M/s. FL Smidth Private Limited, CHENNAI V. DCIT, CHENNAI

ITA 2118/CHNY/2011

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 6216 (ITAT-CHENNAI)
• Duration Of Justice: 5 year(s) 8 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-09-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 15-06-2017
• Assessment Year: 2007-2008
• Appeal Filed On: 26-12-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PATHLAVATH PEERYA
• Keywords: Related party transaction; Transfer pricing; International transaction; Earning of tax free income; Services rendered outside India
• Section: 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI , , . , BEFORE SHRI GEORGE MATHAN, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ./ I.T.A.NO.2118/MDS/2011 ( / ASSESSMENT YEAR: 2007-08) M/S. FL SMIDTH PRIVATE LIMITED, 34,EGATOOR, KELAMBAKKAM, RAJIV GANDHI SALAI, CHENNAI 600 103. VS THE DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE II(1), CHENNAI PAN : AAACF4997N ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : SHRI GIRISH DAVE FOR SHRI S.P. CHIDAMBARAM, ADVOCATES /RESPONDENT BY : SHRI PATHLAVATH PEERYA, CIT /DATE OF HEARING : 12.07.2017 !' /DATE OF PRONOUNCEMENT : 05.09.2017 / O R D E R PER: A. MOHAN ALANKAMONY, AM:- THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER PASSED BY THE DISPUTE RESOLUTION PANEL, CHENNAI F.NO.DRP/CHENNAI/SECTT./33/2011 DATED 28.09.2011 FO R THE ASSESSMENT YEAR 2007-08 PASSED U/S.143(3) R.W.S.144 C OF THE ACT. 2. THE ASSESSEE HAS RAISED SEVERAL GROUNDS IN ITS A PPEAL AND THE CONCISE GROUNDS ARE BRIEFLY STATED HEREIN BELOW FOR ADJUDICATION:- 2 ITA NO.2118/MDS/2011 CORPORATE TAX ISSUES:- (I) THE LD.AO/DRP HAS ERRED IN APPLYING RULE 8D OF THE RULES WHILE COMPUTING DISALLOWANCE U/S.14A OF THE A CT, BECAUSE THE AFORESAID RULE CAME INTO EFFECT FROM 24.03.2008 AND THEREFORE NOT APPLICABLE FOR THE REL EVANT ASSESSMENT YEAR 2007-08. (II) THE LD.AO/DRP HAD ERRED IN DISALLOWING THE SAL ES COMMISSION PAID FOR RS.25,49,750/- BY INVOKING THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT, BECAUSE THE ENTIRE SERVICES WAS RENDERED OUTSIDE INDIA BY M/S. MAPLE LEAF INTERNATIONAL, BANGLADESH. (III) THE LD.AO/DRP HAD ERRED IN CONFIRMING THE DIS ALLOWANCE OF RS.64,69,066/- U/S. 40(A)(IA) OF THE ACT BEING E XPENSE INCURRED FOR IMPORT OF PROJECT SPECIFIED ENGINEERIN G DRAWINGS FROM FL SMIDTH AUTOMATION A/S, DENMARK BY HOLDING THAT THE EXPENDITURE IS IN THE NATURE OF F EES FOR TECHNICAL SERVICES. (IV) THE LD.AO HAD ERRED IN LEVYING INTEREST U/S.23 4B & 234C OF THE ACT. (V) THE LD.AO HAD ERRED IN INITIATING PENALTY PROCE EDINGS U/S.271(1)(C) OF THE ACT. 3 ITA NO.2118/MDS/2011 TRANSFER PRICING ISSUES: (VI) THE LD.DRP HAS ERRED IN UPHOLDING THE ORDER OF LD.TPO/A.O, WHO HAD COMPARED THE INTERNATIONAL TRANSACTION OF THE ASSESSEE WITH THE COMPANIES PROV IDING SOFTWARE DEVELOPMENT SERVICE WHEN THE FACT WAS THAT THE ASSESSEE WAS PROVIDING ONLY BASIC ENGINEERING SERVI CES. