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2015 (5) TMI 349 - ITAT DELHI

2015 (5) TMI 349 - ITAT DELHI - [2015] 40 ITR (Trib) 524 (ITAT [Del]) - Transfer pricing adjustment - choice of certain comparables in respect of `Software development segment’ - Held that:- Infosys Technologies Ltd. in view the huge turnover, economies of scale, brand value and other factors pointed out by ld. counsel in his submissions and also keeping in view the decision of Hon’ble Delhi High Court in the case of Aginity India Technologies Pvt. Ltd. [2010 (11) TMI 852 - ITAT DELHI] & (2013 ( .....

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any. Also there was a merger of Wipro Infrastructure Engineering Ltd., Wipro Healthcare IT Ltd., Quantech Global Services Ltd., with this company during the year in question.

Exclusion of certain companies from the list of comparables in the ‘Marketing support services’ segment - Held that:- Choksi Laboratories Ltd.is basically engaged in providing testing services for various products and also offers services in the field of pollution control. As against this, the services provided b .....

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can be considered as comparable with the assessee.

WAPCOS Ltd. (Seg.) is not comparable as this company has maintained accounts on entity level and there is no bifurcation available in respect of the services similar to those provided by the assessee under this segment, this company on entity level cannot be considered as comparable.

Recruitment and training expenses - CIT(A) deleted addition - Held that:- The view taken by the ld. CIT(A) that the training expenses are to .....

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mpugned order on this issue is set aside and the matter is sent to the file of AO for deciding it afresh as per law, after allowing a reasonable opportunity of being heard to the assessee. - Decided in favour of revenue for statistical purposes. - ITA No.3324/Del/2013, ITA No.2948/Del/2013) - Dated:- 23-4-2015 - Shri R.S. Syal And SHRI C.M. Garg JJ For the Appellant : Shri Himanshu S. Sinha, Advocate & Shri Md. Fahad Khalid, CA For the Respondent : Shri Judy James, Standing Counsel ORDER Per .....

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f the case are that the assessee is a wholly owned subsidiary of Ciena Corporation, USA and is engaged in the business of provision of software development and marketing support services to its overseas group companies. The assessee reported four international transactions. The Assessing Officer (AO) referred the international transactions to the Transfer Pricing Officer (TPO) for determination of their arm s length price (ALP). Two of such transactions were accepted by the TPO as at arm s lengt .....

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ing Profit/Total Cost (OP/TC). Profit margin in the software development service segment was declared by the assessee at 19.16%. In order to demonstrate that these services were provided at arm s length price, the assessee chose 20 companies as comparable. The TPO rejected the assessee s computation of arm s length price worked out on the basis of multiple year data of the comparables and proceeded to determine the ALP of such transactions by relying on the current year s data alone. He rejected .....

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8 40.41 8. Kals Information Systems Ltd. (Seg.) 2.05 41.94 9. LGS Global Ltd. 136.52 26.64 10. Mindtree Ltd. (Seg.) 572.96 17.51 11. Persistent Systems Ltd. 409.88 27.23 12. Quintegra Solution Ltd. 89.88 21.74 13. R systems International (seg.) 144.56 15.3 14. RS. Software (India) Ltd. 101.11 7.79 15. Sasken Communication Technologies Ltd. (seg.) 389 13.44 16. Tata Elxsi (Seg.) 342.05 18.97 17. Thirdware Solution Ltd. 522.76 18.01 18 Wipro Ltd. (Seg.) 11955.6 28.38 19. Softsol India Ltd. 23.65 4 .....

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18 companies, the ld. CIT(A) computed average of the OP/TC of these companies at 20.48%. Since the PLI of the assessee was at 19.15%, being within the permissible range, he ordered for the deletion of addition of ₹ 5.25 crore and odd. 6. We have heard the rival submissions and perused the relevant material on record. It can be seen from the orders of the authorities below that neither the application of TNMM as the most appropriate method nor the PLI has been disputed for determination of .....

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isfied with all the findings given by the TPO, as endorsed in the first appeal, in respect of other issues connected with the determination of ALP of the international transaction of Provision of software development services . We will take up the above three companies, one by one, for the purposes of ascertaining as to whether they are comparable or not. Before embarking upon the exercise of making comparison of these three companies with the assessee, it is sine qua non to consider the functio .....

