GST Helpdesk   Subscription   Demo   New User   Login      
Tax Management India .com
TMI - Tax Management India. Com
Extracts
Home List
← Previous Next →

2015 (12) TMI 517 - ITAT DELHI

2015 (12) TMI 517 - ITAT DELHI - TMI - Transfer pricing adjustment - adjustment to the arm's length price of the international transaction of provision of software development services provided by the appellant company to its holding company M/s ION Trading UK Ltd. - Held that:- 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 sho .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

essee. Moreover, the assessee has not given any cogent basis to satisfy the reasons for underutilization. Once the assessee is a software service provider to its AE then there can be no claim on account of under utilization of capacity as it was AE who initiates such expansion. Hence, we reject the ground raised by the assessee.

Risk adjustment under Rule 10B(1)(e)(iii) and Rule 10B(3) to account for differences in the risk profile of the comparable companies vis-ŗ-vis the Appellant - .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

pointing out the differences between it and the comparables. Risk adjustment can be allowed provided the assessee places on record some appropriate material to demonstrate that the risk undertaken by the comparable companies were relatively more than it, warranting downward adjustment in their profit rates. Further, the variation in such risks, if any, should be capable of quantification on some reasonable and logical basis. Since the ld. AR has failed to objectively demonstrate the relatively h .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

while determining the armís length price to the Appellant as per the proviso to section 92C(2) of the Act. - ITA No.1035/Del./2015 - Dated:- 7-12-2015 - SHRI R.S. SYAL, ACCOUNTANT MEMBER AND SHRI A.T. VARKEY, JUDICIAL MEMBER For the Petitioner : Shri Manoj Pardasani, CA For the Respondent : Shri Amrendra Kumar, CIT DR ORDER PER A.T. VARKEY, JUDICIAL MEMBER : This appeal arises from an order passed by Income Tax Officer, Ward 12(4), New Delhi dated 21.01.2015 u/s 144C(13)/143(3) of the Act in pur .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

2010-11 at ₹ 30,678,470 as against the returned income of ₹ 353,440, thereby making an adjustment of ₹ 30,325,034 to the Officer-1 (2)value of the international transaction of provision of computer software development services by the Appellant to its Associates Enterprises ( AEs ). 2. On facts and in law, the Ld. AO erred in making a reference to the Learned Additional Commissioner of Income Tax, Transfer Pricing Officer-1 (2), New Delhi ( Ld. TPO ), inter alia, since he has n .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

tment under the provisions of Chapter X of the Act. 4. On facts and in law, the Ld. TPO/Ld. AO erred in conducting and the Hon ble DRP further erred in allowing a fresh benchmarking analysis using non contemporaneous data and substituting the Appellant s analysis with the fresh benchmarking analysis on his own conjectures and surmises. 5. On facts and in law, the Ld. TPO/Ld. AO and Hon ble DRP erred in violating the provisions of Rule 10B(2) of Income Tax Rules, 1962 ( the Rules ) by introducing .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

n 25% of turnover as proposed by the Ld. TPO to employee cost of less than 75% of turnover; and further erred in incorrectly computing the filter ratio at less than 75% instead of correct ratio of 79.69% of turnover. 7. On the facts and in law, the Ld. AO/Ld. TPO and the Hon ble DRP erred, violating provisions of Rule 10B(2) by considering E-Infochips Bangalore Limited as a comparable to the Appellant. 8. On the facts and in law, the Ld. AO/Ld. TPO and the Hon ble DRP erred, violating provisions .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

law, the Ld. AO/Ld. TPO and the Hon ble DRP erred, violating provisions of Rule 10B(2) by considering Sasken Communications Technologies Limited as a comparable to the Appellant. 12. On the facts and in law, the Ld. AO/Ld. TPO and the Hon ble DRP erred, violating provisions of Rule 10B(2) by considering Thirdware Solutions Limited as a comparable to the Appellant. 13. On the facts and in law, the Ld. AO/Ld. TPO and the Hon ble DRP erred, violating provisions of Rule 10B(2) by considering Wipro .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

