TMI Blog2015 (10) TMI 945X X X X Extracts X X X X X X X X Extracts X X X X ..... ies Ltd. - these companies are not to be selected on various reasons, we uphold the objections of Assessee and direct the T PO/AO to work out the arithmetic mean of PLI on the balance of companies. Grounds raised by Assessee on this issue are allowed. 16.3.2 Following the aforesaid decision of the ITAT, Hyderabad Bench in the case of CES Pvt. Ltd. for Assessment Year 2006-07 (supra), for the factual reasons cited therein and also brought before us, we hold and direct that these two companies namely, Spanco and Allsec Technologies Ltd. are to be excluded from the set of comparable companies for the ITES segment of the assessee. Genisys International Corp. Ltd. company did not come to be selected in the search process of either the TPO or the assessee. That being the case, we find that the assessee has not brought on record any factual evidence to establish its claim that this company satisfies all the conditions and filters for comparability. In this view of the matter, the contentions of the assessee for inclusion of this company as a comparable are not acceptable and we, therefore, dismiss this ground raised by the assessee. Computation of deduction u/s. 10A - Held that:- T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made by the Assessing Officer to the Transfer Pricing Officer ( TPO ) in respect of the following international transactions entered into by the assessee with its Associated Enterprises ( AEs ) in the year under consideration :- Back-end Services (ITES) ₹ 1,24,40,30,865 Software Development Services ₹ 45,11,75,241 Reimbursement of expenses paid ₹ 29,09,92,785 Reimbursement of expenses received. ₹ 1,43,58,174 2.3 The TPO passed an order under Section 92CA of the Act dt.28.10.2009 wherein an aggregate T.P. Adjustment of ₹ 19,52,63,407 was proposed to arrive at the Arm s Length Price ( ALP ) of the international transactions which included an adjustment of ₹ 4,16,14,767 to the software development services segment and an adjustment of ₹ 15,36,48,640 to the ITES segment. After receipt of the TPO s order under Section 92CA of the Act, the Assessing Officer passed the draft assessment order incorporating, inter alia, the T.P. Adjustments proposed by the TPO. 2.4 Aggrieved by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso not as per the provisions of the Act and was not available to the Appellant at the time of complying with the transfer pricing documentation requirements. 5. The Honourable DRP and the learned AO/TPO erred in fact and in law in determining the Arm s Length Price ( ALP ) by adopting the financial data for a single year (i.e. the financial year 2005-06) of the comparables as against multiple year data considered by the Appellant. 6. The learned TPO and the Honourable DRP have erred in determining the arm s length margin at 19.96 percent for the software segment and 23.19 percent for the ITES segment based on companies which are not comparable to the Appellant due to various factors such as functional comparability, product led revenues, inadequate financial information, use of unreliable segment financials, extra ordinary events, low employee cost levels, failing of TPO s own filters, inconsistent approach of the TPO for different comparables etc. and rejecting certain companies comparable to the Appellant based on incorrect reasons. 7. The learned TPO erred in computing the operating margins of the comparable companies at higher levels and determining the opera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned AO have erred in law and on facts in upholding that the said communication expenses should not be reduced from the total turnover for the purpose of computation of relief under section 10A of the Act even if these are reduced from the export turnover. 16. The learned AO has erred in facts and on law in computing the interest under section 234C of the Act at a higher amount without appreciating that the said interest is to be computed on the basis of the income returned by the appellant. 17. The Honourable DRP and the learned AO/TPO has erred in law and on facts in levying and wrongly computing interest under section 234B, 234C and 234D of the Act. 3.3 The Additional Grounds of appeal raised are as under :- 1. The learned DRP/A.O./TPO have erred in selecting companies (including Spanco Limited (formerly known as Spanco Telesystems Solutions Ltd.) Allsec Technologies Ltd. (ITES), which are not comparable to the appellant. These companies cannot be retained as comparable, merely because these were initially selected by the appellant in its transfer pricing documentation. 2. The learned DRP/A.O./TPO have erred in not selecting companies (including ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ucted a T.P. Study for the reported international transactions by separately bench marking the transactions related to the ITES Segment and software development services segment. The assessee adopted Transactional Net Margin Method ( TNMM ) as the Most Appropriate Method ( MAM ). The profit level indicator taken was operating profit to operating cost. Based on the study conducted and comparability analysis, the assessee selected a set of 49 companies as comparable to the assessee. The average operating profit margin of these 49 comparables was computed at 12.80%. As the average mean of the comparables was within the 5% range, as compared to the assessee's margin at 10%, the assessee conducted that its international transactions of the software development service segment were at arm s length. 