TMI Blog2011 (1) TMI 875X X X X Extracts X X X X X X X X Extracts X X X X ..... renders the Orders of the TPO and the AO to be non-speaking, so far as the objections raised by the assessee - in the case of Vodafone Essar Ltd. v. the Dispute Resolution Penal-II & Others", (2011 -TMI - 207599 - Delhi High Court), the jurisdictional High Court has held that it is obligatory for a judicial body like the Dispute Resolution Panel to pass a reasoned order - Appeal is allowed by way of remand to DRP - ITA NO. 4370/DEL./2010 - - - Dated:- 21-1-2011 - ORDER Per A.D. JAIN, Judicial Member : This is assessee's appeal for assessment year 2000-07 against the order dated 25.08.2010, passed by AO. The following effective of grounds of appeal have been raised : "1. The draft assessment order passed by the Ld.AO is bad in law and void ab-initio. 2. The Ld.Dispute Resolution Panel ("Ld.DRP") and the Ld.AO ( Ld.AO ) (following the directions of the Ld.DRP) erred both on facts and in law in confirming the addition of Rs. 59,411,421 to the income of the appellant proposed by the Ld.Transfer Pricing Officer (Ld.TPO") by holding that its international transactions pertaining to provision of information Technology "IT") Enabled Services ("ITES") and Contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... data, for FYs 2003-04 to 05-06, to the extent available. 6. In the TP assessment proceedings, the TPO asked the assessee to furnish the current year data i.e. data for FY 2005-06. This was duly submitted by the assessee while at the same time maintaining is stand that multiple year data should be relied on. A summary of such data has been tabulated as follows: Particulars ITES CSD segment No. of companies 13 20 Mean (average) OP/TC 7% 7% Appellant's OP/TC Value of transaction 14.48% 80.32 13.27% 14.14 The TPO made a total adjustment of Rs. 59411421 (Rs. 17,173470 (from CSD segment) + Rs. 42237951 (from ITES segment). 7. For the assessee's CSD segment, the TPO took four comparables for benchmarking, the assessee's international transactions, as follows: S.No. Company DP/TC 1. Bodhtree Consulting Ltd. 14% 2. SIP Technologies Ltd. 21% 3. Infosys Ltd. 38.74% 4. Wipro Ltd. 34.38% Mean 27.03% 8. The TPO rejected a number of compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se Quality Services l Independent Validation Services l Infomation Management Services l Infrastructure Services l Packaged Application Services l SOA Services Systems Integration Services" We provide concept-to-market R D and engineering services to improve your product operations. Our services address the complete engineering value chain spanning various industry verticals. l Product Engineering l Manufacturing Process and Plant Solutions l Lifecycle Management" BPO Services Infosys BPO combines domain expertise process skills and technology to deliver world-class process outsourcing Offering by Function l Business Platforms l Customer Service Outsourcing l Finance and Accounting l Human Resource Outsourcing l Knowledge Services l Legal Services l Order managemen l Sourcing and Procurement Outsourcing" Hence, unlike the assessee, the company is extremely diversified and undertakes a wide range of services apart form software development. Since, the revenues and profitability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ite vs. Offshore) Infosys Onsite-49.8% Offshore-50.2% Typically, onsite command higher billable rates and consequently it would not be appropriate to compare the assessee which earns its entire income from offshore services with Infosys which earns more than half of is services income from onsite services. (d) Comparison of turnover The importance of turnover/size as a quantitative filter for comparability analysis cannot be underestimated Greater size implies economies of scale and more bargaining power that may impact profitability of a company. Size of a company also matters while raising financial resources for investment/expansion purposes. In this regard, the assessee would like to place reliance on the decision of the Hon'ble Pune Bench of the Income-tax Appellate Tribunal ('ITAT') in the matter of M/s E-Gain Communication Pvt. Ltd., ITA NO.1685/PN/2007 which states the following in respect of a similar issue:- We see no justification for considering oversized companies as taken by the TPO' (Emphasis supplied) One may also usefully refer to the following extract fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roposed by your goodself. (ii) Wipro Ltd. ('Wipro') Wipro should not be included in the final set of comparables for the following reasons: (a) Diversified nature of operations The annual report of the company for FY 2005-06 provides details on the manufacturing activity undertaken by the company. The annual report provides information on the licensed/-registered/-installed capacities for various product lines which include Vanaspati/Hydrogenated Oils. Toilet soaps Leather shoe uppers, leather shoes and allied articles. Fatty acids, Glycerine, GLS Lamps. TL shells, Flourescent tube lights. CFL and Mini computers/micro processor based systems. Moreover, the break-up of 'cost of sales and services' (INR 68,634.87 million) provided in 'Schedule 14 of the financial statements demonstrates that 'raw material, finished and process stocks' (INR 13,264.79 million) as well as 'stores and spares' (INR 387.89 million) together constitute close to 20 percent of the total 'cost of sales and services'. The fact that manufacturing activity is undertaken by the company is also borne out from Schedule 7 of the financial statements prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Managed Services l Lab on Hire Infrastructure Management Services l Transformation consulting and Global SI l Business service management l IT service desk l End-user computing l Network services l Datacenter services l Enterprise security Business Process Outsourcing l Customer Service l Technical Help Desk l Finance and Accounts Outsourcing l Human Resource Outsourcing l Procurement Outsourcing l Specialized Services l BASE Product engineering services l Product strategy and consulting l Application and Embedded software l Electronic hardware and VLSI design l Mechanical engineering design l Technical publications l Industrial automation and engineering l DSP Multimedia l High performance computing Hence, clearly even within the domain of IT services, the company is diversified and not undertaking just software development but a far broader range of services which renders the company incomparable to the assessee. (b) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... innovation Projects Wipro's innovation initiative has a full time team of 275 and CoEs have a full time team of 128 and about 100 leveraged resources. We fun 40 CoEs and 50 Innovation Projects Revenues from innovation for the year 2005-06 are $53 million. Our Technology IP Innovations contributed $84. Business innovative solutions contributed about $41 million and Business Productivity Tools innovative solutions contributed $36 million. The enabled opportunities from CoEs account for $48.2 million.' 