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2015 (8) TMI 703 - ITAT BANGALORE

2015 (8) TMI 703 - ITAT BANGALORE - TMI - Transfer Pricing adjustment - software development services segment - selection of comparable - Held that:- We direct Infosys Technologies Ltd. be excluded from the final list of comparable companies chosen by the TPO the reason being that the latter is giant in the area of development of software and it assumes all risks, leading to higher profit. See Agnity India Technologies Pvt. Ltd. v. ITO [2010 (11) TMI 852 - ITAT DELHI] confirmed by HC [2013 (7) T .....

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ís paperbook. We are therefore of the view that it would be just and appropriate to set aside the directions of the DRP in this regard and direct the TPO/AO to verify the claim of the assessee and if found correct, to take only the segmental margins of this company as pleaded by the assessee.

Working capital adjustments - Held that:- The annual reports of the comparable companies chosen for the purpose of calculating working capital adjustment are accepted as additional evidence. The .....

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ely for the purpose of business - Held that:- As relying on CIT v. United Glass Mfg. Co. Ltd.[2012 (9) TMI 914 - SUPREME COURT] wherein taken the view that club membership fees of employees incurred by the assessee is business expenses u/s. 37 of the Act. In view of the aforesaid decision the claim of assessee in this regard has to be allowed. - Decided in favour of assessee.

Disallowance of employee provident fund liability u/s. 36(1)(va) - Held that:- It is not disputed that the afo .....

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e by the revenue authorities has to be deleted. Accordingly, the same is directed to be deleted. - Decided in favour of assessee. - IT(TP)A No.8/Bang/2011 - Dated:- 19-6-2015 - SHRI N.V. VASUDEVAN AND SHRI JASON P. BOAZ, JJ. For The Appellant : Smt. Madhawi Rati, CA For The Respondent : Shri Farahat Hussain Qureshi, CIT-II(DR) ORDER Per N.V. Vasudevan, Judicial Member This appeal by the assessee is against the order dated 21.10.2010 of the Dy. CIT, Circle 12(5), Bangalore passed u/s. 143(3) .....

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isys Corpn., USA. During FY 2005-06, Unisys India was essentially engaged in providing IT enabled services(ITES) and software development (IT) to its overseas group companies. The Assessee is organized into two operating divisions one in Bangalore and one in Mumbai. The Bangalore division primarily provides Software and BPO Services while Mumbai division is primarily engaged in purchase and resale of Unisys Products and Provision of Support Services. 4. The international transactions with associ .....

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7 Export of spares parts 685,749 TNMM OP/Sales 8 Provision of software maintenance services 13,497,927 TNMM OP/Sales 9 Availing of administrative support services 5,879,022 CPM OP/Sales 10 Import of fixed assets 850,475 CUP NA 11 Availing of consultancy services 6,248,580 TNMM OP/TC 12 Interest on external commercial borrowings 874,031 CUP NA 13 Interest on current account balances 12,060,796 CUP NA 14 Reimbursement of expenses (paid) 6,405,931 NA NA 15 Reimbursement of expense (received) 4,646 .....

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parable chosen by the TPO is only 33 and has wrongly been given as 34 in the above chart. This is because the company by name, Maars Software International Ltd. has been listed twice in the above chart at Sl.Nos.17 and 24. 7. The assessee prayed for working capital adjustment to its margin as well as margins of the comparables chosen by the TPO. The TPO did not allow the aforesaid claim of the assessee for the following reason:- 26. The assessee has not given any details as to how the working ca .....

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f Provision of services by the assessee (a) 29,97,07,226 OP/OC 16.67 Margin @ 16.67% as discussed above (b) 4,99,61,194 Arm s Length Price A (a+b) 34,96,68,420 Price at which international transaction has been undertaken B 33,15,62,802 Difference 1,81,05,618 % of difference with B above 5.46% 9. On appeal by the assessee, the CIT(Appeals) confirmed the adjustment of ₹ 1,81,05,618 made by the AO by way of adjustment, consequent to determination of ALP. 10. We have heard the submissions of t .....

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or A.Y. 2006-07. In the aforesaid decision, the Delhi Bench of the Tribunal in the case of a software development services company such as the assessee, observed in para 5.2 of its order as follows:- 5.2 Various arguments, as stated earlier, were taken before the DRP which inter-alia included rejection of comparable cases; application of arbitrary filter of wage to sales ratio; ignoring that the assessee is a limited risk company; inclusion of Infosys Technologies Ltd.; and inclusion of Satyam C .....

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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 at all as seen from the financial data etc. of the two companies mentioned earlier in this order. Therefore, we are of the view that this case is required to be excluded. Once that is done, it is the accepted position of both the parties that the results of the assessee are in line with .....

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firmed by the Hon ble Delhi High Court referred to above will be squarely applicable to the case of the assessee. Accordingly, we direct Infosys Technologies Ltd. be excluded from the final list of comparable companies chosen by the TPO. 12. The next company from the list of comparables chosen by the TPO that is sought by the assessee to be excluded is Satyam Computer Services Ltd. The DRP in its directions at page 9 has accepted the claim of assessee that Satyam Computer Services Ltd. cannot be .....

