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आयकर अपीलीय अिधकरण, ‘डी’ यायपीठ,चे ई

IN THE INCOME TAX APPELLATE TRIBUNAL
‘D’ BENCH, CHENNAI

ी महावीर सह, उपा य एवं ी एस.आर. रघुनाथा, लेखा सद य के सम

BEFORE SHRI MAHAVIR SINGH, VICE PRESIDENTAND
SHRI S.R. RAGHUNATHA, ACCOUNTANT MEMBER

आयकर अपील सं./ITA No.: 630/CHNY/2023

िनधारण वष/Assessment Year:2016-17
&
C.O No.28/CHNY/2023
[in I.T.A. No.630/CHNY/2023]

The Income Tax Officer, Encore IT Solutions Pvt.

Corporate Ward 2(1), vs. Ltd.,
Chennai – 600 034. HTC Towers,
No.41 GST Road, Guindy,
Chennai – 600 032.

PAN: AAACE 8044K

(अपीलाथ /Appellant) ( यथ /Respondent/Cross Objector)

राज व क ओर से /Revenue by : ShriG. Suresh, JCIT

िनधा रती क ओर से/Assessee by : Shri Vikram Vijayaraghavan, Advocate

सुनवाई क तारीख/Date of Hearing : 11.07.2024

घोषणा क तारीख/Date of Pronouncement : 11.07.2024

आदेश /O R D E R

PER MAHAVIR SINGH, VICE PRESIDENT:

This appeal by the Revenue and cross objection by the assessee

are arising out of the order of the Commissioner of Income Tax

(Appeals), Chennai in ITA No.543/CIT(A)-16/2019-20 dated

20.03.2023. The assessment was framed by the Asst. Commissioner

of Income Tax, Circle-2(1), Chennai for the assessment year 2016-

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CO No.28/CHNY/2023

17 u/s.143(3) of the Income Tax Act (hereinafter the ‘Act’) vide

orderdated18.12.2019.

2. At the outset, it is pointed out by the Registry that this appeal

is time barred by 1186 days as Revenue in its Form 36 has pointed

out that the date of order is 18.12.2019 and date of communication

or service of order is 20.12.2019. But, when it was pointed out, the

ld.Senior DR pointed out that the date of order is 20.03.2023 and

this order was received in the office of PCIT on 28.03.2023, as the

date is mentioned and the appeal before Tribunal was filed on

19.05.2023. It means that this is within time and there is no delay.

3. Coming to the issue on merits raised by Revenue as regards to

the order of CIT(A) deleting the TP adjustment of Rs.2,50,08,077/-

towards the value of international transaction. For this, the Revenue

has raised the following effective ground nos.2 to 5:-

2. The Ld. CIT(A) erred in holding that upper turnover filter of 200crores
has to be adopted while selecting the comparable set of companies, for the
purpose of bench marking under TNMM Method.

3.The Ld. CITA) erred in not considering the decisions of the Hon’bleITAT,
Mumbai and ITAT, Delhi in the cases of M/s Capgemini and M/s. S T
Micro Electronics Put. Ltd.

4. The Ld. CIT(A) erred in holding that the comparable companies emerged
from the search process conducted by the TPO are functionally dissimilar
to the assessee company.

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5. The Ld.CIT(A) erred in holding that the net margin earned by the
assessee company from the international transaction involving provision of
software staffing support services to its holding company viz. Encore US is
at arm's Length from the Indian TP perspective.

