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2015 (7) TMI 125 - ITAT DELHI

2015 (7) TMI 125 - ITAT DELHI - TMI - Transfer pricing adjustment - selection of comparable - Held that:- For M/s E-Infochips Bangalore Ltd. profit margin of such entity in the immediately preceding year(s) may also be taken into consideration and the FAR analysis in such cases may be reviewed to ensure that the potential comparable earning higher profit satisfies the comparability condition. Since this exercise has not been done either by the AO/TPO or the DRP in the present case, we are of the .....

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pellant is also captive service provider to its AE and as such, M/s. Infosys Ltd. is not a valid comparable with the appellant.

M/S PERSISTENT SYSTEMS LTD should not be regarded as a comparable as relying on Agnity Technologies case [2010 (11) TMI 852 - ITAT DELHI]

Treatment of foreign exchange fluctuation gain/loss as operating item - Held that:- As relying on Westfalia Separator India Pvt. Ltd. vs. ACIT [2015 (3) TMI 140 - ITAT DELHI] the forex gain or loss is the differe .....

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ton (1978 (9) TMI 1 - SUPREME Court) in juxtaposition to that of the Special Bench in case of Prakash I Shah (2008 (8) TMI 387 - ITAT BOMBAY-K ), there remains no doubt that forex gain or loss from a trading transaction is not only an item of revenue nature, but is, in fact, a part of the price of import or value of export transaction, as the case may be. Thus we direct the AO/TPO to treat the foreign exchange gain/loss as an operating item - Decided in favour of assessee. - ITA No. 6737/Del/201 .....

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his appeal, the following grounds have been raised by the appellants: 1. That on facts and circumstances of the case and in law, final assessment order dated 14.11.2014 passed by the Assessing Officer ( AO ) is in complete disregard of the provisions of Section 144C(13) of the Income tax Act, 1961 (the Act ) inasmuch that the AO failed to pass the said Order in conformity with the binding and mandatory directions issued by the Dispute Resolution Panel ( DRP ) and consequently the Order dated 14. .....

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e services rendered by the Appellant to its parent company, viz., Fiserv Global Services Inc., USA. without appreciating that the DRP has allowed substantial relief to the Appellant in respect of the aforesaid issue. 2. Without prejudice to the aforesaid, the AO erred in assessing the total income of the Appellant at ₹ 28,74,75,770/- as against income of ₹ 15,69,443/- returned by the Appellant after making transfer pricing addition of ₹ 28,59,06,323/- in respect of internationa .....

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cts and in circumstances of the case and in law, the AO and DRP erred in partly confirming the action of the TPO in making an addition to the income of the Appellant without appreciating that the Appellant had computed arm s length price in respect of international transaction entered into by the Appellant with its Associated Enterprise ( AE ) using the most appropriate method (i.e. the transactional net margin method), maintained all the information and documentation required under section 92D .....

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t on facts and circumstances of the case and in law, the AO and DRP erred in confirming the action of the TPO in applying the following filters: A. Use of only current year (i.e. FY 2009-10) data for comparability despite the fact that at the time of comparison done by the Appellant, the complete data for the FY 2009-10 was not available in the public domain, B. Rejecting companies with turnover below ₹ 5 crores without applying an upper filter of ₹ 500 crores C. Rejecting companies .....

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ess than 25% of total operating cost, without appreciating that such a filter is not decisive for tracing out service companies since there is no compulsion on companies to necessarily keep personnel on their rolls F. Rejecting companies with different financial year without assigning any cogent reasons for applying the said filter, 7. That the AO and DRP erred in confirming the action of the TPO in rejecting the comparable companies selected by the Appellant without providing any cogent and/or .....

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al transaction entered into by the Appellant with its AE without appreciating that the said company had fluctuating margins over the years and that complete financial data of the said company was not available in the public domain. 10. That the AO and DRP erred in confirming the action of the TPO in selecting Persistent Systems Ltd. as a comparable for benchmarking the international transaction entered into by the Appellant with its AE without appreciating that the company had RPT of more than 1 .....

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llant without appreciating that since the Appellant was eligible to claim deduction under Section 10A of the Act in respect of income from the international transaction entered into between the Appellant and its AE, there was no motive to shift profits outside India by manipulating the prices charged in international transactions, which is pre-requisite to make any adjustment under the provisions of Chapter X of the Act. 14. That the DRP erred in law in confirming the action of the AO/TPO in mec .....

