Lear Automotive India Pvt. Ltd., Pune V. ACIT, New Delhi

ITA 5612/DEL/2011

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 7526 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-12-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 18-12-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 13-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PEEYUSH JAIN
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Additional evidence
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I NEW DELHI DELHI BENCH: I NEW DELHI DELHI BENCH: I NEW DELHI DELHI BENCH: I NEW DELHI BEFORE SHRI R. S. SYAL, AM BEFORE SHRI R. S. SYAL, AM BEFORE SHRI R. S. SYAL, AM BEFORE SHRI R. S. SYAL, AM AND SHRI AND SHRI AND SHRI AND SHRI GEORGE GEORGE.K., GEORGE GEORGE.K., GEORGE GEORGE.K., GEORGE GEORGE.K., JM JMJM JM I.T.A .NO. I.T.A .NO. I.T.A .NO. I.T.A .NO. 5612 5612 5612 5612/DEL/201 /DEL/201 /DEL/201 /DEL/2011 11 1 A AA ASSESSMENT YEAR : SSESSMENT YEAR : SSESSMENT YEAR : SSESSMENT YEAR : 2007 2007 2007 2007- -- -0 00 08 88 8 LEAR AUTOMOTIVE INDIA P. LTD. VS. VS. VS. VS. ACIT E-25, 26, 27, BHOSARI MIDC, CIRCLE 4(1), PUNE-411026. NEW DELHI. PAN: AAAC PAN: AAAC PAN: AAAC PAN: AAACL1978K L1978K L1978K L1978K (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI ROHIT TIWARI, CA & SHRI ANUBHAV RASTOGI, ADVOCA TE. REVENUE BY : SHRI PEEYUSH JAIN, CIT, DR & SHRI VIVEK KUMAR, SR. DR ORDER ORDER ORDER ORDER PER R. S. SYAL, AM : PER R. S. SYAL, AM : PER R. S. SYAL, AM : PER R. S. SYAL, AM : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE FINAL ORDER PASSED BY THE ASSESSING OFFICER (AO) ON 5.10 .2011 U/S 143(3) READ WITH SECTION 144C OF THE INCOME-TAX ACT , 1961, (HEREINAFTER ALSO CALLED THE ACT) IN RELATION TO THE ASSESSMENT YEAR 2007-08. 2.1. FIRST ISSUE RAISED IN THIS APPEAL IS AGAINST T HE ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT MADE FOR THE INTERNATIONAL TRANSACTION OF COST ALLOCATION FROM ASSOCIATED ENTERPRISES. ITA NO.5612/DEL/2011 2 2.2. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS A SUBSIDIARY OF LEAR CORPORATION USA, WHICH HOLDS T HE ENTIRE SHARE CAPITAL OF THE ASSESSEE-COMPANY THROUGH ITS A FFILIATE VIZ., LEAR CORPORATION (MAURITIUS) LTD. THE ASSESSEE IS P RIMARILY ENGAGED IN THE MANUFACTURE/ASSEMBLY OF AUTOMOTIVE S EATING SYSTEMS (I.E. SEATS AND SEAT TRIMS) AND INTERIOR PA RTS. THE ASSESSEE PROVIDES DESIGN AND ENGINEERING SUPPORT SE RVICES ALONG WITH EMBEDDED SOFTWARE DEVELOPMENT SUPPORT SE RVICES TO GROUP COMPANIES, AND DESIGN AND ENGINEERING SERV ICES TO AUTOMOTIVE INDUSTRY CUSTOMERS, LIKE GENERAL MOTORS LTD. AND MAHINDRA & MAHINDRA (M&M). APART FROM CERTAIN OTHER INTERNATIONAL TRANSACTIONS, THE ASSESSEE REPORTED A PAYMENT OF RS.1,99,22,532/- TO