M/s Success Factors Business Solutions India Private Limited, Bangalore V. ITO, Bangalore

ITA 674/BANG/2016

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 7681 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 5 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-08-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 12-08-2020
• Assessment Year: 2011-2012
• Appeal Filed On: 30-03-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MUZAFFAR HUSSAIN BENGALURU
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Set aside
• Section: 64; 13; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI B R BASKARAN , ACCOUNTANT MEMBER IT A NO. 674/BANG/2016 ASSESSMENT YEAR: 2011 - 12 M/S.SAP LABS INDIA PRIVATE LIMITED, (SUCCESSOR IN INTEREST OF ERSTWHILE M/S. SUCCESS FACTORS BUSINESS SOLUTIONS INDIA PRIVATE LIMITED, NO.138, EXPORT PROMOTION INDUSTRIAL PARK, WHITE FIELD, BENGALURU-560 066. PAN : AAMCS9736N VS. THE INCOME-TAX OFFICER, WARD-6(1)(4), BANGALORE. APPELLANT RE SPONDENT APPELLANT BY : SHRI ALIASGAR RAMPURWALA, CA RESPONDENT BY : SHRI MUZAFFAR HUSSAIN, CIT(DR)(ITAT), BENGALURU. DATE OF HEARING : 13 .0 8 .2020 DATE OF PRONOUNCEMENT : 31 .0 8 .2020 O R D E R PER N.V. VASUDEVAN, VICE PRESIDENT THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORD ER DATED 31.3.2015 OF ITO, WARD-6(1)(4), BANGALORE (HEREINAF TER REFERRED TO AS THE ASSESSING OFFICER, AO IN SHORT) PASSED U/S.143(3) READ WITH SECTION 144C(13) OF THE INCOME TAX ACT, 1961 (ACT) IN RELAT ION TO ASSESSMENT YEAR 2011-12. 2. THE ASSESSEE IN ENGAGED IN THE BUSINESS OF PRO VISION OF SOFTWARE DEVELOPMENT SERVICES (SWD SERVICES), AND MARKETING AND SALES SUPPORT ITA NO.674/BANG/2016 PAGE 2 OF 13 SERVICES (MSS) TO ITS WHOLLY OWNED HOLDING COMPANY. IN TERMS OF THE PROVISIONS OF SEC.92-A OF THE ACT, THE ASSESSEE AND ITS WHOLLY OWNED HOLDING COMPANY WERE ASSOCIATED ENTERPRISES ('AES') . IN TERMS OF SEC.92B(1) OF THE ACT, THE TRANSACTION OF PROVIDING SWD SERVICES AND MSS WERE INTERNATIONAL TRANSACTION I.E., A TRANSACTIO N BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES, EITHER OR BOTH OF WHOM ARE NON-RESIDENTS, IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR IN TANGIBLE PROPERTY, OR PROVISION OF SERVICES, OR LENDING OR BORROWING MONE Y, OR ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOME , LOSSES OR ASSETS OF SUCH ENTERPRISES, AND SHALL INCLUDE A MUTUAL AGREEM ENT OR ARRANGEMENT BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES FOR THE ALLOCATION OR APPORTIONMENT OF, OR ANY CONTRIBUTION TO, ANY COST OR EXPENSE INCURRED OR TO BE INCURRED IN CONNECTION WITH