TMI Blog2013 (11) TMI 422X X X X Extracts X X X X X X X X Extracts X X X X ..... pon the judgment of Mumbai Tribunal in the case of Telcordia Technologies India (P.) Ltd. [2012 (6) TMI 388 - ITAT MUMBAI], it was held that Tata Elxsi is engaged in development of niche product and development services, which is entirely different from the assessee company. Deduction u/s 10A of the Income Tax Act - Chennai and Hyderabad units should be considered as two distinct and separate units for benefit u/s 10A - It was submitted that benefit u/s 10A has to be granted separately for both the units as each of the unit has separate source of income – Held that:- Reliance has been placed on the assessee’ own case [2013 (11) TMI 1311 - ITAT HYDERABAD] - Chennai Unit is not formed by reconstruction of the Hyderabad unit, but, they ultimately held that Chennai Unit and Hyderabad Unit are not two distinct and independent units - Following the decision of the coordinate bench, allowed the ground of the assessee and direct the AO to allow benefit u/s 10A of the Act to the Chennai Unit – Decided in favor of Assessee. Whether there should be rejection of reimbursement of expenses to Virtusa Corporation, USA of an amount of ₹ 62,71,942/- from the export turnover while comput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal transaction with its AE: (i) Provision of software development services 186,96,89,012 (ii) Reimbursement of expenses to AE 62,71,942 (iii) Reimbursement of expenses by AE 4,42,63,545 3. In course of the proceeding before the TPO, the assessee submitted TP study conducted by M/s Ernst Young, CAs., after undertaking a detailed analysis for determining the functions, assets and risks utilized by the assessee and its AE in respect of international transactions between them. As per the functional analysis in the TP study the assessee was categorised as risk mitigated contract services provider. Transaction Net Margin Method (TNMM) was adopted as most appropriate method for determining ALP. Search was conducted in the Prowess and Capitaline Data Bases to select comparable companies by selecting the operating margin i.e. operating profit to operating cost as profit level indicator. The assessee considered the financial results for the period ending between 1st April, 2004 to 30/06/2007. The aforesaid search process yielded a set of 28 comparables with a weighted average profit margin of 14.64% on operating cost. Since the assessee's net margin during the year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 44,27,871/-. Apart from adding TP adjustment, the Assessing Officer also reduced the communication charges from the export turnover while computing deduction u/s 10 of the Act and also made some other disallowances. 5. Being aggrieved of the draft assessment order, the assessee raised the objections before the DRP. 6. The DRP, however, rejected the objections raised by the assessee with regard to selection of comparables made by the TPO excepting in the case of one of the company selected as comparable, namely, Celestial Labs, which DRP directed to be excluded for determining the ALP. As a result of such order of the DRP, the draft assessment was made final. 7. Being aggrieved, the assessee is in appeal before us. 8. So far as the transfer pricing issues are concerned, the assessee has raised altogether 12 grounds. At the outset, the learned AR submitted before us that the assessee does not want to press ground Nos. 1,2,3,4,5,6,9, 10 11. In view of the aforesaid submissions of the learned AR, these grounds are dismissed as not pressed. 9. In Ground No. 7, the assessee has raised objection with regard to selection of certain companies as comparables by the TPO and sought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perused the material on record with regard to the aforesaid company being treated as comparable. The fact that this company is earning revenue from product development also has not been controverted by the learned DR. The ITAT, Mumbai Bench in case of Telcordia Technologies India (P.) Ltd. (supra) while considering the objections raised with regard to the aforesaid company held as under: "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. It was also highlighted that the margin of this company at 52.59% which represents abnormal circums ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 46 of 2012, dated 25-4-2013]. 5. Adaptec (India) (P.) Ltd. v. Dy. CIT [2013] 154 TTJ 129 (Hyd.) 6. Cordys Software India (P.) Ltd. v. ACIT [IT Appeal No. 1972 (H) of 2011]. 7. Trinity Advanced Software Labs Pvt. Ltd. Vs. ACIT, ITANo. 