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE IS A LIMITED COMPANY ENGAGED IN THE BUSINESS OF MANUFACT URING AND SUPPLYING OF CEMENT MACHINERY, FILED ITS RETURN OF INCOME ELECTRONICALLY FOR THE ASSESSMENT YEAR 2007-08 ON 3 1.10.2007. THE RETURN WAS PROCESSED INITIALLY U/S.143(1) OF TH E ACT AND THEREAFTER THE ASSESSMENT WAS REOPENED AND FINALLY THE ASSESSMENT WAS COMPLETED U/S.143(3) R.W.S 144C OF T HE ACT. 4. CORPORATE TAX ISSUES: 4.1 GROUND NO. 2(I) : DISALLOWANCE OF RS.71,36,053/- U/S.14A R.W.R. 8D OF THE RULES:- DURING THE COURSE OF SCRUTINY ASSESSMENT, IT WAS OBSERVED BY THE LD.AO THAT THE ASSESSEE HAD MADE INVESTMENT IN SHARES 4 ITA NO.2118/MDS/2011 AND MUTUAL FUNDS TO THE TUNE OF RS.130,30,92,373/- AND EARNED A DIVIDEND INCOME EXEMPT FROM TAX OF RS.9,35,92,674/- . HOWEVER, THE ASSESSEE HAD NOT DISALLOWED ANY EXPENDITURE FOR EARNING EXEMPT INCOME, WHICH IS TO BE, DISALLOWED U/S.14A O F THE ACT. ON QUERY, THE ASSESSEE AGREED TO DISALLOW A PORTION OF THE SALARY OF ITS DIRECTORS AND OTHER MANAGERIAL STAFF U/S.14A OF THE ACT AND THEREBY WORKED OUT THE DISALLOWANCE AT RS.78,000/-. SINCE THE ASSESSEE HAS NOT APPORTIONED THE EXPENSE INCURRED FOR EARNIN G EXEMPT INCOME TO THE SATISFACTION OF THE LD.AO, THE LD.AO APPLIED CLAUSE (III) RULE 8D OF THE RULES AND COMPUTED THE DISALLO WANCE AT RS.71,36,053/-. BEFORE THE DRP THE LD.AR ARGUED STA TING THAT RULE 8D OF THE ACT IS NOT APPLICABLE FOR THE RELEVANT AS SESSMENT YEAR 2007-08 AND PRAYED FOR ESTIMATING THE EXPENDITURE K EEPING IN VIEW OF THE DECISION OF THE CHENNAI BENCH OF THE TRIBUNA L IN THE CASE RANE BRAKE LININGS LTD VS. DCIT IN ITA NO.745/MDS/2 006 DATED 23.03.2007, WHEREIN SUCH DISALLOWANCE WAS DIRECTED TO BE MADE AT 2% OF THE EXEMPT INCOME. IT WAS FURTHER ARGUED THA T THE ASSESSEE HAD NOT INCURRED ANY DIRECT EXPENDITURE FOR EARNING DIVIDEND INCOME. HOWEVER THE LD.DRP REJECTED THE ARGUMENT OF THE LD.AR AND SINCE THE ISSUE WAS NOT SETTLED BY THE HONBLE HIGH COURT & APEX COURT UPHELD THE ORDER OF THE LD.AO. 5 ITA NO.2118/MDS/2011 4.1.1 AT THE OUTSET, THE LD.AR SUBMITTED BEFORE US THAT THE HONBLE MADRAS HIGH COURT IN THE CASE INDIAN NIPPON ELECTRICALS LTD., VS. DCIT IN T.C.(A). NOS.1305 & 1306 OF 2007 VIDE ORDER DATED 2 ND FEBRUARY 2015 HAD HELD THE ORDER OF THE APPELLATE TRIBUNAL TO BE RIGHT IN LAW FOR UPHOLDING THE ESTIM ATE OF EXPENSES AT 2% OF THE DIVIDEND INCOME WHILE COMPUTING DISALLOWA NCE U/S.14A OF THE ACT. THE LD.DR COULD NOT CONTROVERT TO THE SUBMISSION OF THE LD.AR. 4.1.2 WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREF ULLY PERUSED THE MATERIALS AVAILABLE ON RECORD. WE FIND MERIT I N THE SUBMISSION OF THE