A BENEFIT, SERVICE O R FACILITY PROVIDED OR TO BE PROVIDED TO ANY ONE OR MORE OF SUCH ENTERPRISES. I N TERMS OF SEC.92(1) OF THE ACT, THE ANY INCOME ARISING FROM AN INTERNATION AL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. I N THIS APPEAL BY THE ASSESSEE, THE DISPUTE IS WITH REGARD TO DETERMINATI ON OF ARMS LENGTH PRICE (ALP) IN RESPECT OF THE AFORESAID TWO INTERNATIONAL TRANSACTION OF (I) RENDERING SWD SERVICES TO THE AE AND (II) RENDERING OF MSS TO THE AE. WE SHALL DEAL EACH OF THE INTERNATIONAL TRANSACTIONS S EPARATELY. SOFTWARE DEVELOPMENT SERVICES SEGMENT 3. AS FAR AS THE PROVISION OF SOFTWARE DEVELOPMENT SERVICES ARE CONCERNED, THE ASSESSEE FILED A TRANSFER PRICING ST UDY (TP STUDY) TO JUSTIFY THE PRICE PAID IN THE INTERNATIONAL TRANSACTION AS AT ALP BY ADOPTING THE TRANSACTION NET MARGIN METHOD (TNMM) AS THE MOST AP PROPRIATE METHOD (MAM) OF DETERMINING ALP. THE ASSESSEE SELECTED OPE RATING PROFIT/TOTAL COST (OP/TC) AS THE PROFIT LEVEL INDICATOR (PLI) FO R THE PURPOSE OF COMPARISON. THE OP/TC OF THE ASSESSEE WAS ARRIVED AT 12.00% BY THE ASSESSEE IN ITS TP STUDY. THE OPERATING INCOME WAS RS.14,79,85,314/- ITA NO.674/BANG/2016 PAGE 3 OF 13 AND THE OPERATING COST WAS RS.13,21,27,866/-. THE OPERATING PROFIT (OPERATING INCOME OPERATING COST WAS RS.1,58,57,4 48/-. THUS THE OP/TC WAS ARRIVED AT 12.00%. THE ASSESSEE CHOSE COM PANIES WHO ARE ENGAGED IN PROVIDING SIMILAR SERVICES SUCH AS THE A SSESSEE FROM THE PROWESS AND CAPITALINE PLUS DATA BASE. THE ASSESSE E IDENTIFIED 7 COMPANIES WHOSE AVERAGE ARITHMETIC MEAN OF PROFIT M ARGIN WAS LESS THAN AND COMPARABLE THE OPERATING MARGIN OF THE ASSESSEE . THE ASSESSEE THEREFORE CLAIMED THAT THE PRICE IT CHARGED IN THE INTERNATIONAL TRANSACTION SHOULD BE CONSIDERED AS AT ARMS LENGTH. 4. THE TPO TO WHOM THE DETERMINATION OF ALP WAS REF ERRED TO BY THE AO, ACCEPTED TNMM AS THE MAM AND ALSO USED THE SAME PLI FOR COMPARISON I.E., OP/TC. HE ALSO SELECTED COMPARABL E COMPANIES FROM THE SAME DATABASE FROM WHICH THE ASSESSEE HAD CHOSEN CO MPARABLE COMPANIES, VIZ., PROWESS AND CAPITALINE PLUS. THE TPO REJECTED ALL THE 7 COMPANIES CHOSEN BY THE ASSESSEE AS COMPARABLE COMP ANIES. THE TPO ON HIS OWN IDENTIFIED 13 COMPANIES AS COMPARABLE WI TH THE ASSESSEE COMPANY AND WORKED OUT THE AVERAGE ARITHMETIC MEAN OF THEIR PROFIT MARGINS AS FOLLOWS:- ITA NO.674/BANG/2016 PAGE 4 OF 13 5. THE TPO COMPUTED THE ADDITION TO TOTAL INCOME ON ACCOUNT OF ADJUSTMENT TO ALP AS FOLLOWS:- COMPUTATION OF ARM'S LENGTH PRICE BY TPO AND THE AD JUSTMENT MADE ARM'S LENGTH MEAN MARGIN ON COST 24.82% LESS: WORKING CAPITAL ADJUSTMENT 1.63% ADJUSTED