TMI Blog2012 (6) TMI 388X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be taken as comparable on grounds - Lucid Software Limited - this company cannot be treated as having same function and profitability ratio, since company has employed heavy capital in product development expenditure - Infosys Technologies Ltd & Wipro Ltd.-IT Services Segment - cannot be taken as comparable due to size of the company in terms of the sales revenue, stage of business cycle and company's growth cycle - Tata Elxsi Limited - since it is engaged in development of niche product and development services, which is entirely different from the assessee company - Avani CincomTechnologies Ltd.('Avani Cincom') - segmental details of operating income of IT services and sale of software products have not been provided so as to see whether the profit ratio of this company can be taken into consideration for comparison. Assessing Officer is directed to determine the profit ratio after taking the arithmetic mean of all the final tested parties (i.e. after excluding five entities as discussed above) and determine the ALP of the assessee company for international transactions. Depreciation on UPS - 15% or 60% - Held that:- Since computer system can function independentl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciate enterprises (AEs) were as follows :- Sl.No. Description of the transactions Amount(Rs.) 1. Import of capital goods 1,88,85,183 2. Fees for Marketing Services 5,36,48,151 3. Fees for Technical Support Services 6,68,54,541 4. Fees for Software Development and Related Services 10,47,45,490 5. Reimbursement of expenses 2,90,83,299 6. Recovery of expenses 3,17,66,999 2.1 For establishing the arms length price relating to software development and related services, the assessee in the TP Study of the relevant financial year adopted the 'Transaction Net Margin Method' ('TNMM') as the most appropriate method. As per the TP Study report submitted by the assessee, it had identified 18 comparable companies engaged in the software developme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing profit margins were confirmed by the DRP. After giving effect to the DRP's directions to the comparables, the Assessing Officer finally took the arithmetic mean of 27 comparables which worked out to 24.72%. Based on this, the arms length price for international transaction from the AEs was determined after making adjustment of ₹ 88,49,974/-, which was added to the income of the assessee. Against this addition, the assessee has come before us, in this appeal. 5. Learned AR appearing on behalf of the assessee submitted that out of 27 comparable companies, 19 of such entities are not contested and the percentage of operating profit shown by them are accepted. However, for the balance 8 companies, the learned AR submitted his exhaustive objections as to why such comparable cannot be taken into consideration. Based on such objections, the learned AR finally analyzed the arithmetic mean of all the comparables at 18.38% as against 15%, declared by the assessee in the following manner :- Sl. No. Name of Company Operating Profit/Total Cost Ratio (FY 2006-07) As per DRP Operating Profit/ Total Cost Rat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 22. Celestial Labs Ltd 58.35% -- 23. Infosys Technologies Ltd 40.30% -- 24. Wipro Ltd.(Segment) 33.65% -- 25. Flextronics Software Systems Ltd.(Segment) 25.31% -- 26. Tata Elxsi Ltd(Segment) 26.51% -- 27. Avani Cimcon Technologies Ltd. 52.59% -- Arithmetic Mean Margin of Comparables 24.72% 18.38% Assessee's Margin 15.00% Sl.No.20 to 27 have been objected to by the assessee. 6. We now proceed to deal with the objections of the learned AR with regard to the aforesaid 8 comparable entities and also the objections of the learned CIT DR. ( i ) R Systems International Ltd (Segment) : 6.1 This entity has been accepted to be taken for comparable analysis, however, the learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t expenditure itself was ₹ 47,14,783/-, which comes to 39.76% of the capital. The said party is a product software company, different from assessee's nature of activities which is purely engaged in software services. The software product company is different from software development company as the margin of profit in sale of product is very high, hence, it cannot be taken as a comparable case. Alternatively, he submitted that the TPO has wrongly ignored, depreciation and amortisation of the software development expenses and excluded the interest from the operating profit. The analysis of the operating profit vis- -vis the analysis of TPO was given as under :- Particulars As per TPO As per Appellant Operating Revenue 16,992,078 16,992,078 Less : Software services and administrative expenses 11,507,896 11,507,896 Interest (3,99,799) - Foreign exchange fluctuation (134,783) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... strate that it is not comparable at all in the following manner :- Basic/ Particular Infosys Technology Limited Appellant Risk Profile Operate as full-fledged risk taking entrepreneurs Operates at minimal risks as the 100% services are provided to AE Nature of Services Diversified-consulting, application design, development, re-engineering and maintenance, system integration, package evaluation and implementation and business process management, etc. Software Development Services Revenue Rs.13145 Crores Rs.10.47 Crores Ownership of branded/proprietary products. Develops/owns proprietary product like Finacle. Also, the company derives substantial portion of its revenue from sale of its proprietary products (including its flagship banking product suite 'Finacle') As per the annual report of the company, it has intangibles assets worth approx., ₹ 89,069 Crores for the period ended March 31, 2007 N.A. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that services constitute almost 90% of its sales and product sales is only 10%, hence, TPO has rightly taken the said company for comparability analysis and the contention of the assessee should be rejected. ( vii ) Tata Elxsi Limited: 6.7 Learned AR submitted that the software development services rendered by Tata Elxsi are for product development services, innovation design, engineering and visual computing labs, which is different from what the assessee company is mostly involved. He strongly contended that the innovation design and visual computing labs are entirely not comparable. The company is involved in product design and engineering for automotive, consumer goods, electronic and visual computing labs and undertakes content development and animation services for graphics and software animation and image/video editing. He also drew our attention to the relevant extract of the company's reply which was given to the TPO in response to notice under Section 133 (6) that its activities is into very niche and specialized activities and do not have any