TMI Blog2015 (5) TMI 303X X X X Extracts X X X X X X X X Extracts X X X X ..... dia) Ltd. (ESS Segment) functionally different as pointed out by the assessee vis-à-vis the R&D services segment of the said concern are germane and relevant to decide about the inclusion of the said concern for the comparability analysis. Therefore, we direct the lower authorities to exclude the margins relatable to the R&D services segment of the said concern and consider only the margin relatable to the IT services segment alone to benchmark assessee’s activity of Provision of software services to its associated enterprises. Determination of arm's length price with regard to the international transactions of Provision of back office support services - Held that:- the present case that the activities undertaken by Infosys BPO Ltd. cannot be qualitatively compared with the activities being carried out by the assessee in its back office support services segment. Undoubtedly, Infosys BPO Ltd. owns significant intangibles and eminent brand value whereas in the case of the assessee before us there is no such situation. The turnover achieved by Infosys BPO Ltd. is many times higher in comparison to the assessee; the said concern is a giant in comparison to the assessee. In our ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... awat For the Respondent : Mrs. M.S. Verma, CIT ORDER Per G. S. Pannu, AM The captioned appeal has been preferred by the assessee pertaining to the assessment year 2009-10, which is directed against the order of the Dy. Commissioner of Income Tax, Circle 1(2), Pune (in short the Assessing Officer ) passed u/s 143(3) r.w.s. 144C(1) of the Income Tax Act, 1961 (in short the Act ) dated 07.01.2014, passed in conformity with the directions given by the Dispute Resolution Panel, Pune (in short the DRP ) dated 31.12.2013. 2. In this appeal, the Grounds of Appeal raised by the assessee read as under: - 1. The Ld. Assessing Officer ('AO') pursuant to the directions of the Ld. Dispute Resolution Panel ('DRP') erred in rejecting the benchmarking approach adopted/contemporaneous documentation maintained by the appellant and thereby making a transfer pricing adjustment of ₹ 93,951,619 to the income of the appellant by holding that the international transaction, 2 pertaining to provision of Information Technology ('IT or software services') and IT enabled back office support services ( ITES Services or back office support services&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidering the advance tax and tax deducted at source amounts. Further, on a without prejudice basis, the AO has also erred in the tax computation by not considering the credit of minimum alternate tax ('MAT') available to the appellant. 3. In this case, although the assessee company has raised multiple Grounds of Appeal but the substantive dispute is with regard to an addition of ₹ 9,39,51,619/- made by the Assessing Officer on account of determination 3 of arm's length price of the international transactions entered by the assessee with its associated enterprises. 4. Briefly put, the relevant facts are that the appellant is a company incorporated under the provisions of the Companies Act, 1956 and is, interalia, engaged in the business of providing software solutions and back office operations exclusively to its associated enterprises abroad. For the assessment year under consideration, it filed a return of income declaring total income of ₹ 2,33,171/-, which was subject to a scrutiny assessment. The international transactions entered by the assessee with its associated enterprises related to Provision of software services and Provision of back off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it is to be understood that the assessee is a captive service provider which is operating within assured return on costs incurred by it. In order to appreciate the services being rendered by the assessee to its associated enterprises, which reflect international transactions within the meaning of section 92B of the Act, it is appropriate to observe that PFG is a global financial services leader which offers wide range of financial products and services, such as retirement and investor services, insurance, asset management and financial services through financial services company. PFG is not engaged in developing and selling software products and such like services i.e. software development services required to undertake its core business area of financial products and services are outsourced to the assessee company. The software development services rendered by the assessee comprised of application development and quality assurance services which have been categorized as Provision of software services and for the year under consideration, assessee has been remunerated for such services at ₹ 45,26,17,038/-. The second stream of international transactions entered with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ength price. 10. After rejecting certain comparables concerns selected in the Transfer Pricing Study and introducing certain new concerns as comparables and considering the single year financial data of the comparables, the TPO computed the arithmetic mean PLI i.e. OP/TC of the comparables at 32.79%. The final set of comparables and the corresponding PLI taken by the TPO is as under :- Sr.No. Company OP/TC using single year data for FY 2008-09 1. Mindtree Consulting Ltd. 27.60% 2. Akshay Software Technologies Ltd. 8.23% 3. F C S Software Solutions Ltd. 15.61% 4. L G S Global Ltd. 18.88% 5. Compucom Software Ltd. (Software Segment) 42.09% 6. Transworld Infotech Ltd. (Sterling International Enterprises Ltd.) 46.73% 7. KALS Information Systems Ltd. (Application Software Segment) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e said concern, wherein as per Schedule No.18 relating to Notes to the financial statements, it is stated that the said concern was not only engaged in development of software services but also in development of software products and also engaged in running a training centre for software professionals on online projects. Further, it has been submitted before the lower authorities as well as before us that the website of the said concern also makes out various software products developed by the said concern. It was pointed out that the TPO in the assessee s own case for assessment year 2007-08 as also for assessment year 2010-11 in his orders passed u/s 92CA(3) of the Act dated 28.01.2013 and 29.01.2014 respectively excluded the said concern from the final set of comparables. It was also pointed out that under identical circumstances, the Pune Bench of the Tribunal in the case of PTC Software (India) Private Limited vs. DCIT vide ITA No.336/PN/2014 dated 31.10.2014 for assessment year 2009-10 has held that the said concern was not comparable to an assessee which was engaged in Provision of only software development services. 