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2015 (10) TMI 2431 - ITAT DELHI

2015 (10) TMI 2431 - ITAT DELHI - [2015] 43 ITR (Trib) 511 (ITAT [Del]) - Transfer pricing adjustment - selection of comparables - Held that:- CAT Technologies Ltd has earned Medical transcription receipts of ₹ 83.74 lac and Training income of ₹ 2.44 lac, both of which have been combined with the income from Software development and consulting services. One cannot ascertain with precision the contribution made by the income from Medical transcription and Training to the overall profi .....

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rship of branded products and brand related profits, etc. in comparison with the factors prevailing in the case of Agnity India Technologies Pvt. Ltd., being, a captive unit providing software development services without having any IP rights in the work done by it.

Tata Elxsi company is also engaged in sale of software products/solutions and has its own intangibles. The revenues under ‘Systems integration and support’ segment of this company stand at ₹ 4008.75 crore, out of its .....

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e development and maintenance’ segment. This company is, therefore, directed to be excluded.

TCS Ltd. - once acquisition and merger etc. has taken place, it is always likely to affect the profitability of such a company in the year of acquisition etc. There cannot be any standard yardstick to measure the impact of such a factor on the overall profitability of such a company. It is relevant to highlight that we are considering the exclusion of a company on this score. In our considered .....

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tware services’, this company has also earned revenue from ‘Sales.’ The TPO has considered entity level figures of this company for comparison. In view of the joining of the revenue from sales with the revenue from software services, this company ceases to be comparable with the assessee’s ‘Software development and maintenance services’ segment. Here, it is pertinent to mention that this company was considered by the TPO as comparable in the immediately preceding year as well. The Tribunal vide .....

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t ₹ 2.17 crore. Apart from that, it is seen that this company is regularly incurring expenses on Research and development. This company is also earning revenue from sale of software products apart from rendering software services. Following the view taken for the exclusion of Thirdware Solutions Ltd. etc. above, we hold that this company has been rightly excluded from the list of comparables by the TPO because of the joining of its income from sale of products with the income from renderin .....

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f comparables.

Accentia Technologies Ltd. - It has been mentioned that this company: ‘Completed the acquisition of Oak Technologies Inc., USA and has rapidly increased its customer base from New Jersey and neighboring areas.’ This shows that extraordinary financial event happened during the year in this company by means of acquisition, thereby rendering it as unfit for comparison with the assessee’s profitability under this segment. Following the view taken hereinabove while discussin .....

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view taken in the immediately preceding assessment year, we uphold the TPO’s order rejecting the assessee’s contention for exclusion.

Coral Hub (Vishal Information Technology Ltd.) coming to the functional comparability of this company, we observe from its Annual report that it is outsourcing its major activities. Such outsourcing charges constitute around 90.57% of the total operating cost. As against this, the assessee is engaged in providing the services under this segment at its .....

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of the instant case, we find that the segment of the assessee under consideration is ‘Back office support plus F&A services’. By no standard, a KPO company like e-Clerx can be considered as comparable with the ‘Back office support plus F&A services’ segment of the assessee. We, therefore, order for the removal of this company from the list of comparables.

Genesis International Corporation Ltd. company is totally incomparable with this segment of the assessee. At this stage, it is fur .....

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over’, after excluding it from ‘export turnover’ - Held that:- e find force in the contention advanced by the ld. AR, requiring the exclusion of this amount from ‘total turnover’ as well. The obvious reason is that when a particular item does not form part of export turnover, which, in turn, is a necessary ingredient of the total turnover, the same has to be necessarily excluded from the computation of latter. It has been brought to our notice that the Tribunal in assessee’s own case for the A.Y .....

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ct, 1961 (hereinafter also called the Act ) in relation to the assessment year 2009-10. 2. The first issue raised in this appeal is against the addition made by the AO on account of transfer pricing adjustment. 3. Briefly stated, the facts of the case are that the assessee is an Indian company, a part of Sun Life Group, which has diversified financial services organization providing savings, retirement and pension products and life and health insurance in Canada, US, UK and Asia. This group also .....

