Asst. CIT, Circle-7, Pune V. Teito Software Technologies Pvt Ltd., Pune

ITA 965/PUN/2013

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 6975 (ITAT-PUNE)
• Duration Of Justice: 3 year(s) 10 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-03-2017
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 03-01-2017
• Assessment Year: 2007-2008
• Appeal Filed On: 03-05-2013
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: A K MODI; HITENDRA NINAWE ITA NO PUN IT
• Keywords: Related party transaction; Depreciation; Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE , ' , % BEFORE MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURV EDI, AM . / ITA NO.986/PUN/2013 ' ' / ASSESSMENT YEAR : 2007-08 TIETO SOFTWARE TECHNOLOGIES LTD., (FORMERLY KNOWN AS TIETO SOFTWARE TECHNOLOGIES PVT. LTD.) 8 TH FLOOR, D BUILDING, WEIKFIELD IT CITI INFO PARK, NAGAR ROAD, PUNE 411014 . / APPELLANT PAN: AABCI2507A VS. THE DY. COMMISSIONER OF INCOME TAX, CIRCLE 7, PUNE . RESPONDENT . / ITA NO.965/PUN/2013 ' ' / ASSESSMENT YEAR : 2007-08 THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE 7, PUNE . / APPELLANT VS. TIETO SOFTWARE TECHNOLOGIES LTD., (FORMERLY KNOWN AS TIETO SOFTWARE TECHNOLOGIES PVT. LTD.) 8 TH FLOOR, D BUILDING, WEIKFIELD IT CITI INFO PARK, NAGAR ROAD, PUNE 411014 . RESPONDENT PAN: AABCI2507A ASSESSEE BY : SHRI KETAN VED REVENUE BY : S/SHRI A.K. MODI AND HITENDRA NINAWE ITA NO.965/PUN/2013 ITA NO.986/PUN/2013 2 DATE OF HEARING : 03.01.2017 / DATE OF PRONOUNCEMENT: 03.03.2017 / ORDER PER SUSHMA CHOWLA, JM: THE CROSS APPEALS FILED BY THE ASSESSEE AND THE REV ENUE ARE AGAINST THE ORDER OF CIT(A)-IT/TP, PUNE, DATED 27.02.2013 RELAT ING TO ASSESSMENT YEAR 2007-08 PASSED UNDER SECTION 143(3) OF THE INCOME-T AX ACT, 1961 (IN SHORT THE ACT). 2. THE CROSS APPEALS FILED BY THE ASSESSEE AND THE REVENUE WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS CONSOLID ATED ORDER FOR THE SAKE OF CONVENIENCE. 3. THE ASSESSEE IN ITA NO.986/PUN/2013 HAS RAISED T HE FOLLOWING GROUNDS OF APPEAL:- 1. THE HONORABLE CIT (A) ERRED IN LAW AND ON THE FACT S AND IN CIRCUMSTANCES OF THE CASE IN CONFIRMING AN UPWARD ADJUSTMENT TO T HE VALUE OF INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE APPELLANT WITH ITS ASSOCIATED ENTERPRISE ('AE') WITH RESPECT TO RENDERING OF SOFTWARE DEVELO PMENT SERVICES TO ITS AE . 2. THE HONORABLE CIT(A) ERRED IN LAW AND ON THE FACTS AND IN CIRCUMSTANCES OF THE CA S E IN REJECTING THE FUNCTIONAL ADJUSTMENTS INCLUDING B UT NOT LIMITED TO DIFFERENCE IN POLICY FOR DEPRECIATION ON COMPUTER E QUIPMENT IN CASE OF THE APPELLANT AND THE COMPARABLE COMPANIES . IN ADDITION TO THE ABO V E , HONORABLE CIT(A) ERRED IN LAW AND ON THE FACT S AND IN CIRCUMSTANCES OF THE CASE IN IGNORING THAT I N SUBSEQUENT ASSESSMENT YEARS I . E . AY 2008-09 AND AY 2009-10 , THE SAID FUNCTIONAL ADJUSTMENT IS GRANTED BY THE TRANSFER PRICING OFFIC ER . 3. THE HONORABLE CIT(A) ERRED IN LAW AND ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE IN CONFIRMING FOLLOWING AS COMPARABLE COMP ANIES WHICH ARE FUNCTIONALLY DIFFERENT: GOLDSTONE TECHNOLOGY LIMITED SYNETAIROS TECHNOLOGIES LIMITED STERL I NG INTERNATIONAL ENTERPRISE LIMITED ITA NO.965/PUN/2013 ITA NO.986/PUN/2013 3 4. THE HONO R ABL E CIT(A) ERRED IN LAW IN NOT ALLOWING V ARIATION TO THE E X TENT OF ( +/- ) 5 %, W HIL E DET E RMINING THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS . 5. TH E HONORABLE CIT(A) ERRED IN LAW AND ON THE FACTS AND IN CIRCUMSTANCES OF THE CA SE IN NON-GRANTING RISK ADJUSTMENT TO THE APPELLANT. 6. THE HONORABLE CIT(A) ERRED IN LAW AND ON TH E FACTS AND IN CIRCUMSTANCES OF THE CA S E IN CONFIRMING THE REJECTION OF THE COMPARABLE COM PANIES ACCEPTED BY THE APPELLANT IN THE TRANSFER PRICING STUDY REPO RT WITHOUT PROVIDING COGENT REASONS. 7. EACH ONE OF THE ABOVE GROUNDS OF APPEAL IS WITHO UT PREJUDICE TO THE OTHER. 4. THE ASSESSEE HAS ALSO RAISED THE ADDITIONAL GROU NDS OF APPEAL, WHICH READ AS UNDER:- 1. THE COMMISSIONER OF INCOME-TAX (APPEALS) WHILE E XCLUDING COMPUCOM SOFTWARE LTD. FROM THE LIST OF COMPARABLE COMPANIES HAS ERRED IN NOT CONSIDERING THE FACT THAT THE RELATED PARTY TRANSAC TIONS OF THE SAID COMPANY DURING THE YEAR UNDER CONSIDERATION WERE MO RE THAN 25% AND ALSO THE COMPANY IS NOT FUNCTIONALLY COMPARABLE TO THE APPELLANTS BUSINESS AND HENCE ON THIS COUNT THE SAID COMPANY O UGHT TO BE EXCLUDED. 2. THE APPELLANT SUBMITS THAT STERLING INTERNATIONA L ENTERPRISE LTD. (FORMERLY KNOWN AS TRASWORLD INFOTECH LIMITED) OUGHT TO BE EX CLUDED FROM THE LIST OF COMPARABLE COMPANIES FOR THE YEAR UNDER CONSIDER ATION EVEN ON ACCOUNT OF THE FACT THAT THE DATA CONSIDERED BY THE ASSESSING OFFICER / TRANSFER PRICING OFFICER FOR THE COMPARABILITY ANAL YSIS IS FOR THE PERIOD 01 JULY 2006 TO 30 JUNE 2007 WHEREAS THE FINANCIAL YEA R OF THE APPELLANT (WITH WHICH THE COMPARISON IS MADE) IS 01 APRIL 200 6 TO 31 MARCH 2007. 5. THE REVENUE IN ITA NO.965/PUN/2013 HAS RAISED TH E FOLLOWING GROUNDS OF APPEAL:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) HAS ERRED IN DIRECTING THE A.O TO EXCLUDE COMPUCOM SOFT WARE LIMITED FROM THE LIST OF COMPARABLE COMPANIES. 2. WHILE DIRECTING SO, THE LEARNED CIT(A) HAS ERRED IN NOT CONSIDERING THE FACT THAT THE TRANSFER PRICING OFFICER (TPO) HAD IN CLUDED THIS COMPANY AS A COMPARABLE AFTER CONSIDERING ITS SEGMENTAL RESULT S. 6. BRIEFLY IN THE FACTS OF THE CASE THE ASSESSEE FO R THE YEAR UNDER CONSIDERATION HAD FILED RETURN OF INCOME DECLARING TOTAL INCOME AT NIL. THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF SOFTWARE DE VELOPMENT WHEREIN THE ASSESSEE HAD RECEIVED THE APPROVAL FROM STPI. THE ASSESSEE CLAIMS THAT IT WAS A 100% EXPORT ORIENTED UNIT WHICH WAS ENGAGED IN DE SIGNING, DEVELOPING QUALITY ITA NO.965/PUN/2013 ITA NO.986/PUN/2013 4 ASSURED DOCUMENTATION AT ITS UNIT LOCATED IN PUNE. REFERENCE UNDER SECTION 92CA WAS MADE TO THE TRANSFER PRICING OFFICER TO DE TERMINE THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION UNDERTAKEN B Y THE ASSESSEE. THE TRANSFER PRICING OFFICER NOTED VARIOUS INTERNATIONAL TRANSAC TIONS UNDERTAKEN BY THE ASSESSEE WHICH ARE AS UNDER : SR.NO. DESCRIPTION OF TRANSACTION WITH AE AMOUNT (RS.) METHOD 1 DEVELOPMENT AND SALE OF SOFTWARE 19,07,17,500 CPM 2 REIMBURSEMENT OF EXPENSES 2,23,92,362 CUP 3 PAYMENT OF MANAGEMENT AND TECHNICAL FEES 37,41,253 CUP 4 PAYMENT OF INTEREST ON ECB LOAN 1,27,923 CUP TOTAL 21,69,79,038 7. THE TRANSFER PRICING OFFICER OBSERVED THAT ASSES SEE WAS A 100% SUBSIDIARY OF TIETO ENATOR OYJ WHICH BELONG TO THE TE GROUP HEADQUARTERED IN FINLAND. THE