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2015 (10) TMI 1005 - ITAT DELHI

2015 (10) TMI 1005 - ITAT DELHI - TMI - Transfer pricing adjustment - determining the arm's length margin/ price using multiple year data - Held that:- Only the contemporaneous year data is to be taken into consideration for the purposes of bench marking purposes as per Rule 10B (4) of the Incometax Rules, 1962 (hereinafter ‘the Rules’). This position is now well settled by the decision of Hon’ble jurisdictional High Court in the case of Chrys Capital Investment Advisors (I) Pvt. Ltd. Vs. DCIT [ .....

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er profits. The facts of the appellant are akin and the comparative chart of assessee vis –a-vis M/s Infosys clearly depicts the same and therefore, do not warrant any different conclusion. The appellant is also captive service provider to its AE and as such, M/s. Infosys Ltd. is not a valid comparable with the appellant and we direct it’s exclusion from the comparables.

M/S. WIPRO TECHNOLOGY SERVICES LIMTIED - We concur with the finding of DRP while repelling the objection regarding .....

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a comparable.

CALIBER POINT BUSINESS SOLUTIONS LTD. & R SYSTEMS INTERNATIONAL LTD. - We direct the TPO to re-examine these comparables by reworking their margins as on 31st March 2010 as aforestated in the order in the case of M/s. Mercer Consulting (India) Pvt. Ltd. [2014 (10) TMI 467 - THE ITAT DELHI]

ITES SEGMENT - ACCENTIA TECHNOLOGIES LTD. - In the light of the amalgamation, which is having an impact on the figures disclosed as of 31st March 2010, we find force in the .....

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rable. Contrary to this, the audited annual accounts, certify that both, these receipts are rank parri passu and have the same nature and function. Similar is the position with M/s. TCS E-serve International Ltd. so therefore we uphold the inclusion of these two comparables. - Decided in favour of assessee in part. - ITA No.1222/Del/2015 - Dated:- 8-9-2015 - SHRI R.S. SYAL, ACCOUNTANT MEMBER AND SHRI A. T. VARKEY, JUDICIAL MEMBER Appellant by : S/Shri Nageshwar Rao, Ankit D. Aggrawal & Sande .....

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grounds have been raised :- 1. Without prejudice to the above, the order of the learned AO and directions of the Hon'ble DRP are based on incorrect interpretation of law and therefore are bad in law. 2. On the facts and in the circumstances of the case and in law and based on the directions of DRP, the learned AO erred in assessing the total income of the Appellant at ₹ 16,65,79,490 as against returned income of ₹ 12,61,73,755 computed by the Appellant. 3. The learned AO / Trans .....

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ant in accordance with the provisions of the Act read with the Rules, and conducting a fresh economic analysis for the determination of the ALP in connection with the impugned international transaction and holding that the Appellant's international transaction is not at arm's length. 5. The learned TPO and the learned AO have erred, in law and in facts, by determining the arm's length margin/ price using only FY 2009-10 data which was not entirely available to the Appellant at the ti .....

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ot making suitable adjustments to account for differences in the risk profile of the Appellant vis-a-vis the comparables. 9. The learned AO erred, in law and in facts, in initiating penalty proceedings u/s 271(l)(c) of the Act. 3. In this matter Ground Nos.1 & 2 are general in nature and do not require adjudication. 4. Ground No.5 is regarding multiple year data which is no longer res-Integra and now the settled position of law is that only the contemporaneous year data is to be taken into c .....

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cets of adjustments made/upheld in the instant case by the TPO/DRP. 6. Brief facts of the case are that Xchanging Technology Services India Private Limited ('Xchanging India') is a subsidiary of Xchanging Resourcing Services Limited, UK and engaged in the business of rendering contract software development as well as Information Technology Enabled Services (ITES) to Xchanging Group companies. The assessee is registered as a 100% export oriented unit under the Software Technology Parks of .....

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. The ld. TPO requested for certain information/documents which were duly furnished by the assessee. Subsequently, the ld. TPO passed an order dated 16.01.2014 making certain adjustment to the ALP of the international transactions of the assessee. 6.1 The assessee operates in two segments i.e. software development segment and ITES segment. During the FY 2009-10, the assessee had following international transactions with Associated Enterprises (AEs) which were picked-up for scrutiny by the TPO :- .....

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method. In order to identify companies which are comparable to the Assessee, search was conducted on Prowess (a database compiled and managed by The Centre for Monitoring Indian Economy) and Capitaline (a database compiled and managed by Capital Market Publishers) for obtaining publicly available financial information of companies in India engaged in similar business activity as the Assessee. For the companies identified as com parables, weighted average of operating profit earned on operating .....

