 2013) and applying the saidfilter inconsistently.

5.5 The Ld AO/ TPO grossly erred on facts in arbitrarily rejecting


companies having software development revenue less than 75% of
total operating revenue and inconsistently applying such filter,
without considering the specific segmental results.

5. 6 The Ld AO/ TPO also erred on facts in arbitrarily rejecting


companies based on their .financial results without considering the
functional comparability.

5. 7 The Ld AO/ TPO erred on facts and in law in considering a set of


'secret data', i.e. data which was not available in public domain, in
arriving at a fresh set of companies using his power under section
133(6), which is grossly unjustified

5.8 The Ld. AOITPO also erred on facts and in law in accepting
IT (TP) A No. 1616/Bang/2017
Page 5 of 42

comparable companies without considering the turnover and size of


the Appellant and the comparable companies.

GROUNDS.OF APPEADON CORPORATE TAX ISSUES


<.
6. Disallowance of cmj]mission expense on account of non-
deduction of tax at source: ;~
6.1 On the facts and circumstances of the case and in law, the Ld. A 0
erred in disallowing the export commission expense amounting to Rs.
4,34,72, 134 paid to non-resident parties under section 40(a)(i) of the
Act without appreciating that such payments were not taxable in India
and the Honorable DRP erred in confirming the same.

7. Non grant of set· off of Minimum Alternate Tax ('MAT')


credit
7.1 On the facts and circumstances of the case and in law, the Ld. AO
erred in not granting set off of MAT credit while computing tax
liability and the Honorable DRP erred in not adjudicating on the
same.

8. Levy of interest under sections 234B of the Act


8.1 On the facts and circumstances of the case, the Ld. AO erred in
levying interest under section 234B of the Act amounting to Rs.
1,58,63,950.

9. Initiation of proceedings under section 274 read with section 271


of the Act
9.1 On the facts and circumstances of the case, the Ld. AO erred in
initiating penalty proceedings under section 274 read with section
27l(l)(c) of the Act.

10. Directions issued by the Honorable DRP


10.1 That the directions issued by the Honorable DRP, to the
extent they confirm the draft assessment order of the Ld. AO,
are erroneous and liable to be set aside.

11. Relief
11.1 On the facts and circumstances of the case and in law, the
Appellant prays that the Ld. AO be directed to grant all such relief
arising from the preceding grounds as also all relief cons_equential
thereto.

The Appellant craves leave to add to or alter, by deletion,


substitution, modification or otherwise, the above grounds of
appeal, either before or during the hearing of the appeal. Each
of the above grounds of appeal is independent and without
prejudice to the other grounds preferred by the Appellant."

3. The assessee has also filed one additional ground of appeal which is as under.
IT (TP) A No. 1616/Bang/2017
Page 6 of 42

"l. The learned DRP erred in affirming the wrong computations of


margins made by the learned TPO in the cases of the following
comparables:
(a) CG-VAK Software & Exports Ltd.; and
(b) ICRA Techno Analytics Ltd."

4. The Id. AR . of assessee has filed the synopsis of arguments which are
reproduced hereinbelow for ready reference:-
"SYNOPSJS OF THE APPELLANT'S ARGUMENTS
Notes:

(i) Unless repugnant to the context, all sections and rules referred to
herein are sections and rules of the Income Tax Act, 1961 and the
Income Tax Rules, 1962 respectively.

(ii) All grounds taken and arguments urged are without prejudice to
each other.
(iii) The following is not in derogation of the arguments advanced at
the hearing.

The Appellant begs to submit the following synopsis of its


arguments.

TRANSFER PRICING ISSUES


J. The accompanying chart shows a summary of the comparables as
selected by both sides and their fate before the learned DRP.

NEGATIVE WORKING CAPITAL ADJUSTMENT


IMPERMISSIBLE
2. The Appellant submits that the learned TPO erred in making a
negative working capital adjustment to artificially increase the
margins of the comparables for the following reasons.

(a) The Appellant does not have any borrowings at all. It thus does not
incur any expenditure whatsoever in the maintenance of its working
capital.

(b) 99.83% of the Appellant's share capital is held by Lifetree


Cyberworks Pvt. Ltd., the Appellant's holding company and
TecnotreeOyj, Finland, the Appellants ultimate holding company.
Thus. the Appellant does not have any working capital risk at all.

3. A substantial portion of the Appellants working capital arises


out of transactions with its related parties. For instance, out of
the total trade receivables of Rs.163,35,09.966 as at 31.03.2013,
more than 77%. i.e., Rs.126,40,42,576 is receivable from its
holding and subsidiary companies. This reinforces the proposition
that the Appellant bears no working capital risk.
IT (TP) A No. 1616/Bang/2017
Page 7 of 42

4. The following orders of co-ordinate benches of this Tribunal have


held that where the Appellant bears no working capital risk and
incurs no expenditure on working capital, the Revenue cannot make a
negative working capital adjustment.

(a) Adaptec (India) Pvt. Ltd. v ACIT [2015} 57 taxmann.com 307


(Hyderabad-Trib.)
(b) Lam Research (India) Pvt. Ltd. v. DCIT (I. T(TP). A. No.
l 437/Bang/2014) _
(c) CAPCO IT Services India Pvt. Ltd. v ITO [2017} 79 taxmann.com
214 (Bangalore-Trib.)
(d) ITO V Intoto Software (India) Pvt. Ltd [2017] 78
taxmann.com 260 (Hyderabad-Trib.)
(e) TNS India Pvt. Ltd. v. ACIT [2017} 77 taxmann.com 356
(Hyderabad-Trib.)

5. Having referred to the judgment in Adaptec's case (supra.) and


dissented from it against all principles of judicial discipline, the
learned TPO has argued that working capital position affects the
pricing of any service and that risk and value are different
concepts. It is humbly submitted that the basis of the working
capital adjustment is the existence of a difference in the cost of
working capital. This is relevant because the cost is stated to affect
the margin In the Appellant's case, the Appellant has demonstrated
that it holds its working capital at no cost, completely out of its own
funds without any borrowings at all. Thus, if anything, the
comparables' margin is to be reduced to the extent of the
Appellant's cost-saving on account of free working capital. The
learned TPO and the learned DRP have thus erred in upholding a
negative working capital adjustment.

RISK AND OTHER ADJUSTMENTS


6. The Appellant contends that the learned TPO and the learned DRP
erred in not allowing adjustments for risk and other factors such as
size, brand value, and marketing expenditure. The necessity for such
adjustments has been upheld by the Delhi High Court in Chryscapital
Investments case as also by co-ordinate Bengaluru benches in
numerous cases.

7. Option 1. This option is based on the decision of this


Honourable Tribunal in Sony India where a co-ordinate bench of
this Honourable Tribunal found that there are various differences
between the assessee and the comparables. Holding that it was a
difficult exercise to determine precisely the nature and extent of
the differences, it held that a downward adjustment of 20% from
the mean Profit Level Indicator (PL!) of the comparables was to he
allowed.

8. Option 2: This option is based on the decision of a co-ordinate


IT (TP) A No. 1616/Bang/2017 .
Page 8 of 42

bench in Philips Software Centre's cases. In that case, it was held


that the risk premium (i e., the incremental rate of return to be
attributed to additional risk) of the return of full-fledged
entrepreneurs over the return of captive service providers such as
the Appellant would be the difference between the bank rate and
the Prime Lending Rate' (PLR). The bank rate is considered the
risk-free rate of return while the PLR is considered the normal
risk-bearing rate. For the relevant previous year, this risk
premium would be 2.94% (i.e., 294 basis points) (being 10.25%
(PLR notified by RBI during the year ended 31.03.2013) - 7.31%
(bank rate notified by RBIfor that period).

9. Option 3: The third option is based on the decision of a


coordinate bench of this Honourable Tribunal in Motorola's case.
This provides for the use of the Capital Asset Pricing Model
(CAPM) along with the WACC (Weighted Average Cost of
Capital) mechanism. First, the cost of equity is determined using
the CAPM Second, the cost of debt is determined on actual basis.
The WACC is then computed applying the equity and debt mix as
the weight to the cost of equity and the cost of debt. The risk-
adjustment is computed as the portion of the WACC that
represents return attributable solely to risk This risk adjustment.
as a percentage. is applied to the comparables' arithmetic mean to
adjust it. The detailed method of computation is at Annexure 12 to
Form 35A submitted before the learned DRP (at p. 76 thereof)
read with the enclosures thereto which forms a part of the
memorandum. of appeal before this Tribunal. It is not reiterated
here for the sake of brevity.

10. The Appellant submits that while all three options are
reasonable, the second option is the most preferable. The third
option is acceptable too. However, the sensitivity factor (beta)
required to compute the return on equity as per the CAP !VI is not
determinable in the case of unlisted securities. The first option is
· less scientific than the other two. However, the Appellant does not
object to applying any of the options.

11. Marketing and Research and Development Expenses


Ad;ustment: A co-ordinate Bench has: in Rolls Royce's case held
that 5% of the profits of an entity are to be allocated to research
and development while 35% are to be allocated to marketing. This
allocation was accepted by _a coordinate Bengaluru Bench in IBM
India's case In IBM India's case, the co-ordinate Bench relied on
Rolls Royce to direct the learned DRP to consider the question of
the risk adjustment. Based on these allocations. a detailed
computation was furnished in the present case before the DRP, in
Annexure 12 to Form 35A at page 71 thereof The learned DRP
merely wrongly held that the Appellant had submitted no detailed
computation. This is clearly incorrect. Considering the decisions
of the co-ordinate benches, it is submitted that the adjustment
IT (TP) A No. 1616/Bang/2017
Page 9 of 42

(reduction of comparables' margins by 7.13% (i.e., 713 basis


points) for marketing and 424 basis points for R&D expenditure)
deserves to be allowed.

12. The learned DRP also held that the Appellant only sought an ad
hoc adjustment and that it did not provide a detailed computation.
This is untrue. Annexure 12 to the reference to the DRP in Form 35A
read with the enclosures thereto (all forming part of the memorandum
of appeal before this Tribunal) contains detailed computations for this
purpose.

13. The learned TPO has also held that the Appellant has "single
customer risk" and that thus no risk adjustment was warranted. This
reasoning has been expressly disapproved by this Honourable
Tribunal in lntellinet Technologies India Pvt. Ltd. v. ITO [2012) 22
taxmann.com 28 (Bang=Trib.).

