MACOM Technology Solutions (India) P Ltd., (formerly: Applied Micro Circuits India P Ltd), Pune V. Deputy Commissioner of Income tax, Circle - 1(1), Pune

ITA 2831/PUN/2016

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 4235 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 4 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-05-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 13-03-2019
• Assessment Year: 2012-2013
• Appeal Filed On: 14-12-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S B PRASAD
• Assessee Lawyers: M P LOHIA SHRI RAJENDRA AGIWAL; PRATEEK DALMIA
• Keywords: Transfer pricing; Opportunity of being heard; Principle of natural justice; International transaction; Working capital adjustments; Wholly owned subsidiary
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, PUNE . , , BEFORE SHRI D. KARUNAKARA RAO, AM AND SHRI VIKAS AWASTHY, JM . / ITA NO.2831/PUN/2016 / ASSESSMENT YEAR : 2012-13 MACOM TECHNOLOGY SOLUTIONS (INDIA) PRIVATE LIMITED (FORMERLY KNOWN AS APPLIED MICRO CIRCUITS INDIA PRIVATE LIMITED), 601, 6 TH FLOOR, B-1, CEREBRUM IT PARK, KALYANI NAGAR, PUNE 411 006. PAN : AAHCA3503C ....... / APPELLANT / V/S. DCIT, CIRCLE- 1(1), PUNE. / RESPONDENT ASSESSEE BY : SHRI M. P. LOHIA, SHRI RAJENDRA AGIWAL & SHRI PRATEEK DALMIA REVENUE BY : SHRI S. B. PRASAD / DATE OF HEARING : 13.03.2019 / DATE OF PRONOUNCEMENT : 09.05.2019 / ORDER PER D. KARUNAKARA RAO, AM: THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE ORDER OF DRP-3, MUMBAI DATED 14.09.2016 AS WELL AS AGAINST THE ASSESSMENT ORDER DATED 13.10.2016 PASSED U/S 143(3) R.W.S. 144C(13) OF THE ACT FOR THE ASSESSMENT YEAR 2012-13. 2. BRIEFLY STATED THE RELEVANT FACTS INCLUDE THAT THE ASSESSEE IS A 100% SUBSIDIARY WHOLLY OWNED COMPANY OF AMCC, USA. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF DESIGNING AND DEVELOPMENT OF CHIP, INTEGRATED CIRCUITS AND STORAGE COMPONENTS AND ALLIED SERVICES. THE ASSESSEE IS A 2 ITA NO.2831/PUN/2016 CAPTIVE SUPPLIER OF THE ABOVE PRODUCTS OF THE SERVICES TO ITS WHOLLY COMPANY AND ENTERED INTO INTERNATIONAL TRANSACTIONS WITH ITS AES AGGREGATING TO RS.52,40,01,000/-. DURING THE TP STUDY, THE ASSESSEE CONSIDERED THE TNM METHOD AS THE MOST APPROPRIATE METHOD. THE ASSESSEES PLI IS OP/OC AT 16.11%. THE ASSESSEE CONSIDERED FIVE COMPARABLES FOR THE SINGLE YEAR AND THE PLI OF THESE COMPARABLES IS 2.87%. SINCE THE ASSESSEES PLI IS MUCH HIGHER, NO SUO-MOTU ADJUSTMENTS WERE MADE BY THE ASSESSEE. HOWEVER, DURING THE PROCEEDINGS BEFORE THE TPO, 3 COMPARABLES OUT OF 5 COMPARABLES WERE REJECTED BY THE TPO. FURTHER, THE TPO INCLUDED FOUR OTHER COMPARABLES CONSIDERING THE TOTAL SIX COMPARABLES (2 COMPARABLES OF THE ASSESSEE AND 4 COMPARABLES OF THE TPO). THE PLI OF THESE COMPARABLES AT THIS POINT OF TIME IS 23.57% AFTER ALLOWING THE ADJUSTMENT ON ACCOUNT OF WORKING CAPITAL. THIS PLI IS COMPUTED AFTER THE ADJUSTMENT ON ACCOUNT OF WORKING CAPITAL IS ALLOWED BY THE TPO. THIS PLI BEING MUCH HIGHER THAN THE ASSESSEES PLI, THE TPO SUGGESTED THE ADDITION OF RS.3,40,02,747/- AS PER THE COMPUTATION GIVEN