Taluna India Private Limited, Gurgaon vs Assessee

Appellant by : Shri Ashwani Taneja, Advocate Shri Rohit Tiwari, CA Respondent by : Shri Judy James, Standing Counsel

ORDER

PER J.S. REDDY, AM:

1. Both these appeals filed by the assessee are directed against the order passed

by the Assessing Officer u/s 143(3) r.w.s. 144C of the I.T. Act, 1961 for the AY

2008-09 on 29.10.2012 and order dated 29.11.2013 for the AY 2009-10, giving ITA No.6407/Del /2012 2 ITA NO.989/DEL/2014

effect to the order of the DRP-I u/s 144C(5) of the Act. As the issues arising in

both the appeals are common, for the sake of convenience, they heard together and

disposed of by way of this common order.

2. The facts are giving in paras 2, to 2.3 of the TPO order, which is extracted

for ready reference:

"2. Taxpayer's profile 2.1 Name The assessee, Green Filed Online Pvt. Ltd. is primarily engaged in providing contract IT and related services to Greenfield Online Inc. USA (Greenfield US). During FY 2007-08, the taxpayer has also provided marketing support services.

2.2 Segmental Financial Results of the taxpayer for the FY 2007-08

Particulars Software development Market Support Services Operating Revenues 216,533,544 1,589,732 Operating Expenses 188,195,099 1,471,974 Operating Profit 28,338,445 117,758 OP/TC 15.06% 8.00% Method used TNMM TNMM PLI OP/TC OP/TC No of comparables 20 5 Mean Margin of Comparables 13.32% 11.06%

2.3 International Transaction (as mentioned in the 92 CE report)

Provision of Software 216,533,544 Development Services Provision of Market Support 1,589,732 Services Interest on Loan 1,286,086

Software Development Services As the method followed by the TPO and the tax payer is TNMM (as discussed below), these transaction are aggregated for the transfer pricing study."

3. The grounds of appeal for the AY 2008-09 reads as follows:

"1. The Assessment Order passed in pursuance to the directions issued by the Learned Dispute Resolution Panel ('Ld. DRP') is a vitiated order as the Ld. DRP erred both on facts and in law in confirming part of the addition made by the Ld. Assessing Officer ('AO') to the Appellant's income by issuing an order without appropriate application of mind.

ITA No.6407/Del /2012 3 ITA NO.989/DEL/2014

2. The Ld. AO/ Learned Transfer Pricing Officer (Ld. TPO) and the Ld. DRP erred in ignoring the fact that the reference made u/s 143(2) of the Act by the Ld. AO suffers from jurisdictional error as the Ld. AO did not record any reasons in the draft assessment order based on which it was concluded that it was 'necessary or expedient' to refer the matter to the Ld. TPO for computation of the Arm's Length Price (,ALP') for the Appellant's international transactions of provision of contract IT services and provision of marketing support services.

3. The Ld. TPO grossly erred in not considering the correct Operating Profit/ Total Cost ('OP/TC') margins of specific comparable companies with respect to the Appellant's international transaction of provision of contract IT services, despite the fact that the correct computations of OP/TC margins of the said comparable companies were duly submitted by the Appellant before the Ld. TPO in accordance with the directions of the Ld. DRP and the same were also duly checked and verified by the Ld. TPO.

4. The Ld. AO/Ld. DRP erred both on facts and in law in enhancing the income of the Appellant by Rs. 20,039,621/- by holding that its international transactions of provision of contract IT services and provision of marketing support services do not satisfy the arm's length principle envisaged under the Act. In doing so, the Ld. DRP has grossly erred in agreeing with the Ld. TPO's action of:

4.1 not appreciating that none of the conditions set out in section 92C(3) of the Act were satisfied in the present case;