ITS ASSOCIATED ENTERPRISES (AES ) TOWARDS COST ALLOCATION. ON A REFERENCE BEING MADE BY TH E AO, THE TRANSFER PRICING OFFICER (TPO) NOTICED THAT THE ASS ESSEE HAD PAID CERTAIN ALLOCATED COSTS TO GROUP COMPANIES. ON BEING CALLED UPON TO EXPLAIN OF NATURE OF SUCH PAYMENT, T HE ASSESSEE STATED THAT THESE COSTS PRIMARILY RELATED TO CERTAI N SOFTWARES USED BY IT AND COULD BE BROADLY CLASSIFIED INTO TWO PARTS. FIRST PART WAS STATED TO BE THE COSTS RELATING TO PRE-LOA DED DESKTOP SOFTWARE ON SOME OF THE COMPUTERS OF THE ASSESSEE C OMPANY ITA NO.5612/DEL/2011 3 AS WELL AS THE COSTS OF THEIR MAINTENANCE. THE ASSE SSEE SUBMITTED THAT THE COST FOR SUCH DESKTOP SOFTWARES AND THEIR MAINTENANCE WERE INCURRED BY THE GROUP COMPANIES ON A PER COMPUTER BASIS TO THIRD PARTIES AND CHARGED TO THE ASSESSEE ON THE SAME BASIS. THE SECOND PART OF SUCH OVERALL COS TS WAS STATED TO BE THE COSTS RELATING TO THE MAINTENANCE COSTS FOR CERTAIN CAD/CAE SOFTWARES USED BY IT, THE LICENSES FOR WHICH WERE OWNED BY GROUP COMPANIES. OUT OF THE TOTAL LIC ENSES, THE GROUP COMPANIES SET ASIDE A FIXED NUMBER OF LICENSE S AS PER THE REQUEST OF THE ASSESSEE FOR ITS USE, FOR WHICH ANNUAL MAINTENANCE CHARGES WERE PAID TO THIRD PARTIES SOFT WARE VENDORS ON A PER LICENSE BASIS. THE ASSESSEE CLAIME D THAT ALL THE COSTS ALLOCATED BY GROUP COMPANIES TO THE ASSES SEE REPRESENTED THE AMOUNTS PAID BY GROUP COMPANIES TO THIRD PARTIES DEPENDING ON THE ACTUAL UTILIZATION OF SOFT WARES BY THE ASSESSEE. THE ASSESSEE SOUGHT TO BENCHMARK THIS INT ERNATIONAL TRANSACTION ON THE BASIS OF COMPARABLE UNCONTROLLED PRICE (CUP) METHOD UNDER WHICH THE PRICE PAID BY THE GROU P COMPANIES TO THE THIRD PARTIES WAS CONSIDERED AS A COMPARABLE INSTANCE. THE TPO TREATED SUCH PAYMENTS AS TOWARDS INTRA- GROUP SERVICES AND OBSERVED THAT THE DEDUCTION COUL D BE ITA NO.5612/DEL/2011 4 ALLOWED ONLY WHEN THE FACTUM OF THE ASSESSEE HAVING ACTUAL RECEIVED SUCH SERVICES WAS PROVED. IN THE ABSENCE O F THE ASSESSEE PROVIDING ANY DETAILS OF INVOICES AND OTHE R BACK-UP DOCUMENTS TO SHOW THAT SUCH PAYMENTS ACTUAL REPRESE NTED REIMBURSEMENT OF COSTS INCURRED BY THE GROUP COMPAN IES TO THE THIRD PARTIES, THE TPO HELD THAT THE ARMS LENGTH P RICE (ALP) OF THIS TRANSACTION WAS TO BE TAKEN AS NIL. THE ASSESS EE REMAINED UNSUCCESSFUL BEFORE THE DRP. THAT IS HOW, AN ADDITI ON OF RS.1,99,22,532/- WAS MADE IN THE FINAL ORDER PASSED BY THE AO, AGAINST WHICH THE ASSESSEE IS AGGRIEVED BEFORE US. 2.3. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED FRO M THE TPOS ORDER THAT THE INSTANT ISSUE WAS ALSO THERE IN THE PRECEDING YEAR. A USEFUL REFERENCE CAN BE MADE TO PARA 5.2 OF THE TPOS ORDER IN WHICH HE OBSERVED THAT SIMILAR TP ADJUSTME NT WAS ALSO MADE IN THE PRECEDING YEAR. THE LD. AR SUBMITTED T HAT FOR SUCH IMMEDIATELY PRECEDING YEAR, THE ASSESSEE PLACED SOM E ADDITIONAL EVIDENCE BEFORE THE TRIBUNAL INDICATING THAT THE PAYMENT MADE TO ITS FOREIGN AES REPRESENTED A SIMPL E REIMBURSEMENT OF COST INCURRED BY THEM TO THIRD PA RTIES. IT CAN BE SEEN FROM PAGE 21 PARA 5.1 OF THE COMBINED TRIBU NAL ORDER ITA NO.5612/DEL/2011 5 DATED 18.12.2013 PASSED FOR THE ASSESSMENT YEARS 20 05-06, 2006-07 & 2008-09 THAT THERE IS SOME DISCUSSION ABO UT THE ASSESSEE MOVING AN APPLICATION UNDER RULE 29 OF THE ITAT RULES, 1963 SEEKING PERMISSION FOR FILING ADDITIONAL EVIDE NCE FOR CONSIDERATION. AFTER GOING THROUGH THE ENTIRE GAMUT OF THE AVAILABLE MATERIAL, BUT WITHOUT COMMENTING ON SUCH ADDITIONAL EVIDENCE, THE TRIBUNAL RESTORED THE ENTIRE ISSUE TO THE TPO FOR TAKING A FRESH DECISION IN ACCORDANCE WITH LAW. 2.4. BOTH THE SIDES BEFORE US ARE IN AGREEMENT THAT THE FACTS AND CIRCUMSTANCES FOR THE INSTANT YEAR ARE MUTATIS MUTANDIS SIMILAR TO THOSE OF THE PRECEDING YEAR. IT CAN BE S EEN THAT FOR THIS YEAR ALSO, THE ASSESSEE HAS MOVED AN APPLICATI ON UNDER RULE 29 OF THE ITAT RULES SEEKING TO FILE SOME ADDI TIONAL EVIDENCE. WITHOUT GOING INTO THE MERITS OF THIS ISS UE AND RESPECTFULLY FOLLOWING THE PRECEDENT, WE SET ASIDE THE IMPUGNED ORDER ON THIS SCORE AND SEND THE MATTER BA CK TO TPO/AO FOR A FRESH DECISION AS PER LAW AFTER ALLOWI NG A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESS EE. NEEDLESS TO SAY, THE ASSESSEE WILL BE AT LIBERTY TO FILE ANY FRESH EVIDENCE BEFORE THE AUTHORITIES IN SUCH DE NOVO EXAMINATION. ITA NO.5612/DEL/2011 6 3.1. THE NEXT ISSUE RAISED BEFORE US IS AGAINST TH E ADDITION OF RS.1,85,75,701/- ON ACCOUNT OF TRANSFER PRICING ADJ USTMENT FOR INTERNATIONAL TRANSACTION OF COST RECHARGES. THE FACTS OF THIS GROUND ARE THAT THE ASSESSEE INCURRED CERTAIN COSTS /EXPENSES THROUGH GROUP COMPANIES TOWARDS THIRD PARTIES AND R EIMBURSED THE SAME ON COST TO COST BASIS. ON BEING SHOW CAUSE D TO EXPLAIN THE CHARACTER OF THIS INTERNATIONAL TRANSAC TION, THE ASSESSEE STATED THAT THESE EXPENSES WERE IN THE NAT URE OF REIMBURSEMENT OF SALARY COSTS OF EXPATRIATE PERSONN EL DEPUTED TO THE ASSESSEE ON FULL TIME BASIS, RENT AND OTHER MISCELLANEOUS EXPENSES. THE ASSESSEES EXPLANATION THAT SUCH COST S WERE CHARGED BY GROUP COMPANIES TO THE ASSESSEE WITHOUT ANY MARK-UP WAS FOUND BY THE TPO TO BE NOT SUBSTANTIATE D WITH ANY EVIDENCE SUCH AS, SAMPLE COPIES OF DEBIT NOTES RAIS ED BY AES ON THE ASSESSEE, COPIES OF LEDGER ACCOUNTS SHOWING THE BOOKING OF RELEVANT EXPENSES/INVOICES IN THE ASSESSEES BOO KS OF ACCOUNT AND OTHER RELEVANT DOCUMENTS, DESPITE NECES SARY TIME ALLOWED FOR DOING THE NEEDFUL. IN THIS BACKDROP OF THE FACTS, THE TPO HELD THAT THE SAID PAYMENT WAS UNJUSTIFIED AND ACCORDINGLY TOOK THE ALP OF THIS TRANSACTION AT NIL. THIS RESUL TED INTO AN ITA NO.5612/DEL/2011 7 ADDITION OF RS.1.85 CRORE. THE ASSESSEE IS AGGRIEVE D AGAINST THIS ADDITION. 