LD.AR. RULE 8D CAME INTO EFFECT ONLY FROM 2 4.03.2008. THEREFORE IT IS NOT APPLICABLE TO THE RELEVANT ASSE SSMENT YEAR 2007- 08. FURTHER THE HONBLE MADRAS HIGH COURT HAS HELD IN ITS DECISION CITED SUPRA THAT IN CIRCUMSTANCES WHERE THE INDIRECT EXPENSES RELATED TO EXEMPT INCOME CANNOT BE REASONABLY WORKE D, AN ESTIMATE @ 2% OF DIVIDEND INCOME EARNED BY THE ASSE SSEE WOULD SUFFICE TO MAKE DISALLOWANCE U/S.14A OF THE ACT. FR OM THE FACTS OF THE CASE, WE FIND THAT THE LD.AO AS WELL AS THE LD. DRP DID NOT HAVE THE BENEFIT OF THE ORDER OF THE HONBLE HIGH C OURT, SINCE THE 6 ITA NO.2118/MDS/2011 ORDER OF THE HONBLE HIGH COURT WAS PASSED SUBSEQUE NTLY. THEREFORE RESPECTFULLY FOLLOWING THE ORDER OF THE H ONBLE HIGH COURT WE HEREBY DIRECT THE LD.A.O TO ESTIMATE 2% OF THE E XEMPT DIVIDEND INCOME FOR THE PURPOSE OF DISALLOWANCE OF EXPENDITU RE U/S.14A OF THE ACT. HOWEVER, WE ALSO MAKE IT CLEAR THAT IF ANY INTEREST EXPENSES OR OTHER EXPENSES WHICH ARE DIRECTLY ATTRI BUTABLE FOR EARNING EXEMPT INCOME, THE SAME HAS TO BE DISALLOWE D AS PER THE PROVISIONS OF SECTION 14A OF THE ACT APART FROM THE DISALLOWANCE @ 2% OF EXEMPT INCOME WHICH WAS NOT TH E ISSUE BEFORE THE HONBLE HIGH COURT, HENCE NOT ADDRESSED IN ITS ORDER. 4.2 GROUND NO.2(II) : DISALLOWANCE OF SALES COMMISSION BY INVOKING PROVISIONS OF SECTION 40(A)(IA) OF THE ACT :- DURING THE COURSE OF SCRUTINY ASSESSMENT PROCEEDI NGS, IT WAS NOTICED BY THE LD.AO THAT THE ASSESSEE HAD PAID SALES COMMISSION AMOUNTING TO RS.25,49,750/- TO M/S. MAPL E LEAF INTERNATIONAL, BANGLADESH ON WHICH TAX WAS NOT DEDU CTED AT SOURCE IN ACCORDANCE WITH SECTION 195 OF THE ACT. ON QUER Y THE ASSESSEE SUBMITTED BEFORE THE LD.AO THAT THE COMMISSION WAS PAID FOR PROMOTING/MARKETING THE PRODUCTS OF THE COMPANY IN BANGLADESH, FOR PROVIDING VALUABLE INPUTS TO THE COMPANY FOR SE CURING CONTRACTS, 7 ITA NO.2118/MDS/2011 CANVASSING THE CUSTOMERS IN BANGLADESH, FOR DELIVER ING ANNUAL FORECAST AND PERIODIC REPORTS OF PROSPECTIVE BUSINE SS IN BANGLADESH AND FURNISHING THE FINANCIAL CONDITIONS OF THE CUSTOMERS OF THE ASSESSEE IN BANGLADESH, ETC., HENC E THE INCOME TO THE RECIPIENT OF THE COMMISSION HAD NOT ACCRUED IN INDIA AND THEREFORE THE PROVISIONS OF SECTION195 OF THE ACT I S NOT APPLICABLE, HENCE SECTION 40(A)(IA) IS NOT ATTRACTED. HOWEVER, THE LD.AO OPINED THAT M/S. MAPLE LEAF INTERNATIONAL, BANGLADE SH DOES VALUE ADDED SERVICE TO THE ASSESSEE AND IT IS NOT A MERE COMMISSION AGENT WHO DERIVES COMMISSION BASED ON TURNOVER. TH E LD.AO FURTHER OBSERVED THAT THE CBDT CIRCULAR NO.7 OF 200 9 DATED 22.10.2009, CIRCULAR NO.23 OF 1969 AND CIRCULAR NO. 786 OF 2000 WAS WITHDRAWN AND THEREFORE THERE WAS NO IMMUNITY T O THE ASSESSEE AGAINST SECTION 195 & 40(A)(IA) OF THE ACT , WITH RESPECT TO THE PAYMENT OF COMMISSION MADE ABROAD TO NON-RESIDE NT. THE LD.AO FURTHER OPINED THAT THE PROVISIONS OF SECTION 9 OF THE ACT WILL BE APPLICABLE AND ACCORDINGLY INCOME WILL BE DEEMED TO HAVE ARISEN IN INDIA TO THE RECIPIENTS OF THE PAYMENT MA DE BY THE ASSESSEE TOWARDS COMMISSION OUTSIDE INDIA. ON APPE AL, THE LD.CIT(A) CONCURRED WITH THE VIEW OF THE LD.AO AND UPHELD HIS ORDER. 