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rvices. The Ciena Group is a supplier of communications networking equipment, software and services that support the delivery and transport of voice, video and data services. The products of Ciena Group include optical networking, broadband networking and data networking products along with network and services management software used in communication networks and followed by telecommunications service providers across the globe. The Group specializes in transitioning legacy communications netw .....

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services include maintenance and updation activities. The assessee entered into an agreement with its holding company, Ciena, USA to continue to assist Ciena, USA in research and development activities related to Ciena, USA products. A copy of this Agreement dated 10.4.2006 is available on record. As per this Agreement, the assessee provided software development/Engineering Design/research related to Ciena, USA products and technology. The assessee is compensated by its USA Associated enterprise .....

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y Rights. This clause provides that the assessee, at no time, shall acquire or retain any right, title or interest whatsoever in the work done by it. This clause further provides that the intellectual property rights in the format, presentation, procedures, process, computer software and other material of whatever nature created, developed or enhanced by Ciena India in the course of providing the services to Ciena, USA shall be and remain the sole property of Ciena, USA absolutely. From the abov .....

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and tax at ₹ 11.46 crore and the resultant profit ratio of 13.19%. With the above understanding of the nature of services provided by the assessee to its AEs under this segment, we will espouse the disputed companies for consideration as to their comparability or otherwise. Infosys Technologies Ltd. 8.1. The TPO noticed that this company was finding place in the accept/reject matrix and was rejected in the TP documentation by saying that it failed functional area comparability. The TPO fo .....

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can be seen that the TPO included this company in the list of comparables by rejecting the assessee s contention about the brand of this company helping in earning huge profits and also the brand related profits swelling its ultimate profit rate. We find that the assessee is a captive unit rendering services to its AEs alone without acquiring any intellectual property rights in the work done by it in the development of software. The Hon ble Delhi High Court in CIT vs. Agnity India Technologies .....

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hi High Court held Infosys Ltd., to be incomparable with Agnity India Technologies Pvt. Ltd. The facts of the instant case are more or less similar inasmuch as the assessee is also a captive service provider with a limited number of employees at its disposal and also not owning any branded products with no expenditure on R&D at its own etc. When we consider the cumulative effect of all the above factors, we find that by no standard, the assessee can be compared with Infosys Technologies Ltd. .....

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company regarding break up of software products and software development services. On consideration of such information, he observed that around 95.1% of the total revenue of this company was from software development services and the remaining amount was from software products. After considering the assessee s objections, the TPO included it in the list of comparables. The assessee is aggrieved against the consideration of this company as comparable. 9.2. We have heard the rival submissions an .....

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rvices, but, is also a software product company, which is evident from the information supplied by it to the TPO. Thus, the total profits of the company on entity level also, inter alia, include revenue from product licences. As there is no separate segmental information and it has been considered as comparable on entity level, it implies that the total revenue considered also consist of some part from product licences. In such circumstances, it is not possible to ascertain the impact of such re .....

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Pvt. Ltd. Vs. ACIT (ITA No.5645/Del/2011, vide its order dated 26.8.2014 has held Persistent Systems Ltd. to be incomparable with Toluna India Pvt. Ltd., also a company engaged in providing software development services to its related parties alone. Similar view has been taken by the Tribunal in Lear Automotive India Pvt. Ltd. Vs. ACIT (ITA No.5612/Del/2011) vide its order dated 22.12.2014. The ld. DR could not point out any distinguishing feature in the factual matrix of the assessee in questi .....

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gment of this company on standalone basis was comparable with the assessee company. He sought some information from this company u/s 133(6) of the Act and, thereafter, came to the conclusion that its IT services segment was comparable with the assessee. In doing so, he rejected the assessee s contention about branding and turnover, which was also taken by the assessee against the inclusion of Infosys Technologies Ltd. The ld. CIT(A) upheld the finding of the AO/TPO in treating it as a correct co .....

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n the case of Toluna India (supra) and Lear Automotive (supra). The Tribunal, in both the cases, has held Wipro Ltd. (Seg.) as not comparable. This company is also operating as a full-fledged risk taking entity; engaged in providing technology infrastructure services, testing services, package implementation having more than 82,000 employees. It has its own R&D centre. It incurred around 11% of net sales as expenditure on research and development. None of the above factors match with the ass .....