ASSESSEE WAS A DEDICATED IN-HOUSE SOF TWARE DEVELOPER FOR THE TE GROUP HANDLING AND THE ENTIRE EXPORT BILLING WAS MA DE ON TE GROUP AND NOT ON ANY OUTSIDE PARTIES. THE ASSESSEE HAD SELECTED CPM AS THE MOST APPROPRIATE METHOD TO BENCHMARK THE INTERNATIONAL TRANSACTION R ELATING TO RENDERING OF SOFTWARE DEVELOPMENT SERVICES. HOWEVER, THE TPO RE JECTED THE SAME AND DURING THE COURSE OF HEARING ITSELF TNMM WAS CONSID ERED AS MOST APPROPRIATE METHOD. DURING THE COURSE OF HEARING THE ASSESSEE SELECTED SOME OF THE LISTED COMPANIES AS FUNCTIONALLY COMPARABLE AND THE AVERAG E MARGIN OF THE SAID 4 COMPANIES, I.E. (A) KPIT CUMMINS, (B) SATYAM COMPUT ERS LTD., (C) TATA CONSULTANCY SERVICES LTD. AND (D) PATNI COMPUTER SY STEMS LTD. WORKED OUT TO 14.17%. THE ASSESSEE POINTED OUT THAT THE ARMS LE NGTH PRICE OF ITS INTERNATIONAL TRANSACTION WITH 14.03% MARKUP WAS CO NSIDERED TO BE MOST REASONABLE. HOWEVER, THE TRANSFER PRICING OFFICER DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE AND A SHOW CAUSE NOTICE WAS ISSUED TO THE ASSESSEE. AFTER CONSIDERING THE FILTERS APPLIED BY THE ASSESSEE, TH E TRANSFER PRICING OFFICER FROM ITA NO.965/PUN/2013 ITA NO.986/PUN/2013 5 THE ACCEPT REJECT MATRIX FILED BY THE ASSESSEE CONS IDERED THE FOLLOWING COMPANIES TO BE COMPARABLE TO THE ASSESSEE : SR.NO. NAME OF THE COMPANY NCP 2006 - 07(%) 1 GOLDSTON E TECHNOLOGIES LTD. 21.90 2 SYNETAIROS TECHNOLOGIES LTD. 19.75 3 STERLING INTERNATIONAL ENTERPRISE LTD. 32.90 4 COMPUCOM SOFTWARE LTD. 35.63 ARITHMETIC MEAN 27.54 8. THE ASSESSEE WAS SHOW CAUSED IN THIS REGARD. IN REPLY, THE ASSESSEE OBJECTED TO THE SELECTION OF THE SAID COMPANIES AND THE SUBMISSIONS OF THE ASSESSEE ARE REPRODUCED AT PAGES 8 TO 11 OF THE TRA NSFER PRICING OFFICERS ORDER. THE TRANSFER PRICING OFFICER NOTED THAT NO FRESH SE ARCH WAS CARRIED OUT AND THE CONCERNS WERE TAKEN UP FROM THE ACCEPT REJECT MATRI X OF THE ASSESSEE AND THE DATA FOR THE YEAR UNDER CONSIDERATION WAS APPLIED T O BENCHMARK THE INTERNATIONAL TRANSACTION UNDERTAKEN BY THE ASSESSEE. THE PLEA O F THE ASSESSEE THUS WAS REJECTED AND THE SAID COMPANIES WERE ADOPTED AS FIN AL SET OF COMPARABLES. THE ARITHMETIC MEAN OF THE COMPARABLES WORKED OUT TO 27 .54% AS AGAINST OPERATING PROFIT ON TOTAL COST OF THE ASSESSEE AT 14.03%. AC CORDINGLY, AN ADJUSTMENT OF RS.1,90,33,220/- WAS WORKED OUT BY THE TRANSFER PRI CING OFFICER. THE SAID ADDITION WAS IN RESPECT OF THE INTERNATIONAL TRANSA CTION RELATING TO DEVELOPMENT OF SOFTWARE SERVICES. IN RESPECT OF THE BALANCE INTER NATIONAL TRANSACTIONS NO ADJUSTMENT WAS PROPOSED BY THE TRANSFER PRICING OFF ICER. THE ASSESSEE ALSO ASKED FOR ADJUSTMENT ON ACCOUNT OF CERTAIN EXPENSES WHILE COMPUTING THE MARGINS OF THE COMPARABLES, HOWEVER, THE SAME WERE DENIED BY THE TRANSFER PRICING OFFICER. THE RISK ADJUSTMENT ASKED FOR BY THE ASSESSEE WAS ALSO DENIED TO THE ASSESSEE. 