14. The learned TPO relied on SAP Labs' case'". Meritor LVS'
case and Symantec's case. In both SAP Labs and Symantec's
cases, the risk adjustment was denied as it was either brought up
before the tribunal for the first time or that computations of the
adjustment were not furnished before the lower authorities. Both
these are not true in the present case. Additionally, the learned
DRP relied on the decisions in Zyme Solutions", CDC Software',
Stryker Global, and Aptara Technologies. In Zyme Solutions, the
attending circumstances were that the DRP had directed the TPO
to grant a risk adjustment of 1% without considering any of the
material. In the Appellant's case, it is plainly evident that the
learned DRP has denied the risk adjustment on non-existent
grounds. In Aptara's case. the Tribunal held that where no Arm's
Length Price adjustment was being made at all by virtue of the
margin provided for in the second proviso to section 920(2), the
ground relating to the risk adjustment was infructuous. The
learned DRP has misrepresented this as meaning that the 5% ipso
facto implied that no risk adjustment could be made. All the
precedents are thus distinguished.

R SYSTEMS INTERNATIONAL. LTD. (SEGMENT)


15. This comparable was selected by the Appellant. It was rejected by
both the learned TPO ant the learned DRP on the ground that it has a
different financial year. i.e., year ending 31st December as opposed to
the Appellant's 31st March.

16. The Appellant submits that this issue is covered in favour of


the Appellant by the following precedents.

(a) CIT v. Mercer Consulting (India) Pvt Ltd. [2017) 390 !TR 615,
627 (P&H) - The Punjab & Haryana High Court held that
different financial year would not itself entail the rejection of the
company so long as the data for the· relevant period is available.
IT (TP) A No. 1616/Bang/2017
Page 10 of 42

(b) e4e Business Solutions India Pvt. Ltd, v. ITO [2017} 87


taxmann.com 254 (Bangalore-Trib.l-A coordinate Bengaluru
Bench of this Tribunal held that comparables with different
financial years can be accepted if it is possible to reasonably
· extrapolate data for the relevant period from data available on
the public domain.

(c) G.E. India Exports Pvt. Ltd. v DCIT [2017} 82 taxmann.com 464
(Bangalore-Trib.) coordinate Bengaluru Bench of the Tribunal has
also adopted a view similar to that in e4e Business Solutions' case.

(d) Cadence Design Systems (India) Pvt Ltd. v. DCIT [2017] 86


taxmann. com 188 (Delhi-Trib.) -A coordinate Delhi Bench held
that where proportionate workings for the relevant period can be
easily deduced, there is no -bar to selecting a comparable with a
different financial year. This decision was followed by another
co-ordinate bench in Cadence Design Systems (India) Pvt. Ltd. v.
DCIT [2018] 89 taxmann.com 443 (Delhi-Trib.).

17. The Appellant submits that in its TP Study, it had not


conducted the process of extrapolating the data for the relevant
period. However, in view of the subsequent precedents cited
above, the Appellant has recomputed the P LI by the following
process of reasonable extrapolation. However, in order to do so,
it has had to rely on the financial statements of R Systems for its
financial year ended 31 03.2313 as well. An application for
admitting the same as additional evidence has been filed. It is
humbly prayed that that application be allowed for the reasons
stated therein.

18. The twelve months constituting the Appellant's financial year


consist of nine months from R Systems financial year ended
31.12.2012 and three months from R Systems' financial year
ended 31.12.2013. The Appellant has thus considered 9/12th of R
Systems' segmental figures from its year ended 31.12.2012 and
3112th of its figures from its year ended 31.12.2013. It is submitted
that this method, being a reasonable method of extrapolation
ought to be accepted and thus, the rejection of the comparable on
the ground of its different financial year deserves to be set aside in
accordance with the binding precedents.

19. The PL! of R Systems, so computed, is 15.95%. This


computation is as follows.
Amount {.in Rs.)
Particulars FYE FYE
FYE B=A•9/12 31.12.2013 D=C•3/12 31.03.2013
31.l 2.2012CA! rci
Segment Revenue (A) I,99,04,50,611 1,49,28,37,958 2,35,64,00,658 58,91,00,164 2,08,19,38,123
Less: Segment Result 26,75,09,209 20,06,31,906 49,03,89,126 12,25,97,282 32,32,29,188
Seement Expenditure I, 72,29,41,402 1,29,22,06,052 1,86 60,11,532 46,65,02,883 1, 75,87,08,935
IT (TP) A No. 1616/Bang/2017
Page 11 of 42

Add.Apportioned Operating 3,47,04.136 2,60,28,102 4,34,24,035 1,08,56,009 3,68,84,I I I


Expenditure
Total Segment Operating
Expenditure (Bl 1, 75, 76,45,538 1,31,82,34,154 1,90,94,35,567 47, 73,58,892 1, 79,55,93,046
SEGMENT OPERATING
PROFIT(C=A-B) 23,28,05,0.73 17,46,03,804 44,69,65,091 11,17,41,273 28,63,45,077
PLI(D=C+BJ 13.25% 13.25% 23.41% 23.41% 15.95%

CG-VAKSOFTWAREANDEXPORTSLTD.
20. This comparable was selected by the TPO and has been
upheld by the Id. DRP. The Appellant's only submission before
this Honourable Tribunal is that the learned TPOIAO has
wrongly computed the P LI of this comparable. The Appellant
does not challenge the selection of this comparable and thus does
not press the relevant grounds.

21. As regards the PLI, the learned TPOIAO has determined the PLI
at 20.45% at p. 12 of his order. However, he has finally considered
the PLI at 20.54%. The Appellant submits that the correct PLI is, in
fact, 15.41%. The following table shows the differences (highlighted in
yellow) between the computation of the learned TPOIAO and the
Appellant on the other hand.

Amount (in Rs.)


Particulars As 12er As 12er
As 12er AO As 12er AO
Annellant Aooellant
Revenue from Operations 8,69,20,713 8,69,20, 713
Add: Foreign Exchange Gain 15,67,139 15,67,139
Add: Sundrv Receiots - 58 600
Total Revenue (A) 8,84,87 ,852 8,85,46,452

5,23, 79,214 5,23,79,214


Employee Benefits Expense
Ogerating & Other Exgenses 1,87,38, 171 1,87,38,171
Gross- 39,97,218
Less: Provision for Doubtful Debts -
Less: Share Demat Expenses 1,28,661
Less: Bank Charges 55,000 5,54,004
Less: Donations 55,000

Depreciation and Amortization 1,46,85,953 1,80,00,506


63,45,039 63,45,039
Total Expenditure (Bl 7,34,10,206 7 ,67,24, 759
Operating Profit (C = A - B) 1,50,77,646 1,18,21,693
PL! 20.54% 15.41%

22. Submissions are separately addressed on each of the


differences below.
(a) Sundry receipts: In computations, other income, to the extent·
it does not represent interest and non-operating incomes is
excluded. The learned TPO/AO had no basis to exclude sundry
receipts in the absence of a finding that it is non-operating in its
nature. The learned TPOIAO had every occasion to determine the
nature of the funds by making inquiries with the relevant entity
but has omitted to do so.

(b) Provision for doubtful debts: The learned TPOIAO has


IT (TP) A No. 1616/Bang/2017
Page 12 of 42

excluded provisions for doubtful debt on the ground that it is non-


operating in its character. This runs against settled precedent,
arising from the following precedents, that provisions for doubtful
debts are in fact operating in their character.

i) Outsource Partners International Pvt. Ltd. v. DCIT [2017] 79


taxmann. com 7 4 (Bangalore-Trib.)
ii) Techbooks International (P.) Ltd. v. Dy CIT [2015] 63
taxmann. com 114 (Delhi-Trib.).
iii) Rolls Royce India Pvt. Ltd v. DCIT [2016} 69 taxmann. com
209 (Delhi-Trib.)
iv) Vestergaard Asia Pvt. Ltd. v. DCIT [2017] 88 taxmann.com
313 (Delhi-Trib.)
v) ITO v. Intoto Software (India) Pvt. Ltd. [2017} 78 taxmann.com
260 (Hyderabad-Trib.)
vi) Kenexa Technologies Pvt Ltd. v. [2014] 51 taxmann. com 282
(Hyderabad-Trib.)
vii) Sum Total Systems India Pvt. Ltd. v DCIT [2016] 74
taxmann.com 247 (Hyderabad-Trib.)
It is thus prayed that, following binding precedent, this Tribunal
hold hat provisions for doubtful debts is operating in character and
that the same be considered as an expense in computing the PLI.

(c) Share demat expenses: This represents expenditure incurred


on conversion of shares into dematerialised form. It is humbly
submitted that this is clearly non-operating in nature. It has more
to do with the financing of the company than the company's
operations themselves. It is more akin to finance costs, which as a
matter of routine, are excluded it computing the P LI both by the
assessees and the revenue.

(d) Bank charges Bank charges. being in the nature of a finance


cost, are to be excluded too.

23. It is thus prayed that the Tribunal hold that the margin is to be
computed as the Appellant contends, to arrive at a PLI of 15. 41 % in
respect ofCG-VAK.

ICRA TECHNO ANALYTICS LTD.


24. This comparable was selected by the learned TPO and accepted
by the learned DRP. The Appellant submits that this comparable
deserves to be rejected as it fails even the learned TPO's own related
party transactions (RPT) filter, adopted by him at 25%. This is
demonstrated below, with ·two alternative computations both yielding
the same result.
~ .... ~ •... --····..., -· - ... ···------·
Amount- Amount-
Particulars o[RPT Nature o(.RPT Ootion 2
On/ion I
Professional services received Income 32,008 32,008
Interest Income 409 409
Reimbursement of expenses Other Income 6,862 6,862
IT (TP) A No. 1616/Bang/2017
Page 13 of 42

income Income 355 355


Numerator (A) 39,634 39,634
Expenditure 1,867 1,867
Professional services availed 5,281
Expenditure 5,281
Reimbursement of expenses Interest
Expenditure 479 479
Other expenses Expenditure 71 71
NUMERATOR /BJ 7,698 7,698
Ooerating Revenue (CJ 1,80,737 1,80,737
Total Expenses (D) 1,59,007 1,59,007
RPT Percentage CO[l_tion I l
E=A+C 21.92% NIA
F=B+D 4.84% NIA
G=E+F 26.76% NIA
RPT Percentage (Option 2) 26.19%
NIA
(H= (A+B) + CJ

25. So computed, the RPT percentage exceeds 25%, being the filter
adopted by the learned TPO as upheld by the learned DRP. In any
event the Appellant contends that the appropriate filter to be applied
is 15% and not 25%.