8 ITA NO.2118/MDS/2011 4.2.1 AT THE OUTSET THE LD.AR SUBMITTED THAT ON THE IDENTICAL ISSUE THE HONBLE HIGH COURT OF MADRAS IN THE CASE CIT VS. FAIZAN SHOES PVT. LTD. T.C. (A) NO.789 OF 2013 VIDE ORDER DATED 22.07.2014 HAS HELD IN FAVOUR OF THE ASSESSEE. IT WAS THEREFORE PLEADED THAT THE SAME DECISION MAY BE FOLLOWED IN T HE CASE OF THE ASSESSEE AND ACCORDINGLY RELIEF MAY BE GRANTED. TH E LD.DR THOUGH STOUTLY ARGUED IN SUPPORT OF THE ORDERS OF T HE LD.REVENUE AUTHORITIES, COULD NOT CONTROVERT TO THE SUBMISSION OF THE LD.AR. 4.2.2 AFTER HEARING BOTH SIDES, WE FIND MERIT IN TH E SUBMISSION OF THE LD.AR. THE HONBLE HIGH COURT OF MADRAS IN THE ORDER CITED SUPRA HAS HELD AS FOLLOWS: FACTS THE ASSESSEE WAS A COMPANY ENGAGED IN THE BUSINES S OF MANUFACTURE AND EXPORT OF ARTICLES OF LEATHER. IT E NTERED INTO AN AGENCY AGREEMENT WITH A NON RESIDENT AGENT TO SE CURE ORDERS FROM VARIOUS CUSTOMERS, INCLUDING RETAILERS AND TRADERS, FOR THE EXPORT OF LEATHER SHOE. AS PER THE TERMS OF THE AGENCY AGREEMENT THE BUSINESS WAS TRANSACTED BY OPE NING LETTERS OF CREDIT OR BY CASH AGAINST DOCUMENT BASIS . THE NON- RESIDENT AGENT WAS RESPONSIBLE FOR PROMPT PAYMENT I N RESPECT OF ALL SHIPMENTS EFFECTED ON CASH AGAINST DOCUMENT BASIS. THE ASSESSEE UNDERTOOK TO PAY COMMISSION OF 2.5 PER CEN T ON FOB VALUE ON ALL ORDERS PROCURED BY THE NON-RESIDENT AG ENT. IT 9 ITA NO.2118/MDS/2011 CLAIMED COMMISSION PAID AS EXPENDITURE IN TERMS OF SECTION 37. THE ASSESSING OFFICER HELD THAT PAYMENT OF COMMIS SION TO NON-RESIDENT AGENT WAS TO BE DEALT WITH IN ACCORDAN CE WITH THE PROVISIONS OF SECTION 9(1) READ WITH SECTION 195. H E CONDUCTED THAT SINCE THE ASSESSEE HAD NOT DEDUCTED TAX AT SOU RCE ON THE PAYMENTS MADE 10 THE NON-RESIDENT AGENT, AS REQUIRE D UNDER SECTION 195, THE CLAIM MADE BY THE ASSESSEE WAS DIS ALLOWED UNDER SECTION 40(A)(I). ON APPEAL, BOTH AUTHORITIES DECIDED MATTER IN FAV OUR OF ASSESSEE AND ALLOWED HIS CLAIM. ON APPEAL BY THE REVENUE TO THE HIGH COURT: HELD FOR PROCURING ORDERS FOR LEATHER BUSINESS FROM OV ERSEAS BUYERS - WHOLESALERS OR RETAILERS, AS THE CASE MAY BE, THE NON- RESIDENT AGENT IS PAID 2.5 PER CENT COMMISSION ON F OB BASIS. THAT APPEARS TO BE A COMMISSION SIMPLICITER. THE OP ENING OF LETTERS OF CREDIT FOR THE PURPOSE OF COMPLETING EXP ORT OBLIGATION IS AN INCIDENT OF EXPORT AND, THEREFORE, THE NON- RESIDENT AGENT IS UNDER AN OBLIGATION TO RENDER SUC H SERVICES TO THE ASSESSEE, FOR WHICH COMMISSION IS PAID. THE NON- RESIDENT