4. Brief facts are that the assessee is a private limited company

incorporated in India and 100% wholly owned subsidiary of Encore

Software Services Inc., USA. The assessee is engaged in the

business of rendering software staffing services to the parent

company’s clients. The parent company is not a big company with

big clientele, rather a small entity that serves a few small and mid-

size clients in the US. The clients are all situated in USA. The

assessee do not have the ability to acquire clients on its own,

neither the ability to ascertain the service requirements of clients

but wholly dependent on such skills of the parent company. The

parent company is bound by tax laws in USA and the individual

status within the USA where it conducts its businesses. The parent

company ascertains the skill and nature of IT solution requirements

and accordingly, delivers services with its clients. The assessee filed

its return of income for the relevant assessment year 2017-18 and

subsequently, assessee’s case was selected for scrutiny assessment

for limited scrutiny under CASS and accordingly, notice u/s.143(2)

of the Act was issued and served on assessee. The assessee’s case

was selected for limited scrutiny for the reason to verify “large

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aggregate value of total employee cost in comparison to aggregate

value of international transaction as per books of accounts.”

Accordingly, assessee’s case was referred by the AO to TPO for

determining the Arms Length Price with reference to all the

transactions reported in Form No.3CEB filed along with the return of

income for the assessment year 2016-17. The TPO determined the

Arms Length Price of the International transactions entered into by

the assessee vide letter dated 31.10.2019 u/s.92CA of the Act and

computed ALP at Rs.2,50,08,077/- as under:-

“9. In the light of the discussions, the Arm’s Length Price of the
International Transactions is determined as under:

ALP Calculation:
Value of Transaction with AE = Rs.16,46,22,188
Margin of the assessee company = 5.39%
Median of the list of Comparable Company = 21.4%

If
Cost Markup (%) Sales (%)
100 5.39 105.39
100 21.4 121.4

ALP of the transaction = Rs.16,46,22,188 x 121.4 /105.39 =

Rs.18,96,30,265/-

Since the margin of the assessee company do not fall within range of the
comparable margin, an adjustment of Rs.2,50,08,077/- is made to the value
of the international transaction.”

4.1 Consequently, the AO passed the draft assessment order

u/s.144C of the Act dated 06.11.2019 and made TP adjustment as

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proposed by the TPO of Rs.2,50,08,077/-. Consequent to draft

assessment order, as no objection was filed by the assessee before

DRP, final assessment order was passed by the AO u/s.143(3) r.w.s.

92CA(3) of the Act dated 18.12.2019 and TP adjustment was

retained at Rs.2,50,08,077/-. Aggrieved, assessee came in appeal

before the CIT(A).

5. The CIT(A) after going through the submissions of the

assessee deleted the TP adjustment by observing in paras 8.1 & 8.2

as under:-

“8.1 For all the reasons mentioned in the instant order, basis of the
above table, the net margin earned by the appellant at 5.39% from the
international transaction involving provision of software staffing support
services to its holding company viz ENCORE US is reasonable and the
same is at arm’s length from Indian TP perspective considering the
functional profile of the appellant company.

8.2 Thus, the AO/TPO is directed to delete the TP adjustment to the

extent of Rs.2,50,08,077/-.

Aggrieved, Revenue came in appeal before the Tribunal.

6. We have heard rival contentions and gone through facts and

circumstances of the case. We have perused the case records

including the TPO’s order, assessment order and the order of CIT(A).

We have also perused the paper-book filed by assessee including the

replies filed before TPO and CIT(A). The sole issue before us for

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adjudication in this Revenue appeal, whether the TPO’s adoption of