MEAN MARGIN OF THE COMPARABLES A 23.19% OPERATING COST B RS. 13,21,27,866/- ARM'S LENGTH PRICE (123.19% OF OPERATING COST) C=B*123.19% RS. 16,27,68,318/- PRICE RECEIVED D RS. 1 4,79,85,314/ - SHORT FALL BEING ADJUSTMENT U/ S. 92CA E=C - D RS. 1,47,83,004/- THUS A SUM OF RS.1,47,83,004/- WAS ADDED TO THE TOT AL INCOME OF THE ASSESSEE ON ACCOUNT OF DETERMINATION OF ALP FOR PRO VISION OF SWD SERVICES BY THE ASSESSEE TO ITS AE. 6. THE ASSESSEE FILED OBJECTIONS BEFORE THE DISPUTE S RESOLUTION PANEL (DRP) AGAINST THE DRAFT ASSESSMENT ORDER PASSED BY THE AO WHEREIN THE ADDITION SUGGESTED BY THE TPO AS ADJUSTMENT TO ALP WAS ADDED TO THE TOTAL INCOME OF THE ASSESSEE BY THE AO. THE DRP EX CLUDED 6 COMPARABLE COMPANIES VIZ., INFOSYS LTD., LARSEN & TOUBRO LTD., (III) MINDTREE LTD., (IV) PERSISTENT SYSTEMS LTD., (V) SASKEN COMMUNICATION T ECHNOLOGIES LTD., AND (VI) TATA ELXSI LTD., ON THE APPLICATION OF TUR NOVER FILTER OF MORE THAN RS.200 CRORES. THE ASSESSEES CLAIM FOR ALLOWING W ORKING CAPITAL ADJUSTMENT ON ACTUAL BASIS WITHOUT RESTRICTING THE WORKING CAPITAL ADJUSTMENT TO THE WORKING CAPITAL MEAN MARGIN OF CO MPARABLE COMPANIES WAS NOT GIVEN BY THE DRP. THE DRP ALSO DID NOT AGRE E TO PLEA OF THE ASSESSEE FOR EXCLUSION OF ACROPETAL TECHNOLOGIES LT D., E-INFOCHIPS LTD., ICRA TECHNO ANALYTICS LTD., AND E-ZEST SOLUTIONS LT D., TO THE EXTENT THE ASSESSEE DID NOT GET RELIEF FROM THE DRP, THE ASSES SEE HAS PREFERRED APPEAL BEFORE THE TRIBUNAL. THE SPECIFIC GROUNDS O F CHALLENGE ARE CONTAINED IN THE REVISED GROUNDS OF APPEAL FILED BE FORE THE TRIBUNAL. THE ITA NO.674/BANG/2016 PAGE 5 OF 13 GROUNDS RELATING TO SWD SERVICES SEGMENT THAT WERE PRESSED FOR ADJUDICATION WERE GROUND NO. 2.6 IN WHICH THE ASSES SEE HAS PROJECTED GRIEVANCE WITH REGARD TO NON-EXCLUSION OF THE FOLLO WING FOUR COMPANIES BY THE DRP VIZ., OF ACROPETAL TECHNOLOGIES LTD., E-INF OCHIPS LTD., ICRA TECHNO ANALYTICS LTD., AND E-ZEST SOLUTIONS LTD. GR.NO.2. 6 READS AS FOLLOWS:- 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE DRP/AO/TPO ERRED IN: 2.6 INCLUDING ACROPETAL TECHNOLOGIES LTD., E-ZE ST SOLUTIONS LIMITED, E-INFOCHIPS LTD. AND ICRA TE CHNO ANALYTICS LTD. IN ITS COMPARABILITY ANALYSIS THAT FAIL THE TEST OF COMPARABILITY AS COMPARED TO THE APPELLANT IN RESPE CT OF SOFTWARE DEVELOPMENT SERVICES ( CORRESPONDING TO ORIGINAL GROUND 2.6) . 