AGENT DOES NOT PROVIDE TECHNICAL SERVICES FOR THE PURPOSES OF RUNNING OF THE BUSINESS OF THE ASSESSEE IN INDIA. THE SERVICES RENDERED BY THE NON RESIDENT AGENT CAN AT BEST BE CALLED AS A SERVICE FOR COMPLETION OF THE EXPORT CO MMITMENT. THEREFORE, THE COMMISSION PAID TO THE NON-RESIDENT AGENT WILL NOT FALL WITHIN THE DEFINITION OF 'FEES FOR TECHNIC AL SERVICES'. [PARA 7] THE ASSESSEE ENGAGED THE SERVICES OF NON-RESIDENT AGENT TO PROCURE EXPORT ORDERS AND PAID COMMISSION. [PARA 11 ] 10 ITA NO.2118/MDS/2011 THE SERVICES RENDERED BY THE NON-RESIDENT AGENT C AN AT BEST BE CALLED AS A SERVICE FOR COMPLETION OF THE EXPORT COMMITMENT AND WOULD NOT FALL WITHIN THE DEFINITION OF 'FEES F OR TECHNICAL SERVICES'. SECTION 9 IS NOT APPLICABLE TO THE CASE ON HAND AND CONSEQUENTLY, SECTION 195 OF THE ACT DOES NOT COME INTO PLAY. [PARA 12] THE ISSUE IN THE CASE OF THE ASSESSEE IS ALSO ID ENTICAL TO THE CASE DECIDED BY THE HONBLE MADRAS HIGH COURT SUPRA AND IS NOT DISPUTED BY THE REVENUE EITHER. THEREFORE RESPECTF ULLY FOLLOWING THE DECISION OF THE HONBLE MADRAS HIGH COURT, WE H EREBY HOLD THAT IN THE CASE OF THE ASSESSEE PROVISIONS OF SECTION 1 95 OF THE ACT WILL NOT BE APPLICABLE WITH RESPECT TO PAYMENT OF SALES COMMISSION OF RS.25,49,750/- TO M/S. MAPLE LEAF INTERNATIONAL, B ANGLADESH FOR SERVICES RENDERED OUTSIDE INDIA. CONSEQUENTLY, THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT WILL NOT BE ATTRACTED IN THE CASE OF THE ASSESSEE. THEREFORE WE HEREBY DIRECT THE LD.AO TO DELETE THE ADDITION OF RS.25,49,750/- IN THE HANDS OF THE ASSE SSEE. 4.3 GROUND NO.2(III) : DISALLOWANCE OF EXPENSES TOW ARDS IMPORT OF ENGINEERING DRAWINGS FROM THE ASSESSEES AE FOR RS.64,69,066/- BY INVOKING PROVISIONS OF SECTION 40 (A)(IA) OF THE ACT:- 11 ITA NO.2118/MDS/2011 IT WAS NOTICED BY THE LD.AO THAT THE ASSESSEE HAS I NCURRED EXPENDITURE OF RS.64,69,663/- TOWARDS IMPORT OF ENG INEERING DRAWINGS FROM THE ASSESSEES ASSOCIATED ENTERPRISE (AE) AT DENMARK. THE LD.AO OPINED THAT THE PAYMENT FOR IMPO RTING THE ENGINEERING DRAWING FROM THE ASSESSEES AE WOULD AM OUNT TO PAYMENT MADE FOR FEES FOR TECHNICAL SERVICES. SIN CE THE ASSESSEE HAS NOT DEDUCTED TAX AT SOURCE ON THE PAYMENT MADE FOR PURCHASE OF ENGINEERING DRAWINGS, THE LD.AO OPINED THAT THE ASSESSEE HAS VIOLATED THE PROVISIONS OF SECTION 195 OF THE ACT A ND ACCORDINGLY PENAL PROCEEDINGS OF SECTION 40(A)(IA) OF THE ACT W OULD BE ATTRACTED. THEREFORE THE LD.AO DISALLOWED THE AMOUN T OF RS.64,69,066/- AS ALLOWABLE EXPENDITURE. ON APPEAL , THE LD.CIT(A) CONCURRED WITH THE VIEW OF THE LD.AO. 4.3.1 THE LD.AR VEHEMENTLY ARGUED BEFORE US STATING THAT THE ISSUE IS COVERED BY THE DECISION OF THE HONBLE HIG H COURT OF MADRAS IN THE CASE CIT VS. FAIZAN SHOES PVT. LTD., SUPRA AND PLEADED FOR DELETING THE ADDITION MADE BY THE LD.AO . THE LD.DR ON THE OTHER HAND ARGUED IN SUPPORT OF THE ORDERS O F THE LD.REVENUE AUTHORITIES. 