6.2 The TPO examined the assessee's T.P. Report and rejected the same for the various reasons enumerated in the T.P. order. The TPO then conducted his own search process adopting various criteria/filters and finally selected the following 20 companies as the final set of comparables. Sl. No. Company Name Sales (Rs. Crores) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions by applying the arithmetic mean of the final list of comparable companies chosen by him. After allowing working capital adjustment of 0.72% of the TPO computed the ALP of the assessee's international transactions and the proposed T.P. Adjustment thereto as under :- Particulars Amount (Rs.) Arm s Length Mean Margin on cost 20.68% Less : Working Capital Adjustment 0.72% Adjusted Margin 19.96% Operating Cost 41,39,81,454. ALP @ 119.96% of operating cost 49,66,12,153 Price received 45,49,97,386 Shortfall being adjustment u/s.92CA 4,16,14767. 6.4 Based on the above computation, the TPO proposed an adjustment of ₹ 4,16,14,767 for the international transactions in the software development services which was incorporated in the assessment order by the Assessing Officer. The assessee filed its objections before the DRP. The DRP rejected the adjustments put fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty of products such as Insure, La Vision and eDMS. Further, the application software segment would include both software development and software product sales for which appropriate segmental information is not available. 8.3 In support of its contention for exclusion of these two companies from the list of comparables, on the grounds that they are functionally different from the assessee in the case on hand who is a provider of software development services to its AEs, the learned Authorised Representative placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of Ariba Technologies India Pvt. Ltd. (supra) for Assessment Year 2006-07 dt.19.12.2014. 8.4 Per contra, the learned Departmental Representative supported the orders of the authorities below in including these two companies in the list of comparables to the assessee. 8.5.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial pronouncements cited and placed reliance upon. We find that a co-ordinate bench of this Tribunal in the case of Ariba Technologies India Pvt. Ltd. (supra) for Assessment Year 2006-07 has excluded bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds. Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO. We alsofind that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foresaid company should not be treated as comparables was considered by the Tribunal in Capgemini India Ltd (supra) where the assessee was software developer. The Tribunal, in the said decision referred to by the ld. counsel for the assessee, has accepted that this company was not comparable in the case of the assessees engaged in software development services business. Accepting the argument of the ld. counsel for the assessee, we hold that the aforesaid company should be excluded as comparables. 13. The facts and circumstances under which the aforesaid companies were considered as comparable is identical in the case of the Assessee as well as in the case of Triology EBusiness Software India Pvt.Ltd. (supra). Respectfully following the decision of the Tribunal referred to above in the case of Triiology E-Business Software India Pvt. Ltd.(supra), we direct that KALS Info Systems Ltd. And Accel Transmatic Ltd. be excluded from the list of 20 comparable arrived at by the TPO. 8.5.2 Following the decision of the co-ordinate bench of this Tribunal in the case of Ariba Technologies India Pvt. Ltd. for Asst. Year 2006-07 (supra), we direct the Assessing Officer / TPO to excl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the decision of the ITAT, Hyderabad Bench in the case of CES Pvt. Ltd. (supra) for Assessment Year 2006-07, we hold and direct that this company i.e. Infosys Technologies Ltd. is to be excluded from the set of comparable companies for the software development services segment of the assessee. 10. Megasoft Ltd. 10.1 The learned Authorised Representative of the assessee submitted that this company is a product development company and is therefore functionally different from the assessee in the case on hand who is purely a provider of software development services to its AEs. It is submitted that this company has three divisions; one of which, is, XIUS Division is completely into product development and has various products such as XIUS WISE, XIUS Voise, XIUS Roaming, XIUS Infinet, etc. customises its own products and only passes on right in the form of licenses. The learned Authorised Representative also submitted that this company fails the Related Party Transaction ( RPT ) filter of 15% and is a super profit company. In support of the assessee's contentions, that this company, being into products and product development should be excluded from the list of comparabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amely, Megasoft Ltd. is to be excluded from the list of comparable companies for software development services segment of the assessee. 11. Tata Elxsi Ltd . 11.1 The learned Authorised Representative of the assessee submitted that this company is a product company and it has several core practices which encompass product design services, industrial design and engineering services for automotive and consumer goods; animation and visual effects including content development and system integration services. It is also submitted that appropriate segmental information is not available in respect of the software development segment which have different segments. In support of the assessee's contention that this company ought not to have been included in the set of comparable companies to the assessee who is a non-provider of software development services to its AEs, the learned Authorised Representative placed reliance on the decision of a co-ordinate bench of this Tribunal in the case of Ariba Technologies India Pvt. Ltd. in IT(TP)A No.1179/Bang/2010 dt.19.12.2014 for Assessment Year 2006-07. 11.2 Per contra, the learned Departmental Representative supported the order o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ems Pvt. Ltd. should be taken as a comparable, while comparable at Sl.No.24 viz., Tata Elxsi Ltd. should be rejected as a comparable. 