3.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND P ERUSING THE RELEVANT MATERIAL ON RECORD, IT IS NOTICED THAT THE ASSESSEE FAILED TO FURNISH THE RELEVANT DOCUMENTS CALLED FOR BY THE TPO TO CORROBORATE ITS EXPLANATION. IT CAN BE NOTICED T HAT THE ASSESSEE TRIED TO FILE CERTAIN DETAILS IN THIS REGA RD BEFORE THE DRP VIDE ITS LETTER DATED 5.8.2011, A COPY OF WHICH IS AVAILABLE ON PAGE 4 TO 6 OF THE PAPER BOOK. SUCH DETAILS APPE AR TO HAVE ESCAPED THE ATTENTION OF THE DRP. IT WAS CLAIMED TH AT SHRI RATINDRA R. PURI WAS SENT BY ITS FOREIGN AE AS MANA GING DIRECTOR OF THE ASSESSEE-COMPANY, WHOSE SALARY ETC. WAS PAID THROUGH ITS FOREIGN AE AND THE SAME WAS REIMBURSED AS SUCH WITHOUT ANY MARK-UP. SINCE THE NECESSARY DETAILS IN THIS RE GARD WERE NOT FILED BEFORE THE TPO AND THE DRP ALSO CHOSE NOT TO COMMENT UPON THE SAME, WE ARE OF THE CONSIDERED OPI NION THAT THE ENDS OF JUSTICE WOULD MEET ADEQUATELY IF THE IM PUGNED ORDER ON THIS ISSUE IS ALSO SET ASIDE AND THE MATTE R IS RESTORED TO THE FILE OF TPO/AO. WE ORDER ACCORDINGLY AND DIR ECT THEM TO DECIDE THIS ISSUE AFRESH AS PER LAW AFTER ALLOWING THE REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESS EE. NO PART ITA NO.5612/DEL/2011 8 OF THE DISCUSSION MADE ABOVE SHOULD BE CONSTRUED AS OUR VIEW ON THE CORRECT NATURE OF THE REAL TRANSACTION AND A LLOWABILITY OR OTHERWISE OF THIS AMOUNT. HERE AGAIN, WE CLARIFY TH AT THE ASSESSEE WILL BE AT LIBERTY TO LEAD ANY FRESH EVIDE NCE IN SUPPORT OF THE DEDUCTION AND SIMULTANEOUSLY THE AO WILL ALS O BE ENTITLED TO EXAMINE ANY ASPECT ON THIS MATTER BEFORE REACHIN G FINAL CONCLUSION ABOUT DEDUCTIBILITY OR OTHERWISE OF THIS EXPENDITURE. 4.1. THE ONLY OTHER ISSUE WHICH REMAINS IN THIS AP PEAL IS AGAINST THE ADDITION OF RS.1,90,92,020/- ON ACCOUNT OF TP ADJUSTMENT IN IEC SEGMENT. 4.2. BRIEFLY STATED, THE FACTS OF THIS GROUND ARE T HAT THE TPO OBSERVED THAT THE ASSESSEE WAS PROVIDING SOFTWARE DEVELOPMENT SERVICES TO ITS AE UNDER THIS SEGMENT. THE ASSESSEE DETERMINED THE ALP OF THIS TRANSACTION BY APPLYING TNMM AS THE MOST APPROPRIATE METHOD WITH PROFIT LEV EL INDICATOR (PLI) OF OPERATING PROFIT / TOTAL COST (O P/TC). THE ASSESSEE SHOWED ITS PLI AT 10.86% AGAINST THE AVERA GE PLI OF CERTAIN COMPARABLES ON THE BASIS OF MULTIPLE YEAR D ATA AT 12.74%. THAT IS HOW, THE ASSESSEE DEMONSTRATED THA T THIS INTERNATIONAL TRANSACTION WAS AT THE ALP. THE TPO DID NOT APPROVE THE APPLICATION OF MULTIPLE YEAR DATA. AFT ER MAKING ITA NO.5612/DEL/2011 9 CERTAIN INCLUSIONS AND EXCLUSIONS IN/FROM THE LIST OF COMPARABLES, THE TPO SELECTED 26 COMPANIES AS COMPA RABLE WHICH HAVE BEEN LISTED ON PAGES 157 AND 158 OF HIS ORDER. BY CONSIDERING THE ARITHMETIC MEAN MARGIN OF THESE COM PARABLES (AFTER ALLOWING WORKING-CAPITAL ADJUSTMENT) AT 24.4 6%, THE TPO COMPUTED ADJUSTMENT TO THE TUNE OF `1,90,92,020/-. THAT IS HOW THE ADDITION WAS MADE, AGAINST WHICH THE ASSES SEE IS AGGRIEVED BEFORE US. 4.