IN PARAS 5.11 AND 5.12 OF THE ORDER OF THE TPO AND THE SAME ARE EXTRACTED HEREUNDER :- 5.11 COMPUTATION OF ARMS LENGTH PRICE: THE ARITHMETIC MEAN OF THE PROFIT LEVEL INDICATORS OF COMPARABLES IS TAKEN AS THE ARMS LENGTH MARGIN. BASED ON THIS, THE ARMS LENGTH PRICE OF THE PROVISION OF DESIGN ENGG. SERVICES IS COMPUTED AS UNDER : INR OPERATING REVENUE (B) 45,00,16,000 OPERATING COST 39,16,96,000 ARMS LENGTH MEAN MARGIN (OP/OC) 23.57 ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTION (@ 123.57% OF OPERATING COST ) [A] 48,40,18,747 105% OF THE INTERNATIONAL TRANSACTION 47,25,16,800 ADJUSTMENT OVER OPERATING INCOME [A-B] (SHORTFALL BEING ADJUSTMENT U/S 92CA) 3,40,02,747 3 ITA NO.2831/PUN/2016 5.12 IN VIEW OF THE ABOVE, THE ALP OF THE INTERNATIONAL TRANSACTIONS OF DESIGN ENGG. SERVICES IS ARRIVED AT RS.48,40,18,747/- AND AN ADJUSTMENT OF RS.3,40,02,747/- IS MADE IN RESPECT OF TRANSACTIONS. 3. THE CONTENTS OF PARA 5.9 OF THE ORDER OF THE TPO GIVE THE DETAILS OF THESE COMPARABLES AND THE PLI WORKINGS AFTER CAPITAL WORKING OF TOTAL ADJUSTMENTS. FOR THE SAKE OF COMPLETENESS, THE SAID PARA 5.9 IS EXTRACTED HEREUNDER :- 5.9 IN VIEW OF THE ABOVE SAID DISCUSSION REGARDING ACCEPTANCE & REJECTION OF THE COMPARABLES AND AFTER CONSIDERING WORKING CAPITAL ADJUSTMENTS, THE FINAL SET OF COMPARABLES FOR BENCHMARKING INTERNATIONAL TRANSACTIONS PERTAINING TO PROVISION OF DESIGN ENGG. SERVICES FOR A.Y. 2012- 13 IS TAKEN AS UNDER : SR.NO. NAME OF THE COMPANY PLI=OP/OC% AFTER WORKING CAPITAL ADJT. 1 XS CAD INDIA PVT. LTD. (TRANSCEND DESIGN) 20.79 20.91 2 PENTAMEDIA GRAPHICS LTD. 12.26 8.43 3 GENESYS INTERNATIONAL CORPORATION LTD. 29.92 25.18 4 ACROPETAL TECHNOLOFIES LTD. 15.12 15.12 5 TATA ELXI LTD. 12.62 12.62 6 E CLERX SERVICES LTD. 58.39 59.15 AVERAGE 24.85 23.57 4. AGGRIEVED WITH THE ABOVE ORDER OF THE TPO, THE ASSESSEE CARRIED THE MATTER BEFORE THE DRP. 5. APART FROM OTHER CHANGES, THE DRP FAIRLY CONSIDERED THE INCLUSION OF COMPARABLE PICKED UP BY THE ASSESSEE I.E. INFORMED TECHNOLOGIES INDIA LIMITED AND HELD THAT THE SAME CONSTITUTES A GOOD COMPARABLE. FURTHER, THE DRP REJECTED THE ASSESSEES REQUEST FOR EXCLUSION OF (I) ECLERX SERVICES LIMITED AND (II) GENESYS INTERNATIONAL CORPORATION LIMITED AS GOOD COMPARABLES. IN THE LIGHT OF THESE DIRECTIONS OF THE DRP AND AGGRIEVED 4 ITA NO.2831/PUN/2016 WITH THE ABOVE-SAID EXCLUSION BY THE DRP, THE ASSESSEE FILED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 6. GROUND NO.1 BEING GENERAL AND GROUND NOS.2, 3, 5, 7, 8, 9 & 10 BEING PREMATURE/CONSEQUENTIAL IN NATURE, THEY WERE NOT PRESSED. THEREFORE, THESE GROUNDS DO NOT REQUIRE ANY SPECIFIC ADJUDICATION. ACCORDINGLY, THE GROUND NOS.1, 2, 3, 5, 7, 8, 9 & 10 ARE DISMISSED AS CONSEQUENTIAL, NOT PRESSED AND PREMATURE ETC. THAT LEAVES ONLY GROUND NOS.4 AND 6 FOR ADJUDICATION AND THE SAME ARE EXTRACTED AS UNDER :- GROUND NO.4 INAPPROPRIATELY SELECTING COMPANIES WHICH ARE NOT COMPARABLE TO THE APPELLANT. ERRED IN INAPPROPRIATELY SELECTING ADDITIONAL COMPANIES (WHICH ARE NOT COMPARABLE TO THE APPELLANT) AS COMPARABLE TO THE APPELLANT. GROUND NO.6 INAPPROPRIATELY REJECTING RISK ADJUSTMENT. ERRED IN COMPARING THE FULL-FLEDGED RISK BEARING ENTITIES WITH THE APPELLANTS CAPTIVE OPERATIONS WITHOUT MAKING ANY RISK ADJUSTMENT FOR DIFFERENCES BETWEEN THE FUNCTIONAL AND RISK PROFILE OF COMPARABLE VIS--VIS THE APPELLANT. 