18. In view of the aforesaid decision, we hold that Tata Elxsi has to be excluded from the list of comparable chosen by the TPO. 11.3.2 Following the aforesaid decision of the co-ordinate bench of this Tribunal in the case of Ariba Technologies India Pvt. Ltd. for Assessment Year 2006-07 (supra), we hold and direct that this company, namely, Tata Elxsi Ltd. shall be excluded from the set of comparable companies for the software development segment of the assessee. I.T. Enabled Services ( ITES ) 12.1 The assessee conducted a T.P. Study for the international transactions by separately bench marking the transactions related to the ITES segment and adopted TNMM as the MAM. Based on the study conducted and the comparability analysis conducted, the assessee selected a set of 11 companies as comparable companies to the assessee. The average of the operating profit margin of these 11 comparables was computed at 12.55%. As the average mean margin of the comparables at 12.55% was within the 5% range, as compared to the assessee's margin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment by applying the arithmetic mean of the final list of comparable companies chosen by him. After allowing working capital adjustment of 0.81% to the assessee, the TPO computed the ALP as under :- Particulars Amount (Rs.) Arm s Length Mean Margin on cost 24.00 % Less : Working capital adjustment 0.81% Adjusted Margin 23.19% Operating cost 114,31,24,876 ALP 123.91% of operating cost 140,82,15,534 Price received 125,45,66,894 Shortfall being the adjustment u/s.92CA 15,36,48,640 Based on the above computation, the TPO proposed an adjustment of ₹ 15,36,48,640 for the international transactions in the ITES segment which was incorporated by the Assessing Officer in the order of assessment for Assessment Year 2006-07. 12.4 Aggrieved, the assessee filed its objections before the DRP. The DRP rejected the assessee's arguments regarding the comparability of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has a different business model as it has outsourced its ITES and therefore cannot be comparable to the assessee. 13.2.4 In the case of Asit C Mehta Financial Services Ltd., it was submitted that this company has a different business model from the assessee in the case on hand, as it has a very low employee cost of 23.4% as against 46.95% of the assessee. It was also submitted that there were extra-ordinary events in the form of merger of Nucleus Netsoft and GIS with the assessee company in the year under consideration and therefore its margin of 90%, which have significantly diminished in subsequent years, would render it not comparable to the assessee. It was submitted that in view of the above, this company cannot be treated as comparable to the assessee. 13.2.5 In the case of Goldstone Infratech Ltd. , it was submitted that this company is functionally different from the assessee in the case on hand as it operates by leasing seats to other companies on hire basis and the income from such leasing activity is recognized as part of its BPO income. It was further submitted that this company i.e. Goldstone Infratech Ltd., had diminishing revenues over the last three years and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the reason that the company is functionally different, also does not satisfy the filters such as employee cost and on-site revenue filter. It was submitted that employee cost forms a major portion of the total cost of BPO services and in the assessee s case employee cost is 62% of the total cost, whereas in the selected company the employee cost is less than 2%, which indicates that most of the work was outsourced and the out-sourcing cost was at 88.64% of the operating cost. It was further submitted that the ITAT Bangalore in the case of First Advantage Off-shore Services (ITA No.1252/Bang/2010) has directed to use employee turnover filter in a consistent manner for selection of comparables and in the case of Maersk Global Services Centre (India) Pvt. Ltd. (14 ITR(Trib) 541) the Mumbai Bench of the Tribunal has analysed and rejected this company as comparable for the reason that it has outsourced a considerable portion of it s business and is functionally different. Moreover, it was also submitted that the DRP in the later year of 2008-09 vide its order dated 3.8.2012 has rejected this company as a comparable (name changed to Coral Hub Ltd.), vide para 18 of the order, wherein ult ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsidered as under- 14. The inclusion of second case objected to by the Id. AR is that of Goldstone Infratech Limited (Seg) (earlier known as Goldstone Teleservices Limited). Here it is relevant to note that the TPO, inter alia, applied filter of Companies withexport revenues more than 25% of the revenues . Annual accounts of Goldstone Teleservices Limited indicate total revenue of the company at ₹ 30.89 crore from three segments, viz., Telecommunication at ₹ 13.63 crore, BPO at ₹ 5.02 crore and Insulator at ₹ 12.23 crore. The break up of such revenue of Goldstone Teleservices Limited has been provided at page 236 of the paper book. Schedule forming part of the annual accounts of Goldstone Teleservices Limited divulges earnings in foreign currency at ₹ 4.24 lakh. Such detail is available at page 239 of the paper book. When we compare earning in foreign currency at ₹ 4.24 lakh with the earnings of BPO at ₹ 5.02 crore or for that purpose of the entity as a whole at ₹ 30.89 crore, it becomes manifest that this case does not pass through the filter adopted by the TPO, being, the companies whose export revenues are more than 25% of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced by the learned Departmental Representative for the exclusion of transactions with Datamatics Limited towards Reimbursement of expenses from the overall transactions entered into by Datamatics Financial Services Ltd. with