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE RELEVANT MATERIAL ON RECORD. AT THE OUTSET, WE WAN T TO MAKE IT CLEAR THAT THE ASSESSEE HAS ONLY ASSAILED THE INCLU SION OF FOURTEEN COMPANIES IN THE LIST OF COMPARABLES BY CO NTENDING THAT THEIR FUNCTIONAL PROFILE IS DIFFERENT. APART FROM THAT NO OTHER ASPECT OF THE TP ADJUSTMENT HAS BEEN CHALLENG ED. AS SUCH, WE WILL CONFINE OURSELVES ONLY TO EXAMINING A S TO WHETHER THE COMPANIES SO CHALLENGED ARE, IN FACT, COMPARABL E OR NOT. 4.4. BEFORE EMBARKING UPON THE EXERCISE OF MAKING COMPARISON, IT IS CRUCIAL TO FIRST CONSIDER THE NAT URE OF WORK DONE BY THE ASSESSEE UNDER THIS SEGMENT. ON THE EN TITY LEVEL, THE ASSESSEE HAS TWO FACTORIES IN NASIK, ONE FACTOR Y IN HALOL, ONE FACTORY IN CHENNAI, ONE PROGRAMME ADMINISTRATIO N OFFICE IN ITA NO.5612/DEL/2011 10 PUNE AND ONE ENGINEERING CENTRE AT THANE. WHEREAS THE FACTORIES ARE ENGAGED IN THE MANUFACTURE OF SEATS FOR VARIOUS MOTOR CAR COMPANIES, INDIAN ENGINEERING CENTRE (IEC ) AT THANE IS ENGAGED IN PROVIDING DESIGN AND ENGINEERING SUPP ORT MAINLY TO ITS GROUP COMPANIES IN RESPECT OF AUTOMOTIVE SEA TING, SYSTEMS AND INTERIORS. IT IS THIS IEC SEGMENT, WITH WHICH WE ARE PRESENTLY CONCERNED. THE SUPPORT UNDER THIS SEGMEN T IS PROVIDED MAINLY TO GROUP COMPANIES BY HELPING THEM IN RENDERING DESIGN AND ENGINEERING SERVICES TO THEIR CUSTOMERS. THE ASSESSEE DOES NOT HAVE ANY COMMUNICATION WITH T HE ULTIMATE CUSTOMERS OF ITS GROUP COMPANIES. VARIOUS STAGES IN THE OVERALL PROVISION OF DESIGN AND ENGINEERING SER VICES BY LEAR GROUP TO ITS CUSTOMERS, ARE AS UNDER:- A) UNDERSTANDING OF THE DETAILED REQUIREMENTS/ SPECIFICATIONS OF THE CUSTOMER. B) BASED ON THE ABOVE, CONCEPTUALISE THE DESIGNS. C) BASED ON THE SPECIFICATIONS AND THE CONCEPTUALIS ED DESIGN FRAMEWORK, CREATE/PREPARE THE DESIGNS. D) ONCE THE DESIGNS ARE CREATED/PREPARED AND FINALI SED, THEY ARE TESTED AND SIMULATED. TESTING AND ITA NO.5612/DEL/2011 11 SIMULATION IS ESSENTIALLY DONE TO ENSURE PROPER FUNCTIONING OF THE PRODUCT WHEN ALL ITS COMPONENTS/PARTS ARE ASSEMBLED. E) THE DESIGNS ARE THEN APPROVED BY THE CUSTOMER. F) ONCE THE DESIGNS ARE APPROVED, PROTOTYPES ARE MA DE AS PER THE DESIGNS. G) THE PROTOTYPES ARE TESTED FOR FUNCTIONALITY, AND THE SAME ARE THEN APPROVED BY THE CUSTOMER. H) ONCE THE PROTOTYPES ARE APPROVED, THE