comparable company, which is operating in the area in which the said company operates. Thus, this company cannot b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e deducted while working out the operating profit from the operating revenue. We are unable to agree with the contention of the learned AR that the provision for doubtful debts and provision for doubtful advances are part of the operating expenses. The operating expenses are the expenses which are incurred to earn operational income and, thus, the expenses which have direct nexus with the revenue has to be considered as operational expenses. The doubtful advances and doubtful debts cannot be considered as normal expenses as they are dependent upon number of factors in relation to the trade/business transactions. Accretion of a debt and write off depends upon the wisdom of the business enterprise with regard to timing of its identification and claim as expenditure. Similarly, doubtful advances, the very nature of it, signifies that it has not been incurred in the normal course of business operations. The nature of advance depends upon the transactions between the two parties and its treatment to be doubtful again depends upon the wisdom of the business enterprise and various other factors which requires scrutiny. The very nature of doubtful debts and doubtful advances are that it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... velopment expenditure itself is substantial vis-a-vis the capital employed by the said company, this criteria for being taken as comparable party, gets vitiated. For the purpose of comparability analysis, it is essential that the characteristics and the functions are by and large similar as that of the assessee company and T.P. analysis/study can be made with fewest and most reliable adjustment. If a company has employed heavy capital in development of a product then profitability in the sale of product would be entirely different from the company, who is involved in service sector. Therefore, this company cannot be treated as having same function and profitability ratio. In our view, due to non-availability of full information about the segmental details as to how much is the sale of product and how much is from the services, therefore, this entity cannot be taken into account for comparability analysis for determining arms length price in the case of the assessee. 7.3 Celestial Labs Ltd. : Regarding this company the learned AR submitted that this company is also engaged in development of products in the field of bio-technology, pharmaceutical etc. However, learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee company and therefore, the Infosys cannot be treated as comparable entity for making comparability analysis with the assessee company. The comparability of Infosys Technology of the company as that of an assessee has been dealt with ITAT Delhi Bench in the case of ' Agnity India Technologies ( P. ) Ltd. ( supra ), wherein it was held that Infosys is a giant in the area of development of software and it assumes all risks, leading to higher profit and cannot be compared with the company which is a captive unit of its parent company assuming only limited currency risk. In view of the above finding, we hold that the Infosys cannot be taken as a comparable for determining the arms length price in the case of the assessee. 7.5 Wipro Ltd.-IT Services Segment('Wipro') : This company is also a global IT Company having varieties of service and products and looking to the magnitude of its operations, sales and expenses, the same cannot be taken into consideration for comparability analysis. Moreover, 67% of its sales relates to its product which are sold on premium resulting into higher profitability, therefore, cannot be compared with the assessee compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncomTechnologies Ltd.('Avani Cincom'): Here in this case also the segmental details of operating income of IT services and sale of software products have not been provided so as to see whether the profit ratio of this company can be taken into consideration for comparing the case that of assessee. In absence of any kind of details provided by the TPO, we are unable to persuade ourselves to include it as comparable party. Learned CIT DR has provided a copy of profit loss account which shows that mainly its earning is from software exports, however, the details of percentage of export of products or services have not been given. We, therefore, reject this company also from taking into consideration for comparability analysis. 8. Further the learned AR also submitted that the benefit under Section 92 C (2) for +/- 5% range should be given and if adjustment as per the assessee is made then the same would fall within the 5% range. 9. In view of our finding of each and every eight comparable case, which are in dispute before us, we direct the Assessing Officer to determine the profit ratio after taking the arithmetic mean of all the final tested parties (i.e. after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... depreciation of computer and depreciation of UPS :- The expression computer has not been defined in the Act. However, it has been defined by s.2(1)(i) of the Information Technology Act, 2000. As per the said Act, computer means any electronic, magnet, optical or other high speed data processing device or system which performs logical, arithmetic and memory functions by manipulation of electronics or magnetic or optical impulses and include all input-output processing, storage, computer software or communication facilities which are connected or related to the computer in a computer system or computer network .Whereas the UPS, is defined by Webopedia Computer Dictionary, stands for uninterruptible power supply. Thus, the UPS mainly ensures uninterrupted power supply to computer network and also regulated the flow of power to avoid any kind of damage to the computer network. It is, thus, a source of alternative supply of power to the computer and applying the functional test also, it is a part of power supply system and not the computer system. The UPS is also not inbuilt in the computer as a battery in the laptop to make it an integral part of the computer syst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x chargeable on the total income declared in the return of income furnished by the assessee, as reduced by the amount of tax deductible or collectible at source. The following details of advance tax payment has been placed on record :- Due Date Amount Due Amount paid Cumulative adv tax paid % (Rs) Date (Rs.) (Rs.) (a) (b) (c) (d) (e) (f) 15-Jun-06 15% 6,55,180 14-Jun-06 9,80,000 9,80,000 15-Sep-06 45% 19,65,540 14-Sep-06 15,24,000 25,04,000 15-Dec-06 75% 32,75,900 13-Dec-06 14,36,000 39,40,000 15-Mar-07 100% 43,67,867 14-Mar-07 6,36, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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