(iii) and Rule 10B(3) to account for differences in the risk profile of the comparable companies vis-àvis the Appellant. 16. On the facts and in law, the Ld. AO/Ld. TPO and the Hon ble DRP erred in not granting the benefit of reduction/variation of 5 percent from the arithmetic mean while determining the arm s length price to the Appellant as per the proviso to section 92C(2) of the Act. 17. On the facts and in circumstances of the case, the Ld. AO erred in levying tax at the rate of 40% .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ellant. 20. On the facts and in the circumstances of the case, the Ld. AO erred in levying interest under section 234A and 234D of the Act. 21. On the facts and in law, the Ld. AO erred in initiating penalty proceedings under section 271(1)(c) of the Act. 3. Grounds 1 to 15 relate to adjustment of ₹ 3,03,25,034/- to the arm's length price of the international transaction of provision of software development services provided by the appellant company to its holding company M/s ION Tradi .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

its Associated Enterprise (AE): Sr. No. Type of International Transaction Method Selected Total Value of transaction 1 Computer Software Development Services Transactional Net Margin Method 21,82,68,570 5. In view of the above, AO made a reference u/s 92CA(1) to the Transfer Pricing Officer (TPO) for determining the Arm's Length Price (ALP). In course of proceeding before TPO, appellant submitted a TP study report. In the TP analysis, appellant selected Transactional Net Margin Method (TNMM) .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

see s margin is as under: Particulars As on March 2010 (Amt. in Rs.) Operating income 22,29,50,213 Operating cost 20,38,55,648 Operating profit 1,90,94,565 OP/OC 9.37% It is to be noted here that while calculating the operating cost of ₹ 20,38,55,648/-, a deduction of ₹ 82,18,899/- on account of adjustment of cost relating to rent and maintenance charges for under-utilization of capacity was claimed by the appellant. 6. Furthermore, the appellant had computed the PLI of the comparabl .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

parables on the basis of the search conducted in the public data base Prowess only. Further, TPO applied the following filters: i) Companies with RPT greater than 25% of revenue should have been excluded; ii) Companies who have less than 75% of the revenue as export sales should have been excluded; and iii) Companies whose employee cost to revenue ratio is less than 25% should have been excluded. 8. Pursuant to the above, final comparables out of comparables selected by the appellant are as unde .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

bove stated filters, search on the Capitaline database was also conducted by the TPO and further 18 comparables were identified and included in the final list of comparables. As a result, 23 comparables were selected and, the margin computed as under:: Sr. No. Name of the company OP/OC with Forex 1 Accelya Kale Solutions Ltd. 12.51% 2 Akshay Software Technologies Ltd. -3.91% 3 Allgo Embedded 8.72% 4 CTIL Ltd. 18.22% 5 E-Infochips Bangalore Ltd. 71.38% 6 Evoke Tech 18.20% 7 E-Zest Solutions 18.38 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

irdware Solutions Limited 29.05% 22 Wipro Technology Services Limited (Formerly Citi Technologies) 63.27% 23 Zylog Systems Limited 19.08% Average 23.99% 10. On the aforesaid basis, the TPO made an adjustment of ₹ 4,46,82,661/- in the manner as under: Sr. No. Particulars Amount (Rs.) 1. Total Operating Cost 21,20,74,547* 2. Arm s Length Price at a margin of 23.99% 26,29,51,231 3. Transfer Price received by the taxpayer 21,82,68,570 4. Shortfall of Transfer Price from ALP 4,46,82,661 *by dis .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

n the manner as under: Sr. No. Name of the company OP/OC with Forex 1 Accelya Kale Solutions Ltd. 7.18% 2 Akshay Software Technologies Ltd. -6.83% 3 Allgo Embedded 2.18% 4 CTIL Ltd. 7.47% 5 E-Infochips Bangalore Ltd. 61.40% 6 Evoke Tech 14.60% 7 E-Zest Solutions 12.75% 8 Infinite Data System Pvt. Ltd. 64.96% 9 Infosys Limited 39.83% 10 Kuliza Technologies Private Limited 7.71% 11 Larsen & Toubro Infotech Ltd. 15.51% 12 Mindtree Limited (Segment) 14.46% 13 Persistent Systems Limited 4.80% 14 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