7. OUT OF THE 4 COMPARABLE COMPANIES, THE ASSESSEE DID NOT PRESS FOR EXCLUSION OF COMPARABLE COMPANY E-ZEST SOLUTIONS LT D. 8. THE OTHER GROUND PRESSED FOR ADJUDICATION IN THE SWD SERVICES SEGMENT IS GR.NO.2.10 REGARDING THE ACTION OF THE D RP IN NOT ALLOWING WORKING CAPITAL ADJUSTMENT ON ACTUAL BASIS WITHOUT RESTRICTING THE WORKING CAPITAL ADJUSTMENT TO THE WORKING CAPITAL MEAN MARG IN OF COMPARABLE COMPANIES. GR.NO.2.10 READS AS FOLLOWS:- 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE DRP/AO/TPO ERRED IN: 2.10 ERRONEOUSLY COMPUTING THE WORKING CAPITAL ADJ USTMENT AND LIMITING THE WORKING CAPITAL ADJUSTMENT FOR SOFTWAR E DEVELOPMENT SERVICES AND IN NOT PROVIDING THE WORKING CAPITAL A DJUSTMENT FOR SALES AND MARKETING SUPPORT SERVICES RENDERED BY TH E APPELLANT, TO ACCOUNT FOR THE WORKING CAPITAL DIFFERENCE BASED ON THE ACTUAL WORKING CAPITAL POSITION OF THE APPELLANT VIS--VIS COMPARABLE COMPANIES ( CORRESPONDING TO ORIGINAL GROUND 2.8). ITA NO.674/BANG/2016 PAGE 6 OF 13 9. WE WILL FIRST DEAL WITH THE PLEA OF THE ASSESSEE FOR EXCLUSION OF COMPARABLE COMPANIES CHOSEN BY THE TPO. THE FIRST C OMPANY WHICH THE ASSESSEE SEEKS EXCLUSION IS ACROPETAL TECHNOLOGIES LTD. ON EXCLUSION OF THIS COMPANY, WE HAVE HEARD THE RIVAL SUBMISSIONS. WE FIND THAT THE TPO HAS HIMSELF APPLIED A FILTER FOR EXCLUSION OF COMPA NIES FOR THE PURPOSE OF COMPARISON, VIZ., REVENUE FROM SOFTWARE DEVELOPMENT SERVICE SHOULD BE MORE THAN 75% OF THE TOTAL OPERATING REVENUE. THE ADMITTED FACTUAL POSITION IS THAT REVENUE FROM SOFTWARE DEVELOPMENT SERVICE OF THIS COMPANY WAS 81.40 CRORES OUT OF THE TOTAL OPERATING REVENUE OF RS.141 CRORES. THUS THE REVENUE FROM SOFTWARE DEVELOPMENT IS ADMIT TEDLY LESS THAN 75% OF THE TOTAL OPERATING REVENUE OF THIS COMPANY. TH EREFORE HIS COMPANY HAS TO BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIE S. IT WAS ALSO BROUGHT TO OUR NOTICE THAT THE ITAT BANGALORE IN THE CASE O F APPLIED MATERIALS PVT. LTD., IN IT (TP) A.NO.17 & 39/BANG/2016 FOR AY 2011 -12 ORDER DATED 21.9.2016 NOTICING THE AFORESAID FACTS EXCLUDED THI S COMPANY FROM THE LIST OF COMPARABLE COMPANIES IN THE CASE OF A SOFTWARE D EVELOPMENT SERVICE PROVIDER SUCH AS THE ASSESSEE. WE THEREFORE HOLD T HAT THIS COMPANY SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLE COMP ANIES. 10. THE NEXT COMPANY THAT IS SOUGHT TO BE EXCLUDED BY THE ASSESSEE IS ICRA TECHNO ANALYTICS LTD. AS FAR AS ICRA TECHNO A NALYTICS LTD., IS CONCERNED, THIS TRIBUNAL IN THE CASE OF APPLIED MAT ERIALS INDIA PVT. LTD., (SUPRA) TOOK THE VIEW THAT THIS COMPANY WAS ENGAGED IN DIVERSIFIED ACTIVITIES LIKE SOFTWARE DEVELOPMENT, CONSULTANCY E NGINEERING SERVICES, WEB DEVELOPMENT AND HOSTING AND SUBSTANTIALLY DIVERSIFI ED ITSELF INTO DOMAIN OF BUSINESS ANALYSIS AND BUSINESS PROCESS OUT SOURCING . THEREFORE, IT WAS HELD THAT THIS COMPANY IS FUNCTIONALLY NOT COMPARAB