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ort services with the transacted value of ₹ 6.52 Crore; Provision of F&A support services with the transacted value of ₹ 1.51 Crore and Provision of advisory services with the transacted value of ₹ 1.75 crore. In order to demonstrate that its international transactions were at arm s length price (ALP), the assessee applied the transactional net margin method (TNMM) with the Profit level indicator (PLI) of Operating Profit to Total Cost (OP/TC). On a reference made by the AO .....

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ational transactions was determined by the TPO. On raising certain disputes before the Dispute Resolution Panel (DPO), the assessee got certain reliefs. In the final order, the TPO made an addition in respect of these three segments totaling ₹ 6,47,47,465, which has been assailed by the assessee in the present appeal. A. PROVISION OF SOFTWARE DEVELOPMENT AND MAINTENANCE SUPPORT SERVICES. 4. The TPO first took up software development services segment in which the assessee had computed its O .....

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are development service segment to ₹ 4,82,48,394. The assessee is aggrieved against the sustenance of addition to this extent. 5. We have heard the rival submissions and perused the relevant material on record. It is observed that the TPO has changed composition of comparables by excluding some companies from the assessee s list and including fresh comparables in his final tally. The grievance of the assessee under this segment is confined against the inclusion of five companies and non-in .....

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es for the software being used by its overseas group entities. Maintenance Support Services refer to the services including bug fixing, carrying out maintenance and support services with software used by its overseas group entities. The assessee entered into Services Agreement dated 1.4.2006 with Sun Life Ireland, under which it undertook to provide software development and maintenance services to its overseas group entities. These services have been provided under the directions of Sun Life Ire .....

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mparable. The assessee s objections against the incomparable functional profile of this company were rejected. The TPO noticed that this company launched a job portal viz., Logtalent.com, which was quite successful with job aspirants. The assessee s objection about the incomparability of this function adopted by CAT Technologies Ltd., was held by the TPO to be irrelevant in view of insignificant contribution of such a portal to the assessee s income. The TPO observed that majority of the income .....

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terial on record, we find from the Annual report of this company, a copy of which is available on pages 1 onwards of the paper book, that its total income from operations is ₹ 9,35,57,676/-, with the following break-up :- Training Income - Rs.2,44,107/- Software Development and Consulting Services - Rs.8,49,39,375/- Medical Transcription Receipts - Rs.83,74,194/- 8.3. It is this total figure of ₹ 9.36 crore which has been taken by the TPO. It shows that the TPO has included CAT Techn .....

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ices with the transacted value at ₹ 1.75 crore, whose ALP has been disjointedly determined by the TPO. When we come back to the revenues of CAT Technologies Ltd., it is seen that the major component of ₹ 8.49 crore is on account of Software development and consulting services . Since the segment of the assessee under consideration is only Software development and maintenance support services independent of Advisory services , it becomes manifest that a company rendering both the soft .....

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he income from Medical transcription and Training to the overall profitability of CAT Technologies Ltd., so that the other income may be segregated. As such, we fail to comprehend as to how the entity level comparison of this company with the assessee s Software development and maintenance services segment can be construed as valid. This company is, therefore, directed to be excluded from the list of comparables. ii) Infosys Technologies Ltd. 9.1. The TPO noticed that this company was finding pl .....

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ary objection taken by the ld. DR that the assessee should be prohibited from adopting a stand contrary to the one which was taken at the stage of the TP study or during the course of proceedings before the TPO. It goes without saying that the object of an assessment is to determine the income in respect of which the assessee is rightly chargeable to tax. As the income not originally offered for taxation, if otherwise chargeable, is required to be included in the total income, in the same breath .....

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hen later on claims that it should be excluded, then, there should be nothing to forbid such an assessee from claiming so, provided the TPO is satisfied that the company so originally reported as comparable is, in fact, not comparable. The Special Bench of the Tribunal in DCIT vs. Quark Systems Pvt. Ltd. (2010) 132 TTJ (Chd) (SB) 1 has also held that a company which was included by the assessee and also by the TPO in the list of comparables at the time of computing ALP, can be excluded by the Tr .....