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of comparable companies, the price charged by the Assessee in respect of the IT services transaction was considered to be at arm's length in accordance with the Indian transfer pricing regulations. In connection with the international transaction of provision of ITES, the arithmetic mean of the unadjusted net margins of the comparable companies was 14.27 percent on operating cost. As the Assessee's net margin of 24.96 percent was higher than the arm's length margin of comparable comp .....

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in its TP documentation report. 6.5 Based upon the discussion in the TP order, TPO selected following comparables for bench-marking software development and ITES segment as under:- FIRST ITES SEGMENT S.No. Company Name Adjusted OP/OC (%) 1. Accentia Technologies Ltd. 40.20 2. Cosmic Global Ltd. 20.29 3. E4e Healthcare 31.55 4. Fortune Infotech Ltd. 21.38 5. I-gate Global Ltd. 24.09 6. Infosys B P O Ltd. 30.17 7. Jindal Intellicom Ltd. 14.95 8. Omega Healthcare 13.11 9. T C S E-Serve Internationa .....

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me OP/OC (%) Adjusted OP/OC (%) 1. Akshay Software Technologies Ltd. -1.04 -0.42 2. Cat Technologies Ltd. 11.48 4.49 3. E-Infochips Bangalore Ltd. 72.69 65.99 4. Evoke Technologies Pvt. Ltd. 19.02 19.67 5. E-Zest Solutions Ltd. 18.66 16.36 6. Infinite Data SYstems Pvt. Ltd. 84.65 84.65 7. Infosys Ltd. 45.08 46.41 8. KulizaTech 18.85 17.66 9. Larsen & Toubro Infotech Ltd. 20.48 20.97 10. LGS Global Ltd. 12.79 8.36 11. Maveric Systems Ltd. 16.17 15.68 12. Mindtree Ltd. 16.62 15.46 13. Persiste .....

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Rs.33,51,58,550 Proposed adjustment u/s 92CA Rs.3,65,02,107 10. The TPO s bench-marking approach has been principally upheld by the DRP barring exclusion of few comparables in the original set adopted by the TPO, post- DRP order following TP adjustment has been recalculated by TPO by order dated 18.12.2014 as under :- S.No. Nature of International Transaction Adjustment u/s 92CA (Rs.) 1. Provision of IT Enabled services 2,14,03,620 2. Provision of Software Development services 1,90,02,115 Total .....

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the TP documentation maintained by the Assessee, it wishes to submit that, Infosys should be rejected on account of the difference in levels of functions performed and levels of risk assumed vis-a-vis the assessee, huge revenues derived from software services in comparison to the Assessee and the fact that it is a market leader owning significant amount of intangible assets and incurring huge expenditure on research and development. The functional difference of the assessee with Infosys is evide .....

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w : During the, year SET Labs IP Cell filed 31 patent applications in the United States Patent and Trademark Office (USPTO) and Indian PATENT Office. We now have an aggregate of 224 patent applications pending in India and the U.S. and the USPTO has granted nine patents. Page 27 of the annual report suggests that Infosys earns revenue from software products. 1.b Software products The revenue from software products grew 9.1% compared to 42% in the previous year. Of the software products revenue, .....

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TS Image No. 1 Page 13 Also, the annual report indicates that "Infosys" brand is one of the most important intangible assets owned by the company. Page 15 of the annual report supports the statements: Branding : We believe that the Infosys brand is one of the most important intangible assets that we own. During this fiscal year, we have been appreciated by the following bodies as a recognition of how we operate and conduct business : • Ranked as the most admired company in India a .....

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nctionally not comparable. Infosys operates as a full-fledged risk bearing entrepreneur, undertaking functions and bearing risks which are far greater than the assessee which is risk mitigated captive service provider. The functional difference of the assessee with Infosys is captured in the table below for your goodself's case of reference: Particulars Infosys Technologies Limited XTSI Risk profile Operates as a full-fledged risk bearing entrepreneur Operates at minimal risks as the 100% se .....

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s Most of the revenue composition is offshore Expenditure on advertising sales promotion Has incurred selling and marketing expenditure to the tune of 974 crore. Has 65 marketing offices in total. Does not undertake any expenditure on advertising/ sales promotion as entire services revenue is from AEs. Expenditure on research and development Rs.440 crore Does not undertake product development, merely provides software development services to AEs. He has referred to following decision: a) Aginity .....