TOOLS AND MOULDS TO BE USED IN THE MANUFACTURING PROCESS OF EACH COMPONENT, ARE MANUFACTURED. THESE TOOLS AND MOULDS ARE MANUFACTURED BY SUPPLIERS (COULD BE DOMESTIC OR OVERSEAS), AND IN THEIR SELECTION, LEAR GROUP MAY PROVIDE NECESSARY ASSISTANCE TO THE CUSTOMER. THE COSTS OF MANUFACTURING THESE TOOLS AND MOULDS ARE BORNE BY THE CUSTOMER. FURTHER, LEA R GROUP MAY CO-ORDINATE AND OVERSEE THE MANUFACTURING OF THESE TOOLS AN MOULDS. I) SUBSEQUENT TO THE MANUFACTURE OF TOOLS AND MOULD S, THEY ARE APPROVED BY THE CUSTOMER. USING THESE ITA NO.5612/DEL/2011 12 TOOLS AND MOULDS, SAMPLES ARE MANUFACTURED BY THE SUPPLIER AND PROVIDED TO THE CUSTOMER FOR APPROVAL. J) HAVING PUT THE SAMPLES MANUFACTURED INTO APPLICATION, THE CUSTOMER MAY SUGGEST FURTHER MODIFICATIONS AND CHANGES. AFTER THE SAMPLES ARE FINALLY APPROVED, COMMERCIAL PRODUCTION OF THE INTERIORS BEGINS. 4.5. THE ASSESSEE IS INVOLVED IN STAGES C) AND D) A LONE. IN OTHER WORDS, THE OTHER STAGES IN THE PROVISION OF D ESIGN AND ENGINEERING SERVICES BY THE LEAR GROUP TO ITS CUSTO MERS ARE PERFORMED BY THE AES INDEPENDENT OF THE ASSESSEES HELP. TO PUT IT SIMPLY, WHEREAS THE GROUP COMPANIES UNDERSTA ND THE TOTAL REQUIREMENTS/SPECIFICATIONS OF THE CUSTOMER A ND CONCEPTUALISE THE DESIGNS, THE ASSESSEE, BASED ON S UCH SPECIFICATIONS, PREPARES THE DESIGNS, TESTS AND SIM ULATES TO ENSURE THE PROPER FUNCTIONING OF THE PRODUCT WHEN A LL ITS COMPONENTS WOULD BE ASSEMBLED. THE WORK DONE BY TH E ASSESSEE GOES BACK TO THE AE, WHO THEN GETS SUCH DE SIGNS APPROVED FROM THE FINAL CUSTOMERS AND, THEREAFTER, PROTOTYPES ARE MADE AS PER THE DESIGNS WHICH ARE TESTED FOR FU NCTIONALITY AND THEN APPROVED BY THE CUSTOMER. ONCE THE PROTOT YPES ARE ITA NO.5612/DEL/2011 13 APPROVED, THE AES GET MANUFACTURED TOOLS AND MOULDS FOR THE PURPOSES OF MANUFACTURING COMPONENTS AS PER THE DES IGNS FINALLY APPROVED BY THE CUSTOMER. SUCH TOOLS AND M OULDS ARE THEN APPROVED BY THE CUSTOMERS AND, THEREAFTER, THE ACTUAL MANUFACTURING STARTS. THUS, IT CAN BE SEEN THAT IN THE OVERALL FRAMEWORK OF DESIGNS AND ENGINEERING OF COMPONENTS, THE ASSESSEES ROLE IS LIMITED TO PREPARING SOFTWARE FO R DESIGNS AS PER THE SPECIFICATIONS GIVEN BY ITS AE AND THEN TES TING AND SIMULATING THE WORK DONE BY IT BEFORE HANDING OVER SUCH SOFTWARE TO ITS AES. TO PUT IT SIMPLY, THE ASSESSE E IS SIMPLY ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT SERVICES TO ITS AE, WHICH WORK ENDS BEFORE THE APPROVAL OF DESIGNS BY T HE FINAL CUSTOMERS FOR MANUFACTURING AT A LATER STAGE. WITH THE ABOVE IDEA OF THE NATURE OF ACTIVITY CARRIED OUT BY THE A SSESSEE UNDER THIS SEGMENT, NOW, LET US COMPARE THE COMPANIES CHO SEN BY THE TPO AS TO THEIR COMPARABILITY. 