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er of employees, ownership of branded products and brand related profits, etc. in comparison with the factors prevailing in the case of Agnity India Technologies Pvt. Ltd., being, a captive unit providing software development services without having any IP rights in the work done by it. After making comparison of various factors as enumerated above, the Hon ble Delhi High Court held Infosys Ltd. to be incomparable with Agnity India Technologies Pvt. Ltd. The facts of the instant case are more or .....

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t Infosys Technologies Ltd., cannot be treated as comparable with the assessee company. Here it is pertinent to mention that the Tribunal in the assesse s own case for immediately preceding assessment year in ITA No.5799/Del/2012 vide its order dated 27.5.2015, has also removed this company from the final set of comparables. This company is, therefore, directed to be excluded from the list of comparables. iii) Tata Elxsi. 10.1. The TPO included this company in the tally of comparables. The asses .....

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ng of revenue of ₹ 2352.41 lac from Sales and suport and ₹ 39499.19 lac from Services. Segmental reporting done by this company indicates the split of total revenue of ₹ 41851.60 lac into two segments, namely, ₹ 4008.75 lac under the segment Systems integration and support and ₹ 37843.03 lac under the Software development and services segment. The description of Systems integration and support segment has been given on page 13 of the Annual report which indicates th .....

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so gives narration of Systems integration and support. It has been mentioned that: this segment offers turnkey solutions comprising of integration of hardware and software products sourced from global principals for domestic customers. The solutions are offered in the area of technical computing used in a wide range of industries such as automotive, pharmacy, defence, meteorology. Your company s technical solutions involve supply of different products sourced from different global principals bas .....

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also engaged in sale of software products/solutions and has its own intangibles. The revenues under Systems integration and support segment of this company stand at ₹ 4008.75 crore, out of its total revenue of ₹ 41851.60. For comparison, the TPO has taken the figures of this company at entity level, starting with a revenue at ₹ 41851.60 crore. Since the overall profit of this company includes the effect of profit from sale/licensing of software products/solutions and there is .....

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evant material on record, we find from the Annual report of this company that its total income comprises of revenues from IT and Consultancy services at ₹ 21535.75 crore and Sale of equipment and software licenses at ₹ 868.25 crore. The TPO has taken entity level figures of this company for the purposes of making comparison. When we peruse the segmental reporting given by this company, it is found that the same has been done on the basis of geographical locations and there are no fun .....

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Services Ltd.), the India-based capital BPO, for a total consideration of USD 504.54 million. This indicates that this company made acquisition during the year in question which is an extraordinary financial event. The Mumbai Bench of the Tribunal in Petro Araldite (P) Ltd. Vs. DCIT (2013) 154 TTJ (Mum) 176, has held that a company cannot be considered as comparable because of exceptional financial results due to mergers/demergers. Similar view has been bolstered by the Delhi Bench of the Tribu .....

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company in the year of acquisition etc. There cannot be any standard yardstick to measure the impact of such a factor on the overall profitability of such a company. It is relevant to highlight that we are considering the exclusion of a company on this score. In our considered opinion, when other comparables are available, the exclusion of a probable comparable company cannot have much significance in contrast to a situation of inclusion of a probable incomparable. Respectfully following the ab .....

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vant material on record. It is observed from the Annual report of this company that apart from revenue from Software services , this company has also earned revenue from Sales. The TPO has considered entity level figures of this company for comparison. In view of the joining of the revenue from sales with the revenue from software services, this company ceases to be comparable with the assessee s Software development and maintenance services segment. Here, it is pertinent to mention that this co .....

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d five companies in the final set of comparables by the TPO, the assessee has also assailed the non-inclusion of two companies, namely, Quintegra Solutions Ltd., and Zylog Systems Ltd. We will separately deal with these companies. i) Quintegra Solutions Ltd. 14.1. The assessee treated this company as comparable. The TPO refused to accept the comparability by observing that this company has Copyrights included in its fixed assets and was also having several products customized for its clients. 14 .....