4.2 disregarding the ALP as determined by the Appellant in the Transfer Pricing ("TP') documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('Rules') as well as fresh search; and in particular modifying/ rejecting the filters applied by the Appellant; 4.3 disregarding multiple year prior years' data as used by the Appellant in the TP documentation and holding that current year i.e. Financial Year 2007-08 data for comparable companies should be used despite the fact that the same was not necessarily available to the Appellant at the time of preparing its TP documentation;

4.4 rejecting comparability analysis in the TP documentation/Appellant's fresh search and instead, conducting a fresh comparability analysis based on the application of erroneous and inappropriate quantitative and qualitative filters in determining the ALP for the Appellant's international transactions of provision of contract IT services and provision of marketing support services; 4.5 . including certain companies in the final set that were not comparable to the Appellant in terms of functions performed, assets employed and risks assumed with respect to the Appellant's international transactions of provision of contract IT services and provision of marketing support services; 4.6 excluding certain companies on arbitrary / frivolous grounds even though they were comparable to the Appellant in terms of functions performed, assets employed and risks assumed with respect to the Appellant's international transactions of provision of contract IT services and provision of marketing support services;

4.7 considering foreign exchange fluctuations as operating in nature while calculating the OP/TC margins of certain comparables for determining the ITA No.6407/Del /2012 4 ITA NO.989/DEL/2014

ALP of the Appellant's international transactions of provision of contract IT services and provision of marketing support services; 4.8 including high-profit making companies in the final comparables' set for benchmarking a normal risk bearing Company such as the Appellant and not allowing a risk adjustment to the Appellant;

4.9 collecting information of the companies under section 133(6) of the Act that was not available to the Appellant in the public domain and relying on the same for comparability purposes;

4.10 grossly erred in not providing the benefit of +/- 5% range to the Appellant; and 4.11 disregarding judicial pronouncements in India in undertaking the TP adjustment.

5. That the Ld. AO has grossly erred in initiating penalty proceedings u/s 271 of the Act mechanically and without recording any satisfaction for its initiation.

6. That the Ld. AO has grossly erred in levying an interest u/s 234B of the Act to the taxable income of the Appellant."

4. We have heard Shri Ashwani Taneja, Ld. counsel for the assessee and Shri

Judy James, Ld. Standing Counsel on behalf of the Revenue.

5. Shri Ashwani Taneja, Ld. counsel for the assessee submitted that though a

number of grounds have been raised in this appeal, he would be only disputing the

inclusion of certain comparables by the TPO for determining the Arm's Length

Price. He relied on the decision of the Tribunal in the assessee's own case in the

earlier assessment year and submitted that the same should be followed and the

comparable directed to be excluded by the ITAT in its earlier year order, should

also be excluded by the T.P.O. in the present T.P. order.

6. Ld. Standing Counsel opposed this contention without distinguishing the

order of the ITAT for the earlier assessment year.

7. From the perusal of the order-sheet entry, it is clear that a copy of the

Tribunal's order in the assessee's own case for the immediately preceding year was ITA No.6407/Del /2012 5 ITA NO.989/DEL/2014

given to Standing Counsel on 18.03.2015. The Standing Counsel could not submit

as to why the order of the Tribunal in the assessee's own case for the earlier

assessment year should not be followed. He could not demonstrate that there is

difference in the facts for both the years. Under these circumstances, we

respectfully follow the order of the coordinate Bench of the Tribunal in the

assessee own case in the earlier assessment year and directed the Assessing Officer

to exclude from the comparables, the following companies:

1) Infosys Technologies Ltd.; 2) KALS Information Systems Ltd. (Segmental); 3) Tata Elxsi Ltd. (Software development and services segment) and 4) Wipro Ltd. (IT Services segment);

and then workout afresh the Arm's Length Price.