the adjustment at ₹ 3,03,25,034/- and as such, income of the appellant was finally assessed at ₹ 3,06,78,474/-. The said adjustment has been computed in the manner hereunder: Sr. No. Particulars Amount (Rs.) 1. Operational Cost 21,20,74,547 2. Arm s Length Price at a margin of 17.22% 24,85,93,784 3. Transfer Price received by the taxpayer 21,82,68,570 4. 105% of International Transaction 22,91,82,188 5. Proposed Adjustment u/s 92CA 3,03,25,034 13. Before us the learned counsel for th .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

that the TPO/DRP/AO have erred in making an adjustment of ₹ 3,03,25,034/- to the value of the international transaction of provision of computer software development services by the appellant to its AE. In support of the above submission, it has prayed for inclusion of the comparable M/s CG-Vak Software and Exports Limited (segmental) and exclusion of (i) M/s E-Infochips Bangalore Ltd., (ii) M/s Infinite Data System (P) Ltd. (iii) M/s Infosys Ltd., (iv) M/s Persistent Systems Ltd., (v) M/ .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ve grossly erred in not allowing the risk adjustment under Rule 10B(1)(e)(iii) and Rule 10B(3) to account for differences in the risk profile of the comparable companies vis-a-vis the appellant. The learned DR has supported the orders of DRP/TPO/AO and contended that adjustment made should be sustained and, no interference is warranted. 14. We have considered the rival submissions and perused the material placed on record. The first and foremost substantive contention raised by the learned couns .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

PO had rejected the above comparable by holding as under: Rejection of CG-VAK as a comparable by the undersigned is valid for the reasons explained in the show cause notice. Further, the assessee has not submitted any detail to justify that each one of the identified filters are satisfied in this case. Since the assessee company has failed to discharge its onus, the undersigned is constrained, to reject the said company as comparable. 15. It is seen that the reasons mentioned in the show cause n .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

(product lifecycle, product maintenance, product migration, product testing, tech writing/documentation); custom software services (e-commercie application, website design, client servicer application); testing services; and professional services. The company has three business segments namely software services; BPO services and training. The software services segment has been considered for the purpose of our analysis. Further, it is submitted that CG-VAK Software & Exports Ltd. does not fa .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

elated party transactions (A) 85,03,470 Total income as per Annual Report (B) 6,19,81,460 RPT as a % of sales (A/B) 13.72% 17. However the DRP upheld the exclusion on the following basis: Having considered the above and the material placed on record, we are of the opinion that the said company does not satisfy the filter applied by the TPO of employee cost less than 75% of turnover and therefore the same cannot be taken as comparable. In view of the above, action of the TPO is upheld. 18. Before .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

The relevant extracts from the annual report is given below: PROFIT & LOSS STATEMENT FOR THE YEAR ENDED 31ST MARCH 2012 Note No. 31.3.2012 (Rs.) 31.3.2011 (Rs.) III Expenditure: Employee Benefit Expenses 3.03 5,33,80,368 4,73,01,685 PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31.3.2011 Schedule 31.3.2011 (Rs.) 31.3.2010 (Rs.) Expenditures Cost of services 135 4,73,01,685 4,73,59,185 19. It was also submitted that the company has followed different nomenclature in the FY 2009-10, wherein the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

st 17 19,16,993 30,47,952 Depreciation 63,65,886 59,23,335 6,89,10,003 7,72,29,521 Net Profit/(Loss) for the year (69,28,543) 23,36,381 20. It was submitted that since the cost of service/employee cost (i.e. ₹ 4,73,59,185) is 79.69% of turnover (i.e. ₹ 5,94,28,250) it satisfies the filter applied by the Hon ble DRP and thus, CG-VAK should be accepted as a comparable to the appellant. Reliance was placed on the following judgments: - Lam Research India (P) Ltd. vs. DCIT [TS 203-ITAT-2 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

al details cannot be bifurcated from the financial details, we find that the assessee and the CG-Vak Software and Exports Limited are not comparables. Therefore, we are inclined to uphold the orders of the authorities below in rejecting this company as a comparable. We direct accordingly. 22. Now taking up Grounds No.7 to 13 of Grounds of Appeal, the learned counsel made his submission for exclusion of comparables selected by TPO. We will now consider the merits of the arguments of the parties w .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ables. The appellant has objected to the inclusion of the comparable on the ground of functionally not comparable and, abnormal deviation in profit margin. The appellant submitted that the functional profile of M/s. E-Infochips Bangalore Ltd. is different from that of the assessee company. In this regard, he pointed out that the said company is a product engineering services provider having a technical expertise in software, firmware, hardware, FPGPA, ASIC, Quality testing etc. Its key focus are .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

aken from the company s website (https://www.einfochips.com/software-ips). He thus contended that M/s. E-Infochips Bangalore Ltd. thus is liable to be excluded, besides due to functional differences, even on the basis of insufficient information available in the public domain from the list of comparables. 25. We have considered the rival submissions and also perused the relevant material on record. The contention raised by the learned counsel for the assessee is that the entity M/s. E-Infochips .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