26. The Appellant has applied the 15% filter while the learned TPO
has applied a 25% filter. Therefore, it is common ground that an RPT
filter is to be applied. The only question concerns the percentage to be
considered. Firstly, there is no doubt that the 15% filter is being
regularly applied by various benches of the Tribunal. Secondly, on
the very question of how to choose between the 25% and the 15%
filters, a co-ordinate Bengaluru Bench has held in Dell's case that
the question turns on the availability of comparables. It has further
held that since there is no dearth of comparables in the software
development sector, the stricter 15% filter can be applied. Further,
in Siemens BPO's case, a co-ordinate Bengaluru Bench-has held
that, under normal circumstances, the tolerance level must be 15%.
Accordingly, it is submitted that the 15% filter must be applied. In
whatever manner the RFT computations are made, ICRA fails the
15%filter.

27. Without prejudice, the Appellant submits that the question of


the method of computing the RPT filter was considered at length
by a co-ordinate bench of this Tribunal in Nokia s case. The
Tribunal held that the percentage of numerator to denominator
can be calculated only when the contents · of a part of
representing the RPT of a particular nature is seen with
reference to the contents of whole of that nature. Accordingly, it
is submitted that RP expenditure cannot be compared to total
turnover, but must instead by total expenditure.

L&T INFOTECH LTD.


28. This comparable was selected by the learned !PO and upheld by
the learned DRP. The Appellant submits that this comparable is to be
rejected on the following two grounds.

(a) Brand Value.: The second page (numbered S-623) of L&T


Infotech's director's report throws light on that company's
IT (TP) A No. 1616/Bang/2017
Page 14 of 42

substantial brand value. Further, on the third page (S-624), the


long list of awards and recognitions earned by that company
further evidence the strength of its brand.

(b) Functionally Different: The segment reporting information at


p. S-653 of the annual report shows the multifarious nature of
this comparable 's operations. It has been held by a co-ordinate
Bengaluru Bench in Cisco Systems (India) Pvt. Ltd. v. DCIT
[2014] 50 texmann.com 280 (Bangalore-Trib.) that L&T Infotech,
being a global IT services and solutions provider, cannot be
compared to a captive software development service provider.

(c) High Turnover: L&T Infotech has a turnover ofX3,613.42 crore.


This is more than 18 times the Appellant's turnover. In the following
cases, co-ordinate Benches of this. Honourable Tribunal have held
that a turnover filter of one-tenth the turnover of the tested company
up to ten times its turnover is appropriate.

i) ABB Industrial IT Development Centre Ltd. v. ACIT [2017] 83


taxmann. com 12 2 (Bangalore)
ii) AOL Online India Pvt. Ltd. v. DCIT [2016] 68 taxmann.com
235 (Bangalore)
iii) DCIT v. Sunquest Information Systems (India) Pvt. Ltd.
[2016] 70 taxmann.com 273 (Bangalore)
iv) Lam Research (India) (P.) Ltd. v Dy. CIT [IT Appeal Nos.1437 &
1385 (Bang.) of 2014. dated 30-4-2015] (para 9)

MINDTREE LTD. (SEGMENT)


29. This comparable was selected by the learned TPO and
accepted by the learned DRP.

30. The Appellant submits that this comparable ought to be rejected as


it is functionally different from the Appellant. This is evidenced by the
following statements in Mindtree 's annual report.

(a) Operations (page 28): "With delivery centers in India and


overseas, we offer IT strategy consulting, application development
and maintenance, data warehousing and business intelligence,
package implementation, product architecture, design and
engineering, embedded software, technical support, testing,
infrastructure management services etc., to our customers. "

(b) Substantial Research & Development (page 34): Paragraph


C in the annexures to the Director's Report deals with
"Technology and Innovation" and brings out the substantive and
substantial nature of the company's R&D. There are two
categories of laboratories set up by it, P ES and ESP labs.

(c) Substantial Intellectual Property (page 35): In paragraph C(c) of


the said annexures, there is a long list of patents which Mindtree
IT (TP) A No. 1616/Bang/2017
Page 15 of 42

holds. This makes it clear that the operations ofMindtree extend much
beyondjust software development.

(d) Wide Range of Operations page 57) and Lack of Information


from Segment Reporting (page 58):

i) The learned TPO has taken figures from the "IT services"
segment of Mindtree. Page 58 of the Annual Report shows two
segments "IT services" and 'Product Engineering Servi es (P ES)".

ii) The graphs on page 57 of the annual report show the distribution
ofMindtree's revenue across service lines.

iii) On this graph, development represents only 25% of Mindtree's


revenue. It is not clear whether this 'development" includes product
development (i.e., · development of products for its own exploitation
and sale) or software development (i.e., development of software at
the instructions of its customers where the intellectual property would
eventually vest in such customers) or both.

iv) In the Appellant s case, software development falls in the


latter of these categories. Even if the whole of Mindtree's 25% of
development revenue was considered to be software development
of the kind comparable with the Appellant, it is impossible to
determine how much of the "IT Services" segment of Mindtree
actually constitutes software development. Thus the information
used by the TPO is unreliable.

v) Further, from the graphs on page 57. it emerges that as much


as 22% of Mindtree 's revenue is from maintenance. Maintenance
would certainly be in the nature of "IT Services" and not "PES".
Thus, the "IT Services11 segment itself is heterogenous and not
functionally comparable to the Appellant's homogenous software
development activities.

vi) Further, in the segmental information at page 90 (identical to


the segmental information at page 58) shows that IT Services
Constitutes about 69. 47% of Mindtree 's revenue, but as seen
above, development is only about 25% while maintenance is itself
22%. Thus it is clear that the segment "IT Services" is a
heterogenous, multi-faceted and composite mixture of various
kinds of activities.

vii) In the paragraph above the segment table on page 58/90, the
company itself has stated· that as segmental assets are used
interchangeably between segments, meaningful ·disclosures in
that regard are not possible.

viii) From all this, it is clear that Mindtree's operations are an


indivisible blend of a variety of verticals, rendering any information
IT (TP) A No. 1616/Bang/2017
Page 16 of 42

on specific aspects of its operations unreliable, being merely and


conjectures.

(e) Product Company: Page 3 of its annual report shows that it


offers a wide variety a/products such as Match, MindTest etc.
Thus, since Mindtree's IT Services includes maintenance,
consulting. package implementation, etc., it is evident that these
services are inextricably linked to their products.

(f) Brand: Page 5 of its annual report shows that a process of


brand transformation was undertaken evidencing the existence of
substantial brand value. Page 30 contains an analysis of its
brand identity. Mentions of the comparable's brand are also to
be found at pp. 10 and 28.

31. The above averments as regards the classification of


Mindtree 's segments also · evidences that the information
available from Mindtree's annual report as regards its software
development operations (if any) is scanty and incomplete. This
itself vitiates its reliability as a comparable.

PERSISTENT SYSTEMS
32. This comparable has been selected by the learned TPO and upheld
by the learned DRP. The Appellant submits that this comparable
ought to be rejected on the grounds that:

(a) The comparable is functionally different from the Appellant;


and
(b) The comparable fails the related party transaction (RPT) filter
set by the Appellant.

33. RPT Filter The Appellant submits that it fails the 15% RPT
filter. By the TPO's own computation, the RPTs of Persistent is
19. 62%, thus failing the filter. It has already been submitted
above that a co-ordinate Bengaluru Bench of this Honourable
Tribunal has held that in the software sector, since there is no
dearth of comparables, the stricter 15% RPT filter is to be applied
in preference to the more lenient ~5% filter. It has also been
shown above that various coordinate benches have shown a
preference to the 15% filter in recent times.

34. Functionality
(a) Page 4 of the annual report shows that the company is tn
many lines of businesses such as product engineering, technology
consulting, strategic partnership to build platforms, and 1 Prled
business. The activities are thus wide and multifarious.

(b) Page 19, 27 and 31 of the annual report show a focus on IP-led
business and the acquisition ofIP during the year.
IT (TP) A No. 1616/Bang/2017
Page 17 of 42

(c) Acquisitions: Page 27 shows

(d) The nature of Persistent's services is different too. Page 21 of


the annual report shows the nature of services as being cloud
computing, analytics. social enterprise and enterprise mobility.

(e) R&D: Pages 21 and 28 show that Persistent has an in-house


research lab recognised by the Department ofScientific and Industrial
Research (DSIRJ, Government ofIndia.

35. Without prejudice, the learned TPO and the learned DRP have
wrongly treated provision for doubtful debts as being non-
operating in nature. If this is treated as operating, the margin will
come to 27% as opposed to the 28.27% determined by him.
Detailed arguments have been advanced in this respect in relation
to the comparable CG-VAK.

OTHER ISSUES
TDS ON COMMISSION
36. The Appellant paid commission ofRs. 4,34, 72,134 to parties based
abroad and having no permanent establishment (PE) . in India for
services rendered by them abroad No tax was deducted at source.

The entire amount of Rs.4.34,72,1341- has beer disallowed under


section 40(a)(i) on the ground that export commission is not exempt
under the Act.

37. The DRP noted the factual position that the agents rendered
services and solicited orders outside India and the commission was
also remitted abroad It, however, upheld the disallowance on the
reasoning that as the order is executed by the assessee in India the
right to receive the commission also arose in India. TDS under section
195 was applicable.

38. The Appellant submits that this reasoning is incorrect as the


execution of the orders by the Appellant determines the situs of the
source of the Appellant's income arid not that of the overseas
commission agent.

3 9.The Appellant relies on the following precedents.


(a) CIT vs. Faizman Shoes (P) Limited [2014] 367 JTR 155 (Madras)
where, on identical facts, the court held that TDS is not deductible.
(b) Zanav Home Collection vs. JCIT [2015] 55 Taxman.com 200
(Bangalore - Trib)
(c) Balmer Lawrie and Co, Limited vs. ITO [2016] 68
Taman.com 384 (Kolkata Trib)
(d) DCITvs. SRM Agro Foods [2016] 75 Taxman.com 210 (Mumbai- ,
Trib)

40. The learned AO erred it not giving the Appellant credit for set off
IT (TP) A No. 1616/Bang/2017
Page 18 of 42

of taxes paid by the Appellant in foreign jurisdiction amounting to Rs.


1,18,23, 711."

5. In the course of hearing before us, the Id. AR of assessee has submitted a big
chart containing assessee's arguments in respect of assessee's claim
regarding inclusion / exclusion of some comparables and it was submitted by
Id. AR of assessee that appeal of the assessee may be decided on the basis of
synopsis of the assessee's arguments and the big chart in respect of inclusion /
exclusion of various comparables. The Id. DR of revenue supported the final
assessment order and the order of DRP.