15. On the other hand, the Ld. Departmental Representat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e immediately preceding year. Therefore, having regard to the factual aspects brought out by the assessee, it is correctly asserted that the application software segment of the said concern is not comparable to the assessee s segment of IT services. 28. In the year under consideration also, the said company KALS Information Systems Ltd. is engaged in the sale of software products, which is apparent from the financial statements and notes to accounts filed by the assessee at pages 479 to 489 of the Paper Book. The said company being not functionally comparable in view of the factual aspects referred to by the assessee and in view of finding of the Tribunal in assessee s own case for assessment year 2007-08, we hold that the application of software segment of the said concern was not comparable to the assessee s segment of IT services. 17. Notably, the Tribunal had followed its earlier decision in the case of PTC Software (India) Pvt. Ltd. for assessment year 2007-08 dated 30.04.2013. Evidently, the IT services segment of PTC Software (India) Pvt. Ltd. (supra) was engaged in rendering software development services which did not include development of any software products as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnational transactions in question have been carried out by the assessee. We, therefore, are in agreement with the submissions of the assessee that the said concern is excludible from the final set of comparables. We hold so. 19. The next point made out before us is with respect to the action of the TPO in including ICSA (India) Ltd. (ESS Segment) as a comparable in the final set of comparables. The stand of the assessee before the lower authorities as well as before us is to the effect that the said concern is functionally not comparable to assessee s activity of rendering of Provision of software services to its associated enterprises. Secondly, it has also been pointed out that the said concern has significantly high Research and Development expenses and on this point also the said concern is liable to be excluded. Thirdly, it is submitted that the TPO in assessment year 2010-11 accepted assessee s plea that the said concern was not comparable to the assessee s activity of rendering of Provision of software services to the associated enterprises. 20. The Ld. CIT-DR has primarily referred to the discussion made by the TPO in para 10(7) of the impugned order to say that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ardware products along with the software solutions and does not merely provide standalone software services to its associated enterprises. In this context, the Ld. Representative for the assessee had referred to pages 69 to 161 of the Paper Book wherein is placed a copy of the Annual Report of the said concern. The business profile of the said concern which is emerging from a perusal of the Annual Report of the Paper Book does support assessee s plea that the activities carried out by ICSA (India) Ltd. (ESS Segment) are not purely software services but, inter-alia, also include embedded software solutions, i.e. hardware products along with embedded software products. On this aspect also we find that the assessee has justifiable case for seeking exclusion of the said concern from the final set of comparables. We have also perused the order passed by the TPO u/s 92CA(3) of the Act for assessment year 2010-11 dated 29.01.2014 (supra) wherein the stand of the assessee for exclusion of the said concern from the final set of comparables stands accepted, a copy of the said order is placed at pages 637 to 668 of the Paper Book. Furthermore, the Ld. Representative for the assessee at the ti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are services (including software product development), learning solutions, wind power generation and Treasury, etc.. Assessee also pointed out that the said concern was majorly rendering services to the Government bodies as was evident from the extract of the Annual Report filed for relevant period. Even with regard to the software services segment, which has been adopted by the TPO to be comparable with assessee s activities, it was pointed out that the said segment was involved in Infrastructure Development, IT Infrastructure Solutions, Mobile Solutions and Development Sale of products, etc.. For all the above reasons, the case of the assessee was that the said concern s software services segment was not comparable to the rendering of software services undertaken by the assessee for its associated enterprises. 25. The aforesaid points were made out by the assessee before the lower authorities and we find that there is no arguments put-forth by the lower authorities to repudiate the same. No doubt the application of the TNM Method requires broad functional similarities, and a concern can be said to be functionally comparable with the tested party if it is engaged in similar a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... velopment services only and thus the TPO was justified in adopting the margins at the entity level for the purposes of comparability. 