., the print out of relevant portion of which is placed on record before us. On the basis of the said contents, he has made an attempt to point out that M/s. E-Infochips Bangalore Ltd. is functionally different form the assessee company in as much as the said company is mainly into development of new products whereas the assessee company is mainly providing software development services. It is seen that reference to the website of company is not of much help as it may not have information which .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

s Bangalore Ltd. After having gone through the website www.einfochip.com., we however find that the same is in respect of the entire group of E-Infochips, of which M/s. E-Infochips Bangalore Ltd. is only a part. The functional profile given on the said website thus is that of the entire group and not just of the M/s. E-Infochips Bangalore Ltd. The content of the said website in our opinion, therefore, cannot be relied upon to ascertain the functional profile of M/s. E-Infochips Bangalore Ltd., e .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

that no finding/observation has been recorded by them on the ground of functional differences as well as insufficient data/information available in the public domain. It is also worthwhile to note here that the profit margin of M/s. E-Infochips Bangalore Ltd. is abnormally high and although the said entity cannot be excluded from the list of final comparables merely on the ground of high or abnormal profits, as held by in the case of Maersk Global Centres (India) (P.) Ltd. v. Asstt. CIT 147 ITD .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

relevant year. The profit margin of such entity in the immediately preceding year(s) may also be taken into consideration and the FAR analysis in such cases may be reviewed to ensure that the potential comparable earning higher profit satisfies the comparability condition. Since this exercise has not been done either by the AO/TPO or the DRP in the present case, we are of the view that the matter should go back to the Assessing Officer/TPO for fresh consideration. This, in our opinion, will also .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

tion given by the DRP on this issue and restore the matter to the file of the Assessing Officer/TPO for deciding the same afresh after giving the assessee proper and sufficient opportunity of being heard. 28. Infinite Data System Private Limited 29. The learned counsel for the assessee further contended that the DRP, has completely ignored the submissions made by the assessee and upheld the action of the Assessing Officer/TPO to include Infinite Data System Private Limited in the list of final c .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

g considered the material placed on record we find that the company is mainly involved in software services. Therefore we hold that TPO is right in including the same for the purpose of comparability analysis. 31. Before us the learned AR of the appellant has contended as under: Substantially Related Party Transactions - Company s operations relates to providing services to its sole customer-Fujitsu Services Ltd. (substantially related) which can be substantiated as per the news letter and annua .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

itsuservices- 4020499021_1.html) As per the Annual report The company s operations are predominantly related to providing software technical consultancy services to us sole customer Fujitsu services Ltd. (Refer page 689 of the Paper Book Volume II) b) Functionally not comparable As per Annual Report S(chedule 17) It provides solutions that encompass technical consulting, design and development of software, maintenance, system integration, implementation, testing and infrastructure management ser .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

II) c) Ld. TPOs approach of using data from Infinite s website as on the current date and drawing comparison thereof with FY 2009010 i.e. 4 years prior to the current year is incorrect. (Refer page 70 of the Paper book for TPO s observation) 32. On the other hand, the learned DR supported the order of the lower authorities regarding the inclusion of the same in the list of comparables. He reiterated the contents of the TPO's order which states as under: It is seen that Infinite is providing .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

hellip;.It can be seen that all the services have been referred primarily as IT services. The objection of the assessee is mainly on verticals of the company. Under TNMM the standards of comparability are relatively relaxed and only broad similarity of functions is required. It is further stated that TNMM can be used with data for companies that are broadly comparable to the taxpayer, as functional differences are likely to be reflected in the level of operating expenses incurred by each company .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