9. THE ASSESSING OFFICER PASSED THE ORDER UNDER SEC TION 143(3) READ WITH SECTION 144C(3) OF THE ACT. THE ASSESSEE FILED AN A PPEAL BEFORE THE CIT(A) WHO IN TURN HELD THAT TNMM IS TO BE APPLIED TO BENCHMAR K THE INTERNATIONAL ITA NO.965/PUN/2013 ITA NO.986/PUN/2013 6 TRANSACTION UNDERTAKEN BY THE ASSESSEE. THE NEXT OB JECTION OF THE ASSESSEE WAS AGAINST SELECTION OF 4 NEW COMPANIES WHICH AS PER T HE ASSESSEE WERE NOT FUNCTIONALLY COMPARABLE. THE CIT(A) TOOK NOTE OF T HE SEGMENTAL REPORTING OF GOLDSTONE TECHNOLOGIES LTD., ALSO THE NOTES TO ACCO UNTS IN THE ANNUAL REPORT WHICH SHOW THAT THE COMPANY WAS ENGAGED IN THE BUSI NESS OF SOFTWARE DEVELOPMENT. IN VIEW THEREOF THE OBJECTION OF THE ASSESSEE WAS DISMISSED. IN RESPECT OF THE OTHER 3 CONCERNS THE CIT(A) CONFIRME D THE ORDER OF THE TRANSFER PRICING OFFICER IN SELECTING SYNETAIROS TECHNOLOGIE S LTD. AND STERLING INTERNATIONAL ENTERPRISE LTD. BEING FUNCTIONALLY CO MPARABLE AS THE SAID CONCERNS WERE ENGAGED IN SOFTWARE DEVELOPMENT. IN RESPECT O F COMPUCOM SOFTWARE LTD. THE CIT(A) NOTED THAT THE COMPANY FAILS RELATED PAR TY TRANSACTION FILTER OF MINIMUM 75% OF EXPORT EARNINGS AND HENCE THE ASSESS ING OFFICER WAS DIRECTED TO EXCLUDE THE SAID CONCERN FROM THE LIST OF COMPAR ABLE COMPANIES. THE NEXT OBJECTION OF THE ASSESSEE THAT THERE WERE NO REASON S FOR REJECTING THE COMPARABLES SELECTED BY IT WAS ALSO REJECTED BY THE CIT(A) AS THE CPM METHOD WAS NOT APPLIED AND THE COMPANIES WHICH WERE USED F OR APPLYING THE SAID METHOD MERITS TO BE REJECTED. 10. THE NEXT OBJECTION OF THE ASSESSEE BEFORE CIT(A ) WAS THE REQUISITE COMPARABILITY ADJUSTMENTS WHEREIN ADJUSTMENT WAS SO UGHT ON ACCOUNT OF DEPRECIATION ON FIXED ASSETS. THE ASSESSEE CLAIMED THAT UNDER THE STRAIGHTLINE METHOD, THE DEPRECIATION CLAIMED WAS HIGHER THAN TH E RATE PRESCRIBED UNDER SCHEDULE XIV OF THE COMPANIES ACT. THE ASSESSEE PO INTED OUT THAT IT WAS CLAIMING HIGHER CHARGE ON ACCOUNT OF DEPRECIATION O N PCS AND LAPTOPS WHICH COST ASSUMPTION MAY NOT BE THERE IN THE OTHER I.T. COMPANIES. THE ASSESSEE SUBMITTED THAT IT WOULD BE APPROPRIATE TO ADJUST TH E PROFITS BY ADDING 100% DEPRECIATION ON PCS AND LAPTOPS AS THE SAME WERE DE BITED TO THE PROFIT AND LOSS ACCOUNT AS A RESULT OF SOFTWARE CONSIDERATION FOR C OST, ADOPTED BY IT W.E.F. 01-04- 2006. THE CIT(A) NOTED THAT THE ASSESSEE HAD NOT SO UGHT THIS ADJUSTMENT BEFORE ITA NO.965/PUN/2013 ITA NO.986/PUN/2013 7 THE TRANSFER PRICING OFFICER. HOWEVER, SINCE IT WA S IN NATURE OF LEGAL ARGUMENT THE SAME WAS ADMITTED. ON PRINCIPLE IT WAS HELD AS UNDER : 2.5.1.1.3 I HAVE CONSIDERED THE FACTS AND ARGUMENT S OF THE APPELLANT. I FIND THAT THIS ADJUSTMENT WAS NOT SOUGHT BY THE A PPELLANT BEFORE THE LEARNED TPO. HOWEVER, PRAYER FOR GRANTING OF SUCH ADJUSTMENT IS IN THE NATURE OF LEGAL ARGUMENT. THEREFORE, I ADMIT THE S AME. ON PRINCIPLE, ADJUSTMENT ON ACCOUNT OF DIFFERENCES IN ACCOUNTING POLICIES CAN BE ALLOWED UNDER THE RULE 10B(1)(E)(II). ACCORDINGLY, THE APP ELLANT WOULD BE WELL WITHIN THE LAW TO ADJUST THE PROFIT MARGIN IF IT HA D CLAIMED DEPRECIATION AT THE RATES HIGHER THAN WHAT IS PROVIDED IN THE COMPA NIES ACT. HOWEVER, WHAT I FIND IN THIS CASE IS THAT THE APPELLANT IS NOT CLEAR ABOUT THE ACCOUNTING POLICY ON LAPTOPS AND PCS ADOPTED BY THE COMPARABLE COMPANIES. THE APPELLANTS LACK OF CLARITY ON THIS ISSUE IS EXPRESSED BY IT AS THIS IS SPECIAL COST ASSUMPTION, WHICH MAY NOT BE THERE IN OTHER IT COMPANIES IN ITS WRITTEN SUBMISSION. 2.5.1.1.4 RULE 10B(1)(3)(II) REQUIRES THAT THE ADJU STMENT MADE SHOULD BE RELIABLE AND REASONABLY ACCURATE. HOWEVER, IF T HE APPELLANT IS NOT CLEAR ABOUT THE DEPRECIATION RATE AT WHICH COMPARABLE COM PANIES HAVE CLAIMED DEPRECIATION ON PCS & LAPTOPS, NO ADJUSTMENT CAN BE MADE AS BOTH COMPARABLE COMPANY AND THE TESTED PARTY CANNOT ATTA IN THE SAME LEVEL OF COMPARABILITY. THEREFORE, IN THE FACTS OF THE CASE , I DECLINE TO GRANT AN ADJUSTMENT FOR DEPRECIATION TO THE APPELLANT. 