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r Services Ltd. from the final list of comparables. 13. The next submission of the ld. counsel for the assessee is with regard to the margins of Visualsoft Technologies Ltd., which is at Sl.No.15 of the list of comparables chosen by the TPO. The assessee s objection is with regard to computation of margins for the purpose of comparison as done by the TPO was as follows:- Incorrectly computing the OP/TC margin for Visualsoft Technologies Ltd.; 3 168 In the TP order the Ld TPO has considered the O .....

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3.170 It is submitted that the above margin of 19.79% should be considered while adjudicating on the transfer prices followed by the assessee in respect of its software development services. 14. On the above objections, the DRP has observed that the margin of this company provided before the DRP were segmental margins and the TPO has taken entity level margin for comparison because of nonavailability of segmental information in the public domain. The DRP was therefore of the view that the action .....

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and contrary to material on record. The ld. counsel therefore prayed that the margins as claimed by the assessee in the objections before the DRP should be considered. 16. The ld. DR, on the other hand, submitted that the issue requires verification by the AO/TPO and therefore objections of the assessee in this regard should be directed to be verified by the AO/TPO. 17. We have given a very careful consideration to the rival submissions and are of the view that the basis on which the DRP came t .....

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pleaded by the assessee. 18. The next objection of the assessee is that the TPO has not given working capital adjustments. In this regard, the ld. counsel for the assessee drew our attention to the objections filed by the assessee to the DRP in which the Assessee has highlighted as to how working capital adjustment is essentially an adjustment for the opportunity cost of making investments in working capital (ie entities, accounts receivable/debtors and accounts payable/creditors) which require .....

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imply differences in credits granted to customers and such a credit function is akin to an additional service for which markets are willing to pay. High levels of working capital create costs ether in the form of incurred interest or in the form of opportunity costs. Therefore no profit maximizing/entrepreneurial firm would hold working capital without a return. A working capital adjustment analysis seeks to adjust the profitability of each comparable company based on the working capital positi .....

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reasonable accuracy and is the best available estimate of the cost of capital. For this purpose the PLR is secured from CMIE (ie Center for Monitoring Indian Economy) and Reserve Bank of India Publications. 19. The assessee also gave a working capital margin calculation. The same is at page 165 to 168 of the assessee s paperbook. The DRP, however, did not agree with the claim of the assessee for the very same reason assigned by the TPO. The ld. counsel for the assessee drew our attention to appl .....

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the aforesaid documents are necessary for the purpose of proper adjudication of the dispute before the Tribunal, the same should be admitted as additional evidence. 20. We have considered the prayer of the ld. counsel for the assessee and are of the view that the same deserves to be accepted. Accordingly, the annual reports of the comparable companies chosen for the purpose of calculating working capital adjustment are accepted as additional evidence. The issue, however, requires verification by .....

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l for the assessee then drew our attention to the determination of the ALP in the ITES sector. As far as ITES segment is concerned, the assessee in its TP study submitted that the OP/TC margin earned by the assessee in the ITES segment was 12.62%. The single year margin of comparable companies in the transfer pricing documentation prepared by the assessee was 7.90% after working capital adjustment and thus the Assessee claimed that the price charged by it was at Arm s Length. 24. The TPO rejecte .....

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23 % of difference with B above 6.57% 26. Adjustment on account of determination of ALP of ₹ 1,21,45,823 was added to the total income by the AO in the final assessment order. On appeal by the assessee, the DRP confirmed the order of TPO. Before us, the limited prayer of the ld. counsel for the assessee is to exclude Allsec Technologies Ltd., which was a comparable chosen by the TPO from the list of comparables. In this regard, it transpired in the course of hearing that before the TPO, th .....

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ssessee on exclusion of the aforesaid company. 27. Before us, the ld. counsel for the assessee brought to our notice the decision of ITAT Hyderabad Bench in the case of CES Pvt. Ltd. v. ACIT, ITA No.1445/Hyd/2010 for AY 2006-07. In the aforesaid decision, the objection by a company engaged in the business of providing ITES to regard it as a comparable was as follows:- 6. Allsec Technologies Ltd. The learned counsel for the assessee submission is to exclude the said company from the list of compa .....

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AT order in the case of Google India Pvt. Ltd. vide 1368/Bang/2010 where this company is rejected as comparable to ITES. 2. Hyderabad ITAT order in the case of Capital IQ Information Systems (India) Ltd. vide Para 11 and 15. 3. Mumbai ITAT order in Teva India Pvt. Ltd. Vs. DCIT Mumbai. 28. The ITAT Hyderabad Bench accepted the claim of the assessee in this regard in para 17 of its order, which reads as follows:- 17. We have considered the various objection in the light of material placed before .....

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mparable companies. 30. The next claim of the assessee with regard to the action of the Revenue in not allowing working capital adjustment. While deciding similar ground in software development services segment, we have already held that working capital adjustment needs to be allowed, subject to verification of details filed by the assessee in this regard. We are of the view that the said directions will hold good for ITES also. The TPO/AO is accordingly directed to allow working capital adjustm .....

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