cord. After considering the submissions, we are in agreement with the conclusion of TPO/DRP held that Infinite is providing following services: technical consulting, design & development of software maintenance, systems integration, implementation, testing and infrastructure management services. These services except infrastructure management services have been referred as technical support services in revenue recognition portion and as software technical consultancy services in segment repo .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

es which is functionally similar to the appellant company. There is no RPT transaction of the comparable and transaction with a sole customer does not constitute a RPT transaction. 35. Having regard to the above and for the reasons stated above, we uphold the conclusion of TPO for inclusion of Infinite Data System Private Limited since it is comparable to appellant company. 36. Infosys Limited 37. The learned counsel for the assessee contended that the DRP has completely ignored the submissions .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ellectual property. It has been further pointed out that as per Annual Report of FY 2009-10, the company claims itself as the most reputed and admired company in India (Pg. 18 of Director s Report). Further assessee contended that Infosys Limited has a turnover of ₹ 21,140 crores, which is even more than 968 times of that of the assessee. The Ld. Counsel for the appellant has placed reliance upon the various decisions, in which Infosys Limited has been rejected as a comparable considering .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

Infosys in increasing its number of clients & retention of existing clients and this an increase in its market share, but it has not necessarily resulted in better profit margins. Brand may bring more revenues but not necessarily higher margins….a brand may generate revenue but with a cost compensating any extra benefit, if any derived from such efforts. Assessee had objected on the high turnover of this comparable company which is already discussed in the order. However, TPO has made .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ument that companies having large scale of operations have better margins is without any basis, and is therefore liable for rejection. 39. The DRP supported the action of the TPO in including this company in the final list of comparables by holding as under: The TPO has dealt the issue in para 8.5 of the order and held that the company is providing software development services which is parimateria with the functions carried on by the assessee. Having considered the material placed on record we .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

o. 3856/2010 (Del), it was held as under: 15. We find that Ld. CIT(A) after considering the facts of the case and the submission of the AR observed that with regard to Infosys Technologies Ltd. it was evident from the Annual Report of the company that Infosys Technologies provides much wider range of services, performs extensive functions, undertakes diversified business activities and assumes significant risks as compared to routine software development service providers like the assessee. Furt .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

in significant R&D activities, and is very huge in size/volume as compared to the assessee. Hence, it cannot be said to be comparable with the assessee. The said proposition has also been confirmed by Delhi Tribunal in Agnity India Technologies v. ITO [IT Appeal No.3856 (Delhi) of 2010] wherein the Coordinate Bench held as follows : "Various arguments, as stated earlier, were taken before the DRP which inter-alia included rejection of comparable cases; application of arbitrary filter of .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

the latter is giant in the area of development of software and it assumes all risks, leading to higher profit. On the other hand, the assessee is a 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 cas .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

Profile Infosys Technologies Ltd. Operate as full-fledged risk taking entrepreneurs Assessee 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 implementation and business process management, etc. (refer page 117 of the Paper Book) Contract software development services Turnover 20,264 crores 209.83 crores Ownership branded/pr .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

service, income from onsite services The appellant provides only offshore services (i.e. remotely from India) Expenditure on advertising/sales 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 cent offshore (from India) 11.6 On the basis of the above chart, the Hon'ble High Court affirmed the conclusion that a captive unit of acomparable company which assumed .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

A) has rightly ordered exclusion of the Infosys Technologies Ltd. from the comparable and this impugned order is upheld. 41. Having regard to the above regard to the above judicial pronouncement, we hold that Infosys Limited cannot be considered as comparable for the purpose of benchmarking international transaction of the assessee. 42. Persistent Systems Limited 43. The assessee has sought exclusion of the aforesaid company on the ground that this company is a technology company into software p .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

been submitted that segmental break of sales on sale of products and services has not been given by the company as the pricing consequently the margin would differ that on sale of products and sale of services. Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the list of comparables. 44. The TPO has held as under: The company does have some products but as has been brought out above, the product revenue (from IP led businesses) are .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

he functions carried on by the assessee. Having considered the material placed on record we find that the company is mainly involved in software services. Therefore, we hold that TPO is right in including the same for the purpose of comparability analysis. 46. We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that this company i.e. Persistent Systems Ltd., is engaged in product development and product design ser .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