11. THE NEXT ADJUSTMENT SOUGHT BY THE ASSESSEE WAS WORKING CAPITAL ADJUSTMENT WHICH WAS ALLOWED TO THE ASSESSEE AND NE CESSARY DIRECTIONS WERE ISSUED TO THE ASSESSING OFFICER. THIRD ADJUSTMENT SOUGHT WAS RISK ADJUSTMENT WHEREIN THE CIT(A) HELD THAT THE ASSESSEE WAS NOT A RISK FREE ENTITY, AS IT WAS CONTENDED THAT THE ASSESSEE WAS A CAPTIVE SERVICE P ROVIDER. RELYING ON SERIES OF DECISIONS THE CIT(A) DECLINED TO GRANT RISK ADJU STMENT TO THE ASSESSEE. 12. BOTH THE ASSESSEE AND THE REVENUE ARE IN APPEAL AGAINST THE ORDER OF CIT(A). 13. THE REVENUE IS IN APPEAL ONLY AGAINST THE EXCLU SION OF THE CONCERN COMPUCOM SOFTWARE LIMITED. 14. THE LD. DEPARTMENTAL REPRESENTATIVE FOR THE REV ENUE POINTED OUT THAT THE CIT(A) HAD DIRECTED THE ASSESSING OFFICER TO EXCLUD E COMPUCOM SOFTWARE LIMITED FROM THE FINAL LIST OF COMPARABLES SINCE IT FAILED TO FULFIL RELATED PARTY TRANSACTION FILTER OF 75%. THE LD. DEPARTMENTAL RE PRESENTATIVE DREW OUR ITA NO.965/PUN/2013 ITA NO.986/PUN/2013 8 ATTENTION TO PAGE 66 OF THE PAPER BOOK NO.2 WHEREIN UNDER THE HEAD SOFTWARE DEVELOPMENT SERVICES THE INCOME FROM OVERSEAS PROJ ECTS WAS DECLARED AT RS.10,96,57,237/- AND FROM THE DOMESTIC PROJECTS AT RS.37,76,407/-. OUR ATTENTION WAS FURTHER DRAWN TO PAGE 73 OF PAPER BOO K NO.2 WHEREIN THE TRANSACTION WITH THE RELATED PARTIES FOR THE UNDER CONSIDERATION THE REVENUE FROM SOFTWARE SERVICES WERE DECLARED AT RS.1134.34 LAKHS , I.E. CUMULATIVE TOTAL OF OVERSEAS SERVICES OF RS.1096.57 LAKHS AND DOMESTIC RECEIPTS OF RS.37.76 LAKHS. HE STRESSED THAT THE DIRECTIONS ISSUED BY THE CIT(A ) IN THIS REGARD ARE TO BE REVERSED. 15. THE LD. AUTHORISED REPRESENTATIVE FOR THE ASSES SEE RELIED ON THE ORDER OF THE CIT(A). THE LD. AUTHORISED REPRESENTATIVE FOR THE ASSESSEE ALSO REFERRED TO THE ADDITIONAL GROUND OF APPEAL AND POINTED OUT THAT BOTH THE GROUNDS OF APPEAL DO NOT INVOLVE ANY INVESTIGATION INTO FACTS AND THE SAME MAY BE ADMITTED FOR ADJUDICATION. HE FURTHER REFERRED TO THE ADDIT IONAL GROUND OF APPEAL NO.1 WHICH WAS AGAINST INCLUSION OF COMPUCOM SOFTWARE LI MITED SINCE IT FAILS RELATED PARTY TRANSACTION FILTER. IN THIS REGARD, THE LD. AUTHORISED REPRESENTATIVE FOR THE ASSESSEE RELIED ON THE RATIO LAID DOWN BY THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF PTC SOFTWARE (INDIA) PVT. LTD. VS. ACIT IN ITA NO.1605/PUN/2011 RELATING TO ASSESSMENT YEAR 2007-08, VIDE ORDER DAT ED 30-04-2013 HAD HELD THAT COMPUCOM SOFTWARE LIMITED COULD NOT BE CONSIDERED A S COMPARABLE SINCE THE RELATED PARTY TRANSACTION EXCEEDED TO 25% FILTER. SIMILAR VIEW WAS TAKEN IN THE CASE OF M/S. SUNGARD SOLUTIONS (INDIA) PVT. LTD. VS . DY. DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) IN ITA NO.122/PUN/2011 ORD ER DATED 30-09-2014 RELATING TO ASSESSMENT YEAR 2007 AND IN THE CASE OF JOHN DEERE PVT. LTD. VS. ACIT IN ITA NO.1319/PUN/2011 ORDER DATED 10-10-2014 RELATING TO ASSESSMENT YEAR 2007-08. ITA NO.965/PUN/2013 ITA NO.986/PUN/2013 9 16. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE FIRST ISSUE WHICH ARISES FOR ADJUDICATION IS AGAINST EXCL USION OF CONCERN COMPUCOM SOFTWARE LIMITED FROM THE FINAL LIST OF COMPARABLES . AS POINTED OUT IN THE PARAS HEREINABOVE, THE ASSESSEE WAS ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT SERVICES TO ITS ASSOCIATE ENTERPRISES. THE UNIT OF THE ASSESSEE WAS 100% EXPORT ORIENTED UNIT WHEREIN THE ASSESSEE HAD RECEIVED THE RECOGNITION UNDER THE STPI SCHEME. THE ASSESSEE WHILE BENCHMARKING ITS INTERNA TIONAL TRANSACTION HAD INITIALLY APPLIED CPM AS THE MOST APPROPRIATE METHO D; HOWEVER, THE TRANSFER PRICING OFFICER APPLIED TNMM AS MOST APPROPRIATE. THE LD. AUTHORISED REPRESENTATIVE FOR THE ASSESSEE DURING THE COURSE O F HEARING POINTED OUT THAT THERE WAS NO DISPUTE ON THE APPLICATION OF METHOD A ND ALSO ON THE APPLICATION OF FILTER, HOWEVER, THE ISSUES WERE AGAINST VARIOUS AD JUSTMENTS NOT ALLOWED TO THE ASSESSEE. 17. THE APPEAL OF THE REVENUE IS AGAINST EXCLUSION OF COMPUCOM SOFTWARE LIMITED ON THE GROUND THAT IT DOES NOT FAIL THE EXP ORT FILTER AND ITS EXPORT SALES AT RS. 10.96 CRORES FAR EXCEEDED THE DOMESTIC SALES OF RS.37.76 LAKHS. WE HAVE PERUSED THE FINANCIAL STATEMENTS OF THE SAID CONCER N. WE FIND AS PER THE ANNUAL REPORT, THE ASSESSEE FOR THE YEAR UNDER CONSIDERATI ON, HAD DECLARED ITS INCOME UNDER THE HEAD SOFTWARE DEVELOPMENT AND SERVICES WHEREIN FOR THE YEAR UNDER CONSIDERATION THE INCOME FROM OVERSEAS OPERATION WA S DECLARED AT RS.10.96 CRORES AND THE DOMESTIC SALES SERVICES WERE TO THE TUNE OF RS.37.76 LAKHS. WE FIND ERROR IN THE ORDER OF THE CIT(A); THOUGH THE I NCOME REPORTED BY THE SAID COMPANY IN ITS ANNUAL REPORT IS REPRODUCED IN PARA 2.3.3.5.1 AT PAGE 10 OF THE APPELLATE ORDER, HOWEVER, THE CIT(A) DIRECTED ITS E XCLUSION FAILING TO SATISFY THE FILTER OF MINIMUM 75% OF EXPORT EARNINGS. WE REVER SE THE ORDER OF CIT(A) IN THIS REGARD SINCE THE SAID CONCERN FULFILS THE FILTER OF MINIMUM 75% OF THE EXPORT EARNINGS. HENCE, GROUND OF APPEAL NO1 RAISED BY TH E REVENUE IS ALLOWED. ITA NO.965/PUN/2013 ITA NO.986/PUN/2013 10 18. NOW COMING TO THE ALTERNATE PLEA RAISED BY THE ASSESSEE BY WAY OF ADDITIONAL GROUND OF APPEAL NO.1 FOR THE EXCLUSION OF THE SAID CONCERN COMPUCOM SOFTWARE LIMITED FAILING TO SATISFY THE RE LATED PARTY TRANSACTION FILTER, WE FIND THIS ISSUE OF THE SAID CONCERN BEIN G NOT COMPARABLE ON FAILING TO FULFIL RELATED PARTY TRANSACTION FILTER AROSE BEFOR E THE PUNE BENCH OF THE TRIBUNAL FOR THE INSTANT ASSESSMENT YEAR ITSELF, I.E. 2007-0 8 IN THE CASE OF PTC SOFTWARE (INDIA) PVT. LTD. VIDE PARA 14 THE TRIBUNAL HELD TH AT THE RELATED PARTY TRANSACTION WAS IN EXCESS OF 25% FILTER ADOPTED BY THE TPO AND COMPUCOM SOFTWARE LIMITED WAS TO BE EXCLUDED FROM THE LIST OF COMPARA BLES FOR THE PURPOSE OF COMPARABILITY ANALYSIS. SIMILAR VIEW HAS BEEN TAKE N IN M/S. SUNGARD SOLUTIONS (INDIA) PVT. LTD. VS. DY. DIRECTOR OF INCOME TAX (I NTERNATIONAL TAXATION) AND IN JOHN DEERE PVT. LTD. VS. ACIT (SUPRA). 19. FOLLOWING THE SAID RATIO, WE HOLD THAT COMPUCOM SOFTWARE LIMITED DOES NOT FULFIL THE RELATED PARTY TRANSACTION FILTER AND HENCE THE SAID CONCERN IS TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES ON ACCOU NT OF FAILURE TO FULFIL RELATED PARTY TRANSACTION FILTER. THE ADDITIONAL GROUND OF APPEAL NO.1 RAISED BY THE ASSESSEE IS THUS ALLOWED. 