LE WITH A SOFTWARE DEVELOPMENT SERVICES PROVIDER. ITA NO.674/BANG/2016 PAGE 7 OF 13 11. THE NEXT COMPANY THAT IS SOUGHT TO BE EXCLUDED BY THE ASSESSEE IS E-INFOCHIPS LTD. AS FAR AS E-INFOCHIPS LTD., IS CO NCERNED OUR ATTENTION WAS DRAWN TO DECISION OF THE DELHI ITAT IN THE CASE OF SAXO INDIA PVT. LTD., VS. ACIT 67 TAXMANN.COM 155 WHEREIN THE DELHI TRIBUNAL TOOK NOTE OF THE FACT THAT THE OPERATING REVENUE OF THIS COMPANY WAS FROM SOFTWARE DEVELOPMENT, HARDWARE MAINTENANCE, INFORMATION TECH NOLOGY, CONSULTANCY ETC. THE TRIBUNAL FOUND THAT 15% OF THE TOTAL REVEN UE WAS FROM HARDWARE MAINTENANCE. THE OTHER SEGMENTAL INFORMATION WAS NO T AVAILABLE. SINCE NO SEGMENTAL DATA WAS AVAILABLE INDICATING OPERATING P ROFIT FROM SOFTWARE DEVELOPMENT SERVICES, THIS COMPANY WAS EXCLUDED FRO M THE LIST OF COMPARABLE COMPANIES. THUS GR.NO.2.6 IS PARTLY ALLO WED. 12. AS FAR AS GR.NO.2.10 RELATING TO THE ACTION OF THE DRP IN NOT ALLOWING WORKING CAPITAL ADJUSTMENT ON ACTUAL BASIS WITHOUT RESTRICTING THE WORKING CAPITAL ADJUSTMENT TO THE WORKING CAPITAL MEAN MARG IN OF COMPARABLE COMPANIES, IS CONCERNED, IT WAS SUBMITTED BY THE L EARNED COUNSEL FOR THE ASSESSEE THAT THE TPO, WHILE GRANTING WORKING CAPIT AL ADJUSTMENT IN RESPECT OF THE ASSESSEE'S SWD SEGMENT, HAS ARBITRA RILY AND UNREASONABLE RESTRICTED THE SAME AT 1.63% , WITHOUT PROVIDING AN Y LEGAL BASIS OR RATIONALE FOR LIMITING THE WORKING CAPITAL ADJUSTMENT TO THE SAID PERCENTAGE. THE DRP ALSO, VIDE ITS DIRECTIONS UPHELD THIS ACTION OF THE TPO. IT WAS SUBMITTED THAT THIS DIRECTION OF THE DRP IS ERRONEOUS AND MERITS T HE INTERFERENCE OF THIS HON'BLE TRIBUNAL. IT WAS SUBMITTED THAT WORKING CAP ITAL ADJUSTMENT MUST BE GRANTED IN FULL WITHOUT THERE BEING ANY ARBITRARY A ND ADHOC UPPER CAP OR RESTRICTION TO THE SAME, AS HAS BEEN DONE BY THE TP O. THE WORKING CAPITAL ADJUSTMENT HAS BEEN ARRIVED AT BY THE TPO ON THE BA SIS OF A SCIENTIFIC CALCULATION AND BY ADOPTING THE METHODOLOGY PRESCRI BED BY THE OECD GUIDELINES. THUS, ONCE A WORKING CAPITAL ADJUSTMENT IS ARRIVED AT IN THE MANNER PRESCRIBED BY LAW, THE CONSEQUENCES OF SUCH AN ADJUSTMENT ON A ITA NO.674/BANG/2016 PAGE 8 OF 13 COMPARABLE'S PROFIT MARGIN CANNOT BE THE REASON FOR APPLYING A CAP ON SUCH ADJUSTMENT. RULE 10B(3) OF THE INCOME-TAX RULES, 19 62 ('THE IT RULES' FOR SHORT), PROVIDES THAT AN ADJUSTMENT OUGHT TO BE PRO VIDED FOR ANY DIFFERENCES IN THE ECONOMIC FACTORS BETWEEN THE TESTED PARTY AN D THE COMPARABLES. A WORKING CAPITAL ADJUSTMENT IS ONE SUCH ADJUSTMENT W HICH IS TO BE APPLIED IN ORDER TO ADJUST FOR THE DIFFERENCES BETWEEN THE WOR KING CAPITAL POSITIONS