7. WE SHALL NOW DEAL WITH EACH OF THESE GROUNDS IN THE FOLLOWING PARAGRAPHS. 8. GROUND NO.4 RELATES TO THE INAPPROPRIATE SELECTION OF COMPARABLES WHICH ARE FUNCTIONALLY DIFFERENT FROM THAT OF THE ASSESSEE. IN THIS REGARD, LD. COUNSEL FOR THE ASSESSEE BROUGHT OUR ATTENTION TO THE FUNCTIONS OF THE ASSESSEE AND SUBMITTED THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF DESIGNING AND DEVELOPMENT OF CHIP, INTEGRATED CIRCUITS AND STORAGE COMPONENTS AND ALLIED SERVICES FOR ITS HOLDING COMPANY AMCC, USA. IN THIS REGARD, LD. COUNSEL SUBMITTED THAT THE COMPARABLES (I) E CLERX 5 ITA NO.2831/PUN/2016 SERVICES LTD. AND (II) GENESYS INTERNATIONAL CORPORATION LTD. ARE REQUIRED TO BE EXCLUDED AS THEY ARE COMPLETELY OF DISSIMILAR FUNCTIONS. FURTHER, LD. COUNSEL SUBMITTED THAT THE TPO/DRP/ASSESSING OFFICER WAS OF THE VIEWS THAT BOTH THESE COMPARABLES AS WELL AS THE ASSESSEE ARE ENGAGED IN THE KPO SERVICES AND, THEREFORE, THEY ARE OF SIMILAR FUNCTIONS. IN THIS REGARD, LD. COUNSEL BROUGHT OUR ATTENTION TO THE ORDER OF THE TPO. REFERRING TO PARA 5.8 OF SUB-PARA (VIII) OF THE ORDER OF THE TPO RELATING TO E CLERX SERVICES LTD. , LD. COUNSEL READ OUT THE REASONING GIVEN BY THE TPO FOR INCLUSION OF THE SAID COMPARABLE AS A GOOD COMPARABLE. FOR THE SAKE OF COMPLETENESS, THE RELEVANT LINES OF THE TPOS ORDER ARE EXTRACTED HEREUNDER :- (VIII) E CLERX SERVICES LTD: THE ASSESSEE TOOK THE OBJECTION TO INCLUDE THIS COMPANY ON THE GROUND THAT IT IS ENGAGED IN THE DATA ANALYTICS . I HAVE PERUSED THE OBJECTION OF THE ASSESSEE. RULE 10TA (G) OF THE INCOME TAX RULES, GIVES THE DEFINITION KPO . IN THIS DEFINITION, DATA ANALYTICS AND DESIGN ENGINEERING SERVICE HAS BEEN CONSIDERED AS KPO ONLY. HENCE, THE OBJECTION OF THE ASSESSEE IS NOT ACCEPTED. 9. FURTHER, REFERRING TO PARA 5.8 OF SUB-PARA (VI) OF THE TPOS ORDER RELATING TO GENESYS INTERNATIONAL CORPORATION LTD. , LD. COUNSEL READ OUT THE REASONING GIVEN BY THE TPO FOR INCLUSION OF THE SAID COMPARABLE AS A GOOD COMPARABLE. FOR THE SAKE OF COMPLETENESS, THE RELEVANT LINES OF THE TPOS ORDER ARE EXTRACTED HEREUNDER :- (VI) GENESYS INTERNATIONAL CORPORATION LTD.: THE ASSESSEE STATED THAT THIS COMPARABLE WAS REJECTED BY ITSELF, AS IT IS FUNCTIONALLY DIFFERENT . IT ALSO ARGUED THAT THERE IS ABNORMAL TREND IN THE UNADJUSTED PROFITABILITY OF THIS COMPANY. THE OBJECTION OF THE ASSESSEE HAS BEEN PERUSED. THE COMPANY IS NOT PERSISTENT LOSS MAKING. HENCE IT SATISFIES ALL THE ACCEPTED FILTERS. 6 ITA NO.2831/PUN/2016 FURTHER, RULE 10TA(G) OF THE INCOME TAX RULES, GIVES THE DEFINITION KPO. IN THIS DEFINITION, GEOGRAPHICAL INFORMATION SYSTEM AND DESIGN ENGINEERING SERVICE HAS BEEN CONSIDERED AS KPO ONLY. HENCE, THE OBJECTION OF THE ASSESSEE IS NOT ACCEPTED. 