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Further, appeal of Revenue against this order has been dismissed by the Hon ble Andhra Pradesh High Court vide an Order dated 18.06.2014 in ITA No. 371/2014. 13. On the other hand the ld. DR relied on findings of DRP. 14. We have considered rival submissions, perused the material on the record. In the case of Agnity Technologies, ITA No.3856/Del/2010, a coordinate Bench has held as under:- It is argued that the case of the assessee is not comparable with Infosys Technologies Ltd., the reason be .....

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this case is required to be excluded 15. The aforesaid order was upheld by the Hon ble Delhi High Court after taking note of the chart as given below: Basic Particular Infosys Technologies Ltd. Assessee Risk Profile Operate as full-fledged risk taking entrepreneurs Operate at minimal risks as the 100 percent services are provided to AEs Nature of services Diversified-consulting, application design, development, reengineering and maintenance system integration, package evaluation and implementat .....

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rendered by Infosys are onsite (i.e. services performed at the customer s location overseas). And offshore (50.20 per cent) Refer p. 117 of the Paper Book) than half of its service, income from onsite services The appellant provides only offshore services (i.e. remotely from India) Expenditure on advertising/sale s promotion and brand building ₹ 80 crores Rs. Nil (as the 1-percent services are provided to AEs) Expenditure on Research and Development ₹ 236 crores Rs. Nil Other 100 per .....

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ion. The appellant is also captive service provider to its AE and as such, M/s. Infosys Ltd. is not a valid comparable with the appellant and we direct it s exclusion from the comparables. M/S. WIPRO TECHNOLOGY SERVICES LIMTIED 17. As regards this comparable, the assessee had the following objections taken before the lower authorities :- In this regard, the Assessee wishes to submit that Wipro should be rejected on the ground that there is insufficient financial information in the annual report .....

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e in the annual report. Further, the 'Balance Sheet Abstract and the Company's General Business Profile' section on Page 14 does not provide any information regarding the type of products/ services the company deals in as shown below: V. Generic names of the three Products/Services of the Company(as per monetary terms) (i) Item Code No (ITC Cod.) Product Description (ii) Item Code No (ITC Code) Product Description (iii) Item Code No (ITC Code) Product Description Your goodself has al .....

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ng all of Citigroup interest in CTS w.e.f. 21 January 2009. On 21 January 2009, Wipro signed a master service agreement (MSA) with Citigroup Inc. for the delivery of technology infrastructure services and application development and maintenance services for the period of six years. The MSA provides for the delivery of at least $500 million in service revenues over the period of the contract. After the acquisition by Wipro, the name of CTS was changed to Wipro Technology Services Limited ('WT .....

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rks. The relevant extract as on Page 5 has been provided below for your easy reference: 8. Select companies based on an analysis of the nature of operations undertaken by each of the companies. The rationale for excluding companies that are affected by factors like persistent losses, declining sales, extraordinary income or expense, mergers and acquisitions or other such factors which affect the operations of the company substantially should not be used as comparables as they will not prove to b .....

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s and acquisitions or other such factors which affect the operations of the company substantially should not be used as comparables as they will not prove to be good benchmarks. The relevant extracts from the annual report are enclosed as item 5 in the supporting booklet attached to the submission. Company should be rejected as it is earning super-profits The Assessee submits that Wipro Technology has posted an operating margin of more than 70% and under the circumstances when the software indus .....

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unay Jewels Private Limited [ITA No. 5758/Mum/2007] • M/s SAP Labs India Private Limited vs. ACIT, Bangalore [ITA No. 398/Bang/2008] • M/s Adobe Systems India Private Limited Vs. ACIT, Noida (ITA No. 5043/De1/2010) • M/s NIT Ltd Vs. ACIT (2011-TII-16-ITAT-DEL-TP) • Sapient Corporation Private Limited (ITA No. 5263/De1/2010) Considering the above facts, it would be incorrect to accept Wipro Technology as a comparable on the grounds that there is lack of sufficient financial in .....

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he assessee raised the other objections as were raised before us i.e. this company is rendering different services, there is insufficient segmental information, it fails RPT filter and there is an extra ordinary event during the year. The DRP observation on the aforesaid objection is as under:- DRP has considered the objection of the assessee. DRP is of the opinion that the event is not extraordinary in the sense that this is going to affect the profit margin of the comparable company. So called .....