6. We have considered the rival submissions. We find that as per the synopsis of
arguments filed by Id. AR of assessee and reproduced above, in transfer
pricing issues, one matter to be decided is regarding negative working capital
adjustment done by the AO and the second TP issue is regarding the
assessee's claim for risk and other adjustments. In addition to this, the
assessee is requesting for inclusion of one comparable i.e. R Systems
International Ltd. (segment) and exclusion of five comparables i.e. 1) CG-VAK
Software and Exports Ltd., 2) ICRA Techno Analytics Ltd., 3) L&T lnfotech Ltd.,
4) Mindtree Ltd. (segment) and 5) Persistent Systems. In addition to TP issues,
there is one issue on corporate taxation i.e. TDS on commission. We decide
this appeal by deciding various issues one by one.

7. We first examine and decide the issue in respect of ·negative working capital
adjustment. In this regard, this is the submission of the assessee that 99.83%
of the assessee's share capital is held by Lifetree Cyberworks Pvt. Ltd., the
assessee's holding company and TecnotreeOyj, Finland, the assessee's
ultimate holding company and thus, the assessee does not have any working
capital risk at all. This is also the assessee's submission that a substantial
portion of the assessee's working capital arises out of transactions with its
related parties and in support of this contention, it was submitted that out of
total trade receivables of Rs. 163.35 Crores as on 31.03.2013, more than 77%
i.e. Rs. 126,40,42,576/- is receivable from its holding and subsidiary companies
and this is the claim of the assessee that this factual position reinforces the
IT (TP) A No. 1616/Bang/2017
Page 19 of 42

proposition that the assessee bears no working capital risk. The assessee has
placed reliance on several Tribunal orders as noted in para 4 of the synopsis of
the assessee's arguments reproduced above and therefore, we have to
consider and examine the applicability of these judgments. The first Tribunal
order on which reliance is placed is the Tribunal order of Hyderabad Bench of
the Tribunal rendered in the case of Adaptec (India) Pvt. Ltd. vs. ACIT as
reported in [2015] 57 taxmann.com 307. Copy of this Tribunal order is
available on pages 275 to 286 of compilation of case laws and in particular, our
· attention was drawn to paras 10 & 11 of this Tribunal order available on page
nos. 285 and 286 of paper book. Hence, for the sake of ready reference, these
paras are reproduced hereinbelow. The same are as under.

"JO. Ground No.8 pertains to the issue of negative working capital. As


briefly stated above, after arriving at the arithmetic mean of all
comparables at 22.03%, the A.O. worked out negative working capital
adjustment of 3.22% thereby, making arms length price at 25.25%.
Even though, DRP refused to interfere with the objections of the
assessee in its order, we were informed that DRP has directed the
TPOIA.O. not to make any negative working capital adjustment in
some of the cases in the next assessment year, in the cases of Market
Tools Research P. Ltd., and Mega Systems Worldwide India P. Ltd.,
assessee placed on record copies of orders of DRP. In that DRP
considered the issue and directed the TPO as under :

"14. Ground No.11 : Negative Working Capital adjustment -


Making a negative working capital adjustment without
appreciating the fact that the company does not bear any working
capital risks. On this issue, the assessee submitted as under :

"The learned TPO determined the ALP for the international


transactions with A.Es by making a negative working capital
adjustment for the differences in working capital between the
assessee and the companies considered as comparables. The
assessee does not agree with the learned TPO as:

• The company does not bear any working capital risk since it is
been fully funded by it's A.E. from its inception and has no working
capital contingencies.
• The company has never taken any loans till date from the date of
incorporation nor has incurred any expense for meeting the
working capital requirement."

We have gone through the submissions and the order of the TPO. The
assessee pleaded that the DRP has acceded such a plea in some other
IT (TP) A No. 1616/Bang/2017
Page 20 of 42

case. On examination, we find that the DRP, Hyderabad in the case of


Cordys Software India P. ltd., for A. Y 2008-09 in its directions dated
03.08.2012 has given a finding as under:
"7. 7. 4 Thus, working capital adjustment is made for the time value
of money lost when credit time is provided to the customers. The
applicant is not an entrepreneur but a captive service provider. Its
entire funding needs are provided by the A.E. This being so, the
applicant does not stand to lose anything as it is compensated on a
total cost plus basis. The TPO probably was carried away by the
large amount of receivables appearing in the books of the
applicant: But the applicant is running its business without any
working capital risk while comparable companies have such a risk
for them. If at all any working capital adjustment is to be made to t
his situation, only a positive adjustment has to be made to the
comparables so that they are brought on par with the applicant. In
view of the same, the Panel directs that negative working capital
adjustment to the arithmetic mean margin of the comparables shall
not be made. 11

In view of the above, the Panel directs that negative working


capital adjustment to the arithmetic mean margin of the
11
comparables shall not be made.

I I. In view of the above, we are of the opinion that assessee 's case
being similar, there is no need for making any negative working
capital adjustment when assessee does not carry any working capital
risk. In fact, TPO should have done necessary working capital
adjustment to the profits of the selected comparables so as to make
them comparable to the assessee. In view of this, we direct the TPO
not to make negative working capital adjustment."

8. From the above paras reproduced from this Tribunal order, it is seen that in
that case, the Tribunal has reproduced the relevant para of the directions of
DRP in a different case i.e. Market Tools Research P. Ltd. and Mega Systems
Worldwide India P. Ltd. We find that in these paras of these directions of
DRP, this is the basis of decision of DRP that assessee company does not
bear any working capital risk since it has been fully funded by it's A.E. from its
inception and has no working capital contingencies and the company has
never taken any loans till date from the date of incorporation nor has incurred
any expense for meeting the working capital requirement. In that case, the
ORP has examined the direction of DRP, Hyderabad in some other case i.e.
Cordys Software India P. Ltd. for Assessment Year 2008-09 dated 03.08.2012
and the direction in _that case are also reproduced and as per the same, it is
held by ORP in that case that working capital adjustment is made for the time
IT {TP) A No. 1616/Bang/2017
Page 21 of 42

value of money lost when credit time is provided to the customers. In our
considered opinion, this very basis adopted by DRP in those cases that
working capital adjustment made is for the time value of money lost when
credit time is provided to the customers is incorrect because in TP analysis,
comparison is made of operating profit margin i.e. profit before interest and
therefore, interest cost has no relevance for TP analysis. In fact, the working
capital adjustment is made for this reason that if the sale is made on the terms
of cash payment to one customer and to second customer the sale is made
with the payment terms of one morith outstanding and to third customer with
payment terms of two months outstanding then the prices charged to the first
customer having cash payment terms will be minimum and the prices charged
for the second customer with the payment terms of one month credit will be
more as compared to the prices charged to first customer and the prices
charged to the third customer with the payment terms of two months credit will
be more than the prices charged to the first customer also. Similar is the
situation for creditors because if the assessee makes payment to its suppliers
on cash basis, the assessee will get least price and if the assessee is making
payment after one or two months then the prices charged to the assessee by
the supplier will be extra. Such extra pricing depending on the payment terms
is not for this reason that the -supplier is making payment of interest because
even if a supplier has its own money and has no interest burden then also he
will charge extra if the payment terms is for two months credit as against
payment terms of one month credit and payment terms of cash payment i.e.
immediately on supply. Hence it is seen that the very basis adopted by DRP
in those cases is wrong and the Tribunal has simply decided the issue on this
basis that since the assessee does not carry any working capital risk, negative
working capital adjustment is not called for. At this juncture, we feel it proper
to reproduce the relevant Para from the order of TPO in the present case from
page 31 of the order of TPO being Para 12.1 which reads as under.
"12.1 NEGATIVE WORKING CAPITAL ADJUSTMENT
A question that few !TAT benches have deliberated over lately
pertains to whether negative working capital adjustment should be
given. Most JTATs have equivocated that positive working capital
adjustment should be made on the comparables' margin. The adjusted
margin is [PLI-WCA}. Hence positive WCA reduces the mean margin
IT (TP) A No. 1616/Bang/2017
Page 22 of 42

of comparables, whereas negative WCA increases the mean margin of


comparables. In the case of Adaptec (India) Private Limited (!TA.No.
206/Hyd/2014), the assesse argued in !TAT that it is a captive service
provider and does not bear any working capital risk. Hon'ble !TAT
ruled that negative working capital adjustment should not be made.
This has been followed by few other judgments:
On analysis, it is seen that the case was not properly
represented in front of Hon'ble !TAT Risk and Value are different
concepts. Working Capital Adjustment is given on the time value of
working capital. Working capital position affects the pricing of any
service in open market.* WCA basically calculates the difference in
pricing of comparable and taxpayer. Whether positive or negative,
does not matter. WCA is done on each comparable, and it will be seen
that for some comparables, WCA is positive while for others, WCA is
negative. The end impact of WCA is that it increases comparability.
The purpose of WCA is not to benefit the assessee, but to increase
comparability and be just.
Working capital risk is a different concept. It is part of many
risks that companies face. For a captive service provider, systematic
risk is lower than comparables whereas unsystematic risk is higher
than comparables. Working capital risk is one of the many risks. To
account for working capital risk, the appropriate adjustment is risk
adjustment. It cannot be corifused with Working Capital Adjustment.
In the present case, net working capital adjustment is negative.
WCA has increased comparability, and hence is justifiable."
* Emphasis supplied.

9. From the above Para from the order of TPO, it is seen that as per the TPO in
the present case, working capital position affects the pricing of any service in
open market as discussed above. The TPO also held that whether positive or
negative working capital difference is not material .and the purpose of the
working capital adjustment is this that it increases comparability and the
purpose of working capital adjustment is not to benefit the assessee but to
increase comparability and be just. In our considered opinion, working capital
risk and whether there is interest burden or not are not relevant factors for
deciding working capital adjustment because in our considered opinion,
working capital adjustment is done because working capital position affects
the pricing of any service or goods in the open market. Since this aspect has
not been considered by Tribunal in that case, in our considered opinion, this
Tribunal order is not binding precedence for the purpose of deciding this ,
aspect that working capital position affects the pricing of any service or goods
in the open market because in the present case, this is the objection of the
IT (TP) A No. 1616/Bang/2017
Page 23 of 42

TPO as per relevant paras reproduced above and this aspect is not discussed
and decided by Tribunal in this case.