1129/H/2005. 8. DCIT Vs. Deloitte Consulting India (P) Ltd., 46 SOT 379 (Mum.) 9. Agnity India Technologies v. ITO [IT Appeal No. 3856 (Delhi) of 2010, dated 4-11-2010]. 10. Genesys Integrating Systems India (P.) Ltd. v. Dy. CIT [IT Appeal No. 1231 (Bang) of 2010, dated 5-8-2011]. 11. Brigade Global Services Pvt. Ltd., ITA No. 1449 /H/10. 12. Frost Sullivan India Pvt. Ltd., 50 SOT 517 (Mum.) 2.2 The learned DR, on the other hand, supported the orders of the DRP and TPO in so far as selection of the aforesaid company as comparable. 2.3 We have heard the submissions of the parties and perused the material on record. The issue of comparability of Infosys to companies which are merely captive service provider is no longer RES INTEGRA as different benches of the Tribunal have held that Infosys being a giant company and into diversified activities cannot be treated as comparable. In a recent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he aforesaid company being treated as comparable in case of Intoto Software India (P.) Ltd. (supra) found it to be not a comparable company as it has failed both on account of employee cost filter as well as related party transaction filter and directed to be excluded this company from the list of comparables. Following the aforesaid decision of the coordinate bench, we also direct exclusion of the aforesaid company from the list of comparables while determining the ALP. 4. Lucid Software Ltd. 4.1 Objecting to the aforesaid company being treated as comparable, the learned AR submitted that the aforesaid company cannot be treated as comparable as it has revenue from products also. It was further submitted that segmental financials of the company are also not available. In support of such contention, the learned AR relied on the following decisions of coordinate benches of the Tribunal. 1. Intoto Software India (P.) Ltd. (supra). 2. LG Soft India (P.) Ltd. (supra) 3. Transwitch India (P.) Ltd. (supra). 4. Mercedes Benz Research Development India (P.) Ltd. (supra). 5. CSR India (P.) Ltd. (supra). 6. First Advantage offshore Services (P.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidering the data of only Blueally division, which provides services only. It was submitted that different benches of the Tribunal while considering identical issue have held that segmental margin of the services segment should only be considered as comparable to a software services provider. For such contentions, the learned AR relied on the following decisions: 1. Intoto Software India (P.) Ltd. (supra). 2. LG Soft India (P.) Ltd. (supra). 3. Transwitch India (P.) Ltd. (supra). 4. Mercedes Benz Research Development India (P.) Ltd. (supra). 5. CSR India (P.) Ltd. (supra). 6. First Advantage offshore Services (P.) Ltd. (supra). 7. HCL EAI Services Ltd. (supra). 8. Telcordia Technologies India (P.) Ltd. (supra). 9. Trilogy E Business Software India (P.) Ltd. (supra). 10. Bearing Point Business Consulting (P.) Ltd. (supra). 5.2 The learned DR, on the other hand, referring to the discussions made by the TPO with regard to the aforesaid contention submitted that the aforesaid company has been selected as a comparable on the basis of well founded reason, hence, there is no reason to entertain the objections rais ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company fit for comparability analysis for determining the arms length price for the assessee, hence, should be excluded from the list of comparable parties. " 6.4 Following the decision of the ITAT Mumbai Bench as aforesaid and also considering the fact that the company itself information provided in response to the notice issued u/s 133(6) of the Act has admitted that it cannot be considered as comparable with the assessee, we direct exclusion of the aforesaid company from the list of comparables while determining ALP. 7. Wipro Ltd. 7.1 While objecting to the aforesaid company being treated as comparable, the learned AR submitted that the TPO only on considering segmental details submitted by the said company for IT services, in response to notice issued u/s 133(6), has considered it as a comparable. It was submitted that the aforesaid company is a dive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Ltd. we hold that Wipro Ltd. cannot be treated as comparable with the assessee. 10. In Ground No. 8, the assessee has challenged the action of the TPO in rejecting certain comparables selected by the assessee, which are as under: 1. Aztec Soft Ltd. 2. Birla Technologies Ltd. 3. Indium software India Ltd. 4. Larsen Toubro Infotech. 