8. For the sake of brevity, we do not extract the findings of the Tribunal on

each of these comparables. Suffice to say, the issue of Infosys Technologies Ltd.

being treated as a comparable was dealt with by the Tribunal at Para 25 at Page 29

of the order and the issue of KALS Information Systems Ltd. (Segmental) was

dealt with at Para 27.1 at Page 32 of that order. Similarly, the issue of Tata Elxsi

Ltd. being treated as a comparable was discussed at Para 39.1 and 39.2 at pages 39

& 40 of that order and the issue of Wipro Ltd. being treated as a comparable was

discussed at Para 41 pages 40 & 41 of the order for the AY 2007-08.

9. Ld. counsel for the assessee submits that if these comparables are eliminated

from the list of comparables, then the Arm's Length Price worked out by the

assessee would be the same as Arm's Length Price arrived at by the Revenue. As ITA No.6407/Del /2012 6 ITA NO.989/DEL/2014

the assessee felt that it would get relief on this count, the Ld. counsel did not

advance any arguments on the other grounds raised in this regard for the reason

that it would be academic exercise. He reserved his right to raise these grounds in

other assessment year.

10. In view of above submission, we do not deal with all the other ground of the

assessee and dismiss the same as not argued in the present proceedings.

11. In the result, this appeal is allowed in part.

12. ITA No. 989/Del/2014 pertains to the AY 2009-10, here also the dispute is

regarding selection of comparables by the TPO. The other issue is grant of

"working capital adjustment".

13. The Ld. counsel for the assessee, Mr. Rohit Tiwari submits that he would

press the argument that "Infosys Technologies Ltd." should be eliminated as a

comparable by following the preposition laid down in the order of the Tribunal in

the assessee's own case in ITA No. 5645/Del/2011 for the AY 2007-08 dated

26.08.2014. He further submits that working capital adjustment has to be granted.

Ld. DR though do not leave his ground agreed that the Tribunal has held that

"Infosys Technologies Ltd." cannot be considered as a comparable on the facts and

circumstances of the case. On the issue of "working capital adjustment", he

vehemently contended that the data has not been provided by the assessee to either

the T.P.O. or the D.R.P.

14. In reply, the Ld. counsel for the assessee referred to Page 33 of the order of

Transfer Pricing Officer and also to Para 17.1 of the order of the DRP and ITA No.6407/Del /2012 7 ITA NO.989/DEL/2014

submitted that the date in question was given to both authorities and was before the

authorities and that the same was not considered. He argued that the rejection of

the claim of the assessee for working capital adjustment is against the proposition

of law laid down by various Tribunals. We find that the assessee made detailed

submissions before the lower authorities on this issue, which we do not extract for

the sake of brevity. Suffice to say that the contentions raised by the assessee have

not been dealt with by the TPO as well as the DRP. The propositions of law laid

down by the Tribunals on the issue of working capital adjustment have also not

been considered.

15. Thus, it would be appropriate to set aside the matter to the file of the

Assessing Officer/T.P.O. for fresh adjudication, in accordance with law,

specifically, when the TPO in the preceding AYs 2007-08 & 2008-09 had allowed

the very same adjustment to the assessee on the same facts and had not considered

the material and arguments of the assessee in this year.

16. The TPO is directed to consider the date furnished before him by the

assessee the contention raised on this issue as well as the proposition laid down in

the following cases:

i) Mentor Graphics Pvt. Ltd. (2007) 109 ITD 101 ii) E-Gain Communication (P) Ltd. Vs. ITO (118 ITD 243)

iii) Philips Software Centre Pvt. Ltd. (119 TTJ 721)

iv) Nokia India Pvt. Ltd. [2012] 20 taxmann.com 810 (Delhi) ITA No.6407/Del /2012 8 ITA NO.989/DEL/2014

17. In the result, this appeal of the assessee is allowed in part.

The Order pronounced in the open Court on 2nd June, 2015.

Sd/- Sd/- (GEORGE GEORGE K.) (J.S. REDDY) Judicial Member Accountant Member

Dated: 2 nd June, 2015. Aks/-

Copy forwarded to 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi