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2015 (10) TMI 2248 - ITAT DELHI

2015 (10) TMI 2248 - ITAT DELHI - TMI - Transfer pricing adjustment - Armís Length Price (ALP) of the international transaction representing software development services provided to the AEs is determined by applying Transactional Net Margin Method (TNMM) - selection of comparable - Held that:- FCS SOFTWARE - annual report states that the said company is engaged in software consultancy, technical support services, e-learning and other related allied services and it is recorded in the annual repo .....

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the segmental breakup which is essential to work out the PLI, because admittedly this company operates in different segments. In such circumstances, we deem it fit to remand the matter back to the file of the TPO to examine whether the segmental data relating to software development are available to compute the PLI at segmental level of this company. In case, it is not able to discern the segmental data as aforesaid of this company then this company should be excluded from the list of comparable .....

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e this company as a comparable for the instant year under consideration. Accordingly, we remand the matter back to the file of the TPO for de novo consideration.

Disallowance of risk adjustment - Held that:- initial onus for claiming any adjustment in the computation of ALP is always on the assessee. It is only when such initial onus is discharged that the turn of the TPO comes for ascertaining whether the claim so made by the assessee is correct or not. Adverting to the facts of the .....

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available either before the authorities below or us, we are disinclined to direct the granting of any risk adjustment. - Decided against assessee. - ITA No. 149/Del./2013 - Dated:- 23-9-2015 - Shri R. S. Syal, Accountant Member And Shri A. T. Varkey, Judicial Member For the Petitioner : Shri Rohit Tiwari, CA and Ms. Shruti Khimta, Advocate For the Respondent : Shri Rahul Garg and Vijay Choudhary, Senior DRs ORDER Per A. T. Varkey, Judicial Member This appeal, at the instance of the assessee, is .....

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the directions of the Ld. DRP), erred on facts and in law, in not granting the Appellant complete relief, instead re-computing the mean margin of comparable companies and upholding in part (Rs.5,805,299) the enhancement effected to the income of the appellant on account of the initial Transfer Pricing (UTPU) adjustment u/s 92CA(3) of the Income Tax Act, 1961 ( Act ) made by the Learned Additional Director of Income-tax, Transfer Pricing Officer - 11(2) ( Ld. TPO ) amounting to ₹ 8,409,662 .....

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ction 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('Rules') as well as fresh search; and in particular modifying/ rejecting the filters applied by the appellant. 3. disregarding multiple year and prior years' data as used by the Appellant in the TP documentation and holding that current year (i.e. FY 2007-08) data for comparable companies should be used despite the fact that the same was not available to the Appellant for most of the finally selected comparables a .....

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ices segment) is remunerated on an arm's length cost plus basis, i.e. it is compensated for all its operating costs plus a pre-agreed mark-up based on a bench marking analysis, the Appellant undertakes minimal business risks as against comparable companies that are full-fledged risk taking entrepreneurs, and by not allowing a risk adjustment to the Appellant on account of this fact. 7. ignoring the fact that the Appellant is entitled to tax holiday under section 10A of the Act on its profits .....

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reserve of ₹ 18,45,875 to the book profits of the Appellant, declared under section 115JB of the Act, erroneously proposing that the amount of rent equalisation reserve charged to profit and loss account is covered under clause (b) or (c) of Explanation 1 to Section 115JB of the Act, and thus needs to be added in Book profits. 3. The brief facts of the case are that the assessee company was incorporated on June 14, 2008 under the Companies Act, 1956 as a wholly owned subsidiary of Stryker .....

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ther entities of the Group are essentially engaged in distribution of these products in their respective territories. 4. During the relevant assessment year, the Stryker Global Technology Centre Private Limited rendered software development and IT Enabled Services (ITES) to its various Associate Enterprises (AEs). For this, it was compensated based on the terms of agreements entered between the entities on cost plus 17%. As per the transfer pricing document furnished for the assessment year 2008 .....

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l Net Margin Method (TNMM) which is stated to be the most appropriate method in the facts and circumstances of the case. The operating profit to total cost (OP/TC) ratio is taken as profit level indicator (PLI) in the TNMM analysis. The assessee prepared the PLI by TNMM analysis on multiple year data i.e. FYs 2005-06, 2006-07 and 2007-08 using 16 comparables and arm s length mean OP/TC was 12% whereas the PLI of the company was 17%. It is further seen that average profit level indicator was comp .....

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summarized as under :- S.N. Nature of transaction Method Value of transaction Margin OP/TC 1. Provision of CAD/Engineering Design services TNMM 77,187,428 17% 2. Provision of Contract Software Development Services TNMM 107,775,779 17% 3. Provision of IT enabled back office support services. TNMM 11,664,838 17% 4. Reimbursement of expenses CUP 18,622,126 The TPO vide order dated 21.10.2011 rejected the transfer pricing study of the assessee and substituted a fresh process and modified the filters .....

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ng a TP adjustment of ₹ 84,09,662/- holding that the international transactions with the AEs under Contract Software Development Segment do not satisfy the arm s length principle envisaged under the Act. So, it can be seen that the dispute is only with regard to the transaction of contracts software development services wherein the TPO has ordered addition while computing arms length price. 6. Thereafter, the DRP vide order dated 20.09.2012 held the adjustment made by the TPO, however, add .....