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e exclusion of Thirdware Solutions Ltd. etc. above, we hold that this company has been rightly excluded from the list of comparables by the TPO because of the joining of its income from sale of products with the income from rendering of software development services. The TPO s action is, therefore, approved. ii) Zylog Systems Ltd. 15. This company was considered by the assessee as comparable. The TPO refused to accept it as comparable on the ground that its revenues were segmented into onshore a .....

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K OFFICE SUPPORT SERVICES AND F & A SUPPORT SERVICES. 16. The assessee separately reported the international transactions of Provision of back office support services and Provision of F&A support services . Separate OP/TC was computed and it was claimed that these international transactions were at arm s length price (ALP). The TPO merged these international transactions for benchmarking. The assessee had chosen certain companies as comparables. The TPO made alterations in comparables. F .....

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d not seriously raise any dispute against the merger of the two segments by the TPO. As such, we are proceeding to determine the ALP of these merged segments into one. 18. Back office support service provided by the assessee include Policy administration and maintenance and also Contract generation. Generating insurance contracts for the customers of overseas group entities and sending them to the respective overseas of Sun Life group entities is one of the activities performed by the assessee f .....

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this merged segment of provision of services, we will now explore as to whether the companies assailed before us are, in fact, comparable or not. 19. The assessee has disputed inclusion of five companies in the final set of comparables with which we will deal hereinafter. i) Accentia Technologies Ltd. 20.1. The TPO considered this company as comparable. The assessee s objections about its functional incomparability were repelled. That is how, this company came to be included in the final set of .....

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ppened during the year in this company by means of acquisition, thereby rendering it as unfit for comparison with the assessee s profitability under this segment. Following the view taken hereinabove while discussing the exclusion of TCS Ltd. from the Software Development and Maintenance segment of the assessee, we direct the elimination of this company also from the final list of comparables. ii. Cosmic Global Ltd. 21.1. This company was included by the assessee in its list of comparables. Howe .....

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ssessment year, we uphold the TPO s order rejecting the assessee s contention for exclusion. iii. Coral Hub (Vishal Information Technology Ltd.) 22.1. The assessee chose this company as comparable. As such, no objection was taken before the TPO against its inclusion. However, the assessee argued before the DRP that this company was wrongly included. The DRP refused to accept the assessee s contention. That is how the assessee is aggrieved before us. 22.2. In view of discussion made supra, we are .....

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ut any outsourcing. This crucial difference between the manner of performing services has an important bearing on the ultimate profitability. The Delhi Bench of the Tribunal in the case of Mercer Consulting (India) Pvt. Ltd. Vs. DCIT in ITA No.9666/Del/2014, has approved the exclusion of this company from the list of comparables by, in turn, relying on the two Tribunal orders passed by the Mumbai Benches in Hapag Lloyd Global Services and ACIT vs. Mersk Global Services Centre (India) Pvt. Ltd. W .....

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ted. The assessee is assailing the inclusion of this company in the list of comparables. 23.2. We have heard the rival submissions and perused the relevant material on record. Without going into the further details, it is observed that the Hon ble jurisdictional High Court in the case of Rampgreen Solutions Pvt. Ltd. vs. CIT vide its judgment dated 10.8.2015 has observed that e-Clerx is engaged in KPO services which cannot be compared with a company providing low-end BPO services. Turning to the .....

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ns about its functional dissimilarity were jettisoned. 24.2. Having heard the rival submissions and perused the relevant material on record, we find that this company is engaged in rendering full range of geospatial services to its customers. These services, in simple terms, mean the services relating to the positioning of things on the earth s surface. These include 3-D mapping, Navigation maps, Image processing, Cadastral mapping, etc. When we consider the nature of services provided by this c .....

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, we are not inclined to accept the comparability of this company with the assessee s merged Back office support and F&A support services segment. This company is directed to be taken away from the tally of comparables under this segment. C. ADVISORY SERVICES SEGMENT 25. The TPO recommended a transfer pricing adjustment under this segment for a sum of ₹ 17,08,751. The assessee assailed the draft order on this issue before the DRP. Pursuant to the directions given by the DRP, the AO mad .....