g the financial year 2008-09, it has a turnover of approx. ₹ 14.45 crores which cannot be compared with certain companies having turnover of more than 200 crores. Support was drawn from the following decisions : (a) Decision of ITAT in the case of appellant for A.Y. 2006-07 ITA No. 3856/D/2010 A.Y. 2006-07; (b) Genisys Integrating Systems (India) (P.) Ltd. v. Dy. CIT [2012] 20 taxmann.com 715/53 SOT 159 (Bang.) (c) Centillium India (P.) Ltd. v. Dy. CIT [2012] 23 taxmann.com 34/53 SOT 145 ( .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ologies (P.) Ltd.[2013] 36 taxmann.com 289/219 Taxman 26 (Delhi)] that a giant company in the area of development of software which assumed all risks leading to higher profits is not comparable with the assessee which was a captive unit of the parent company and assumed only a limited risk. The Hon'ble High Curt has held as under : "8. It is a common case that Satyam Computer Services Ltd. should not be taken into consideration. The Tribunal for valid and good reasons has pointed out th .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

he assessee. Details of these companies are mentioned in para 5 of the impugned order. 9. In view of the aforesaid position, we do not think that any substantial question of law arises for consideration. The appeal is dismissed." 16. When considering the exclusion of persistent system Ltd, we find no need to interfere in the order of the Ld CIT(A) because it is engaged in development of software product; and this company was excluded by the Tribunal in assessment year 2006-2007, which has b .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

d direct inclusion of Larsen & Toubro Infotech Ltd and Mind tree Ltd. 47. Similar view has also been expressed in the case of Fiserv India (P) Ltd. vs. DCIT 60 taxmann.com 345 (Del), it was held as under: 12.2 We have considered the rival submission and perused the material on record. The counsel for the assessee has contended that Persistent Systems Ltd. is functionally different from the assessee as the company is into software development services as well as software products unlike the a .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

he above 26 comparables, applied a lower turnover filter of ₹ 1 crore but preferred not to apply any upper turnover limit. The size of the comparable is an important factor in comparability. The ICAI TP guidance note has observed that the transaction entered into by a ₹ 1000 crores company cannot be compared with the transaction entered into by a ₹ 10 crores company and the two most obvious reasons are the size of the two companies and related economies of scale under which the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

g cases: (i) M/s. Kodiak Networks (I) Pvt. Ltd. v. ACIT - ITA No.1413/Bang/2010; (ii) M/s Genesis Microchip (I) Pvt. Ltd. DCIT - ITA NO.1254/Bang/2010; (iii) Electronic for Imaging India Pvt. Ltd - ITA NO.1171/Bang/2010; & (iv) M/s. Trilogy E-Business Software India Private Ltd . v. DCIT - ITA No.1054/Bang/2011 dated 23.11.2012. 3.3.1 In the case of M/s.Genisys Integrating Systems (India) Pvt. Ltd . v. DCIT (supra ), relying on Dun and Bradstreet', has observed as under: "9. &hellip .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which are loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of compani .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

on for the purpose of making TP Study." 3.3.2 The above view has been followed in the recent order of the Tribunal in the case of Trilogy E -Business (supra ). The relevant findings of the Tribunal are extracted as under: 20. In this regard we find that the provisions of law pointed out by the ld. counsel for the assessee as well as the decisions referred to by the ld. counsel for the assessee clearly lay down the principle that the turnover filter is an important criteria in choosing the c .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

he following companies will have to be excluded from the list of 26 comparables drawn by the TPO viz. Turnover Rs. (1) Flextronics Software Systems Ltd. 848.66 crores (2) iGate Global Solutions Ltd. 747.27 crores (3) Mindtree Ltd. 590.39 crores (4) Persistent Systems Ltd. 293.74 crores (5) Sasken Communication Technologies Ltd. 343.57 crores (6) Tata Elxsi Ltd. 262.58 crores (7) Wipro Ltd. 961.09 crores. (8) Infosys Technologies Ltd. 13149 crores".. In view of the above said reasoning and t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ing the aforesaid decision of the Tribunal and the judgment of Hon'ble High Court of Delhi in the case of Aginity Technologies (supra ) we hold that Persistent Systems Ltd. should not be regarded as a comparable. 48. Therefore, following the above judgments we hold that this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. It is ordered accordingly. 49. Sasken Communication Technologies Limited (Sasken) 50. The assessee ha .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