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wned subsidiary of Results International Systems Inc., USA. Further, Results International Systems Inc., USA is a 100% subsidiary of Fiserv Inc., USA. 4 During the relevant assessment year, Fiserv India rendered software development and maintenance services to its AE vis. Fiserv Global Services Inc., USA. For this it was compensated based on the terms of the Master Service Agreement entered between both the entities on cost plus 15%. As per the transfer pricing (TP) document furnished for the AY .....

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ate method in the facts and circumstances of the case. The operating profit to total cost (OP/TC) ratio is taken as the profit level indicator (PLI) in the TNMM analysis. The PLI of the company is arrived at 14.64% on cost; whereas the average PLI of the comparables is arrived at 12.13% as per the analysis in the TP document. It is further seen that average Profit Level Indicator (PLI) was directed on the basis of 12 comparables selected by the tax payers. The mean margin of the comparables sele .....

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(Adjusted) 12.13% 6 The TPO vide an order dated 10.1.2014 rejected the transfer pricing study of the assessee and substituted a fresh process and modified the filters and comparable selected by the assessee. Thereafter the TPO selected a list of 13 comparables and proposed an adjustment of ₹ 28,59,06,323/- by computing the mean Profit Level Indicator (PLI) of the comparable companies at 25.94% as against PLI of 14.64% of the assessee. Thereafter Dispute Resolution Panel (DRP) vide order d .....

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E-Infochips Bangalore Ltd. 66.23% 4. Infosys Limited 45.41% 5. L&T Infotech Ltd. 20.40% 6. I.G.S. Global Ltd. 14.38% 7. Mindtree Limited (segment) 13.49% 8. Persistent Systems Limited 29.16% 9. Quintegra Solutions Ltd. -17.49% 10. R S Software (India) Ltd. 12.37% 11. Sasken Communication Tech Ltd. 18.80% 12. Tata Elexi Ltd. 21.46% 13. Thinksoft Global Services Ltd. 15.66% Average 19.52% 7 As a result of the above, the final assessment was completed vide order dated 14.11.2014 passed u/s 143 .....

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learned counsel for the assessee submitted that all his contentions vis-à-vis grounds raised in the memo of appeal be confined to the exclusion of the following comparables from the list which was finally selected by the DRP: a) E-Infochips Bangalore Ltd. b) Infosys Ltd. c) Persistent Systems Ltd.; and treatment of foreign exchange fluctuation gain/loss as operating item 9 We have considered the rival submissions and perused the material on record. Taking up the each of the comparables co .....

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so involved in turnkey product development, hardware & software design (board design, BSP, RTOS, Codecs/Stacks) sustenance engineering services, and product reengineering. As per P-54/AR:- Income from Software Services 43,04,66,481/- Software Development Expenses 20,66,74,788/- It can be seen from the above main income is from software development services Hence it will be used as a comparable. 10.1 Before us the learned counsel submitted as under Functionally different-deals in products sof .....

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re Ltd. is involved in providing a varied range of services as mentioned below: a) Software b) Firmware c) Hardware d) FPGA (field Programmable Gate Array) e) ASIC (Application Specific Integrated Circuit) f) QA & Testing 10.3 It was further submitted that the said company provides complex product development services and is therefore not comparable with the appellant company. It was submitted that consultancy charges substantial part of revenue and in absence of segmental information the sa .....

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e was considered by the coordinate bench in the case of M/s Electronics Arts Games vs. ACIT ITA No. 265/Hyd/2015 A.Y. 2010-11 dated 29.4.2015 has held as under:- 13. We have considered the rival submissions and also perused the relevant material on record. The limited contention raised by the learned counsel for the assessee is that the entity M/s. E-Infochips Bangalore Ltd. taken by the Assessing Officer/TPO as comparable should be excluded from the list of final comparables for the purposes of .....

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point out that M/s. E-Infochips Bangalore Ltd. is functionally different form the assessee company in as much as the said company is mainly into development of new products whereas the assessee company is mainly providing software development services. After having gone through the website www.einfochip.com., we however find that the same is in respect of the entire group of e-Infochips, of which M/s. E-Infochips Bangalore Ltd. is only a part. The functional profile given on the said website th .....