12 ITA NO.2118/MDS/2011 4.3.2 WE HAVE HEARD THE RIVAL SUBMISSIONS AND CARE FULLY PERUSED THE MATERIALS AVAILABLE ON RECORD. PERUSIN G THE FACTS OF THE CASE, WE FIND MERIT IN THE SUBMISSION OF THE LD .AR. FROM THE FACTS OF THE CASE, IT IS EVIDENT THAT THE ENGINEERI NG DESIGNS AND DRAWINGS ARE DEVELOPED BY THE ASSESSEES AE VIZ., F LSMIDTH AUTOMATION A/S IN DENMARK. THEREFORE IT IS SERVICE RENDERED OUTSIDE INDIA TOWARDS WHICH THE ASSESSEE HAS MADE T HE PAYMENT. HENCE AS STATED BY THE LD.AR, THE DECISION OF THE H ONBLE HIGH COURT IN THE CASE FAIZAN SHOES PVT. LTD., SUPRA IS SQUARELY APPLICABLE IN THE CASE OF THE ASSESSEE. THEREFORE, WE HEREBY DIRECT THE LD.AO TO DELETE THE ADDITION OF RS. 64,6 9,066/- IN THE HANDS OF THE ASSESSEE. 4.4 GROUND NO. 2(IV): INTEREST U/S.234B & 234C OF T HE ACT:- INTEREST U/S.234B & 234C OF THE ACT ARE CONSEQUENTI AL IN NATURE. THEREFORE THIS GROUND RAISED BY THE ASSESSE E IS DISMISSED. 4.5 GROUND NO. 2(V) : PENALTY PROCEEDINGS U/S.271(1 )(C) OF THE ACT:- THE ASSESSEE HAS RAISED THE GROUND STATING THAT THE LD.AO HAS ERRED IN INITIATING THE PENALTY PROCEEDINGS U/S .271(1)(C) OF THE 13 ITA NO.2118/MDS/2011 ACT. THIS GROUND RAISED BY THE ASSESSEE IS PREMATU RE AT THIS STAGE AND ACCORDINGLY DISMISSED. 5 TRANSFER PRICING ISSUES: GROUND NO.2(VI) : WRONGLY ADOPTING SOFTWARE COMPANI ES AS THE COMPARABLE WHEN THE ASSESSEE COMPANY WAS RENDER ING ENGINEERING SERVICES:- THE LD.AR SUBMITTED BEFORE US THAT THE LD.REVENUE AUTHORITIES HAD ADOPTED THE SOFTWARE DEVELOPMENT CO MPANIES AS THE COMPARABLE COMPANIES WHILE DETERMINING THE ARM S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION OF THE ASSES SEE COMPANY WHILE AS THE ASSESSEE IS IN THE BUSINESS OF RENDERI NG SERVICES RELATED TO ENGINEERING SERVICES. HENCE IT WAS PLEA DED THAT THE MATTER MAY BE REMITTED BACK TO THE LD.TPO FOR DE-NO VA CONSIDERATION. THE LD.AR BEFORE US FURTHER LISTED T HE COMPARABLE COMPANIES MENTIONED HEREIN BELOW WHICH WAS ADOPTED BY THE LD.REVENUE AUTHORITIES FOR DETERMINING THE ARMS LE NGTH PRICE OF THE INTERNATIONAL TRANSACTION OF THE ASSESSEE COMPA NY IN ORDER TO JUSTIFY THAT ALL THOSE COMPANIES ARE SOFTWARE COMPA NIES AND CANNOT BE COMPARED WITH THE ACTIVITIES OF THE ASSESSEE COM PANY:- 14 ITA NO.2118/MDS/2011 1. ACCEL TRANSMATICS LIMITED: THE COMPANY IS NOT FU NCTIONALLY COMPARABLE TO THE ASSESSEE COMPANY BECAUSE THE COMPANY HAS SOLD USHUS TECHNOLOGY / SOFTWARE SEGME NT BEING SOFTWARE ON WHICH INTELLECTUAL PROPERTY RIGHT IS APPLICABLE AND THEREBY EARNS ROYALTY INCOME. 2. MEGASOFT LIMITED: THE COMPANY FALLS UNDER THE SO FTWARE SEGMENT AND HAS SIGNIFICANT RELATED PARTY TRANSACTI ON. IT ALSO HAS FLUCTUATING MARGINS AND HENCE IT HAS TO BE REJECTED. 