'Generation, Incubation and Successful Execution Further, the fixed assets schedule (Schedule 5') in the company a financial statements includes 'Patents trademarks rights' at a value of INR 731 crores and Technical know-how' at 103 crores. Therefore, unlike the assesse which is a routine captive service provider (not indulging in any R D efforts resulting in violation of non-routine valuable intangibles). Wipro undertakes R D and also owns intangible assets. On this ground alone the said company warrants exclusion from the final set of comparables chosen for benchmarking assessee's international transactions. (d) Comparison of turnover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the returned income of the assessee is on account of difference in the arm's length price of transactions as declared by the assessee and as computed in order u/s 92CA(4) of the Act. The ALP (arm's length price) declared by the assessee for international receipts for software development is at Rs. 141357964 whereas as per the order u/s 92CA(3) of the Act it is computed at Rs. 158531434 whereby making an addition of the difference of Rs. 17173470. Also the ALP (arm's length price) declared by the assessee for international receipts for the IT-enabled services is at Rs. 803214141 whereas as per the order u/s 92CA(3) of the Act it is computed at Rs. 84,54,52,092 whereby making an addition of the difference of Rs. 4,22,37,951. Hence, the income declared by the assessee is enhanced from the returned income of nil and computed at Rs. 5,94,11,421. The income computed as per the provisions of section 92CA of the Act is strongly based on the provisions of the Act and on settled principles of law by various judicial rulings. As such it brings out the intention of the assessee to conceal its income and by this furnish inaccurate particulars of its income. Hence in my opinion it is a fit case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO has ignored the fact that the assessee is entitled to tax holiday u/s 10A of IT. Act and would not have any untoward motive of deriving a tax advantage by manipulating transfer prices of international transactions. The TPO has disregarded multiple years/prior years data. In ITES segment, the TPO has resorted arbitrary rejection of no profit/loss making companies and retained only high profit making companies as comparables. He has arbitrary substituted turnover filter of Rs. 5 crores against Rs. 1 crore as taken by the assessee. It has been stated that certain company have been excluded on the ground that they are functionally incomparable and that the TPO has failed to apply the wages/sales ratio filter in ITES segment. 2.3 The submissions made by the assessee have been considered but the same are not correct. The TPO has not selected new comparables but have short listed some companies out of given set of comparables by assessee itself. This short listing has been done by applying scientific and logical filters. The assessee's submission in the matter of last year/prior year's data for comparables has also not been found correct. In the matter of risk adjustment also the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee (as computed by your goodself), is in any case based on the company-wide numbers, and could thus be equally applied to the IT enabled services' business segment. If the wages/sales ratio filter in the range of 30-60 per cent is applied to the set of comparables proposed by your goodself vide notice dated July 14,2009 (without prejudice to all other objections raised by the assessee against use of such set of comparables - refer the assessee's reply to the said notice vide submission dated August 3, 2009) for benchmarking assessee's 'IT enabled services' business segment, then the following result is achieved (refer table below) S.No. Company Wages/Sales Application of wages/sales ratio filter 30-60 per cent OP/TC 1. Allsec Technologies Ltd. 38.72% Accepted 28.73% 2. Nucleus Nelson and GlS (India) Ltd. 23.24% Rejected 35.89% 3. Galaxy Commercial Ltd. 51.70% Accepted 19.77% 4. Maple Esolutions Ltd. 30.96% Accepted 36.83% 5. Vishal Information Technologies Ltd. 1 49% Rejected 48.05% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if any, of the Assessing Officer, Valuation Officer or Transfer Pricing Officer or any other authority; (e) records relating to the draft order; (f) evidence collected by, or caused to be collected by, it; and (g) result of any enquiry made by, or caused to be made by, it. (7) The Dispute Resolution panel may, before issuing any directions referred to in sub-section (5), (a) make such further enquiry, as it thinks fit; or (b) cause any further enquiry to be made by any income tax authority and report the result of the same to it. (8) The Dispute Resolution Panel may confirm, reduce or enhance the variations proposed in the draft order so, however, that it shall not set aside any proposed variation or issue any direction under sub-section (5) for further enquiry and passing of the assessment order. (9) If the members of the Dispute Resolution Panel differ in opinion on any point, the point shall be decided according to the opinion of the majority of the members. (10) Every direction issued by the Dispute Resolution Panel shall be binding on the Assessing Officer. (11) No direction under sub-section (5) shall be issued unless an opportunity ..... X X X X Extracts X X X X X X X X Extracts X X X X
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