certain companies as comparable to the assessee’s company is

correct or the assessee adopted certain companies as comparable

companies is correct. The companies adopted by assessee giving

details of net sales, sales to total income, operating profit, operating

margin, PBT, net worth, operating profit to total income, RPT to

sales are as under:-

Operati Operat
Sales to
Operat ng ing RPT to
Company Long Year Net Total Net-
ing Profit PBT Profit Sales
Name End Sales Income worth
Profit Margin to (%)
(x)
(%) Total
Ram Info Ltd 201603 22.69 0.94 1.38 6.08 0.98 8.3 6.38 4.2
ACS Technologies
201603 29,95 0.98 0.96 3.21 0.52 1.12 3.3 0
Ltd
APITCO Ltd. 201603 18.13 0.98 0.64 3.53 0.93 23.18 3.64 -
R A S Infotech Ltd 201603 16.54 0.89 0.17 1.03 2.11 8.13 1.03 3.08
Softdel Systems Pvt
201603 17.43 0.98 0.35 2.01 0.25 2.85 2.03 15.4
Ltd
Batchmaster
201603 22.57 1 0.74 3.28 0.19 0.89 3.31 2.34
Software Pvt Ltd
True Sparrow
201603 15.78 0.96 0.54 3.42 0.36 17.47 3.38 -
Systems Pvt Ltd
IFS Solutions India
201603 23.07 0.97 1.02 4.42 1.58 14.38 4.6 -
Pvt Ltd
Handygo
Technologies Pvt 201603 20.83 0.96 1.07 5.14 0.19 10.87 5.26 27.82
Ltd
Health Asyst Pvt Ltd 201603 29.47 0.94 1.13 3.83 2.54 43.17 3.94 -
Mantra Softech (I)
201603 29.85 0.92 1.37 4.59 0.39 3.01 4.74 -
Pvt Ltd
MFX Infotech Pvt
201603 20.66 1 0.65 3.15 0.07 1.62 3.23 -
Ltd

The assessee as well as the Revenue admitted that the assessee’s

turnover in this year is Rs.17 crore and it was almost from Rs.15 to

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20 crore range from last five years. The assessee’s essential

function is software staffing services. Admittedly, the comparable

selected by Revenue i.e., TPO are as under, which includes reasons

for its non-comparability with that of the assessee and the relevant

chart reads as under:-

Reason for its non comparability

with that of Encore (being a
Name of the Company
S software development company –
(Given by the Department Operating Margin
.No. not only specific product – with
as Comparable)
turnover of around Rs.17 Crores in
2016)
1 Cigntit Technologies Ltd. 19.25% Turnover more than Rs.280 Crores
2 Larsen & Turbo Infotech 21.98% Turnover of about Rs.6000 Crores.
Ltd. Not comparable
3 Mindtree Ltd 19.86% Software product – Turnover about
Rs.4600 Crores. Hence not
comparable
4 Tata Elxsi Ltd. 24.51% Product design and development –
Turnover of Rs.1075 Crores

From the above comparable charts, it is clear that the companies

selected by TPO are not only functionally dissimilar to the functions

performed by the assessee company but it is almost incomparable in

term of turnover filter also, because these companies selected by

TPO is having turnover ranging from Rs.1000 crores to 6000 crores

whereas assessee’s turnover is only Rs.17 crore. Hence, in our view,

the CIT(A) has rightly adopted assessee’s filters and directed the AO

to delete the TP adjustment to the extent of Rs.2,50,08,077/-. We

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find no infirmity in the order of CIT(A) in view of above reasons.

Hence, this issue of Revenue’s appeal is dismissed.

7. Coming to cross objection of the assessee in C.O.

No.28/CHNY/2023, since we have adjudicated the issue of

Revenue’s appeal on merits in favour of assessee, the cross

objection raised by the assessee on jurisdictional issue has become

academic and does not require any adjudication. Hence, the same is

dismissed as academic.

8. In the result, both the appeal filed by the Revenue and the

cross objection filed by the assessee are dismissed.

Order pronounced in the open court at the time of hearing on

11th July, 2024 at Chennai.

Sd/- Sd/-
(एस. आर. रघुनाथा) (महावीर सह )
(S.R. RAGHUNATHA) (MAHAVIR SINGH)
लेखा सद य/ACCOUNTANT MEMBER उपा य /VICE PRESIDENT

चे ई/Chennai,
दनांक/Dated, the 11th July, 2024

RSR
आदेश क ितिलिप अ ेिषत/Copy to:
1. अपीलाथ /Appellant
2. यथ /Respondent
3. आयकर आयु /CIT, Chennai.
4. िवभागीय ितिनिध/DR
5. गाड फाईल/GF.

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