3. FLEXTRONICS SOFTWARE SYSTEMS LIMITED: THE COMPAN Y IS NOT FUNCTIONALLY COMPARABLE BECAUSE IT ALSO FALLS UNDER THE SOFTWARE SEGMENT. MOREOVER IT IS OVERSIZED COMPANY AND CANNOT BE COMPARED WITH THE ACTIVITIES OF THE ASSES SEE COMPANY. THEREFORE THE COMPANY HAS TO BE REJECTED AS IT IS NOT COMPARABLE WITH THE ASSESSEE COMPANY. 4. KALS INFORMATION SYSTEM LIMITED: THE COMPANY IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE COMPANY BEC AUSE THE COMPANY IS PREDOMINANTLY A SOFTWARE PRODUCT COM PANY WHEREIN THE REVENUE FROM THOSE ACTIVITIES CONSTITUT ES 99% OF THE TOTAL OPERATING TURNOVER. HENCE THE COMPANY HAS TO BE REJECTED AS COMPARABLE. 15 ITA NO.2118/MDS/2011 5. R SYSTEM INTERNATIONAL LIMITED: THE COMPANY IS A LSO NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE COMPANY BEC AUSE THE COMPANY GENERATES REVENUE FROM SOFTWARE DEVELOP MENT & CUSTOMIZATION SERVICES (BPO). HENCE IT HAS TO BE REJECTED. 6. TATA ELXSI LIMITED: THE COMPANY IS NOT FUNCTIONA LLY COMPARABLE TO THE ASSESSEE COMPANY BECAUSE IT IS A HARDWARE DESIGN COMPANY. HENCE IT HAS TO BE REJECTE D. 7. CELESTIAL LABS LIMITED: THE COMPANY IS NOT FUNCT IONALLY COMPARABLE TO THE ASSESSEE COMPANY BECAUSE THE COMPANY IS ENGAGED IN SOFTWARE DEVELOPMENT IN THE F IELD OF BIOINFORMATICS SERVICES, DATA WAREHOUSING AND MININ G. HENCE THE ACTIVITIES OF THE COMPANY ARE NOT RELATED TO THE ASSESSEE AND HENCE IT HAS TO BE REJECTED. 8. HELIOS & MATHESON INFORMATION TECHNOLOGY: IN THI S COMPANY THERE IS AN ABNORMAL INCREASE OF REVENUE AN D THEREFORE IT CANNOT BE TREATED AS A COMPARABLE COMP ANY. 9. AVANI CIMCON TECHNOLOGIES LIMITED: THE COMPANY I S ENGAGED IN ENGAGED IN SOFTWARE PRODUCT DEVELOPMENT AND IT IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE COMP ANY. HENCE IT SHOULD BE REJECTED. 16 ITA NO.2118/MDS/2011 10. ISHIR INFOTECH LIMITED: THE COMPANY IS NOT FUNC TIONALLY COMPARABLE TO THE ASSESSEE COMPANY BECAUSE IT HAS SIGNIFICANTLY RELATED PARTY TRANSACTIONS. 11. LUCID SOFTWARE LIMITED: THE COMPANY IS NOT FUN CTIONALLY COMPARABLE TO THE ASSESSEE COMPANY BECAUSE IT IS ENGAGED IN SOFTWARE PRODUCT DEVELOPMENT. 12. E-ZEST SOLUTIONS LIMITED: THE COMPANY IS A SOFT WARE DEVELOPMENT SERVICE PROVIDER AND RENDERING KPO / BP O SERVICES. HENCE IT IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE COMPANY AND THEREFORE IT SHOULD BE REJECTE D. 13. WIPRO LIMITED: THE COMPANY HAS TO BE REJECTED BECAUSE IT IS A SOFTWARE COMPANY DRIVEN BY BRAND HAVING LARGE ECONOMICS AND OVERSIZED. IT IS A LEADER IN THE INDU STRY AND CANNOT BE COMPARED WITH THE ASSESSEE COMPANY WHICH IS MUCH SMALLER IN SIZE. 14. PRESISTENT SYSTEM LIMITED: THE COMPANY IS NOT F UNCTIONALLY COMPARABLE TO THE ASSESSEE COMPANY BECAUSE THE COMPANY IS ENGAGED IN SOFTWARE PRODUCT DEVELOPMENT AND HAS PROPRIETARY PRODUCTS LICENSED TO CUSTOMERS. 