10. FROM THE ABOVE, IT IS EVIDENT THAT THE DATA ANALYSIS FUNCTION OF (I) E-CLERX SERVICES LTD. ARE LOSS MAKING COMPANY AND (II) GENESYS INTERNATIONAL CORPORATION LTD. ARE NOT COMPARABLE THAT OF THE ASSESSEE. IT IS ALSO A FACT THAT THE TPO NEVER GRANTED ANY ADJUSTMENTS TO THE FUNCTIONAL DIFFERENCES. 11. FURTHER, BRINGING OUR ATTENTION TO THE ORDER OF THE DRP, LD. COUNSEL SUBMITTED THAT THE REASONING GIVEN BY THE TPO WAS APPROVED WITHOUT APPLICATION OF MIND TO THE ACTUAL FUNCTIONS OF THE COMPARABLES QUA THE ASSESSEE. FURTHER, REFERRING TO THE PERSISTENT OF THIS ISSUE, LD. COUNSEL BROUGHT OUR ATTENTION TO THE VARIOUS DECISIONS TO DEMONSTRATE THAT THE DATA ANALYSIS AS FUNCTION IS NO WAY COMPARABLE TO THE FUNCTION OF ENGINEERING DESIGNS REPORTED BY THE ASSESSEE. THE LD. COUNSEL FOR THE ASSESSEE BROUGHT OUR ATTENTION TO THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF ACTIS GLOBAL SERVICES PVT. LTD. VS. PCIT VIDE ITA 417/2016 DATED 05.08.2016 (PAGE 648 OF THE PAPER BOOK) AND SUBMITTED THAT E CLERX SERVICES LIMITED BEING A KPO SERVICES COMPANY, WAS CONSIDERED AS A GOOD COMPARABLE IN THAT CASE WITH KPO FUNCTIONS. IN THIS CASE, THE HONBLE HIGH COURT HELD THAT MERE GROUPING INTO KPO COMPANIES CANNOT BE CONSIDERED AS GOOD COMPARABLES. THE CHARACTERISTIC FEATURES OF THE SERVICES ACTUALLY RENDERED ARE IMPORTANT AND MERE THE COMPANIES FALLING IN THE KPO GROUP CANNOT GIVE RISE TO A GOOD COMPARABLE. RELYING ON THE DECISION OF HONBLE DELHI HIGH COURT IN 7 ITA NO.2831/PUN/2016 THE CASE OF RAMPGREEN SOLUTIONS PVT. LTD. VS. CIT (2015) 377 ITR 533 (DEL), THE HONBLE DELHI HIGH COURT HELD THAT E CLERX SERVICES LTD. IS NOT A GOOD COMPARABLE. FOR THE SAKE OF COMPLETENESS, THE RELEVANT PARAS 4 TO 6 ARE EXTRACTED AS FOLLOWS :- 4. AS FAR AS THE EXCLUSION OF ESL IS CONCERNED, THE ITAT APPEARS TO HAVE RELIED UPON PARA 31 OF THE DECISION OF THIS COURT IN RAMPGREEN SOLUTIONS PVT LTD V. COMMISSIONER OF INCOME TAX (2015) 377 ITR 533 (DEL). THE ITAT HAS EXTRACTED PARA 31 OF THE SAID DECISION WHERE INTER ALIA THE COURT POINTED OUT THAT: ...31......WE FIND IT DIFFICULT TO ACCEPT THIS VIEW AS IT IS CONTRARY TO THE FUNDAMENTAL RATIONALE OF DETERMINING ALP BY COMPARING CONTROLLED TRANSACTIONS/ENTITIES WITH SIMILAR UNCONTROLLED TRANSACTIONS/ENTITIES. ITES ENCOMPASSES A WIDE SPECTRUM OF SERVICES THAT USE INFORMATION TECHNOLOGY BASED DELIVERY. SUCH SERVICES COULD INCLUDE RENDERING HIGHLY TECHNICAL SERVICES BY QUALIFIED TECHNICAL PERSONNEL, ITA 102/2015 PAGE 31 OF 42 INVOLVING ADVANCED SKILLS AND KNOWLEDGE, SUCH AS ENGINEERING, DESIGN AND SUPPORT. WHILE, ON THE OTHER END OF THE SPECTRUM ITES WOULD ALSO INCLUDE VOICEBASED CALL CENTERS THAT RENDER ROUTINE CUSTOMER SUPPORT FOR THEIR CLIENTS. CLEARLY, CHARACTERISTICS OF THE SERVICE RENDERED WOULD BE DISSIMILAR. FURTHER, BOTH SERVICE PROVIDERS CANNOT BE CONSIDERED TO BE FUNCTIONALLY SIMILAR. THEIR BUSINESS ENVIRONMENT WOULD BE ENTIRELY DIFFERENT, THE DEMAND AND SUPPLY FOR THE SERVICES WOULD BE DIFFERENT, THE ASSETS AND CAPITAL EMPLOYED WOULD DIFFER, THE COMPETENCE REQUIRED TO OPERATE THE TWO SERVICES WOULD BE DIFFERENT. EACH OF THE AFORESAID FACTORS WOULD HAVE A MATERIAL BEARING ON THE PROFITABILITY OF THE TWO ENTITIES. TREATING THE SAID ENTITIES TO BE COMPARABLES ONLY FOR THE REASON THAT THEY USE INFORMATION TECHNOLOGY FOR THE DELIVERY OF THEIR SERVICES, WOULD, IN OUR OPINION, BE ERRONEOUS.... 5. IT IS URGED BY MR SANJAY KUMAR, LEARNED COUNSEL FOR THE REVENUE, THAT THE ITAT OUGHT NOT TO HAVE EXCLUDED ESL AS A COMPARABLE BECAUSE BOTH ESL AND THE ASSESSEE WERE KPOS AND BOTH WERE CATERING TO HIGH-END CLIENTS. 6. THE ABOVE SUBMISSION OVERLOOKS WHAT ITAT ITSELF HAS NOTED IN ITS IMPUGNED ORDER, THAT THE FUNCTION PROFILE OF THE TWO COMPANIES WERE DIFFERENT. WHILE THE ASSESSEE IS CATERING TO THE CAPITAL AND FINANCIAL SERVICES MARKETS, ESL WORKS IN THE AREA OF SALES, MARKETING AND SUPPORTING FINANCIAL SERVICES. THE FINANCIAL PROFILE OF THE TWO KPOS COULD NOT BE SAID TO BE SIMILAR FROM THE POINT OF VIEW OF THE TYPE OF BUSINESSES THEY WERE CATERING TO. 12. EXPLAINING THE ABOVE SAID PRINCIPLE LAID DOWN BY THE HONBLE DELHI HIGH COURT, LD. COUNSEL BROUGHT OUR ATTENTION TO THE VARIOUS OTHER 8 ITA NO.2831/PUN/2016 DECISIONS TO DEMONSTRATE THAT MERE GROUPING OF KPO COMPANIES WILL NOT SUFFICIENT FOR IDENTIFYING A GOOD COMPARABLE BY THE TPO. 13. FURTHER, REFERRING TO THE GENESYS INTERNATIONAL CORPORATION LIMITED , LD. COUNSEL FOR THE ASSESSEE BROUGHT OUR ATTENTION TO VARIOUS DECISIONS SUCH AS : (I) VISTCON ENGINEERING CENTER (INDIA) PVT. LTD. V. ACIT (ITA NO.358/PN/2013 (AY 2008-09) (PUNE ITAT) (21 OCTOBER 2015). (II) VISTCON ENGINEERING CENTER (INDIA) PVT. LTD. V. ACIT (ITA NO.331/PN/2014 (AY 2009-10) (PUNE ITAT) (11 APRIL 2016). (III) JOHN DEERE INDIA PVT. LTD. V. DCIT (ITA NO.827/PN/2014) (AY 2009- 10) (PUNE ITAT) (27 OCTOBER 2016). (IV) HYUNDAI MOTORS INDIA ENGINEERING PVT. LTD. V. DCIT (ITA NO.255/HYD/14) (AY 2009-10) (HYDERABAD ITAT) (31 JULY 2014). 14. THE LD. COUNSEL SUBMITTED THAT MERE GROUPING INTO KPO COMPANIES DOES NOT CREATE A GOOD COMPARABLE UNLESS THE FUNCTIONS OF THE COMPARABLES UNDER CHARACTERISTIC OF THE SERVICES RENDERED ARE SIMILAR. FOR THE SAKE OF COMPLETENESS, THE RELEVANT EXTRACTS FROM THE DECISION OF PUNE BENCH OF THE TRIBUNAL IN THE CASE OF VISTCON ENGINEERING CENTER (INDIA) PVT. LTD. (SUPRA) ARE EXTRACTED HEREUNDER :- 27. SO FAR AS GENESYS INTERNATIONAL CORPORATION LTD. IS CONCERNED THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ABOVE COMPANY IS FUNCTIONALLY DIFFERENT. THE COMPANY IS ENGAGED IN PROVIDING GEOGRAPHICAL INFORMATION SERVICES COMPRISING PHOTOGRAMMERTRY, REMOTE SENSING, CARTOGRAPHY, DATA CONVERSION AND RELATED COMPUTER BASED SERVICES ACCORDING TO THE INFORMATION PROVIDED IN THE ANNUAL REPORT. FURTHER, IT OWNS INTANGIBLE ASSETS OF COMPUTER AND GIS DATABASE AND HAS ACQUIRED NEW BUSINESS. REFERRING TO THE COPY OF THE ASSESSMENT ORDER FOR A.Y. 2010-11 AND 2011-12 HE SUBMITTED THAT THE TPO, BASED ON THE SUBMISSIONS MADE BY THE ASSESSEE, HAS DROPPED GENESYS INTERNATIONAL CORPORATION LTD. FROM THE FINAL SET OF COMPARABLES. REFERRING TO THE DECISION OF THE HYDERABAD BENCH OF THE TRIBUNAL IN THE CASE OF HYUNDAI MOTORS INDIA ENGG. PVT. LTD. VS. ITO VIDE ITA NO.1850/HYD/2012 