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26. This claim of the assessee is common to all the three segments finally considered by the TPO. The assessee requested for grant of working capital adjustment. The TPO refused to allow such adjustment by noticing that the assessee had not demonstrated that there was any difference in the levels of working capital employed by it vis-à-vis the comparables. He, further noticed that the issue of working capital would be relevant only when there is a situation of inventory remaining tied up .....

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of provision of back office support and F&A services; and Advisory services. The TPO refused to allow such adjustment, inter alia, by opining that the financials of the company showed consolidated income from all the three segments and, hence, it was not possible to ascertain creditors and debtors pertaining to each segment. The DRP strengthened the case of the TPO by adding one more reason, being the necessity and non-availability of daily average of working capital deployed as against the .....

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d to pay their dues, which will result into higher interest cost and the resultant low net profit. Similarly, by carrying high trade payables, a company benefits from a relatively longer period available to it for paying back the dues to its suppliers, which reduces the interest cost and increases profits. In order to neutralize the differences on account of carrying high or low inventory, trade payables and trade receivables, it becomes eminent to allow working capital adjustment so as to bring .....

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Del/2012). Vide its order dated 31.5.2013, the Tribunal has held that the components of the working capital deployed should be considered on annual basis with the average of opening and closing figures. We, therefore, hold that the entitlement of the assessee to the working capital adjustment, cannot be denied. 30. Notwithstanding the otherwise availability of the working capital adjustment, we are unable to countenance the calculation given by the assessee at its face value because of an import .....

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tion of working capital adjustment, one needs to look only at the figures of inventory, trade receivables and trade payables. These figures can be culled out from balance sheet without any reference to the segregated income statement of each segment. On a pointed query from the Bench, the ld. AR conceded that there may be some trade receivables or payables common to the Software development segment , Merged segment and Advisory services segment . In such a situation, it becomes relevant to see a .....

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o occasion for him to examine the veracity of the computation of working capital adjustment as put forth on behalf of the assessee. Under such circumstances, we direct the AO/TPO to compute and allow working capital adjustment, if any, available under all these segments, namely, Provision of software development and maintenance services , Provision of back office support services and F&A support services and Advisory services distinctly in the light of our above discussion. It is noticed tha .....

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issue raised in this appeal is against the treatment of foreign exchange (FOREX) gain/loss as an item of non-operating nature. On a pertinent query, it was admitted by the ld. AR that the FOREX gain/loss in the hands of the assessee relates to its revenue transactions alone. The ld. DR relied on the orders passed by the authorities below. 32. We find merit in the contention raised on behalf of the assessee about the treatment of foreign exchange gain/loss as an item of operating nature. As rega .....

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gain due to fluctuations in the foreign exchange rate emanating from export is its integral part and cannot be differentiated from the export proceeds simply on the ground that the foreign currency rate has increased subsequent to sale but prior to realization. It went on to add that when goods are exported and invoice is raised in currency of the country where such goods are sold and subsequently when the amount is realized in that foreign currency and then converted into Indian rupees, the en .....

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eld that such an exchange rate fluctuation gain/loss arising from exports cannot be viewed differently from the sale proceeds. 34. In the context of transfer pricing, the Bangalore Bench of the Tribunal in SAP Labs India Pvt. Ltd. Vs ACIT (2011) 44 SOT 156 (Bangalore) has held that foreign exchange fluctuation gain is part of operating profit of the company and should be included in the operating revenue. Similar view has been taken in Trilogy E Business Software India (P) Ltd. Vs DCIT (2011) 47 .....

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comparables under all the three segments. 35. In view of the foregoing discussion, we set aside the impugned order on the question of addition on account of transfer pricing adjustment under all the three segments made by the TPO and remit the matter to the file of AO/TPO for re-determination of the ALP afresh in consonance with our directions given in the earlier parts of this order. Needless to say, the assessee will be allowed a reasonable opportunity of being heard. 36. The only other ground .....

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