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d the mean margin of comparables at an upward adjustment of ₹ 58,05,299/-. Accordingly, the Assessing Officer made the assessment vide order dated 26.10.2012 passed u/s 143(3) read with section 144C of the Act assessing the total income of the assessee at ₹ 2,05,44,662/- after making transfer pricing adjustment of ₹ 58,05,299/-. 7. During the course of hearing, the ld. Counsel for the assessee, Shri Rohit Tiwari submitted that all his contentions visà- vis grounds raised .....

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uld be excluded from the list of comparables and relied on the orders of M/s. Mentor, M/s. SAP Labs and Quark Systems. The TPO takes note that FCS Software has margin of 34% and he was of the opinion that in comparability analysis loss or so called higher margin is not a determining factor unless there are any peculiar circumstances in such a case and the TPO relied on certain decisions like Exxon Mobile Company India Pvt. Ltd. (2011-TII-68-ITAT-MUM-TP) and held that :- 7.23 It may also be menti .....

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nnot be termed as abnormal by any standards. 7.24 In view of the above discussion and the position of law the taxpayer's contention that high profit making comparables should be rejected, is not accepted. 10. Before us, the ld. Counsel, Shri Rohit drew our attention to the annual report of FCS Software for financial year 2007-08 which is placed at pages 203 to 283 of the paper book and took our attention to page 274 wherein the product description and business profile is written as software .....

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s his point that this company is functionally dissimilar and contented that FCS software is engaged in software consultancy, technical support and other e-learning services. And it is also engaged in diversified activities like management of hardware, network, LAN/WAN etc. The relevant extract from the Annual Report is reproduced below: P.2.4 Quantitative Details, The company is engaged in the software consultancy, technical support services, e-learning and other related allied services. These s .....

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anage all Hardware, Network, LAN/WAN, Data and Voice networks that a client needs to run its applications. Our skills in Document Management Systems, Data Backup and Recovery, Virus Protection, SPAM Control, Hacking protection, and Business Continuity will some of the key reasons for clients to outsource their infrastructure management to us apart from their desire to have us as their one stop shop. The Ld counsel also brought to our notice that FCS Software is also engaged in significant R& .....

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evelop reusable objects and we are glad to announce that the company has made good progress in this area. This helps us to increase productivity and revenue per person because of saving in effort that would have been needed otherwise. Ld. Counsel for the assessee also brought to our notice to page 578 of the paper book, wherein the TPO s order in the case of assessee for assessment year 2009-10 is placed and the TPO himself has opined that the said company has three strategic business units i.e. .....

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sions and perused the material on record. The arguments of the ld. AR that only on account of super normal profit this comparable should be excluded is not tenable in the light of the Hon ble jurisdictional High Court decision in the case of ChrysCapital Investment Advisors (India) Pvt. Ltd in ITA 417/2014 judgment dated 27.04.2015 and so, the said contention is rejected. Further, the counsel for the assessee has contended that FCS Software is involved in providing not only software development .....

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functions; application support is 11%, infrastructure management service is 15% and IT consulting is 44%; and thus contended that the said company is engaged in different activities and so is not a comparable with the functional profile of the assessee. The ld. DR could not point out from the annual report of the said company the segmental breakup which is essential to work out the PLI, because admittedly this company operates in different segments. In such circumstances, we deem it fit to reman .....

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010-11 and has not found in the final list of comparables of the TPO order. The assessee has rejected this comparable at the segmental level stating that the geographical segments are the primary reported segment and took our attention to page 55 of the paper book which is the annual report, wherein intangible assets of the company is shown in the heading of design, development testing of software tools for IT services and ld. Counsel argued that the said company is involved in the IT enabled se .....

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e have heard both the parties and have gone through the said annual report of the company. We find force in the argument of the ld. DR after perusal of the annual report that the company in the present assessment year is engaged in the software development, so is functionally similar, therefore, we uphold the decision of TPO/DRP to include this company as a comparable. This ground is rejected. (iii) LANCO GLOBAL SYSTEMS 16. Ld. Counsel took our attention to page 507 of the paper book wherein the .....

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ices, supply chain management, sales and customer care etc., in the BPO sector, custom development and took our attention to the chart wherein the segment wise and product wise performance has been discussed to show that the revenue yielding during the relevant assessment year from IT, ITES and Telecom is only 15.8% and the rest of it mainly from consulting i.e. consulting 28.4% and healthcare is 17.8%, manufacturing is 13.3% etc. So, according to the ld. Counsel, this company by no stretch of i .....

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the company cannot be said to be merely a software developer, hence, it cannot be taken as a comparable. 17. On the other hand, the ld. DR stated that assessee had not contested the exclusion of this company before DRP and now it cannot take a U-turn at this juncture before the Tribunal. Ld. DR relied on the orders of the TPO and DRP. 18. We have heard both the sides and perused the record. We find that the TPO in assessee s own case for assessment year 2009-10 has not included this company as .....

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