15. INFOSYS TECHNOLOGIES LIMITED: THE COMPANY HAS T O BE REJECTED BECAUSE IT IS A SOFTWARE COMPANY DRIVEN BY BRAND 17 ITA NO.2118/MDS/2011 HAVING LARGE ECONOMICS AND OVERSIZED. IT IS A LEADE R IN THE INDUSTRY AND CANNOT BE COMPARED WITH THE ASSESSEE COMPANY WHICH IS MUCH SMALLER IN SIZE. 16. BODHTREE CONSULTING LIMITED: IT IS NOT A COMPAR ABLE COMPANY BECAUSE IT HAS PECULIAR ECONOMIC CIRCUMSTAN CES DURING THE RELEVANT FINANCIAL YEAR AND HAS RESTRUCT URED ITS BUSINESS. FURTHER IT DOES NOT QUALIFY THE REVENUE FILTER APPLIED BY THE LD.TPO. HENCE IT HAS TO BE REJECTED . 17. SASKEN COMMUNICATION TECHNOLOGIES LIMITED: THE CORE ACTIVITY OF THE COMPANY IS FUNCTIONALLY DIFFERENT F ROM THE ASSESSEE COMPANY. THEREFORE IT CANNOT BE TREATED A S COMPARABLE COMPANY. 18. THIRDWARE SOLUTIONS LIMITED: THE ACTIVITIES OF THE COMPANY ARE NOT RELATED TO THE ACTIVITIES OF THE ASSESSEE C OMPANY. HENCE IT HAS TO BE REJECTED. 5.1 THE LD.DR ON THE OTHER HAND COULD NOT CONTROVER T TO THE SUBMISSION OF THE LD.AR BECAUSE IT IS APPARENT FROM THE COMPARABLE COMPANIES SELECTED BY THE REVENUE THAT T HOSE COMPANIES ARE EITHER SOFTWARE DEVELOPMENT COMPANIES OR NOT RELATED TO THE BUSINESS OF THE ASSESSEE. 18 ITA NO.2118/MDS/2011 5.2 AFTER HEARING BOTH SIDES AND PERUSING THE MATER IALS ON RECORD, WE FIND MERIT IN THE SUBMISSION OF THE LD.A R. ALL THE COMPANIES SELECTED BY THE REVENUE ARE SOFTWARE DEVE LOPMENT COMPANIES AND NOT RELATED TO THE BUSINESS CONDUCTED BY THE ASSESSEE COMPANY WHICH IS THE TESTED PARTY. THIS FA CT IS ALSO NOT DISPUTE BY THE LD.REVENUE AUTHORITIES AND THE LD.D. R. HOWEVER IT IS PERTINENT TO MENTION THAT IT IS A PRELIMINARY RE QUIREMENT FOR THE COMPARABLE COMPANIES TO BE FUNCTIONALLY COMPARABLE. IN THE CASE OF THE ASSESSEE COMPANY THE LD.TPO HAS ADAPTED COMP ANIES WHICH ARE NOT FUNCTIONALLY COMPARABLE. THEREFORE, W E DO NOT HAVE ANY OTHER OPTION BUT TO REMIT THE MATTER TO THE FIL E OF TPO FOR DE- NOVA CONSIDERATION WITH FURTHER DIRECTIONS TO ADAPT COMPANIES WHICH ARE FUNCTIONALLY COMPARABLE WITH IDENTICAL OR WITH SIMILAR INTRINSIC CHARACTERISTICS IN ADDITION TO ADHERENCE OF THE OTHER RELEVANT PARAMETERS WHILE DETERMINING THE ARMS LEN GTH PRICE OF THE INTERNATIONAL TRANSACTION OF THE ASSESSEE COMPANY. ACCORDINGLY WITH RESPECT TO ALL THE GROUNDS RAISED BY THE ASSES SEE IN REGARD TO TRANSFER PRICING ISSUES THE MATTER IS REMITTED BACK TO THE FILE OF LD.TPO FOR FRESH CONSIDERATION. 19 ITA NO.2118/MDS/2011 6. IN THE RESULT APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON THE 05 TH SEPTEMBER, 2017 AT CHENNAI. SD/- SD/- ( ) (GEORGE MATHAN) /JUDICIAL MEMBER ( . ) (A. MOHAN ALANKAMONY) / ACCOUNTANT MEMBER #$ /CHENNAI, %& /DATED 05 TH SEPTEMBER, 2017 RSR & () *) /COPY TO: 1. /APPELLANT 2. /RESPONDENT 3. - ( )/CIT(A) 4. - /CIT 5. )./ 0 /DR 6. / /GF