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ing place for this comparable, but for a different reason, i.e. the relevant extra ordinary event took place in the preceding Financial Year i.e. FY 2008-09. However, we concur with the submissions advanced by Ld AR that the Director s Report and Notes to Account for this comparable are not available in public domain. Ld. DR has not been able to controvert this fact. Since sufficient information for this comparable is not available, we direct exclusion of this company as a comparable. CALIBER PO .....

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he TPO solely for the reason that its financial year is different without considering that the data for the financial year adopted by the assessee can be easily compiled from the audited statements of such company. We, therefore, set aside the impugned order on this issue and remit the matter to the TPO/AO for including the case of R. Systems International Ltd. in the list of comparables by working out the figures relevant to the financial year ending 31.3.09 from the audited accounts of R. Syst .....

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rivate Limited with the company. Pursuant to the scheme of amalgamation of the erstwhile Asscent lnfoserve Private Limited (subsidiary of the company) with the company as approved by the shareholder in the court convened meeting held ON the 25th day of April, 2009 and subsequently sanctioned by the honorable high court of Judicature at Mumbai vide order dated 21st August 2009 and Honorable high court of Karnataka at Bangalore vide order dated 6th February 201 0, the assets and liabilities of the .....

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te Limited (as at 1st Apr 2008) have been incorporated in the books of accounts of the company as per "pooling of interest" method as prescribed by AS14 notified under Companies auditing standards 2006. The resultant Goodwill as specified in the scheme of amalgamation has been incorporated in the books of the accounts of the company and same will be amortized over the period of 10 years . • The financial results of the company for the year ended 31st March, 2010 are inclusive of t .....

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he name of the erstwhile amalgamating companies. In view of the above amalgamation being effective the figures for the year ended 31st Mar, 2010 are inclusive of the figures relating to the amalgamating company and thus are not comparable with those of the previous year. 2. Conversion of Share warrants to Equity shares: The Company has issued 400000 Equity shares during the year at the rate of ₹ 135.99 per share including the share premium of ₹ 125.99 per share as part of conversion .....

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nvested USD One and Half Million for 260 equity shares of Trans Service INC, USA. 22. In the light of the aforesaid amalgamation, which is having an impact on the figures disclosed as of 31st March 2010, we find force in the contention of the ld. AR, this company should be excluded from the comparable and we order accordingly. TCS E - SERVE INTERNATIONAL LTD. & TCS E-SERVE LTD. 23. We find that for both these comparables, the following objections were raised before us :- TCS E-Serve Internat .....

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lobal Service Centres (India) Private Limited vs. ACIT (ITA No. 7466/Mum/2012) (SB) (AY 2008- 09) - para 99 • Insufficient Segmental Information: Broad range of ITES services comprising of 'Financial Information Processing', 'Customer Contact' and 'Functional Testing Services'; IT services comprise of software testing, verification and validation of software at the time of implementation and data centre management activities. [Pg. 32 of Annual Report] No break-up of .....

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h a huge brand name; more than two- fold increase in PBT vis-avis preceding year [Pg. 92 of Annual Report]. • Earning Super-normal profits due to exceptional year of operation - reliance placed on Maersk Global Service Centres (India) Private Limited vs. ACIT (ITA No.7466/Mum/2012) (SB) (AY 2008- 09) - para 99 • Insufficient Segmental Information: Broad range of ITES services comprising of processing, collections, customer care and payments in relation to the services offered by Citigr .....

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E Serve and TCS E serve International Ltd., are functionally similar to the case of the assessee as both are providing services in the IT enabled services segments. The relevant extracts from the respective annual reports are given as under :- TCS E-Serve International Ltd. As per P-39/AR:-''The Company is engaged in Business Process Outsourcing (transaction processing) services to the Banking &Financial Services Industry (BFSI) and Travel, Tourism and Hospitality (TTH) , which are c .....

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ed in Business Process Outsourcing (transaction processing) services to the Banking &Financial Services Industry (BFSI) and Travel, Tourism and Hospitality (TTH), which are considered as industry segment. Geographic segments of the Company are India, Americas, Europe and others." As per P-105/AR:-"TCS e-Serve Limited is engaged in the business of providing Information Technology - Enabled Services (ITES) / Business Process Outsourcing (BPO) services, primarily to Citigroup entities .....

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to provision of ITES using TNMM. 25. We have carefully considered the contention raised by both the parties and perused the material on record. We find that the argument of super normal profit and exceptional year of operations, is not a valid ground in the light of decision in ChrysCapital (supra). As regards the objection in respect to insufficient segmental information is concerned, we find no merit in the same. On a perusal of the annual report of TCS E-serve Ltd., it is observed that the c .....

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