OF THE TESTED PARTY AND OF THE COMPARABLE. THE IT RULE S DO NOT PROVIDE FOR THE REQUIREMENT OF APPLICATION OF ANY CAP OR UPPER LIMI T TO SUCH ADJUSTMENTS. THIS POSITION UNDER THE ACT AND THE IT RULES IS ALS O EVIDENT FROM THE OECD GUIDELINES. IN THIS REGARD, OUR ATTENTION WAS DRAWN TO A DECISION OF HON'BLE TRIBUNAL IN ARM EMBEDDED TECHNOLOGIES P. LTD V. ITO [IT(TP)A NO. 1659 AND 1560/BANG/2014] (PARAGRAPH 24-25) (2015) 64 TAX MANN.COM 445 (BANG-TRIB) WHICH SUPPORTS THE CONTENTION OF THE LE ARNED COUNSEL FOR THE ASSESSEE. HENCE IT WAS SUBMITTED THAT THE ABOVE ACT ION OF THE TPO AND SUBSEQUENT CONFIRMATION OF THE SAME BY DRP IS WHOLL Y ERRONEOUS AND LIABLE TO SET ASIDE BY THIS HON'BLE TRIBUNAL. THE L EARNED DR RELIED ON THE ORDER OF THE TPO/DRP. IN THE LIGHT OF THE DECISION CITED BY THE LEARNED COUNSEL FOR THE ASSESSEE, WE ARE OF THE VIEW THAT T HE WORKING CAPITAL ADJUSTMENT HAS TO BE ALLOWED ON ACTUAL AND THERE CA NNOT BE ANY CAP THAT CAN BE IMPOSED IN ALLOWING ADJUSTMENT TO THE MARGIN S OF COMPARABLES OR THAT OF THE TESTED PARTY TOWARDS WORKING CAPITAL AD JUSTMENT. GR.NO.2.10 TO THIS EXTENT IS ALLOWED. 13. THE TPO IS DIRECTED TO COMPUTE THE ALP IN ACCOR DANCE WITH THE DIRECTIONS CONTAINED INT IS ORDER AFTER AFFORDING A SSESSEE OPPORTUNITY OF BEING HEARD. MARKETING SUPPORT SERVICES SEGMENT (MSS) 14. AS FAR AS THE PROVISION OF MSS IS CONCERNED, TH E ASSESSEE FILED A TRANSFER PRICING STUDY (TP STUDY) TO JUSTIFY THE PR ICE PAID IN THE ITA NO.674/BANG/2016 PAGE 9 OF 13 INTERNATIONAL TRANSACTION AS AT ALP BY ADOPTING THE TRANSACTION NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD (MAM) OF DETERMINING ALP. THE ASSESSEE SELECTED OPERATING PROFIT/TOTAL C OST (OP/TC) AS THE PROFIT LEVEL INDICATOR (PLI) FOR THE PURPOSE OF COM PARISON. THE OP/OC OF ASSESSEE WAS 12.00%. THE TPO TO WHOM THE DETERMINA TION OF ALP WAS REFERRED TO BY THE AO, ACCEPTED TNMM AS THE MAM AND ALSO USED THE SAME PLI FOR COMPARISON I.E., OP/TC. THE TPO REJEC TED ALL THE COMPANIES CHOSEN AS COMPARABLE COMPANY BY THE ASSESSEE AND ON HIS OWN CHOSE THREE COMPANIES AND WORKED OUT THE AVERAGE ARITHMET IC MEAN OF THEIR PROFIT MARGINS AND ADJUSTMENT TO ALP AS FOLLOWS: 15. THE TPO COMPUTED ALP AND CONSEQUENT ADDITION TO THE TOTAL INCOME AS FOLLOWS:- COMPUTATION OF ARM'S LENGTH PRICE BY TPO AND THE AD JUSTMENT MADE ARM'S LENGTH MEAN MARGIN ON COST 18.25% OPERATING COST B RS. 1,08,16,416/ - ARM'S LENGTH PRICE (118.25% OF OPERATING COST) C=B*118.25% RS. 1,27,90,412/ - PRICE RECEIVED D RS. 1,21,14,385/ - SHORT FALL BEING ADJUSTMENT U/S. 92CA E=C - D RS. 6,76,027/- ITA NO.674/BANG/2016 PAGE 10 OF 