inventory in the books of accounts. The assessee also contended that company is also actively engaged in product development and earns revenue also from sale of software products, there were also peculiar economic circumstances as it underwent restructuring during the year which inflated its profit by ₹ 1,519.70 lakhs in addition to other factors affecting its sales and margins. Further, the turnover of the company is more than 19 times of the appellant. The TPO has held as under: It is s .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

osen as it is engaged in providing software development, which is broadly similar to the service being provided by the assessee. Since, the assessee is also providing similar services, so this company can be used as a comparable. 51. The DRP supported the action of the TPO in including this company in the final list of comparables by holding as under: The TPO has dealt the issue in para 8.8 of the order and held that the company is providing software development services which is parimateria wit .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

Ground of Appeal No.4.5, the appellant has assailed the action of the TPO in excluding Sasken Communications Technologies Ltd. from the final set of comparables. As per the discussion in para 11(viii) of the order of the TPO, it is noticed that the said concern has been excluded on the ground that during the year under consideration it has undertaken business restructuring. The Ld. Representative also pointed out that in the show-cause notice dated 31.10.2012 issued by the TPO another reason has .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

the inclusion of the said comparable on the following ground that the aforesaid company is focused on solutions and services in the Enterprise Allocation Space (EAS) in the Transaction, Analytics, and Collaborative Solution Layers. This includes ERP, customer relationship management (CRM), SCM, BI/DW, BPM etc. Thirdware offers Application Implementation Services (AIS), Application Development Services (ADS) and Application Management-support Services (AMS). It was further submitted that it is en .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

s from software development. Having considered the material placed on record we find that the company is mainly involved in software services. Therefore, we hold that TPO is right in including the same for the purpose of comparability analysis. 56. We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that the functions of Thirdware are in contrast with the assessee which only provides software development in the fi .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ipro Technology Services Limited (Wipro) 58. As far as this company is concerned, the arguments of the assessee were not only on account of functional dissimilarity but the assessee also raised the other objection that there was an extraordinary event during the year. Wipro provides program management and third party information security assessment services to businesses that outsource technology and operations to third party vendors in India, the Philippines, China and the Russian Federation. I .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

p Inc. for the delivery of technology infrastructure services and application development and maintenance services for the period of six years. Without prejudice, it was submitted that before 20.01.2009, the Company was part of the Citi group and rendered services to various entities of the Citi group worldwide. With effect from 21.01.2009, the Company was acquired by Wipro Ltd. however, in order giving effect to the directions of Hon ble DRP, Ld. TPO has held that In the case of M/s Wipro Techn .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

Wipro as comparable to the Appellant company observed as under: The audited report of the company reveals that company is mainly engaged in software development. The majority of income is from software development. Having considered the material placed on record we find that the company is mainly involved in software services. However, the assessee has brought to the notice that Wipro Technologies Service Ltd has RPT of more than 25%. The AO is directed to verify the computation provided by the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

Further, while repelling the objection regarding extra-ordinary event taking 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 n .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ansaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by enterprise or having regard to any other relevant base . In view of the above, for computing margin from an international transaction adjustment claim ought to be allowed. 61. The TPO has rejected the contention of the assessee by holding that: The contention of the assessee company is not acceptable on account of the following reasons:- a) The .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ore space. This expenditure cannot be taken to be extra ordinary in nature for the simple reason that it was expended in the hope of gaining business as is done by millions of businesses worldwide and every failure cannot be written off by the tax authorities as being extra ordinary. In this case the assessee has over reached itself in the hurry to get business by committing a sum of money in terms of rental and maintenance charges. c) The assessee is required to support its claim for any adjust .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

tment in service industry is not applicable as the business model I s cost plus so there is no question of idle capacity in terms of fixed costs assets. d) If the taxpayer had seen a sudden spike in the volume o f its work during the year, it would have reaped the benefits of advance planning and foresight. This would have resulted in greater profits and better margins owing to its smart moves. However, when the volume of work did not grow as anticipated, it is seeking an adjustment due to the s .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

jective basis led by the assessee to support its claim; mere submission that there was underutilization does not discharge the burden upon the assessee. Moreover, the assessee has not given any cogent basis to satisfy the reasons for underutilization. Once the assessee is a software service provider to its AE then there can be no claim on account of under utilization of capacity as it was AE who initiates such expansion. Hence, we reject the ground raised by the assessee. 63. The next issue rais .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ing profiles of the companies selected as comparables. 65. The AR has highlighted the significance of comparing the level of risks between independent comparables and the taxpayer. It was submitted that TPO should consider the risk free nature of the taxpayer s operations while adjudicating on the transfer prices. Based on the above, ignoring the risk profile of the Assessee would be unjust on the part of the revenue. He contended that TPO/drip should have appreciated that the intent of the tran .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