10. Now we examine the applicability of the second Tribunal order on which
reliance is placed and this Tribunal order is rendered in the case of Lam
Research (India) Pvt. Ltd. Vs. DCIT (supra), copy of this Tribunal order has not
been provided by the assessee in the compilation of case laws and no citation
is also provided and this is not a reported Tribunal order and therefore, we
cannot examine and consider the applicability of this Tribunal order and
hence, we hold that this Tribunal order is not applicable in the present case.

11. The third Tribunal order on which reliance is placed is the Tribunal order
rendered in the case of CAPCO IT Services India Pvt. Ltd. Vs. ITO (supra),
copy available on pages 287 to 295 of case law compilation and it was pointed
out before us that paras 13 to 17 of this Tribunal order are relevant and the
same are available on page no. 294 of paper book. These paras from this
Tribunal order are reproduced hereinbelow.
"13. It was further submitted that for the purpose of the Economic
Analysis, the cost plus mark-up of the Appellant is compared against
that of uncontrolled companies engaged in similar services and that
such independent comparable uncontrolled companies, who operate
under uncontrolled conditions, bear risk during the course of its
operations including market risk, research and development risk,
technology risk credit risk, currency fluctuation risk, liquidity risk,
default risk etc. As a result, the resultant profitability of such
comparable uncontrolled companies is directly related to the level of
risk borne, which is not so it the case of a captive service provider
similar to the Appellant as it assumes minimal risks and being an
entity with a fixed mark-up on the cost earn steady return year on
year.

14. We heard both parties relying on the following Tribunal


judgments, wherein comparability economic adjustments are also
mandated by the Tribunal.

• Sony India (P.) Ltd v. Dy. CIT [2008] 114 !TD 448 (Delhi)
• E-Gain Communication (P) Ltd v. ITO [2009J 118 !TD
243/[2008] 23 SOT 385 (Fune)
• Mentor Ruling
• Motorola Solutions India (P) Ltd v. Asstt. CIT [2014] 48
taxmann.com 248/[2015] 152 !TD 158 (Delhi - Trib.)
IT (TP) A No. 1616/Bang/2017
Page 24 of 42

15. Further, in addition to the above rulings, the principle has also
been upheld by the recent High Court ruling the case of Chryscapital
Investment Advisors (India) (P) Ltd v. Dy. CIT [2015] 376 ITR
183/232 Taxman 20/56 taxmann.com 417 (Delhi), wherein the
Hon'ble Court has held that appropriate adjustments should be
carried out in situations where there are differences between the
tested parties and comparables and in case such differences
perceptible in the comparables cannot be eliminated on account of
adjustments or otherwise, then such comparables have to be rejected.

16. We direct the TPO to work out appropriate risk adjustment.

17. The learned AOIDRP erred in not providing appropriate working


capital adjustment

The learned TPO determined the ALP for the international


transactions with A.Es by making a negative working capital
adjustment for the differences in working capital between the assessee
and the companies considered as comparables.

It is submitted that working capital adjustment is made for the time


value of money lost when credit time is provided to the customers. It
was submitted that the assessee is not an entrepreneur but a captive
service provider and its entire funding needs are provided by the A.E.
This being so, the assessee does not static to lose anything as it is
compensated on a total cost plus basis. It was further submitted that
the assessee is running its business without any working capital
adjustment is to be made to this situation, only a positive adjustment
has to be made to the comparables so that they are brought on par
with the assessee."

12. We find that in this case also, the decision of Tribunal is on this basis that
working capital adjustment is made for the time value of money lost when
credit time is provided to the customers and there is no decision in this case
also on this aspect that working capital position affects the pricing of any
service or goods in open market as the case made out by TPO in the present
case as per Para 12.1 of TPO's order reproduced hereinabove. Hence we
hold that in the present case, this tribunal order is also not applicable.

13. Now we examine the applicability of the fourth Tribunal order on which
reliance is placed having been rendered in the case of ITO Vs. lntoto Software
(India) Pvt. Ltd. (supra), copy available on pages 61 to 73 of case law
IT (TP) A No. 1616/Bang/2017
Page 25 of 42

compilation and it was pointed out before us that Para 14 on pages 71 and 72
are relevant and hence, the same is reproduced hereinbelow.
"14. Ground No.14 is raised as an additional ground stating that
TPOIDRP has erred in making a negative working capital
adjustment of (-)0.61% while computing the adjustment uls. 92CA.
It was the submission that negative working capital adjustment was
not allowed in various decisions and relied on the decision of
Adaptec (India) P. Ltd., Vs. ACITin !TA No. 206/Hyd/2014, dt. 25-
03-2015, in the above referred case.
"JO. Ground No.8 pertains to the issue of negative working
capital. As briefly stated above, after arriving at the arithmetic
mean of all comparables at 22.03%, the A.O. worked out
negative working capital adjustment of 3.22% thereby, making
arms length price at 25.25%. Even though, DRP refused to
interfere with the ·objections of the assessee in its order, we were
informed that DRP has directed the TPOIA.O. not to make any
negative working capital adjustment in some of the cases in the
next assessment year, in the cases of Market Tools Research P.
Ltd., and Mega Systems Worldwide India P. Ltd., assessee
placed on record copies of orders of DRP. In that DRP
considered the issue and directed the TPO as under :

"14. Ground No.I I : Negative Working Capital adjustment -


Making a negative working capital adjustment without
· appreciating the fact that the company does not bear any
working capital risks. On this issue, the assessee submitted as
under:

"The learned TPO determined the ALP for the international


transactions with A.Es by making a negative working capital
adjustment for the differences in working capital between the
assessee and the companies considered as comparables. The
assessee does not agree with the learned TPO as :

• The company does not bear any working capital risk since
it is been fully funded by it's A.E. from its inception and has
no working capital contingencies.
• The company has never taken any loans till date from the
date of incorporation nor has incurred any expense for
meeting the working capital requirement. "

We have gone through the submissions and the order of the TPO.
The assessee pleaded that the DRP has acceded such a plea in
some other case. On examination, we find that the DRP,
Hyderabad in the case of Cordys Software India P. ltd., for A. Y
2008-09 in its directions dated 03.08.2012 has given a finding as
under:
IT (TP) A No. 1616/Bang/2017 .
Page 26 of 42

"7. 7. 4 Thus, working capital adjustment is made for the time


value of money lost when credit time is provided to the
customers. The applicant is not an entrepreneur but a captive
service provider. Its entire funding needs are provided by the
A.E. This being so, the applicant does not stand to lose anything
as it is compensated on a total cost plus basis. The TPO
probably was carried away by the large amount of receivables
appearing in the books of the applicant. But the applicant is
running its business without any working capital risk. while
comparable companies have such a risk for them. If at all any
working capital adjustment is to be made to this situation, only a
positive adjustment has to be made to the comparables so that
they are brought on par with the applicant. In view of the same,
the Panel directs that negative working capital adjustment to the
11
arithmetic mean margin of the comparables shall not be made.
In view of the above, the Panel directs that negative working
capital adjustment to the arithmetic mean margin . of the
comparables shall not be made. 11
11. In view of the above, we are of the opinion that assessee 's
case being similar, there is no need for making any negative
working capital adjustment when assessee does not carry any
working capital risk. In fact, TPO should have done necessary
working capital adjustment to the profits of the selected
comparables so as to make them comparable to the 21
ITA.No. 206/Hyd/20 I 4 Adaptec (India) P. Ltd., Hyderabad.
assessee. In view of this, we direct the TPO not to make negative
working capital adjustment"."

14. From the above Paras reproduced from this Tribunal order, it is seen that in
this case also, the decision is on the basis of Tribunal order rendered in the
case of Adaptec (India) Pvt. Ltd. vs. ACIT (supra). As we have already seen
that the tribunal order rendered in the case of Adaptec (India) Pvt. Ltd. Vs.
ACIT (supra) is not applicable in the present case because it was found that in
that case, the Tribunal decision is not on this aspect that working capital
position affects the pricing of any services or goods in open market as the
case made out by the TPO in the present case. Hence we hold that this
. Tribunal order is also not relevant in the present case.

15. The last Tribunal order on which reliance is placed is the Tribunal order
rendered in the case of TNS India Pvt. Ltd. Vs. ACIT (supra), copy available
on pages 296 to 310 of case law compilationand before us, it was pointed out
that para 8.1 on page nos. 298 & 299 is relevant and hence, we reproduce
IT (TP) A No. 1616/Bang/20'17
Page 27 of 42

para 8.1 from pages 298 & 299 of the compilation of case laws. The same is
as under.
"8.1. This ground pertains to incorrect computation of working
capital adjustment. It was submitted that working capital adjustment
was wrongly considered by considering the total receivables and
arrivals including third party transactions and making a negative
working capital adjustment. A OITPO is directed to examine this issue
and work out the working capital adjustment afresh, as certain
comparable companies are being considered separately. In case the
working capital adjustment comes negative, AOITPO is directed not to
make any negative working capital adjustment as the same is not
approved in various Co-ordinate Bench decisions. The Co-ordinate
Bench of !TAT in the case ofAdaptec (India) P. Ltd., Vs. ACIT in !TA.
No. 206/Hyd/2014 (AY 2009-10) dt. 25-03-2015, has decided the issue
of negative working capital as under:

"10. GroundNo.8 pertains to the issue of negative working capital As


briefly stated above, after arriving at the arithmetic mean of all
comparables at 22. 03%, the A. 0. worked out negative working capital
adjustment of 3.22% thereby, making arms length price at 25.25%.
Even though, DRP refused to interfere with the objections of the
assessee in its order, we were informed that DRP has directed the
TPOIA.O. not to make any negative working capital adjustment in
some of the cases in the next assessment year, in the cases of Market
Tools Research P. Ltd, and Mega Systems Worldwide India P. Ltd,
assessee placed on record copies of orders of DRP. In that DRP
considered the issue and directed the TPO as under :

"14. Ground No.11 : Negative Working Capital adjustment - Making a


negative working capital adjustment without appreciating the fact that
the company does not bear any working capital risks. On this issue,
the assessee submitted as under :

"The learned TPO determined the ALP for the international


transactions with A.Es by making a negative working capital .
adjustment for the differences in working capital between the assessee
and the companies considered as comparables. The assessee does not
agree with the learned TPO as :

• The company does not bear any working capital risk since it is
been fully funded by it's A.E. from its inception and has no working
capital contingencies.