13 16. THE ASSESSEE FILED OBJECTION BEFORE THE DRP AGA INST THE DRAFT ORDER OF ASSESSMENT WHEREIN THE ADDITION SUGGESTED BY THE TPO WAS ADDED TO THE TOTAL INCOME OF THE ASSESSEE. THE DRP HOWEVER CONFIRMED THE ORDER OF THE AO. BEFORE THE TRIBUNAL, THE ASSESSEE SEEKS EXCLUSION OF TWO OUT OF THE THREE COMPARABLE COMPANIES CHOSEN BY THE TPO VI Z., ASIAN BUSINESS EXHIBITION & CONFERENCES LTD., AND ICC INTERNATIONA L AGENCIES LTD. IN GR.NO.2.7 WHICH READS AS FOLLOWS:- 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, THE DRP/AO/TPO ERRED IN: 2.7 INCLUDING ASIAN BUSINESS EXHIBITION & CONFERE NCE LTD., AND ICC INTERNATIONAL AGENCIES LTD. IN ITS COMPAR ABILITY ANALYSIS THAT FAIL THE TEST OF COMPARABILITY, AS CO MPARED TO APPELLANT IN RESPECT OF SALES AND MARKETING SUPPORT SERVICES ( CORRESPONDING TO ORIGINAL GROUND 2.6 ). 17. AT THE TIME OF HEARING THE LEARNED COUNSEL FOR THE ASSESSEE PRESSED FOR ADJUDICATION OF EXCLUSION OF ICC INTERNATIONAL AGENCIES LTD., ALONE. IT WAS BROUGHT TO OUR NOTICE BY THE LEARNED COUNSEL FO R THE ASSESSEE THAT IN THE CASE OF AMD INDIA PVT. LTD. VS. ACIT IN IT(TP) A.NO.1487 & 1496/BANG/2015 ORDER DATED 6.4.2017 ITAT BANGALORE BENCH FOR THE VERY SAME SEGMENT FOR AY 2011-12 WAS PLEASED TO HOLD THA T THIS COMPANY WAS WITH MS SERVICES PROVIDING COMPANY. THE RELEVANT O BSERVATIONS ARE AS FOLLOWS:- 2. ICC INTERNATIONAL AGENCIES LTD : THE ASSESSEE SUBMITTED BEFORE THE DRP THAT THIS COM PANY IS FUNCTIONALLY NOT COMPARABLE SINCE IT IS ENGAGED IN TRADING ACTIVITY AND THEREBY FUNCTIONALLY DIFFERENT. THE DRP REJECTE D THIS COMPANY FOR THE REASON THAT THIS COMPANY IS FUNCTIO NALLY DISSIMILAR AND FOR INCORRECT MARGIN COMPUTATION MAD E BY THE TPO. THE REVENUE IS ON APPEAL . THE ASSESSEE PLEADE D THAT THIS IS FUNCTIONALLY DIFFERENT AND RELIES ON THIS TRIBUNAL DECISION IN ITO ITA NO.674/BANG/2016 PAGE 11 OF 13 V INTERWOVEN SOFTWARE SERVICES(INDIA) P LTD [TS -72 3-ITAT - 2016 -BANG-TP AY 2010-11. THE RELEVANT PORTION OF T HE ORDER IT(TP)A.1487 & 1496/BANG/2015 PAGE - 36 FROM ITO V INTERWOVEN SOFTWARE SERVICES (INDIA) P LTD [IT(TP)A.NO.461/BANG/2015 DT 26.8.2016 FOR A Y 2010 -11 IS EXTRACTED AS UNDER : '28. FOR THIS SEGMENT, THE ASSESSEE IS SEEKING EXCL USION OF TWO COMPARABLES I.E. M/S ACENTIA TECHNOLOGIES LTD., AND M/S ICC INTERNATIONAL AGENCIES LTD., THE CLAIM OF ASSESSEE REGARDING EXCLUSION OF M/S ACENTIA TECHNOL OGIES LTD. IS ALSO COVERED IN FAVOUR OF THE ASSESSEE BY T HE SAME TRIBUNAL ORDER RENDERED IN THE CASE OF M/S ELECTRON ICS FOR IMAGING INDIA (P)LTD.,(SUPRA) AND RESPECTFULLY FOLL OWING THE SAME TRIBUNAL ORDER, WE DIRECT THE AO/TPO TO EX CLUDE THIS COMPANY FROM THE LIST OF FINAL COMPARABLE BECA USE THE LD. DR OF THE REVENUE COULD NOT POINT OUT ANY DIFFE RENCE IN FACTS. 