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2015 (6) TMI 132 - ITAT DELHI

2015 (6) TMI 132 - ITAT DELHI - [2015] 41 ITR (Trib) 622 (ITAT [Del]) - Transfer pricing adjustment - Transactional Net Margin Method - selection of comparable - Held that:- Infosys Technologies Ltd., cannot be treated as comparable with the assessee company considering the giantness of Infosys Ltd., in terms of risk profile, nature of services, number of employees, ownership of branded products and brand related profits, etc. See CIT vs. Agnity India Technologies (P) Ltd. 2013 (7) TMI 696 - DEL .....

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as a captive unit. It is manifest that under the circumstances prevailing in the case of this company, the impact of the profit from the sale/licence of software products on the overall profitability of the ‘Application software’ segment cannot be segregated. To what extent the overall profits of this company have been influenced by the revenues from software products, cannot be precisely ascertained. In view of the aforegoing distinguishing facts, this company ceases to be comparable.

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nd carries on the activity of rendering software development services at its own cannot be compared with a company which provides software development services by using its own IPRS in the form of patents of software. Under such circumstances, we hold that this company cannot be considered as comparable at segment level. The same is ex consequenti directed to expelled from the set of comparables. - ITA No.122/Del/2013 - Dated:- 4-6-2015 - SHRI R.S. SYAL AND SHRI C.M. GARG, JJ. For the Appellan .....

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peal is a challenge to the addition on account of transfer pricing adjustment amounting to ₹ 12,82,48,777/-. 3. Succinctly, the assessee is an Indian company, a wholly owned subsidiary of Global Logic, US. It is engaged mainly in the provision of software development services to its overseas group companies. The assessee reported two international transactions as per its Audit Report in Form No.3CEB. The entire controversy in this appeal is restricted to the international transaction of Pr .....

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pment services was at ALP. The assessee chose Profit Level Indicator (PLI) of Operating Profit/Total Cost (OP/TC). The assessee selected 23 companies as comparable. The mean margin of such comparables, on the basis of current/multiple-years data was computed at 14.84%. As the assessee s OP/TC stood at 12.47%, it was claimed that the international transactions were at ALP. The TPO shortlisted 19 companies as comparable and computed the arithmetical mean of their PLI at 24.82%, after allowing work .....

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crore and odd in the final assessment order passed on 19.10.2012. The assessee is aggrieved against this addition made towards transfer pricing adjustment. 4. We have heard the rival submissions and perused the relevant material on record. The assessee has accepted all the aspects of the transfer pricing analysis carried out by the TPO except the inclusion of the following companies in the list of comparables:- i. Avani Cincom Technologies ii. Infosys Ltd. iii. Kals Information Systems Ltd. (Se .....

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by the assessee in the TPO s order. On adverting to the Transfer pricing study report, a copy of which is available on pages 40 onwards of the paper book, we find some further elaboration of the nature of activity done under the international transaction of Provision of software development services. Page 21 of the TP study report indicates that the assessee renders software development services to its associated enterprises (AEs) and gets remunerated on a cost plus mark-up basis for these servi .....

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ferred sub-heads:- Marketing Function Global Logic Inc and GIPL s marketing staff initiates contact directly with a potential client. Thereafter, Global Logic Inc prepares and submits a proposal to the client, irrespective of whether the client lead is provided by GIPL or GlobalLogic Inc., giving the scope and the technical aspects of the project. Bid costs are borne by GlobalLogic Inc. Hence, though primary responsibility for identification of customers and marketing the GlobalLogic Groups serv .....

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s all financial responsibility for the work as well as billing. Testing & Quality Control The last step involves testing the software that has been developed. GIPL has the responsibility of testing the software. GIPL has quality control departments which adopts the quality control procedures at par with the industry. This department is inter alia involved in process improvisations, making of new processes, quality audits, customer surveys, etc. Project Management GIPL is responsible for ensu .....

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that it is mainly responsible for the development of software under the projects sub-contracted to it by GlobalLogic Inc. Such developed software are to be tested by the assessee. The Testing department of the assessee, apart from testing the software developed by it, also undertakes process improvisations, making of new processes, quality audits. After developing and testing a software, the assessee is required to ensure that such developed software are timely delivered. Apart from rendering th .....

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er consideration, the assessee not only provided software development and maintenance services but also Marketing and Administrative support services to its AEs. 7. When we peruse the Agreement dated 10.11.2006 effective from 1.4.2006 between the assessee and GlobalLogic Inc. under which the assessee was assigned the task of rendering Software Development and other Allied Services , it transpires that Clause 1 of the Agreement containing - Scope of Work - stipulates that the assessee shall carry .....

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Support services, which do not figure in the Agreement. As the TPO has treated the entire amount under this international transaction as consideration for rendering Software development services and benchmarked it accordingly, without separately taking cognizance of any Marketing and Administrative services, we leave this issue here only and do not propose to start everything afresh by setting up an altogether new case. It is for the TPO to analyze the functions performed in proper perspective a .....