• The company has never taken any loans till date from the date of
incorporation nor has. incurred any expense for meeting the
working capital requirement. "

We have gone through the submissions and the order of the TPO. The
assessee pleaded that the DRP has acceded such a plea in some other
IT (TP) A No. 1616/Bang/2017
Page 28 of 42

case. On examination, we find that the DRP, Hyderabad in the case of


Cordys Software India P. ltd, for A. Y 2008-09 in its directions dated
03.08.2012 has given a finding as under:

"7. 7. 4 Thus, working capital adjustment is made for the time value of
money lost when credit time is provided to the customers. The
applicant is not an entrepreneur but a captive service provider. Its
entire funding needs are provided by the A.E. This being so, the
applicant does not stand to lose anything as it is compensated on a
total cost plus basis. The TPO probably was carried away by the large
amount of receivables appearing in the books of the applicant. But the
applicant is running its business without any working capital risk
while comparable companies have such a risk for them. If at all any
working capital adjustment is to be made to t his situation, only a
positive adjustment has to be made to the comparables so that they
are brought on par with the applicant. In view of the same, the Panel
directs that negative working capital adjustment to the arithmetic
mean margin of the comparables shall not be made. "

In view of the above, the Panel directs that negative working capital
adjustment to the arithmetic mean margin of the cornparables shall
not be made. "

11. In view of the above, we are of the opinion that assessee 's case
being similar, there is no need for making any negative working
capital adjustment when assessee does not carry any working capital
risk. In fact, TPO should have done necessary working capital
adjustment to the profits of the selected cornparables so as to make
them comparable to the assessee. In view of this, we direct the TPO
not to make negative working capital adjustment"."

16. From the above paras, we find that in this case-also, the issue is decided by
Tribunal by following Tribunal order rendered in the case of Adaptec (India)
Pvt. ltd. Vs. ACIT (supra) and we have already seen that this Tribunal order is
not relevant in the present for the reasons mentioned above and therefore, we
hold that this Tribunal order is also not applicable in the present case. We
also find that in para 5 of the synopsis of arguments reproduced above, this is
the submission of the assessee that the basis of the working capital
adjustment is the existence of a difference in the cost of working capital and it
is also stated that this is relevant because the cost is stated to affect the
margin and in the assessee's case, the assessee has demonstrated that it
holds its working capital at no cost, completely out of its own funds without any
borrowings at all. In our considered opinion, these factors are not relevant for
IT (TP) A No. 1616/Bang/2017
Page 29 of 42

working capital adjustment because in TP analysis, operating profit is


considered which is profit before interest and therefore, the interest cost has
no relevance for TP analysis and the working capital adjustment is for this
reason that working capital position affects the pricing of any services or
goods in the open market and not because the working capital cost increases
or decreases the profit margin. Hence we find no merit in this claim of the
assessee and accordingly this issue is decided against the assessee.

17. Now we decide the assessee's claim regarding risk and other adjustments.
We first reproduce Para no. 13 available on page nos. 31 & 32 of TPO order.
The same is as under.
"13. RISK ADJUSTMENT:
Risk adjustment involves two vital preconditions. They are that
difference in risk level exists between the tested party and the
uncontrolled comparables; and that it is. possible to calculate in
terms of numbers the differences in risk so that adjustment can be
made. But in case of the taxpayer, both the prerequisites are missing.
Neither the difference in risk level of the tested party and uncontrolled
comparables has been established nor is it possible to convert the
difference in risk level, if there is any, into numbers. If there is any
difference, for a moment academically speaking, it. rests in the realm
of quality and not quantity. There is no reliable method to convert the
qualitative difference into quantitative difference and to make
adjustment on account of risk level. As per the provisions of Rule I OB
(3), if any adjustment should be made, it should be reasonably
accurate to eliminate the material effects of such differences. But in
case of risk adjustment, neither reasonably accurate adjustment can
be made for want of method to do so nor has it been established that
there is a material effect that is affecting the comparisons due to risk
level. If the taxpayer is suggesting that there exists a difference in the
risk level assumed by the tested party and uncontrolled comparables,
it is academic in nature and not based on any study whose results has
been validated
Further, it is not out ofplace to reiterate that single customer risk is a
huge risk which the uncontrolled comparables are not assuming. By
having more customers, the risk is shared or spread. In other words,
if one customer goes out of business still there are others which will
sustain the business of the tested party. But in case of the taxpayer
there being only one client, the entire risk is concentrated on one
client, and therefore, if the client is out of business the taxpayer will
also be out of business.
Moreover, the proviso to Sec. 9 2C (2) of the Act provides for adopting
arithmetical mean of the different prices. This provision neutralizes
the effect of difference in the risk profile, if any between the tax payer
IT (TP) A No. 1616/Bang/2017
Page 30 of 42

and the comparables as realized risk may pull down the profitability
below the risk free return. This stand is supported by the decision of
the Hon 'ble ITAT Bangalore bench in the case of Mis SAP Labs India
(P.) Ltd. [2012] 17 taxmann.com 16 (Bang.) and Mis Meritor LVS
India Pvt. Ltd. [2015] 64 taxmann.com 136 (Bangalore - Trib.) and
also by the Hon 'ble ]TAT, Mumbai bench in the case of Mis. Symantec
Software Solutions Pvt. Ltd. Vs ACIT (2011) 46 SOT 48 (Mumbai).
Based on the above discussions, no risk adjustment is allowed."

18. We also reproduce Para no. 10 available on page no. 13 of DRP directions.

"10.0 Objection no 12
The Ld. TPO erred in not allowing appropriate adjustments on
account of difference in functional, risk and operational profile. The
Ld. AO erred in upholding the actions of the TPO.

10.1 In relation to the above objection, at the time of hearings before


this Panel, the assessee submitted that it needs to be allowed a risk
adjustment as it is a non-risk bearing entity The submissions of the
assessee have duly been considered. The assessee relied on various
decisions of JTAT to argue that such adjustment needs to be allowed
in
to it. The issue has been discussed in detail by the TPO para 13 of
his order. During the proceedings before this Panel the assessee was
asked to give detailed working of the risk adjustment it was seeking
and the basis thereof However, as discussed supra, the assessee just
sought an adhoc adjustment on this account. The assessee argued that
it can be provided such adjustment on basis of various decisions of
IAT Such a claim of the assessee does not have any scientific backing.
The claim of the assessee is only a theoretical one. Further, from the
financials of the assessee it is noted that the assessee is not a 100%
- export entity but it is operating in the domestic market also and thus is
subject to normal risks in relation to revenue from such source. The
TPO has rightly pointed out that if the assessee is subject to 'single
customer risk', the same in itself is huge and the comparables are not
bearing such a risk. Mumbai ]TAT in the case of Symantec Software
Solutions (P.) Ltd. v Asstt. CIT [2011] 216 SOT 48/11 taxmann.com
264 for AY 2006-07, held that (para 16) -

"As regards the difference in function and risk level adjustment;


the assessee has raised this issue without quantification of such
adjustment on this account. Even otherwise until and unless such
difference results in deflation or inflation offinancial result of the
comparables, it is not general rule of standard adjustment. The
assessee has not brought on record how such functional difference
and risk has influenced the result of the comparables with
quantified data to the satisfaction of the authorities. The assessee
did not quantify the alleged adjustments on account of difference in
risk. However, the assessee, first time filed certain calculation
before the DRP in support of its claim. The said calculation is also
not on the basis of any formula or principle rather it is general in
IT (TP) A No. 1616/Bang/2017
Page 31 of 42

nature. In our opinion, second proviso to sub.sec. 2 of sec. 92C


cover and take care of these aspects. Since it is impossible to have
a perfect comparable without any difference or variation regarding
turnover risk profile and functional differences; therefore, the
legislature has provided a margin of+ 5% while determining the
ALP. Therefore, when the assessee is having benefit of
choice/option as per the said provision as existed at the relevant
point of time, no separate adjustment is required on account of risk
and functional differences. Therefore, we do not find any merit and
substance in the claim of the assessee for adjustment in respect of
risk andfunctional differences.

10.2 In view of the decision in the case of Symantec Software


Solutions (P.) Ltd. v. Asstt. (supra), no separate adjustment is
required on account of risk functional difference. Further, the
assessee has not provided any detailed working of the adjustment it
was seeking. So in view of the decision of the Hon'ble !TAT
Bangalore in Zyme Solutions AY 2010-11 in IT(I'P).A No. 465/
Bang/2015 order dt 22.01.2016, no such adjustment can now be
provided to the assessee. That Risk Adjustment cannot not be granted
as a general rule was also upheld in CDC Software India Pvt Ltd [TS-
839-ITAT-2016(Bang)-TP] and Stryker Global Technology Centre Pvt
Ltd [TS-450-ITAT-2015(DEL)-TP] Assessee has failed to give any
justification for non-application of this adjustment in its transfer
pricing study. The assessese has not brought on record how lack of
this adjustment has influenced the result of the comparables with
quantified data. Second proviso to sec 92C (2) also covers and take
care of these aspects. Since it is impossible to· have a perfect
comparable without any differences, the legislature has provided a
margin of+/- 3% while determining ALP. Further, in following cases
this was held that the margin of +I- 5 % (now 3%) takes care of the
risk difference:

>" Symantec Software Solutions (P.) Ltd [2011] 11 taxmann. com 264
(Mumbai) Followed in
>" SAP Labs India (P.) Ltd. [2012] 17 taxmann.com 16 (Bang.)
>" Aptara Technologies Pvt Ltd [TS-309-1TAT-2016(PUN)-TP}

10. 3 Considering above, the objection of the assessee is not


accepted."

19. From the above Para no. 10 reproduced from the directions of DRP, it is seen
that this is the basis of DRP directions that as per the Tribunal order rendered
in the case of Symantec Software Solutions (P.) Ltd. Vs. ACIT (supra) in which
the issue was decided against the assessee on this basis that the assessee
did not quantify the alleged adjustments on account of difference in risk, the
assessee, first time filed certain calculation before the DRP in support of its
IT (TP) A No. 1616/Bang/2017
Page 32 of 42

claim and although the same calculation is also not on the basis of any
formula or principle rather it is general in nature.This finding is also given by
DRP that the DRP asked the assessee to give detailed working of the risk
adjustment which the assessee was seeking and the basis thereof. But the
assessee just sought of adhoc adjustments on this account based on various
Tribunal decisions. The DRP has given a categorical finding that the
assessee does not have any scientific backing and the assessee's claim is
only a theoretical one. As per para 13 of the order of TPO also, a categorical
finding has been given by TPO that the assessee has not established the
difference in risk level of the tested party and uncontrolled comparables and
this is also not established that it is possible to convert the difference in risk
level, if there is any, into numbers. He has also given a finding that there is no
reliable method to convert the qualitative difference into quantitative difference
to make adjustment on account of risk level. The TPO has also referred to
Rule 1 OB (3) of IT Rules which says that if any adjustment should be made, it
should be reasonably accurate to eliminate the material effects of such
differences. Before us also, as per the synopsis reproduced above, the
assessee has pointed out three options for risk adjustment but these are
general in nature and the assessee has not established that there is any risk
difference between the tested party and the comparables. In the absence of
any working having been provided by the assessee showing difference in risk
between the tested party and comparables and in the absence of any working
regarding . the assessee's claim for risk adjustment, we find no reason to
interfere in the order of DRP on this issue also. This issue is also decided

against the assessee.