20. NOW COMING TO THE APPEAL FILED BY THE ASSESSEE WHEREIN THE GROUND OF APPEAL NO.1 IS GENERAL IN NATURE AND HENCE THE SAME IS DISMISSED. 21. GROUND OF APPEAL NO.2 RAISED BY THE ASSESSEE IS AGAINST THE ORDER OF AUTHORITIES BELOW IN NOT ALLOWING ADJUSTMENT ON ACC OUNT OF DEPRECIATION. 22. THE ASSESSEE BEFORE US IS A CAPTIVE SERVICE PRO VIDER TO ITS ASSOCIATED ENTERPRISE IS 100% EXPORT ORIENTED UNIT WHEREIN SER VICES ARE PROVIDED TO THE ASSOCIATED ENTERPRISE. THE ASSESSEE HAS SOUGHT DEP RECIATION ADJUSTMENT ON THE GROUND THAT IT IS PROVIDING HIGHER DEPRECIATION ON CERTAIN ASSETS ON A DIFFERENT BASIS WHILE THE OTHER COMPARABLES ARE PROVIDING DEP RECIATION AS PER THE COMPANIES ACT. THE ISSUE OF CLAIM OF DEPRECIATION WHILE WORKING OUT THE ITA NO.965/PUN/2013 ITA NO.986/PUN/2013 11 OPERATING MARGINS AROSE BEFORE THE HONBLE BOMBAY H IGH COURT IN CIT VS. M/S. WELSPUN ZUCCHI TEXTILES LTD. IN INCOME TAX APPEAL N O.1286 OF 2014, JUDGMENT DATED 06.01.2017, WHERE THE QUESTION RAISED BEFORE THE HONBLE HIGH COURT WAS AS UNDER:- (II) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND DESPITE THE PRESCRIPTION OF PARAMETERS OF COMPARABILITY BY RULE 10B(2) OF THE INCOME TAX RULES, 1962, THE TRIBUNAL WAS CORRECT IN LAW, IN DI RECTING THE INCLUSION OF DEPB IN TURNOVER AND DEPRECIATION IN NET PROFIT FOR THE PUR POSE OF PROFIT MARGIN OF COMPARABLES AND ASSESSEE? 23. THE HONBLE HIGH COURT HELD THAT THE DEPRECIATI ON IS TO BE INCLUDED AS OPERATING EXPENSES TO DETERMINE THE OPERATING COST OF THE ASSESSEE AND THE COMPARABLES. THE QUESTION BEFORE THE HONBLE HIGH COURT WAS THE COMPARABILITY BETWEEN PROFIT MARGINS OF ASSESSEE AND THE COMPARAB LES IN VIEW OF THE PARAMETERS OF COMPARABILITY UNDER RULE 10B(2) OF IT RULES. THE HONBLE HIGH COURT HAS HELD AS UNDER:- 4.. (A). (B). (D) WE FIND THAT SO FAR AS EXCLUSION OF DEPB BENEF IT IN ARRIVING AT THE OPERATING PROFIT OF THE RESPONDENT ASSESSEE IS CONC ERNED, THE ORDER OF THE TRIBUNAL FOR THE ASSESSMENT YEARS2005-06 AND 2007-0 8 WERE APPEALED BY THE REVENUE TO THIS COURT. MR. SURESH KUMAR, LEARNED C OUNSEL APPEARING FOR THE REVENUE VERY FAIRLY STATES THAT THIS VERY ISSUE WAS RAISED BY THE REVENUE IN ITS APPEAL BEFORE THIS COURT FOR THE EARLIER ASSESSMENT YEARS BEING INCOME TAX APPEAL NO.1827 OF 2013 RELATING TO A.Y. 2005-06 AND INCOME TAX APPEAL NO.171 OF 2014 RELATING TO A.Y. 2007-08. HOWEVER, THIS COURT BY ORDERS DATED 22 ND SEPTEMBER, 2015 FOR A.Y. 2005-06 AND 1 ST JULY, 2016 FOR A.Y. 2007-08, DISMISSED THE REVENUES APPEAL. IN THE ABOVE VIEW, THE ISSUE WITH REGARD TO THE EXCLUSION OF THE DEPB BENEFIT STANDS CONCLUDED BY V IRTUE OF ORDER OF THIS COURT AGAINST THE REVENUE AND IN FAVOUR OF THE RESPONDENT ASSESSEE. (E) SO FAR AS DEPRECIATION IS CONCERNED, WE FIND TH AT THE ANALYSIS DONE BY THE TRIBUNAL TO INCLUDE DEPB BENEFIT TO HOLD IT TO BE A N OPERATING REVENUE TO DETERMINE OPERATING PROFIT, WOULD BE EQUALLY APPLIC ABLE IN CASE OF DEPRECIATION FOR THE PURPOSES OF HOLDING IT TO BE AN OPERATING E XPENSES TO DETERMINE OPERATING COSTS. IT MUST BE BORNE IN MIND THAT THE DEPRECIAT ION WHICH IS INCURRED BY THE COMPARABLES ARE NOT BEING EXCLUDED BEFORE ARRIVING AT THE TOTAL COST WHILE APPLYING THE TNMM METHOD FOR THE PURPOSES OF DETERM INING THE ALP PRICE OF THE RESPONDENT ASSESSEES EXPORT TO ITS ASSOCIATE ENTER PRISE. THE COMPARISON TO DETERMINE THE ALP HAS TO THE EXTENT POSSIBLE HAS TO BE DONE BETWEEN LIKE TO LIKE AND SIMILAR TO SIMILAR. ONE SIDED EXCLUSION WOULD LEAD TO DISTORTION IN COMPARISON. ITA NO.965/PUN/2013 ITA NO.986/PUN/2013 12 24. IN VIEW THEREOF WE HOLD THAT WHILE DETERMINING THE OPERATING MARGINS OF THE ASSESSEE, DEPRECIATION IS TO BE CONSIDERED AS P ART OF COST AND THERE IS NO MERIT IN THE CLAIM OF THE ASSESSEE IN THIS REGARD. IT MAY FURTHER BE CLARIFIED THAT AS PER RULE 10B(1)(E)(III) OF THE RULES, ADJUSTMENT IF ANY HAS TO BE MADE IN THE HANDS OF THE COMPARABLES AND NOT IN THE HANDS OF TH E TESTED PARTY. SO WE DISMISS THE PLEA OF THE ASSESSEE IN THIS REGARD. H OWEVER, IN CASE THE ASSESSEE IS ABLE TO ESTABLISH THAT THERE IS MATERIAL DIFFERE NCE IN THE CLAIM OF DEPRECIATION BY THE ASSESSEE VIS--VIS COMPARABLES, THEN SUITABLE A DJUSTMENT MAY BE ALLOWED IN THE HANDS OF COMPARABLES AFTER DUE VERIFICATION BY THE ASSESSING OFFICER / TRANSFER PRICING OFFICER. 25. THE ASSESSEE HAS RAISED OTHER GROUNDS OF APPEAL AGAINST EXCLUSION OR INCLUSION OF THE CONCERNS AS COMPARABLES BUT THE LD . AUTHORISED REPRESENTATIVE FOR THE ASSESSEE HAS NOT MADE ANY SUBMISSION IN THI S REGARD AND THE SAID GROUNDS OF APPEAL ARE DISMISSED. EVEN IN THE WRITT EN SUBMISSIONS FILED THE ASSESSEE IN ITS APPEAL HAS AGITATED GROUNDS OF APPE AL NO.2 WHICH IS AGAINST THE ADJUSTMENT CLAIMED ON ACCOUNT OF DEPRECIATION WHICH WE HAVE ALREADY ADJUDICATED IN THE PARAS HEREIN ABOVE. HOWEVER, TH E ADDITIONAL GROUND OF APPEAL NO.2 RAISED BY THE ASSESSEE IS AGAINST THE I NCLUSION OF STERLING INTERNATIONAL ENTERPRISE LTD. ON THE GROUND THAT TH E FINANCIAL YEARS ARE DIFFERENT. 26. THE LD. AUTHORISED REPRESENTATIVE FOR THE ASSES SEE POINTED OUT THAT THE PUNE BENCH OF THE TRIBUNAL IN PTC SOFTWARE (INDIA) PVT. LTD. VS. ACIT (SUPRA) FOR THE VERY SAME ASSESSMENT YEAR, I.E. 2007-08 HAD HELD THAT THE SAID COMPANY COULD NOT BE CONSIDERED AS COMPARABLE AS THE ACCOUN TING PERIOD ADOPTED DOES NOT RELATE TO THE FINANCIAL YEAR IN WHICH THE INTER NATIONAL TRANSACTION HAD BEEN UNDERTAKEN BY THE ASSESSEE. ITA NO.965/PUN/2013 ITA NO.986/PUN/2013 13 27. WE FIND MERIT IN THE CLAIM OF THE ASSESSEE IN T HIS REGARD AND APPLYING RATIO LAID DOWN IN PTC SOFTWARE (INDIA) PVT. LTD. VS. ACI T (SUPRA) WE HOLD THAT STERLING INTERNATIONAL ENTERPRISE LTD. NOW KNOWN AS TRANSWORLD INFOTECH LTD. IS TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES IN OR DER TO BENCHMARK THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION UNDER TAKEN BY THE ASSESSEE, AS IT HAS DIFFERENT YEAR ENDING. THE ASSESSING OFFICER/T RANSFER PRICING OFFICER IS DIRECTED TO RECOMPUTE THE ARMS LENGTH PRICE IN REL ATION TO OUR DIRECTIONS IN THE PARAS HEREINABOVE. THE ADDITIONAL GROUNDS OF APPEA L NO.2 RAISED BY THE ASSESSEE IS THIS ALLOWED. 28. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED AND APPEAL OF THE REVENUE IS ALLOWED. ORDER PRONOUNCED ON THIS 03 RD DAY OF MARCH, 2017. SD/- SD/- ( ANIL CHATURVEDI ) (SUSHMA CHOWLA) / ACCOUNTANT MEMBER / JUDICIAL MEMBER / PUNE DATED : 03 RD MARCH, 2017 . SATISH ) *+, -, / COPY OF THE ORDER IS FORWARDED TO : THE APPELLANT ; THE RESPONDENT; THE CIT(A) - IT/TP / CIT - IV , PUNE ; THE DIT (TP/IT), PUNE ; THE DR B , ITAT, PUNE; GUARD FILE . / BY ORDER, & ' // TRUE COPY // / ASSISTANT REGISTRAR, + , / ITAT, PUNE