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Bangalore Ltd. at different places in its Annual Report are very sketchy and it is very difficult to ascertain from the same, exact nature of services rendered by the said entity. 14. It is also pertinent to note here that a detailed submission was made by the assessee before the DRP in support of its case for exclusion of M/s. E-Infochips Bangalore Ltd. from the list of final comparables on the ground of functional differences as well as insufficient data/information available in the public do .....

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cannot be excluded from the list of final comparables merely on the ground of high or abnormal profits, as held by the Special Bench of ITAT in the case of Maersk Global Service Centre (India) Private Limited in ITA No.7466/Mum/12 dated 7.3.2014, it should trigger further investigation in order to establish whether it can be taken as comparable or not. As further held by the Special Bench in the case of Maersk Global Centres (India) P. Ltd., such investigations should be to ascertain as to whet .....

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, we are of the view that the matter should go back to the Assessing Officer/TPO for fresh consideration. This, in our opinion, will also take care of the grievance of the assessee relating to the lack of sufficient information in respect of M/s. E-Infochips Bangalore Ltd. available in the public domain in as much as the TPO can obtain such information in the form of relevant schedules of the Profit & Loss Account of the said entity as well as the segmental details, if any, directly from the .....

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set-aside the orders of TPO/DRP for denova examination after providing reasonable opportunity to the taxpayer INFOSYS LTD.: 11. Before the TPO the assessee objected to the use of this comparable on the ground that this comparable is having huge premium because of its brand value, which is not in the case with the assessee and turnover of the comparable is also very huge as compared to assessee. The TPO rejected the objection and included Infosys as a comparable. The assessee s appeal before the .....

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ervices. Further, as per Page-30/AR:- The growth in software services and product revenues is due to an all-round growth in various segments of the business mix and is mainly due to growth in business volumes. Details of the same are as follows: Income (in Rs. Crore) 2010 2009 Software services 20,215 19,416 Software products 925 848 Total 21,140 20,264 It is seen that majority of the income is from software services. Taxpayer has also argued that its services are different from that of taxpayer .....

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evelopment services. 11.1 The Ld counsel referred to following distinguishing parameters to submit that M/s. Infosys Ltd. is not comparable with the appellant: Diversified business v. Software development service Turnover of ₹ 21,140 crores vs. ₹ 230.36 crores Significant intangibles of more than ₹ 1 lac crores vs. NIL Onsite (48.7) and offshore (51.3) vs. Only services from India Sales, advertisement and brand building expenses of over ₹ 75 crores vs. Nil R&D expendi .....

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Bench has held as under:- It is argued that the case of the assessee is not comparable with Infosys Technologies Ltd., the reason being that the latter is giant in the area of development of software and it assumes all risks, leading to higher profit. On the other hand, the assessee is a captive unit of its parent company in the USA and it assumes only limited Currency risk. Having considered these points, we are of the view that the case of aforesaid Infosys and the assessee are not comparable .....

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fied-consulting, application design, development, re-engineering and maintenance system integration, package evaluation and implementation and business process management, etc. (refer page 117 of the Paper Book) Contract software development services Turnover 20,264 crores 209.83 crores Ownership branded/proprietary products Develops/owns proprietary products like Finacle, Infosys Actice Desk, Infosys iProwe, Infosys mConnect. Also the company derives substantial portion of its proprietary produ .....

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Nil (as the 1-percent services are provided to AEs) Expenditure on Research and Development ₹ 236 crores Rs. Nil Other 100 per cent offshore (from India) 11.6 On the basis of the above chart, the Hon ble High Court affirmed the conclusion that a captive unit of a comparable company which assumed only a limited risk, cannot be compared with a giant company in the area of development of software who assumes all types of risks leading to higher profits. The facts of the appellant are akin an .....

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ies like testing, professional services and customer support (Source page 76 of Annual Report March 2010) However, as per P-82/AR Income The company is engaged in providing outsourced product development services to Independent Software Vendors (ISVs) and Enterprises. The company derives a significant portion of its revenues from export of software services and products. It can be seen from the above this company is engaged in software development services hence it is good comparable As mentione .....