4.6. AT THE VERY BEGINNING OF VENTURING TO MAKE COM PARISON OF THE FUNCTIONAL PROFILE OF THE ASSESSEE WITH THE COM PARABLE COMPANIES, THE LD. AR POINTED OUT THAT THE TRIBUNAL CONSIDERED AN IDENTICAL CASE IN TOLUNA INDIA PVT. LTD. VS. ACI T (ITA NO.5645/DEL/2011). HE CONTENDED THAT THE TRIBUNAL VIDE ITS ITA NO.5612/DEL/2011 14 ORDER DATED 26.08.2014, EXAMINED THE COMPARABILITY OF ALL THE COMPANIES IN QUESTION AND THEN TOOK DECISION AS TO THEIR COMPARABILITY OR OTHERWISE. IT WAS SUBMITTED THAT THE TPO IN THAT CASE ALSO CHOSE EXACTLY THE SAME COMPANIES AS WERE CHOSEN FOR THE ASSESSEE AND FURTHER THE ASSESSMENT YEAR IN BOTH IS ALSO THE SAME. IT WAS, THEREFORE, PRAYED BY THE LD. AR THAT THE DECISION TAKEN BY THE TRIBUNAL IN THE CASE OF TOLUNA INDIA PVT. LTD., BE APPLIED TO THE FACTS OF THE INS TANT CASE AS WELL. 4.7. THE LD. DR OPPOSED THIS CONTENTION BY STATING THAT TOLUNA INDIA PVT. LTD., IS ENGAGED IN A DIFFERENT ACTIVITY AND ITS MODEL OF REMUNERATION IS ALSO DIFFERENT. IT WAS SUBMITTED T HAT TOLUNA INDIA PVT. LTD., IS BOTH A SERVICE PROVIDER AND ALS O A SOFTWARE DEVELOPER. 4.8. IT IS APPARENT FROM THE ORDER PASSED IN THE CASE OF TOLUNA INDIA PVT. LTD. (SUPRA) THAT THE ASSESSEE THEREIN W AS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND ALSO PROVI DING SOFTWARE RELATED SERVICES TO GREENFIELD GROUP. THA T ASSESSEE UNDERTOOK PROVISION OF CONTRACT IT SERVICES TO ITS AES AND WAS COMPENSATED ON COST PLUS 15%. THE TRIBUNAL FOUND T HAT ASSESSEE TO BE BOTH A SOFTWARE RELATED SERVICE PROV IDER AND ITA NO.5612/DEL/2011 15 ALSO A SOFTWARE DEVELOPER. DUE TO COMMON POOL OF TH E REVENUES OF THAT ASSESSEE AND GETTING COMPENSATED UNIFORMLY AT COST PLUS 15%, THE TRIBUNAL HELD THAT : THE COMPANIES E NGAGED EITHER IN SOFTWARE DEVELOPMENT OR PROVIDING SOFTWAR E SERVICE OR DOING BOTH, ARE FUNCTIONALLY COMPARABLE TO THE ASSE SSEE. 4.9. WHEN WE TURN TO THE FACTS OF THE INSTANT C ASE, WE FIND THAT THE TPO HAS CLASSIFIED THE ASSESSEE, AND RIGHT LY SO, AS PROVIDING SOFTWARE DEVELOPMENT SERVICES. IN OUR CON SIDERED OPINION, THE MODEL OF REMUNERATION CANNOT BE DECISI VE OF THE NATURE OF ACTIVITIES CARRIED OUT BY THE ASSESSEE. T HE FACT THAT THE ASSESSEE IN QUESTION HAS BEEN COMPENSATED AT AN HOURLY RATE, AND REMUNERATION IN THE CASE OF TOLUNA (SUPRA ) IS AT COST PLUS 15%, CANNOT MAKE THEM FUNCTIONALLY DIFFERENT O N THIS SCORE. WHEN WE KEEP THE FINE DISTINCTION BETWEEN TH E SOFTWARE RELATED SERVICES AND SOFTWARE DEVELOPMENT SERVICES IN MIND, IT BECOMES NOTICEABLE THAT THE SCOPE OF THE ACTIVITY O F TOLUNA IS WIDER THAN THAT OF THE ASSESSEE INASMUCH AS TOLUNA INDIA PVT. LTD., IS BOTH A SOFTWARE RELATED SERVICE PROVIDER A ND ALSO A SOFTWARE DEVELOPER. ON THE OTHER HAND, THE ASSESSEE IS ONLY ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT SERVICES. SEEN FROM THAT ANGLE, IT BECOMES MANIFEST THAT THE ACTIV ITY DONE BY ITA NO.5612/DEL/2011 16 THE ASSESSEE IS A PART OF THE ACTIVITIES CARRIED ON BY TOLUNA INDIA PVT. LTD. IF A PARTICULAR CASE IS HELD TO BE NOT COMPARABLE TO TOLUNA INDIA PVT. LTD., THAT CASE WOULD BE INCOM PARABLE TO THE ASSESSEE ALSO UNLESS IT IS SHOWN THAT SUCH COMP ARABLE WAS ENGAGED EITHER IN PROVIDING EXCLUSIVE SOFTWARE RELA TED SERVICES OR BOTH SOFTWARE RELATED SERVICES AND SOFTWARE DEVE LOPMENT SERVICES JOINTLY, WHICH ARE DIFFERENT FROM SIMPLE S OFTWARE DEVELOPMENT SERVICES PROVIDED BY THE ASSESSEE. NO SUCH DISTINCTION HAS BEEN BROUGHT TO OUR NOTICE BY THE L D. DR IN RESPECT OF THE COMPANIES CHALLENGED BY THE ASSESSEE AS NOT COMPARABLE. IN VIEW OF THE ABOVE DISCUSSION, WE FI ND NO HESITATION IN HOLDING THAT IN THE PRESENT FACTS AND CIRCUMSTANCES, THE COMPANIES WHICH HAVE BEEN CONSI DERED AS INCOMPARABLE TO TOLUNA INDIA PVT. LTD. (SUPRA), CAN NOT BE CONSIDERED AS COMPARABLE TO THE ASSESSEE AS WELL. 4.10. IT IS NOTICED THAT THE LD. AR HAS CHALLENGE D THE INCLUSION OF 14 COMPANIES. WHEN WE CONSIDER THE TRIBUNAL OR DER IN THE CASE OF TOLUNA INDIA PVT. LTD. (SUPRA), THE COMPAR ABILITY OR OTHERWISE OF THE SUCH COMPANIES CAN BE SUMMARISED A S UNDER:- ITA NO.5612/DEL/2011 17 SL.NO. NAME OF THE COMPANY WHETHER HELD TO BE COMPARABLE. 1. AVANI CIMCON TECHNOLOGIES LTD. YES 2. CELESTIAL LABS LTD. NO 3. E - ZEST SOLUTIONS LTD. YES 4. FLEXTRONICS SOFTWARE SYSTEMS LTD. (SEG.) NO 5. INFOSYS TECHNOLOGIES LTD. NO 6. ISHIR INFOTECH LTD. YES 7. KALS INFORMATION SYSTEMS LTD. (SEG.) NO 8. LUCID SOFTWARE LTD. NO 9. MEGASOFT LTD. NO 10. PERSISTENT SYSTEMS LTD. NO 11. SASKEN COMMUNICATION NO 12. TATA ELXI LTD. (SEG.) NO 13. THIRDWARE SOLUTIONS LTD. YES 14 . WIPRO LTD. (SEG.) NO 4.11. FOLLOWING THE ORDER IN THE CASE OF TOLUNA I NDIA (SUPRA), WE HOLD THAT THE COMPANIES LISTED AT SL. NOS. 1, 3, 6 AND 13 ARE COMPARABLE, WHILE THE OTHERS ARE NOT. IN THE FINAL ANALYSIS, WE SET ASIDE THE IMPUGNED ORDER ON THIS ISSUE AND SEND THE MATTER BACK TO THE FILE OF TPO/AO FOR THE DETERMINATION OF THE ALP OF THE INTERNATIONAL TRANSACTION UNDER IEC SEGMENT AFR ESH IN THE LIGHT OF OUR ABOVE DIRECTIONS. ITA NO.5612/DEL/2011 18 5. IN THE RESULT, THE APPEAL IS ALLOWED FOR STATIST ICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 22/12/2014. S SS SD DD D/ // /- -- - S SS SD DD D/ // /- -- - ( (( (GEORGE GEORGE K. GEORGE GEORGE K. GEORGE GEORGE K. GEORGE GEORGE K.) )) ) (R. S. SYAL) (R. S. SYAL) (R. S. SYAL) (R. S. SYAL) JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER DATED: 22 /12/2014 DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTR ASSISTANT REGISTR ASSISTANT REGISTR ASSISTANT REGISTRAR ARAR AR