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ench of the Tribunal in Petro Arandite (P) Ltd. Vs. DCIT (2013) 154 TTJ (Mum) 176 has held that a company cannot be considered as comparable because of financial results distorted due to mergers and demergers, etc. Similar view has been taken by the Delhi Bench of the Tribunal in the case of Toluna India Pvt. Ltd. (supra). As there were amalgamations in Wipro Ltd. during the financial year in question, this fact also makes it incomparable with the assessee company. In view of the foregoing reaso .....

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t afresh in consonance with our above directions. Needless to say, the assessee will be allowed a reasonable opportunity of being heard. 12. Ground no. 1(d) is against the exclusion of certain companies from the list of comparables in the Marketing support services segment. Briefly stated, the facts of this ground are that the assessee reported international transaction of Provision of marketing support services with the transacted value of ₹ 4,21,25,941/-. The assessee employed TNMM as th .....

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companies was computed at 22.5% and, accordingly, transfer pricing adjustment of ₹ 33,13,077/- was proposed by the TPO, which was eventually made by the AO. The ld. CIT(A) excluded Apitco Ltd., Rites Ltd., and Vapi Waste and Affluent Management Company Ltd. from the final list of comparables drawn by the TPO. This resulted into the deletion of addition on account of transfer pricing adjustment under this segment. Both the sides are in appeal against the impugned order to the extent it is p .....

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arketing support services. There is no elaboration of the nature of services in the Agreement between the assessee and Ciena Corporation, USA, except for mentioning in Schedule 2: Provision of other such services to Ciena, USA as Ciena, USA may reasonably request from time to time. The TPO has also not discussed the nature of services under this segment except for recording the description of transactions with its nomenclature being Provision of marketing support services. When we advert to the .....

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resentations on Ciena products and services and providing relevant support to Ciena, US. • Technical Support: Ciena India also provides technical support services to the customers. During FY 2007-08, the Company rendered training and installation support to the end customers of Ciena US. Also, Ciena India received training on technical matters from Ciena Group. 14. From the above description of Marketing support services performed by the assessee for its foreign AE, it is patent that the as .....

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ted the website of this company and noticed that it was engaged in providing analysis, calibrations, pollution control and consultancy services to a broad spectrum of industries. By considering such nature of services provided by this company, the TPO held that these were similar to the services provided by the assessee to its AE. We have gone through the Annual report of this company, which is available on pages 2370 onwards of the paper book. Note no. 8 to Part B - Notes forming part of the ac .....

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also offers services in the field of pollution control. As against this, the services provided by the assessee are purely in the nature of identifying customers for its AEs and providing technical support services to their customers. We fail to appreciate as to how marketing support services can be equated with testing services. When we peruse Schedule of fixed assets of this company, it can be seen that the major asset is Instruments. It is with the help of these instruments that the company is .....

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ee s objections about the functional dissimilarity of this company, were rejected. 16.2. After considering the rival submissions and perusing the relevant material on record, we find from the Annual report of this company that it has two segments, namely, Consultancy and engineering projects and Lumpsum turnkey projects. The TPO has taken Consultancy and engineering project segment for the purposes of comparison with the assessee company. This company is engaged in infrastructure development pro .....

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ew of the above services provided by this company, it can be easily ascertained that it is nowhere close to the rendering of marketing support services, which is being done by the assessee under this segment. The nature of activity done by the assessee is quite distinct from this company. We, therefore, direct to exclude WAPCOS Ltd. (Seg.) from the list of comparables. 17.1. The Revenue is aggrieved against the exclusion by the ld. CIT(A) of Apitco Ltd. This company was considered as comparable .....

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es, Project related Services, Infrastructure Planning & Development, Environment Management, Energy related Services, Cluster Development, Technology Facilitation, Asset Reconstruction & Management Services, Emerging Areas. It can be seen from the nature of operations carried out by this company that the same is towards Micro enterprises development, Skill development and Project related services, etc., also including Infrastructure planning and development along with Energy related serv .....

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company has maintained accounts on entity level and there is no bifurcation available in respect of the services similar to those provided by the assessee under this segment, this company on entity level cannot be considered as comparable. We, therefore, hold that the ld. CIT(A) was justified in considering this company as not comparable. 18. Ground nos. 2 and 3 of the assessee s appeal were not pressed. The same, therefore, stands dismissed. 19.1. Ground no. 2 of the Revenue s appeal is against .....

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