ORDER DATED 21-02-2014 HE SUBMITTED IN THAT CASE GENESYS INTERNATIONAL CORPORATION LTD. WAS EXCLUDED FROM THE LIST OF COMPARABLES ON THE GROUND 9 ITA NO.2831/PUN/2016 THAT THIS COMPANY IS A GEOSPATIAL SERVICES CONTENT PROVIDER SPECIALISING IN LAND BASED TECHNOLOGIES. FURTHER, THE BUSINESS OF THIS COMPANY REQUIRES SKILLED MANPOWER AND SCIENTISTS AND CIVIL ENGINEERS ETC. IT ALSO CARRIED OUT R&D SERVICES AND OWN INTANGIBLES. FOLLOWING THE DECISION OF THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF SUMPHONY MARKETING SALES INDIA PVT. LTD. REPORTED IN 38 TAXMANN.COM 5 (BANGALORE) ORDER DATED 14- 08-2012 THE TRIBUNAL HAS HELD THAT THIS COMPANY CANNOT BE REGARDED AS COMPARABLE AND DESERVES TO BE EXCLUDED FROM THE LIST OF COMPARABLES. . 31. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE TPO/AO/DRP AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. AS REGARDS THE SELECTION OF GENESYS INTERNATIONAL CORPORATION LTD. AS COMPARABLE COMPANY IS CONCERNED WE FIND THE SAID COMPANY HAS NOT BEEN CONSIDERED AS COMPARABLE BY THE TPO HIMSELF IN A.Y. 2010-11 AND 2011-12. DURING A.Y. 2010-11 A SPECIFIC SHOW CAUSE NOTICE WAS GIVEN TO THE ASSESSEE AND THE SAME WAS EXCLUDED AFTER CONSIDERING THE DETAILED REPLY FILED THERETO. IN A.Y. 2011-12, THE SAID COMPANY WAS NOT INCLUDED AS COMPARABLE COMPANY EVEN IN THE SHOW CAUSE NOTICE. . 33. SINCE THE ASSESSEE COMPANY IS ENGAGED IN PROVIDING ENGINEERING DESIGN SERVICES AND SINCE THE HYDERABAD BENCH OF THE TRIBUNAL IN THE CASE OF HYUNDAI MOTORS INDIA ENGG. PVT. LTD. (SUPRA) HAS EXCLUDED GENESYS INTERNATIONAL CORPORATION LTD. FROM THE LIST OF COMPARABLES ON THE GROUND THAT THE COMPANY IS FUNCTIONALLY DIFFERENT, THEREFORE, FOLLOWING THE DECISION CITED (SUPRA) AND FURTHER CONSIDERING THE FACT THAT GENESYS INTERNATIONAL CORPORATION LTD. WAS NOT INCLUDED AS COMPARABLE COMPANY IN A.YRS. 2010-11 AND 2011-12 BY THE AO HIMSELF IN ASSESSEES OWN CASE, WE DIRECT THE TPO TO EXCLUDE GENESYS INTERNATIONAL CORPORATION LTD. FROM THE LIST OF COMPARABLES. 15. ON THE OTHER HAND, LD. DR FOR THE REVENUE RELIED HEAVILY ON THE ORDERS OF THE DRP/TPO/ASSESSING OFFICER. 16. WE HEARD BOTH THE SIDES ON THIS ISSUE AND PERUSED THE ORDERS OF THE REVENUE AUTHORITIES AND THE PAPER BOOK FILED BEFORE US. WE ALSO CONSIDERED THE JUDGEMENTAL LAWS PLACED BEFORE US. ON HEARING BOTH THE SIDES, WE FIND THE CORE ISSUE FOR ADJUDICATION IS THAT IF COMPANY BECOMES A GOOD COMPARABLE MERELY BECAUSE THE SAME IS ENGAGED IN KPO ACTIVITY LIKE THE ASSESSEE. WE FIND, NOW IT IS DECIDED AT THE LEVEL OF THE HONBLE DELHI HIGH COURT THAT THE SIMILARITY OF FUNCTIONS/CHARACTERISTIC OF SERVICES RENDERED BY THE ASSESSEE/COMPARABLES FOR IDENTIFYING THE GOOD 10 ITA NO.2831/PUN/2016 COMPARABLES ASSESSEES IMPORTANCE. IT IS AN UNDISPUTED FACT, IN THE PRESENT CASE, THAT THE DRP/TPO/ASSESSING OFFICER ARE CATEGORICALLY EXPLAINED THAT WITH THE SIMILARITY IN GROUPING OF KPO COMPANIES, THE ASSESSEES COMPANY IS GOOD ENOUGH FOR IDENTIFYING A GOOD COMPARABLE. THIS VIEW IS NOT APPROVED BY THE VARIOUS DECISIONS CITED BY THE LD. COUNSEL FOR THE