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rtain companies as comparable for the similar international transaction of Provision of software development services . The appeal filed by the assessee for such year in ITA No.580/Del/2011 has since been disposed of by the tribunal vide its order dated 22.1.2015, a copy of which is available on record. It can be noticed from such Tribunal order that the TPO treated similar international transaction, as has also been transacted for the instant year, as Provision of software development services .....

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ublic domain, it is a software development and consulting company. After seeking certain information from the company u/s 133(6) of the Act, the TPO prima facie formed the view about the comparability of this company. On being called upon to show cause as to why this company be not considered as comparable, the assessee submitted that data of this company for the year in question was not available in the public domain and, also it was functionally different. Rejecting the assessee s contention, .....

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evelopment service provider, it is also utilizing its own software in rendering such services. Relying on the order passed by the Tribunal in the case of Motorola Solutions India Pvt. Ltd. VS. ACIT (2015) 152 ITD 0158 (Delhi), the Tribunal ordered for the exclusion of this company from the list of comparables. In reaching this conclusion, the Tribunal also observed that apart from rendering software development services, this company was also engaged in the sale of software products and the acco .....

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es, has not been controverted by the ld. DR with any cogent material. Respectfully following the view taken by the Tribunal in the assessee s own case for the immediately preceding year, we order for the exclusion of this company from the list of comparables. Infosys Technologies Ltd. 11. The TPO noticed that this company was finding place in the accept/reject matrix but was rejected in the TP documentation by claiming that it failed functional area comparability. The TPO found this company to b .....

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seen that the TPO has 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 products swelling the ultimate profit rate of this company. We find that the assessee is a captive unit rendering services to its AE 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 T .....

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n ble Delhi 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 extant 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 etc. When we consider all the above factors in a holistic manner, there remains absolutely no doubt in our mind that Infosys Technologies Ltd. is incompar .....

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collected u/s 133(6) from the company, observed that its business activity was into two segments, namely, (i) Software development services; and (ii) Training. By considering the data available before him, the TPO included the Software development services segment into the list of comparables. The assessee is aggrieved the inclusion of this company on segmental level. 14. We have heard the rival submissions and perused the relevant material on record. We have also gone through the Annual report .....

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2(b) on page 357 of the paper book also states that : The company derives its revenues primarily from software services and software products. Since this company is into the business of software products and also software development and has merged the revenue from both the streams under the overall segment of Application software , which has been taken by the TPO for inclusion in the final set of comparables, this company loses the tag of comparability vis-a-vis the assessee company which is ex .....

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ew of the aforegoing distinguishing facts, this company ceases to be comparable. We order for the exclusion of this company from the list of comparables. Persistent Systems Ltd. 15. This company was originally selected by the assessee in its TP study. However, it was contended before the TPO that it is a product company and because of lack of segmental data, the same cannot be considered as comparable. The TPO, after seeking information u/s 133(6) of the Act from this company, observed that 96% .....

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tely preceding year in the assessee s own case by relying on extraordinary events, such as, merger or acquisition, etc. There are no such extraordinary events in the current year. However, we find from the Annual report of this company, that it is a software product company which is apparent from page 383 of the Paper book. It has been mentioned that it : is different from most of the outsourcing firms because we are focused exclusively on the software product development. The same thing has bee .....

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ered by this company as part of revenue from Software development services segment, which has not been controverted by the ld. DR with any cogent material. The Bangalore Bench of the Tribunal in 3DPLM Software Solutions Ltd. Vs. DCIT (ITA No.1303/Bang./2012 vide its order dated 28.11.2013, for the identical assessment year, i.e., 2008-09, has held Persistent Systems Ltd., to be a company engaged in product development and product design services and hence functionally different from a software d .....

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of the considered opinion that Persistent Systems Ltd., cannot be considered as comparable with the assessee company. The same is, therefore, directed to be excluded. Tata Elxsi (Seg.) 17. This company was rejected by the assessee in its TP documents by claiming it to be functionally different . The TPO observed from the Annual report of this company that it has two segments, namely, Software development and services segment and Systems integration and support segment. Noticing the segmental de .....

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and software), Industrial design and engineering (mechanical design with a focus on industrial design) and Animation and Visual Effects. Since this company offers integrated hardware and packaged software solutions, the same cannot be considered as comparable with the assessee company, which is simply providing software related services. The Tribunal in Toluna India Pvt. Ltd. VS. ACIT (2014) 151 ITD 177 (Delhi) and Motorola Solutions India Pvt. Ltd. (supra), both of which were rendering softwar .....

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S in the form of patents; and engaged in R& D activity. The assessee failed to persuade the DRP to fall in line with its reasoning for the exclusion of this company from the final set of comparables. That is how, the assessee is before us. 20. We have heard the rival submissions and perused the relevant material on record. It is noticed that the TPO has taken Software development segment of this company on standalone basis. We agree with the TPO that super normal profits or very high turnove .....

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