.2014 has held as under: The assessee hasn t claimed raised Risk Adjustment in its submission. However, it may claim at later stage on account of adjustment commensurate to the risk profile of the assessee. After carefully considering the facts of the case and the submissions of the taxpayer, I am not inclined to accept the assessee s future claim of risk adjustment. Risk adjustment as a general rule cannot be allowed unless it is clearly shown that the comparables had actually undertaken such r .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

f comparability adjustments are discussed in Chapter V. From the above guidelines it can be seen that unless it is shown that how the risk adjustment would change the result of each comparable and how the same would improve the comparability and unless adequate reasons are given for such adjustment, no adjustment can be allowed to the taxpayer. In the present case, except giving proportion of various risks borne, the taxpayer has not shown with evidence as to whether each of the risk was actuall .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

rity. Even other methodology, whether adhoc adjustment as in case of Sony India, CAPM or Sharpe Ratio (which is a measure of the excess return on risk undertaken by an entity investing in a particular asset), as applied by Hyderabad ITAT in the case of ADP Private Ltd, are based on return of capital which is not the PLI adopted by the assessee and the TPO. All this requires robust and reliable data, both for the assessee and the comparables in the absence of which risk adjustment cannot be consi .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

and robust. Risk adjustment as a general rule cannot be allowed unless it is clearly shown that the comparables had actually undertaken such risk and how the same materially affected their margins. The revised OECD guidelines of 2010 has also stated in para 3.54 as under:- Ensuring the needed level of transparency of comparability adjustments may depend upon the availability of an explanation of any adjustments performed the reasons for the adjustments being considered appropriate, how they were .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ult of each comparable and how the same would improve the comparability and unless adequate reasons are given for such adjustments, no adjustment can be allowed to the assessee. In the present case, except pointing out various risks, the assessee has not shown with evidence as to whether each of the risk was actually undertaken or not by the comparables and if so, how these risks affected each of them and whether such adjustment would improve the comparability. 13.11 Mechanical adjustment cannot .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

tments cannot be considered for enhancing comparability. Thus the objection is rejected. 13.12 In the various judicial pronouncements the risk adjustment has not been allowed by the ITATs. Some of these decisions are discussed below: (a) Vedaris Technology 2010-TII-10-ITAT-Del-TPL: No risk adjustment to be allowed even on ad hoc basis particularly when the same has not been quantified; (b) Marubeni India Private Ltd. (2010-TII-36-ITAT-Del-TP) in which it was held that as the assessee failed to b .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

shown that the difference in function and risk results in deflation or inflation of financial results of the comparables, it is not a general rule to grant it as a standard adjustment. (ii) The assessee could not show how such difference in risk and functions affected the results of the comparables. (e) ST Micro Electronics (2011-TII-63-ITAT-Del-TP): The assessees claim that it was a risk free captive service provider and hence cannot be compared with comparables who were full entrepreneurs was .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

eeds in ably demonstrating that the comparables finally selected bore relatively more risk than it, then there should be no denial of the risk adjustment. If, however, the assessee fails in specifically pointing out the extra risks undertaken by the comparables, then, of course, there cannot be any question of granting risk adjustment. Under the transfer pricing regime, onus is always on the assessee to show the reasons for claiming any separate adjustment by pointing out the differences between .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

 

 

 

 

 



|| Home || Acts and Rules || Notifications || Circulars || Schedules || Tariff || Forms || Case Laws || Manuals ||

|| About us || Contact us || Disclaimer || Terms of Use || Privacy Policy || TMI Database || Members || Site Map ||

© Taxmanagementindia.com [A unit of MS Knowledge Processing Pvt. Ltd.] All rights reserved.

Go to Mobile Version