ASSESSEE BEFORE THE TRIBUNAL. WE HAVE ALREADY EXTRACTED THE RELEVANT PORTION FROM THE JUDGEMENTS OF THE HONBLE HIGH COURT AS WELL AS THE ORDERS OF THE PUNE BENCH OF THE TRIBUNAL THAT FOR IDENTIFYING A GOOD COMPARABLE, ONE HAS TO GO INTO THE CHARACTERISTIC OF THE FUNCTIONS RENDERED BY THE COMPARABLES. THE ASSESSEE IS UNDISPUTEDLY ENGAGED IN THE BUSINESS OF DESIGNING AND DEVELOPMENT OF CHIP, INTEGRATED CIRCUITS AND STORAGE COMPONENTS AND ALLIED SERVICES FOR ITS HOLDING COMPANY AMCC, USA, WHEREAS (I) ECLERX SERVICES LIMITED IS ENGAGED IN DATA ANALYTIC AND (II) GENESYS INTERNATIONAL CORPORATION LIMITED IS ENGAGED IN GEOGRAPHICAL INFORMATION SYSTEM SERVICES. THESE FUNCTIONS ARE ENTIRELY DIFFERENT FROM THAT OF THE BUSINESS OF DESIGNING AND DEVELOPMENT OF CHIP, INTEGRATED CIRCUITS AND STORAGE COMPONENTS ETC. 17. THEREFORE, WE FIND THESE TWO COMPARABLES I.E. (I) ECLERX SERVICES LIMITED AND (II) GENESYS INTERNATIONAL CORPORATION LIMITED ARE REQUIRED TO BE EXCLUDED FOR THE PURPOSE OF BENCHMARKING OF THE INTERNATIONAL TRANSACTIONS. ACCORDINGLY, GROUND NO.4 RAISED BY THE ASSESSEE STANDS ALLOWED. 11 ITA NO.2831/PUN/2016 18. GROUND NO.6 RELATES TO THE INAPPROPRIATE REJECTION OF THE RISK ADJUSTMENT. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE TPO HAS NOT GRANTED ANY RISK ADJUSTMENTS WHILE BENCHMARKING THE TRANSACTIONS. BRINGING OUR ATTENTION TO THE ORDER OF THE DRP, LD. COUNSEL SUBMITTED THAT THE MATTER WAS DISCUSSED BY THE DRP IN PARA 7 AT INTERNAL PAGE 44 OF THE DRPS ORDER. RELYING ON VARIOUS DECISIONS INCLUDING THE DECISION IN THE CASE OF SONY INDIA PVT. LTD. VS. DCIT (2008) 118 TTJ 865 (DEL), LD. COUNSEL SOUGHT FOR GRANT OF RISK ADJUSTMENTS. THE ASSESSEE MADE WRITTEN SUBMISSIONS AND THE SAME ARE EXTRACTED IN PARA 7.1 OF THE ORDER OF THE DRP. EVENTUALLY, THE DRP DECIDED THE ISSUE AGAINST THE ASSESSEE AND REFUSED TO INTERFERE WITH THE ORDER OF TPO IN NOT GRANTING THE RISK ADJUSTMENTS. IN THIS REGARD, LD. COUNSEL SUBMITTED THAT THE GRANTING OF ADJUSTMENTS TOWARDS RISK FACTOR IS NOW SETTLED LAW AND RELIED HEAVILY ON THE LARGE NUMBER OF DECISIONS. BRINGING OUR ATTENTION TO THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE VIDE ITA NO.1250/PUN/2015 DATED 24.11.2017, COPY OF WHICH IS PLACED AT PAGE 312 OF THE PAPER BOOK, LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE TRIBUNAL ALLOWED THE CLAIM OF THE ASSESSEE TOWARDS RISK ADJUSTMENTS. THE TRIBUNAL WHILE DECIDING THIS ISSUE RELIED ON THE SIMILAR ANOTHER DECISION OF THE TRIBUNAL IN THE CASE OF SONY INDIA PVT. LTD. (SUPRA). 19. ON HEARING BOTH THE SIDES, WE OBSERVED THAT IN PRINCIPLE, THE RISK ADJUSTMENTS IS REQUIRED TO BE GRANTED IN FAVOUR THE ASSESSEE AND THEREFORE, THE ORDER OF THE ASSESSING OFFICER/DRP/TPO REQUIRES TO BE REVERSED ON THIS ISSUE. FOR THE SAKE OF COMPLETENESS, WE EXTRACT THE 12 ITA NO.2831/PUN/2016 RELEVANT PARAS 18 TO 20 OF THE SAID ORDER OF THE TRIBUNAL (SUPRA) AS FOLLOWS :- 18. THE NEXT ISSUE RAISED VIDE GROUND OF OBJECTION NO.2.2 IS AGAINST THE CLAIM OF RISK ADJUSTMENT. THE PLEA OF ASSESSEE THAT RISK ADJUSTMENT SHOULD HAVE BEEN GRANTED TO THE ASSESSEE FOR DIFFERENCES BETWEEN FUNCTIONAL AND RISK PROFILE OF COMPARABLE COMPANIES VIS--VIS ASSESSEE. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE IN THIS REGARD POINTED OUT THAT THE ASSESSEE WAS RISK MITIGATED ENTITY, WHEREAS THE COMPARABLES WERE RISK BEARING. HE FURTHER STATED THAT THE ASSESSEE HAD FURNISHED THE WORKING AS PER THE DECISION OF BANGALORE BENCH OF TRIBUNAL IN PHILIPS SOFTWARE CENTRE PVT. LTD. VS. ACIT REPORTED IN 26 SOT 226 AND THE DELHI BENCH OF TRIBUNAL IN THE CASE OF SONY INDIA PVT. LTD. REPORTED IN 114 ITD 448. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE IN THIS REGARD PLACED RELIANCE ON THE RATIO LAID DOWN BY THE PUNE BENCH OF TRIBUNAL IN MSC SOFTWARE CORPORATION INDIA PVT. LTD. VS. ACIT IN ITA NO.46/PUN/2013, RELATING TO ASSESSMENT YEAR 2008-09, ORDER DATED 22.03.2017. 19. WE FIND THAT THE ISSUE IS SQUARELY COVERED BY EARLIER DECISIONS OF THE PUNE BENCH OF TRIBUNAL IN MSC SOFTWARE CORPORATION INDIA PVT. LTD. VS. ACIT (SUPRA), WHEREIN THE SAID CONCERN WAS ALSO CAPTIVE SERVICE PROVIDER TO ITS ASSOCIATED ENTERPRISES AND HAD CLAIMED TO BE RISK FREE. IT HAD ASKED FOR RISK ADJUSTMENT IN THE MARGINS OF FINALLY SELECTED COMPARABLES AND THE TRIBUNAL VIDE ORDER DATED 22.03.2017 HELD AS UNDER:- 34. FOLLOWING THE SAID RATIO, WE DIRECT THE ASSESSING OFFICER TO ALLOW THE RISK ADJUSTMENT AND RE-COMPUTE THE MARGINS OF COMPARABLES BY APPLYING THE RATIO LAID DOWN BY DELHI BENCH OF TRIBUNAL IN THE CASE OF SONY INDIA PVT. LTD. (SUPRA) AND COMPUTE THE TP ADJUSTMENT, IF ANY, IN THE HANDS OF ASSESSEE. 35. THE GROUND OF APPEAL NO.10 RAISED BY THE ASSESSEE IS AGAINST APPLICABILITY OF +/- 5% AND THE BENEFIT CAN BE ALLOWED IF THE ADJUSTMENT IS WITHIN SUCH RANGE AND HENCE, NO ADJUSTMENT IS TO BE MADE IN CASE IT IS NOT MORE THAN 5% FROM THE ARM'S LENGTH PRICE. WE HOLD SO. 20. THE ISSUE ARISING BEFORE US IS SIMILAR AND FOLLOWING THE SAME PARITY OF REASONING, WE DIRECT THE ASSESSING OFFICER TO ALLOW RISK ADJUSTMENT AND RE-WORK THE MARGINS OF COMPARABLES, IN TURN, RELYING ON THE RATIO LAID DOWN BY THE DELHI BENCH OF TRIBUNAL IN THE CASE OF SONY INDIA PVT. LTD. (SUPRA) AND COMPUTE THE TP ADJUSTMENT, IF ANY, IN THE HANDS OF ASSESSEE. THE GROUND OF OBJECTION NO.2.2 IS THUS, ALLOWED. 20. CONSIDERING THE ABOVE, WE SET-ASIDE THE ORDERS OF THE DRP/TPO ON THIS ISSUE AND DIRECT THE ASSESSING OFFICER TO ALLOW THE RISK ADJUSTMENTS. THE ASSESSING OFFICER SHALL GRANT REASONABLE OPPORTUNITY OF BEING HEARD 13 ITA NO.2831/PUN/2016 TO THE ASSESSEE IN ACCORDANCE WITH THE SET PRINCIPLES OF NATURAL JUSTICE. ACCORDINGLY, THE GROUND NO.6 IS ALLOWED AS ABOVE. 21. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED ON 09 TH DAY OF MAY, 2019. SD/- SD/- ( /VIKAS AWASTHY) ( . /D. KARUNAKARA RAO) / JUDICIAL MEMBER / ACCOUNTANT MEMBER / PUNE; / DATED : 09 TH MAY, 2019. SUJEET / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT. 2. / THE RESPONDENT. 3. THE DRP-3, MUMBAI. 4. THE CIT (DRP-3), MUMBAI. 5. , , , / DR, ITAT, A BENCH, PUNE. 6. / GUARD FILE. / BY ORDER, // TRUE COPY // SENIOR PRIVATE SECRETARY , / ITAT, PUNE.