its AEs. Section 92F(v) defines transaction in the context of transfer pricing provisions to include an arrangement, understanding or action in concert whether or not it is formal or in writing or whether or not it is intended to be enforceable by legal proceeding. There is no reference to any transaction having necessarily including profit element or mark-up so as tofall within the definition of transaction under Chapter X of the Income-tax Act. Since the TPO applied filter of having companies with less than 25% related party transactions, it is not open to argue that the transactions of reimbursement of expenses duly reported by Datamatics Financial Services Limited as an international transaction within the meaning of section 92B should be ignored simply because they represent reimbursement of expenses. If the contention of the Id. DR that the reimbursement of expenses not involving profit element should not be construed as a transaction, is taken to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der consideration is 2006-2007 and the Delhi Bench of the Tribunal has also considered the same assessment year while directing the exclusion of the case of Maple e Solutions Limited from the list of comparables, we are unable to accept the contention of the Id. DR in this regard. It is more so because no contrary view has been brought by the Ld. DR to our notice. Respectfully following the precedents, we direct the exclusion of this case from the final list of comparables. Since the DRP in assessee s own case for assessment year 2007-08 also considered and excluded this company, we uphold the assessee s objection in this regard and direct the Assessing Officer to exclude this company from the comparables adopted. Nucleus Netsoft GIS(India) Ltd. 13. The last objection was with reference to the above company, which is on similar facts as that of Vishal Information Technologies, discussed above. It was submitted that this company is functionally different and fails under the employee cost filter. It was further submitted that there is a scheme of amalgamation of earlier company by the orders of the Hon ble High Court of Judicature of Bombay, on 22.2.2006 and in view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny be excluded from the list of comparables. In support of this proposition, the learned Authorised Representative of the assessee placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of Ariba Technologies India Pvt. Ltd. (supra). 14.2 Per contra, the learned Departmental Representative supported the orders of the authorities below in including the company in the list of comparables to the assessee in the case on hand. 14.3.1 We have heard both parties and perused and carefully considered the material on record; including the judicial decision cited and relied upon by the assessee. We find that the co-ordinate bench of this Tribunal in the case of Ariba Technologies India Pvt. Ltd. (supra) has considered the comparability of this company, namely, Apex Knowledge Solution Pvt. Ltd. in the ITES Segment and held that it is not functionally comparable to ITES provider as it provides services such as e-publishing knowledge based services, etc. At paras 26 27 of its order, the co-ordinate bench has held as under :- 26. The learned counsel further submitted that the comparable company chosen by the TPO viz., Apex Knowledge Solution Pvt.Ltd., sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it subsequently came to light that various Tribunals have held that these two companies are not comparables for companies in the ITES sector and therefore had raised additional grounds in this regard. In support of the assessee's contention that these two companies are to be excluded from being adopted as comparables to companies in the ITES sector in the year under consideration, the learned Authorised Representative placed reliance on the decision of the ITAT, Hyderabad Bench in the case of CES Pvt. Ltd. (supra) for Assessment Year 2006-07 wherein Spanco was excluded from the list of comparables on the ground that it had acquired Intelenet BPO Services Ltd. in Nov., 2005 and was also a super profit making company, and Allsec Technologies Ltd. was excluded on grounds of having super normal profits and for entering into new areas of business. 16.2 Per contra, the learned Departmental Representative supported the TPO s order in including these two companies in the list of comparables to the assessee in the case on hand. 16.3.1 We have heard both parties and perused and carefully considered the material on record; including the judicial pronouncement cited by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two companies namely, Spanco and Allsec Technologies Ltd. are to be excluded from the set of comparable companies for the ITES segment of the assessee. 17. Ground No.2 : Genisys International Corp. Ltd. 17.1 In the Ground at S.no.2 of the additional grounds of appeal, the assessee has submitted that this company; namely, Genisys International Corp. Ltd., should be included as a comparable. From the details before us, we find that the assessee has failed to adduce any evidence to support its claim. Evidently, this company was neither selected as a comparable company in the set of 49 comparables chosen by the assessee nor those chosen by the TPO. Therefore, this company did not come to be selected in the search process of either the TPO or the assessee. That being the case, we find that the assessee has not brought on record any factual evidence to establish its claim that this company satisfies all the conditions and filters for comparability. In this view of the matter, the contentions of the assessee for inclusion of this company as a comparable are not acceptable and we, therefore, dismiss this ground raised by the assessee. 18. Ground Nos. 14 15 : Computation/D ..... X X X X Extracts X X X X X X X X Extracts X X X X
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