5. PSI Data systems Ltd. (SEG) 6. VMF Softech Ltd. 11. The learned AR challenging rejection of the aforesaid comparables selected by the assessee in the TP study by the DRP/TPO submitted that the criteria adopted by the TPO while rejecting aforesaid comparables selected by the assessee is not valid as he has not followed a uniform and consistent approach while applying filters. 12. The learned DR, on the other hand submitted that the TPO after appropriately applying filters having found the companies as selected by the assessee to have failed comparability analysis rejected them. Therefore, rejection of the companies is justified. 13. We have heard the submissions of the parties and perused the materials on record. On perusal of the order of the DRP on this issue it is to be seen that so far as the VMF ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d perused the materials on record. We have noticed that the details of reimbursement expenses are given at page 334 of the paper book filed by the assessee. The break-up of the said expenses are not given in detail and it is not clear whether it is the reimbursement of expenses incurred on behalf of the AE. Since the issue is not clear and there is no detailed discussion of the break-up of expenses, we deem it fit and proper to remit the issue to the file of the AO/TPO for detailed verification. We make it clear that if the receipts are mere recovery of expenses without any service then the same should not be added back to the cost base for the purpose of mark-up. It is ordered accordingly." 17. Respectfully following the aforesaid decision of the coordinate bench in case of LG Soft India (P.) Ltd. (supra), we also direct the AO to verify whether these receipts are mere recovery of expenses without any services. If it is found to be so, then the same should not be added back to the cost base. 18. In aforesaid view of the matter, we direct the AO/TPO to recomputed the ALP keeping in view our directions made hereinabove. 19. Ground Nos. 13 to 21 are relating to corporate tax is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oth the parties to the litigation. It is an undisputed fact that distinct capital was invested in creating a new unit at Chennai, without comprising the employees strength of the Hyderabad Unit, Chennai unit also started raising its employees from 44 in number in March, 2004 to 1035 in March 2008, and thus the growth of number of employees is phenomenal by the end of March, 2008. There is no relocation of transfer of plant and machinery in any form from Hyderabad Unit to Chennai Unit. So, this being the strength of the new unit, so far as the infrastructural matters are concerned, we also examined the other areas of business activity of the assessee, to find out if the Chennai Unit cut into the business of the Hyderabad unit. In this regard, we have perused the business activities of the assessee both of Chennai Unit and Hyderabad Unit and find that the nature of services rendered by the assessee through both these units are classified into three categories, (1) BPM, (2)ECM and (3) Data warehousing. So far as the data warehousing/business intelligence is concerned, the Chennai Unit alone renders this service. This data warehousing/intelligence provides an eco system to transform ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paragraphs of this order. 17. In principle, the undertaking is not entitled to the benefits of the provisions of section 10A of the Act if the same is formed by the splitting up or the reconstruction of business already in existence and when the same is not formed by the transfer of plant or machinery previously used for any purpose to a new business. There is no issue about the transfer of the Plant or Machinery from Hyderabad to Chennai Unit and therefore, this limb of the provisions is unquestioned by the revenue. The objections of the revenue revolve around existence of similar agreements/similar services and migration of some of the employees to the Chennai unit. These issues have been already attended to by us in the preceding paragraphs and described how these objections in this case are not sustainable by us. It is not the case of the revenue that the Database Warehousing related services rendered by the assessee to the Principle/clients are not different from those services rendered by the Hyderabad Unit. In the light of the above discussion, we hold that the Revenue authorities are not justified in denying the benefit under S.10A of the Act to the assessee, treatin ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