20. Now we examine the assessee's claim for inclusion of one comparable i.e. R
Systems International Ltd. (segment). On this aspect, it is submitted that this
comparable was excluded by the TPO and DRP on this basis that it has a
different Financial Year i.e. year ending 31st December as opposed to the
assessee's 31st March. Reliance was placed on _the judgment of Punjab &
Haryana High Court rendered in the case of CIT Vs. Mercer Consulting (India)
IT (TP) A No. 1616/Bang/2017
Page 33 of 42

Pvt. Ltd. as reported in [2017] 390 ITR 615. Para nos. 27 to 32 of this
judgment are relevant and hence these paras are reproduced hereinbelow.
"27. The Transfer Pricing Officer excluded the case of R. Systems
International Limited from the list of comparables. The Income-tax
Appellate Tribunal included the same. The Transfer Pricing Officer
excluded the case of R. Systems International Limited on the ground
that it follows the calendar year, i.e., 1st January to 31st December
for maintaining its annual account whereas the accounting year of the
assessee is 1st April to 31st March. The Transfer Pricing Officer
followed an order passed by the Mumbai Bench of the Tribunal in
Asst. CIT v. Hapag Lloyd Global Services P. Ltd. 2013-TII-68-
ITATMUM- TP in which it had been held that a company with a dif-
ferent financial year ending cannot be compared.

28. We are unable to agree with the decision of the Transfer Pricing
Officer and of the Dispute Resolution Panel that affirmed it. The view
taken by the Tribunal commends itself to us. It is not the financial year
per se that is relevant. Even if the financial years of the assessee and
of another enterprise are different, it would make no difference. If it is
possible to determine the value of the transactions during the
corresponding periods, the purpose of comparables would be served.
The question in each case is whether despite the financial years of the
assessee and of the other enterprise being different, the financials of
the corresponding period of each of them are available. If they are,
the Transfer Pricing Officer must refer to the corresponding period of
both the entities in determining whether the two are comparable or
not for the purpose of determining the arm's length price.

29. As noted by the Tribunal, the audit accounts of R System


International Ltd. for the year ending December 31, 2008 had been
given under one column· and the data for the quarter ending March
31, 2009 and March 31, 2008 (both audited) had been given in two
other columns. Thus, as rightly held by the Tribunal, iffrom the yearly
data ending December 31, 2008, the results of the quarter ending
March 31, 2008 are excluded and if the results for the quarter ending
March 31, 2009 are included, it is possible to obtain the data for the
financial year April 1, 2008 to March 31, 2009.

30. This View is not contrary to rule I 0B(4) which reads as under:

"1 OB. (4) The data to be used in analyzing the comparability of


any uncontrolled transaction with an international transaction
shall be the data relating to the financial year in which the
international transaction has been entered into. "

31. The Rule does not exclude from consideration the data of an entity
merely because - its financial year is different from the financial year of
the assessee. What the Rule requires is that the data to be used in
analyzing the financial results of an uncontrolled transaction with an
IT (TP) A No. 1616/Bang/2017
Page 34 of 42

international transaction shall be the data relating to the financial


year in which the international transaction has been entered into.
Thus so long as the data relating to the financial year is available, it
matters not, if the financial year followed is different. In the case
before us the data relating to the relevant financial year of R. Systems
International Limited is available.

32. We are, therefore, entirely in agreement with the decision of the


Tribunal that if the data relating to the financial year in which the
international transaction has been entered into is directly available
from the annual accounts of that comparable, then it cannot be held
as not passing the test ofsub-rule (4) of rule 1 OB."

21. We find that this was held by Hon'ble Punjab & Haryana High Court that if
thedata relating to the financial year in which the international transaction has
been entered into is directly available from the annual accounts of that
comparable, then it cannot be held as not passing the test of sub-rule (4) of
rule 1 OB. In para no. 29 this judgment, it is noted by Hon'ble High Court that it
is noted by Tribunal in that case that the audited accounts of R System
International Ltd. for the year ending December 31, 2008 had been given
under one column and the data for the quarter ending March 31, 2009 and
March 31, 2008 (both audited) had been given in two other columns. In the
present case, the assessee has submitted annual report of R Systems
International for the year ending 31.12.2013 by way of additional evidence
containing 1 to 188 pages and we find that the P&L account is available and
although statement of P&L account is for year ended 31.12.2013 in the said
additional evidence paper book but it is not shown to us that the figures for
31.03.2012 and 31.03.2013 are also available on any page of this additional
evidence as has been noted by Punjab & Haryana High Court in that case.
But still we feel it proper to restore this matter back to the file of AOrf PO for
fresh decision and we order accordingly. The AOff PO is directed that if the
assessee can establish that the figures for Financial Year ending on
31.03.2013 can be worked out from audited accounts of that company then it
should be adopted and this comparable should be included in the list of
comparables. If the assessee is not in a position to do so, then the TPO may

again exclude the same.


IT (TP) A No. 1616/Bang/2017
Page 35 of 42

22. In addition to this, the assessee has also placed reliance on three Tribunal
orders as per the synopsis reproduced above. But since, we are deciding the
issue by following the judgment of Hon'ble Punjab & Haryana High Court; we
feel that those Tribunal orders are not required to be considered separately.
Hence on this issue, we restore the matter back to the file of TPO for fresh
decision in the light of above discussion in the light of judgment of Hon'ble
Punjab & Haryana High Court after providing reasonable opportunity of being
heard to assessee.

23. Now we take up the issue in respect of CG-VAK Software and Exports Ltd.
Regarding this comparable, this is the case of the assessee that the assessee
does not challenge the selection of this comparable and therefore, does not
press the relevant ground. The assessee's case is only to determine the PU
of this company correctly. As per the assessee, the PLI of this company
should be adopted at 15.41 % as against 20.54% computed by the TPO/AO.
In the synopsis reproduced above, the basis of difference in working of the PLI
of this comparable is this that the AO has reduced the amount of 39,97,218
being the provision for doubtful debts from the operating and other expenses
of this company and in the result, the profit of that company has been
increased by AO by this amount resulting in increase of PU. But as per the
assessee, provision for doubtful debts is operating expenses and therefore, it
should not be excluded from the operating and other expenses. In support of
this contention that provision for doubtful debts is an operating expenditure,
reliance has been placed by Id. AR of assessee on various judicial
pronouncements as noted in para 22 of synopsis of arguments reproduced
above. In our considered opinion, only this aspect is covered by these
Tribunal orders that provision for doubtful debts is an operating expenditure
but for the purpose of TP analysis, this alone is not enough. Even after holding
that provision for doubtful debts is an operating expense, it has to be seen that
as to whether the same can be considered as an expenditure for TP analysis.
In TP analysis, percentage of profit of the tested party and the comparable is
worked out by dividing the profit by the turnover. If a receipt or expenditure is
not related to the turnover of the present year being the denominator to work
IT (TP) A No. 1616/Bang/2017
Page 36 of 42

out the profit percentage then such receipt or expenditure also cannot be
considered to compute the profit percentage of that tested party or comparable
being numerator because if we reduce the numerator by the amount of
provision for doubtful debts and the denominator is not reduced by the amount
of related turnover then the result will be absurd. Hence it has to be found out .
from the annual report of the concerned company as to whether provision for
doubtful debts is in relation to sale of the present year or of an earlier year. As
per the annual report of this company available on pages 559 to 608 of paper
. book, this cannot be ascertained as to whether the provision for doubtful debts
is against the turnover of the present year or of an earlier year. Generally the
provision for doubtful debts is created in a later year when it is felt that the
debt has become bad or doubtful and therefore, in the absence of any
categorical reporting in the annual report that the provision for doubtful debts
is against the turnover of the present year, it should be considered as
provision against the turnover of an earlier year and therefore, the same
cannot be considered as operating expenses for the current year in TP
analysis. In this view of the matter, we find no infirmity in the order of
authorities below on this aspect. Therefore, we decline to interfere in the
orders of lower authorities on this aspect and various judgments cited by Id.
AR of assessee in the synopsis are not rendering any help to assessee
because these judgments are only on this aspect that provision for doubtful
debts is an operating expenditure but in our considered opinion, even after
accepting this contention that provision for doubtful debts is operating
expenditure, the same has to be excluded in TP analysis for the reasons

discussed above.

24. Now we examine and decide about the assessee's claim is for exclusion of
four comparables i.e. ICRA Techno Analytics Ltd.,L&T lnfotech Ltd.,Mindtree

Ltd. (segment) andPersistent Systems.

25. Regarding ICRA Techno Analytics Ltd., this is the case of the assessee that
RPT% of this company is either 26.76% or 26.19% and since it is more than
25%, this comparable should be excluded because of RPT filter of 25%
IT (TP) A No. 1616/Bang/2017
Page 37 of 42

adopted by the TPO. This is also the claim of the assessee that in the present
case, the RPT filter should be adopted at 15% and not 25%. In this regard, we
feel it proper that regarding the working of RPT% of this comparable company,
the issue should be restored back to the file of TPO for fresh decision after
examining these contentions of Id. AR of assessee because we find that from
page no. 12 of TPO order, the RPT% of this comparable has been worked out
by the TPO at 0% as against the working of the assessee in the synopsis that
it should be 26.76% or 26.19%. Hence we restore this matter back to the file
of TPO for fresh decision after providing adequate opportunity of being heard
to assessee. The TPO should examine the working of the assessee regarding
RPT% of this comparable as provided in the synopsis reproduced above and
such RPT% should be worked out by way of speaking and reasoned order
after providing adequate opportunity of being heard to assessee.

26. Regarding this contention of Id. AR of assessee that permissible RPT% should
be adopted at 15% and not 25% because there is no dearth of comparable in
the present case, we find that as per page no. 32 of the order of TPO, 7
comparables have been selected and out of the same, the assessee is
requesting for exclusion of four comparables i.e. ICRA Techno Analytics Ltd.,
L&T lnfotech Ltd., Mindtree Ltd. (segment) and Persistent Systems Ltd. (Seg)
and if these four comparables are excluded, the remaining comparables will
be 3 only and hence, in our considered opinion, in the facts of the present
case, 25% RPT filter is proper and not 15%.