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m services Diversified business vs. Software development services Turnover of ₹ 5,000 crores as compared to Nil of the Appellant [Annual Report-Pg. 106] Commission to agents on sales ₹ 30.31 crores which demonstrates that the company has substantial income from sales [Annual Report-Pg. 107] 12.2 We have considered the rival submission and perused the material on record. The counsel for the assessee has contended that Persistent Systems Ltd. is functionally different from the assessee .....

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ival submissions and perused the materials on record. The TPO had, while selecting the above 26 comparables, applied a lower turnover filter of ₹ 1 crore but preferred not to apply any upper turnover limit. The size of the comparable is an important factor in comparability. The ICAI TP guidance note has observed that the transaction entered into by a ₹ 1000 crores company cannot be compared with the transaction entered into by a ₹ 10 crores company and the two most obvious reas .....

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osition has followed by the earlier Benches of this Tribunal in the following cases: (i) M/s. Kodiak Networks (I) Pvt. Ltd v. ACIT - ITA No.1413/Bang/2010; (ii) M/s Genesis Microchip (I) Pvt. Ltd. DCIT - ITA NO.1254/Bang/2010; (iii) Electronic for Imaging India Pvt. Ltd - ITA NO.1171/Bang/2010; & (iv) M/s. Trilogy E-Business Software India Private Ltd. v. DCIT - ITA No.1054/Bang/2011 dated 23.11.2012. 3.3.1 In the case of M/s.Genisys Integrating Systems (India) Pvt. Ltd. v. DCIT (supra), rel .....

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that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which are loss making are excluded from comparables, then the super profit making companies should .....

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er of 1.00 to 200 crores only should be taken into consideration for the purpose of making TP Study. 3.3.2 The above view has been followed in the recent order of the Tribunal in the case of Trilogy E -Business (supra). The relevant findings of the Tribunal are extracted as under: 20. In this regard we find that the provisions of law pointed out by the ld. counsel for the assessee as well as the decisions referred to by the ld. counsel for the assessee clearly lay down the principle that the tur .....

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. counsel for the assessee. Applying those tests, the following companies will have to be excluded from the list of 26 comparables drawn by the TPO viz. Turnover Rs. (1) Flextronics Software Systems Ltd. 848.66 crores (2) iGate Global Solutions Ltd. 747.27 crores (3) Mindtree Ltd. 590.39 crores (4) Persistent Systems Ltd. 293.74 crores (5) Sasken Communication Technologies Ltd. 343.57 crores (6) Tata Elxsi Ltd. 262.58 crores (7) Wipro Ltd. 961.09 crores. (8) Infosys Technologies Ltd. 13149 crore .....

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d. It is ordered accordingly. 12.4 Following the aforesaid decision of the Tribunal and the judgment of Hon ble High Court of Delhi in the case of CIT v. Aginity Technologies (supra) we hold that Persistent Systems Ltd. should not be regarded as a comparable. 13 The next issue relates to treatment of foreign exchange fluctuation gain/loss as operating item. During the course of hearing, the learned counsel submitted that the foreign exchange loss cannot be accepted for the purpose of calculation .....

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85 (Hyd) dated 23.11.2012: relied on SAP Labs decision, that foreign exchange fluctuations are an integral part of the sale proceeds of the assessee carrying on export business.. Further, this Order of Capital IQ has been affirmed by the Hon ble Andhra Pradesh High Court vide an Order dated 05.06.2014 in ITA No. 305/2014 wherein the High Court declined to interfere with the Order of the ITAT on an appeal filed by the Revenue. d) Rusabh Diamonds v. ACIT: (2013) 155 TTJ (Mum) 386: ITAT held that f .....

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. 4446/D/02 for Assessment year 2003-04 wherein it has been held as under: We have heard the rival submissions and perused the relevant material on record. The forex gain or loss is the difference between the price at which an import or export transaction was recorded in the books of account on the basis of rate of foreign exchange then prevailing and the amount actually paid or received at the rate of foreign exchange prevailing at the time of actual payment or receipt. Since such forex loss or .....

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ut of change in foreign currency rate in respect of transaction for import or export of goods is nothing, but inherent part of the price of import or the value of export. The Hon'ble Supreme Court in Sutlej Cotton Mills Ltd. VS. CIT 116 ITR 1 (SC) has held that : 'where profit or loss arises to an asssessee on account of appreciation or depreciation ITA Nos.4446 & 4447/Del/2007 in the value of foreign currency held by it, on conversion into another currency, such profit or loss would .....

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