29. REGARDING EXCLUSION OF SECOND COMPANY, IT WAS SUBMITTED BY THE LEARNED AR OF THE ASSESSEE THAT I. E. M/S ICC INTERNATIONAL AGENCIES LTD., (SUPRA) THIS IS TH E CLAIM OF THE ASSESSEE THAT ANNUAL REPORT OF THIS COMPANY AVAILABLE ON PAGE-1100 & 1104 OF THE PAPER BOOK. AS PER THE SAME, WE FIND THAT THIS COMPANY IS DERIVING INC OME FROM TRADING ACTIVITY AND ALSO MAINTAINING INVENTOR IES. BOTH THESE ARGUMENTS ARE SUPPORTED BY ANNUAL REPORT OF THIS COMPANY AVAILABLE ON PAGE-1100 & 1104 OF THE P APER BOOK. SINCE THE ASSESSEE IS NOT ENGAGED IN TRADING ACTIVITY, IN OUR CONSIDERED OPINION, THIS COMPANY CANNOT BE CONSIDERED AS GOOD COMPARABLE IN THE PRESENT CASE A ND HENCE, WE DIRECT THE AO/TPO TO EXCLUDE HIS COMPANY FROM THE LIST OF FINAL COMPARABLE. 18. FOLLOWING THE SAID DECISION, WE DIRECT EXCLUSIO N OF THE AFORESAID COMPANY ICC INTERNATIONAL AGENCIES LTD., FROM THE L IST OF COMPARABLE COMPANIES. 19. WE SHALL NOW DEAL WITH THE OTHER GROUNDS OF APP EAL IN MS SEGMENT REGARD TO NON-GRANT OF WORKING CAPITAL ADJUSTMENT W HICH IS PROJECTED IN GR.NO.2.10 OF THE GROUNDS OF APPEAL OF THE ASSESSEE WHICH HAS ALREADY BEEN REPRODUCED IN THE EARLIER PART OF THIS ORDER. ON THIS GROUND WE FIND THAT ITA NO.674/BANG/2016 PAGE 12 OF 13 THE GRIEVANCE OF THE ASSESSEE PROJECTED IN OBJECTIO N GR.NO.5.2 WAS THAT THE TPO ERRED IN NOT PROVIDING WORKING ADJUSTMENT FOR M S SEGMENT. THE DRP DID NOT ADJUDICATE THE SAME IN PARAGRAPH 4.1 OF ITS ORDER PRESUMING THAT THE GRIEVANCE OF THE ASSESSEE WAS ONLY IN SWD SERVICES SEGMENT ON WORKING CAPITAL ADJUSTMENT BEING RESTRICTED TO MEAN MARGIN OF COMPARABLE WORKING CAPITAL REQUIREMENTS. NEVERTHELESS, GRANT OF WORKI NG CAPITAL ADJUSTMENT IS NECESSARY IN DETERMINING ALP. WE DIRECT THE TPO TO COMPUTE THE ALP IN ACCORDANCE WITH THE DIRECTIONS CONTAINED IN THIS OR DER AND ALLOW WORKING CAPITAL ADJUSTMENT AFTER EXAMINATION OF THE CLAIM O F THE ASSESSEE IN THIS REGARD IN THE TP STUDY AND ALLOW OPPORTUNITY OF BEI NG HEARD BEFORE DECIDING ON THE QUANTUM OF ADJUSTMENT TO BE GIVEN O N ACCOUNT OF WORKING CAPITAL ADJUSTMENT. 20. NO OTHER GROUNDS WERE PRESSED FOR ADJUDICATION. 21. IN THE RESULT, APPEAL BY THE ASSESSEE IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 31 ST DAY OF AUGUST, 2020. SD/- SD/- ( B R BASKARAN ) ( N V VASUDEVAN ) ACCOUNTANT MEMBER V ICE PRESIDENT BANGALORE, DATED, THE 31 ST AUGUST, 2020. / DESAI S MURTHY / ITA NO.674/BANG/2016 PAGE 13 OF 13 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.