28. We have carefully considered the rival submissions. In the context of the controversy before us, we have perused the Annual Report of the said concern, a copy of which is placed at pages 214 to 267 of the Paper Book. At page 263 of the Paper Book in para 15 of the Schedule to the Annual financial statement, the said concern has enumerated its segmental reporting. As per the Annual Report, the said concern is having two business segments viz. IT services and R D services. The segmental profits relating to R D services and IT services have been separately enumerated therein. The plea of the assessee is that the margin relating to the IT services segment alone be considered comparable to assessee s activities of Provision of software services and not the margin relatable to the R D services segment of the said concern. It has been emphasized that the activities of the R D services segment are nowhere comparable to assessee s activities since assessee does not render such services and rather it is providing software development services on the bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to compute the arm's length price of the international transaction relating to the back office support services. 32. On this aspect, the first point made out by the assessee is to exclude Infosys BPO Ltd. from the final set of comparables. The plea of the assessee is that the said concern was a giant in its area of operation and possessed brand value of Infosys Technology Ltd. whereas assessee was a captive service provider with no significant intangibles or brand value. The Ld. Representative pointed out that Infosys BPO Ltd. has undertaken brand building exercise over a period of time by incurring huge expenditure and that the said concern possessed a huge asset base and therefore it was functionally dissimilar to assessee s activity of rendering of back office support services to its associated enterprises. In this context, the Ld. Representative has placed reliance on the judgement of the Hon ble Delhi High Court in the case of CIT vs. Agnity India Technologies Pvt. Ltd. (2013) 219 taxmann.com 26 (Del). 33. The Ld. CIT-DR has reiterated that the activity of back office support services rendered by the assessee is similar to the activity carried out by Infosys BPO Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-contracting majority of its translation services work to third party vendors and had made significant payments which were almost 62% of the total cost, whereas assessee was undertaking its activities on its own. In this context, reliance has been placed on the decision of the Mumbai Bench of the Tribunal in the case of ACIT vs. Maersk Global Service Centre (India) (P.) Ltd., (2011) 16 taxmann.com 47 (Mum.) as also the decision of the Pune of the Tribunal in the case of PTC Software (India) Pvt. Ltd. dated 30.04.2013 (supra). 36. On the other hand, the Ld CIT-DR referred to the discussion made by the TPO in para 11(1) of the order by pointing out that the said concern was a part of the search conducted by the assessee also. Therefore, according to her, the said concern cannot be excluded at the present stage. 37. In our considered opinion, the point made out by the Ld. CIT-DR that the assessee had initially selected the said concern as comparable cannot be the sole basis to reject assessee plea for exclusion of the said concern if the assessee is otherwise able to justify it on facts. Quite clearly, the difference in the business model undertaken by the assessee vis- -vis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appeal Paper Book. Even before the DRP, assessee had asserted that the Annual Report of the said concern was duly submitted to the TPO and therefore it could not be said that the financial data of the said concern was not available in public domain. The activities rendered by the said concern have also been detailed in the submissions before the DRP and it was asserted that the said concern is functionally comparable to assessee s activities of providing back office support services to the associated enterprises. Thus, assessee justified the inclusion of the said concern in the final set of comparables. In our considered opinion, the assertions made by the assessee before the lower authorities and as well as before us are borne out of the material on record. In-fact, in the face of the detailed submissions made by the assessee before the lower authorities, there is no repudiation emerging from the orders of the authorities below. Therefore, in the absence of any adverse finding that the activities of the said concern are not comparable to assessee s activity of rendering back office support services to its associated enterprises, we deem it fit and proper to direct the lower au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wise of the said concern on the basis of the submissions and the material which the assessee may setup before him. Needless to mention, the Assessing Officer/TPO shall allow the assessee a reasonable opportunity of being heard before passing an order afresh on this aspect. Thus, on this point assessee succeeds for statistical purposes. 45. The last point made out by the assessee is for inclusion of Galaxy Commercial Ltd. (BPO Segment)in the final set of comparables. The TPO rejected the said concern from the final set of comparables on the ground that it was a consistently loss-making concern. Before us also, the Ld. CIT-DR has reiterated the point made out by the TPO in order to exclude the said concern from the final set of comparables. 46. The Ld. Representative for the appellant pointed out that the BPO segment of the said concern was not a consistent loss-maker. In-fact, by referring to the profitability margins of the BPO segment for the immediately preceding assessment year 2008-09, it is sought to be made out that it had a positive margin. 47. We have considered the plea setup by the assessee and prima-facie it appears that in the immediately preceding assessment y ..... X X X X Extracts X X X X X X X X Extracts X X X X
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