27. Now we examine the assessee's claim in respect of exclusion of L&T lnfoTech
Ltd. This is the case of the assessee that this company should be excluded
because this company has substantial brand value and this is functionally
different. The assessee has placed reliance on Tribunal order rendered in the
case of Cisco Systems (India) Pvt. Ltd. Vs. DCIT as reported in 50
taxmann.com 280 (Bangalore-Trib.), copy available on pages 181 to 211 of
case law compilation. We find that this Tribunal order is for Assessment Year
2009-10 whereas in the present case, Assessment Year involved is
Assessment Year 2013-14 and therefore, this Tribunal order is not relevant.
IT (TP) A No. 1616/Bang/2017
Page 38 of 42

One more argument is made by Id. AR of assessee that this company is


having high turnover of Rs. 3,613.42 Crores which is 18 times of the turnover
of the assessee company. Reliance has been placed on several Tribunal
orders as noted in Para 28 of synopsis reproduced above. But on this aspect
of the matter, we are following the judgement of Hon'ble Delhi High Court
rendered in the case ofChryscapital Investment Advisors (India) (P.) Ltd. vs.
OCIT as reported in 376 ITR 183in which it was held that huge profit or huge
turnover, ipso facto does not lead to exclusion of a comparable and the TPO
first, has to be satisfied that such differences do not "materially affect the price
or cost" and secondly, an attempt should be made to make reasonable·
adjustment to eliminate the material effect of such differences. Hence on this
issue, we restore the matter back to the file of AOffPO for fresh decision in the

light of this judgement of Hon'ble Delhi High Court.

28. The next company for which the assessee is requesting for exclusion is
Mindtree Ltd. (seg.). The contentions raised by the assessee regarding
exclusion of Mindtree Ltd. are contained in Para nos. 29 to 31 of the synopsis
reproduced above. As per the same, this is the contention raised that
Mindtree is offering various services such as IT Strategy consulting,
application development and maintenance, data warehousing and business
intelligence, package implementation, product architecture, design and
engineering, embedded software, technical support, testing, infrastructure
management services etc., to its customers. It is also pointed out that this
company is having substantial research and development and have
substantial. intellectual property. This is also contended that this company is
having wide range of operations and there is lack of information from segment
reporting. This is also pointed out that the graphs on page 57 of the annual
report of this company show the distribution of Mindtree's revenue across
service lines and as per this graph, development represents only 25% of
Mindtree's revenue but this is not clear whether this development includes
product development i.e. development of products for its own exploitation and
sale or software development i.e. development of software at the instructions
of its customers where the intellectual property would eventually vest in such
IT (TP) A No. 1616/Bang/2017
Page 39 of 42

customers or both where this activity is mixture of both type of activities. We


find that the orders of TPO and DRP are not speaking orders on these aspects
which · are raised before us and therefore, we feel it proper to restore this
matter also back to the TPO for fresh decision by way of a speaking order
after considering all these aspects and after providing adequate opportunity of
being heard to the assessee. We order accordingly.

29. "(he last company for which the assessee is requesting for exclusion is
Persistent Systems Ltd. This is the claim of the assessee that this company is
functionally different fromthe assessee and this company's RPT is 19.62% as
per the TPO. On this aspect that this company is having RPT of 19.62%, we
hold that since this company is having RPT% less than 25%, this company
cannot be excluded by applying RPT filter. There is one more argument on
account of this company that while working out the PLI of this company also,
the AO has reduced the provision for doubtful debts from the operating
expenses and as a consequence, the profit margin has been increased from
27% to 28.27% . This is the claim of the assessee that provision for doubtful
debts should be part of operating expenditure. Hence it was submitted that for
this issue, the same arguments should be considered which were advanced
for the other company i.e. CG-VAK Software and Exports Ltd. While deciding
the issue in respect of CG-VAK Software and Exports Ltd., we have held that
provision for doubtful debts can be accepted as operating expenditure but the
same cannot be considered for the purpose of TP analysis because it is not
possible to find out whether such provision for doubtful debts is in relation to
the turnover of the present year or earlier year. Hence it should be accepted
that such provision is in relation to the turnover of earlier year and therefore, it
cannot be considered in TP analysis. Accordingly, on the same line, this

argument is rejected for this company also. The third contention of assessee
regarding this comparable company is that this company is not functionally
comparable.

30. Regarding functionality difference aspect of this company, it is submitted in


synopsis that page no. 4 of annual report of that company shows that
IT (TP) A No. 1616/Bang/2017
Page 40 of 42·

company is in many lines of businesses such as product engineering,


technology consulting, strategic partnership to build platforms and IP-led
business and therefore, the activities of this company are wide and
multifarious. We find that the orders of TPO and DRP are not speaking orders
on these aspects which are raised before us and therefore, we feel it proper to
restore this matter also back to the TPO for fresh decision by way of a
speaking order after considering all these aspects and after providing
adequate opportunity of being heard to the assessee. We order accordingly.

31. Regarding assessee's request for exclusion of Larsen & Toubro lnfotech Ltd.
and Persistent Systems Ltd., we have come across a Tribunal order rendered
in the case of W M Global Technology Services (India) (P.) Ltd. Vs. ACIT as
reported in [2018] 91 taxmann.com 403(Bengaluru-Trib) in which one of us i.e.
Ld. Judicial Member is the author. As per this Tribunal order, the issue
regarding assessee's request for exclusion of L&T lnfotech Ltd. and Persistent
Systems Ltd. has been restored back to the file of TPO for fresh decision.
Para nos. 8 to 11 of this Tribunal order are relevant and hence these paras are
reproduced hereinbelow for ready reference.
"LARSEN & TOUBRO INFOTECH Ltd & PERSISTENT SYSTEMS
Ltd:
08. In this regard the Ld. AR has submitted that L & T Infotech Ltd is
engaged in software product development and is having substantial
amount of intangibles assets. Further it also has a significant brand
value and is engaged in diversities including IP Led business
activities. It was also the case of the assessee that segmental
information is not available and therefore cannot be compared with
the assessee. Similar argument was submitted before us in respect of
Persistent Systems Ltd, wherein the assessee has submitted that the
comparable is engaged in software product development and further
engaged in diversified business in IP Led and therefore the segmental
information is not available and therefore has sought the exclusion of
these two companies. Further it was submitted by the Ld. AR that the
facts of the present case are similar to that of Microsoft Research Lab
India P. Ltd [TS-994- JTAT-2017(Bang)], wherein the coordinate
bench, in which one of us i.e., the Accountant Member was a party to
the order, remanded the matter back to the - file of the TPO for
examining afresh the contention of the assessee as well as with respect
to the functionality of these two comparables.

09. On the other hand the Ld. DR has submitted that in terms of the
decision of the Tribunal in Microsoft Research Lab India P. Ltd
IT (TP) A No. 1616/Bang/2017
Page 41 of 42

(supra), the matter may be remitted back to the file of the TPO for
examining afresh in the light of the observations made by the Tribunal
in the said matter.

10. We have heard the rival contention and perused the record. In the·
light of the reliance by both parties on Microsoft Research Lab India
P. Ltd (supra), we would like to remand the matter to the file of TPO
to the similar effect as done in the matter of Microsoft (supra)
however we would like to add a word of caution that it will be unsafe
to follow one decision passed by the Tribunal in any other case unless
the assessee demonstrates that the profile of the assessee company as
well as the assessee in other case are materially comparable with
each other and there is no element of distinction between the profile of
those two companies. However at this stage we do not wish to
examine the profile of the assessee company as well as the profile of
Microsoft Research Lab India P. Ltd(supra) as we are remitting back
the matter and we leave it to the wisdom of the TPO to consider the
facts of the present case (assessee) with that of Microsoft Research
Lab India P. Ltd, and apply the decision of Microsoft Research Lab
India Ltd (supra).

11. Following the above order of the coordinate bench, these two
comparables namely LARSEN & TOUBRO INFOTECH Ltd &
PERSISTENT SYSTEMS Ltd are restored back to the file of the TPO
to decide afresh in terms of the observations made hereinabove."

32. From the above paras reproduced from this Tribunal order, it is seen that our
decision regarding these two comparables to restore back the matter to the file
of TPO is fortified by this Tribunal order also in which, the tribunal has
considered one more Tribunal order rendered in the case of Microsoft
Research Lab India (P.) Ltd. vs. ACIT as reported in [2017] 85 taxmann.com
352 (Bang.-Trib.).

33. Regarding corporate tax issues in respect of disallowance of Rs. 4,34, 72, 134/-
being payment of commission disallowed by the AO u/s. 40(a)(i), reliance has
been placed on the judgement of Hon'ble Madras High Court rendered in the
case of CIT Vs. Faizman Shoes (P) Ltd. as reported in 367 ITR 155. We find
that this was held by Hon'bleMadras High Court in this casethat where the
assessee paid commission to non-resident agent for procuring orders for
leather business from overseas buyers wholesalers or retailers, as the case
may be, the non-resident agent is paid 2.5% commission on FOB basis. That
appears to be a commission simpliciter and did not provide any technical
IT (TP) A No. 1616/Bang/2017
Page 42 of 42

services for purposes of running business in India. The assessee was not
liable to deduct tax on such commission paid. As per the assessment order,
this . is not the case of the AO that the non-resident agent provided any
technical services for the purposes of running business of the assessee in
India. Hence in our considered opinion, this judgment of Hon'ble Madras High
Court is squarely applicable in the present case. Respectfully following this
judgment of Hon'ble Madras High Court, we hold that the TDS was not
required to be deducted from this payment of commission of Rs. 4,34,72,134/-
and therefore, disallowance made of this amount u/s. 40(a)(i) is not justified

and hence we delete the same.

34. In the result, the appeal filed by the assessee is partly allowed in the terms

indicated above.
Order pronounced in the open court on the date mentioned on the caption page.

Sd/-
Sd/- (ARUN KUMAR GAROOIA)
(LALIET KUMAR) Accountant Member
Judicial Member

Bangalore,
Dated, the 27th June, 2018.
/MS/

Copy to:
1. Appellant 4. CIT (A)
2. Respondent 5. OR, ITAT, Bangalore
3. CIT 6. Guard file

By order

Senior Private Secretary,


Income Tax Appellate Tribunal,
Bangalore.