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2015 (12) TMI 769 - ITAT JAIPUR

2015 (12) TMI 769 - ITAT JAIPUR - TMI - Transfer pricing adjustment - selection of comparbales - assessment proceedings on dissimilar companies - Held that:- The Hon’ble Delhi High Court held in the case of CIT Vs. Agnity India Technologies Pvt. Ltd. (2013 (7) TMI 696 - DELHI HIGH COURT) that comparison where super normal profit is shown by the company, it cannot be applied for ALP adjustment. The assessee had shown operating margin @ 13.17%, which is within +/- 5% variation of arithmetic mean i .....

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omparable of comparable companies if any risk as claimed by the appellant was concerned, it will be resulted in the arithmetic mean of all the companies as these risks adjustments also applicable for them. The assessee could not show how such difference in risk and functions affected result of comparables. The assessee in comparing the case with Infosys and Wipro had claimed that the appellant had negligible risk as it is a captive unit providing service to its AE and is remunerated on cost whic .....

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012 and DRP direction dated 18/07/2012 for A.Y. 2008-09. The effective grounds of both the appeals are as under:- Grounds of assessee s appeal ITA 1121/JP/2011 1. Erred in assessing total income at ₹ 91,36,830/- as against ₹ 5,61,900/- computed by the appellant. 2. Erred in making transfer pricing adjustment by rejecting the analysis undertaken by the Appellant to determine arm s length price for its international transactions pertaining to provision of software development services .....

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ng turnover ₹ 1 crore as a comparability criterion without applying any range of turnover on upper side and consequently, selecting inappropriate companies as comparable to the appellant. 7. Erred by rejecting certain comparable companies identified by the appellant by applying inappropriate criteria of companies having diminishing revenue trend. 8. Erred in rejecting certain comparables considered by the appellant on the ground that the comparables were having different accounting year (o .....

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that 3 companies (submitted by the appellant and also considered comparable companies by the learned TPO) can also be considered as final set of comparables for determining the arm s length price of the international transaction. 12. Erred in considering dissimilar companies as comparable companies to the appellant for determining the arm s length price of the international transaction. 13. Erred in selecting the companies having super normal profits as comparables to the appellant. 14. Without .....

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nt services as the mean arm s length price determined, without taking into account the lower 5% variation from the mean arm s length price determined. 17. Erred in ignoring the fact that since appellant is availing tax holiday under section 10B of the Act, there is no intention to shift the profit base out of India, which is one of the basic intentions of the introduction of transfer pricing provisions. 18. Erred in initiating penalty proceeding under sections 271(1)(c), 271AA and 271G of the Ac .....

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price for its international transactions pertaining to provision of software development services to the AE. 2. Erred in rejection of the economic analysis undertaken by the appellant and conducting unjustified fresh search conducted by the learned TPO. 3. Erred in considering the non contemporaneous data and single year data while determining the arm s length price. 4. Erred in inappropriate use of information obtained which was not available in public domain by exercising the powers under sect .....

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ia used by appellant i.e. salary and wages cost ratio of 50% and applying 25% criteria for the same. 9. Erred in rejecting certain comparables considered by the appellant in the comparability analysis using onsite revenues greater than 75 percent of the export revenues as a comparability criterion. 10. Erred in considering dissimilar companies as comparable companies to the appellant for determining the arm s length price of the international transaction. 11. Erred in identifying certain dissimi .....

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comparable to the appellant. 15. Erred in comparing full-fledged risk bearing entities with the appellant s captive operations without making any risk adjustment for differences between the functional and risk profile of comparable companies considered as comparable vis a vis the risk profile of the appellant. 16. Erred in computing the arm s length price of software development services as the mean arm s length price determined, without taking into account the lower 5% variation from the mean a .....

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the above grounds of appeal, at any time before or at the time of hearing of appeal, so as to enable the Hon ble Income Tax Appellate Tribunal to decide this appeal according to law. 2. Ground No. 1 of both the years are general in nature, the same are not pressed. Therefore, we dismiss the ground No. 1 of both the years as not pressed. 3. Grounds No. 2 to 8, 10,11,14,16 and 17 for A.Y. 2007-08 and grounds No. 2 to 7,9,11,13,14,16 and 17 for A.Y. 2008-09 have not been pressed, therefore, the sam .....

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against selecting the companies having super normal profits as comparables to the appellant and ground No. 15 in A.Y. 2007-08 is against comparing full fledged risk bearing entities with the appellant s captive operations without making any risk adjustment for differences between the functional and risk profile of comparable companies considered as comparable vis a vis the risk profile of the appellant. 7. Similar grounds of appeal have also been raised by the appellant in A.Y. 2008-09. The ld .....

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cal support. The major clients are global hotel chains, such as, Hilton, Hyatt, Shangri-La etc. The software used by the hotels to help optimizing room pricing. During the A.Y. 2007-08, the assessee had shown net profit of ₹ 85,41,157/- yielding N.P. rate of 10.73% against gross turnover of ₹ 7,95,98,205/- and N.P. disclosed in A.Y. 2008-09 at ₹ 1,32,66,234/- on gross turnover of ₹ 11,12,66,664/- yielding N.P. rate of 11.91%. On perusal of P&L account, it revealed tha .....

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ceived by the Assessing Officer and forwarded to the assessee for its comment. In A.Y. 2007-08, the TPO has observed as under:- Computation of arm s length price: The arithmetic mean of the Profit Level indicators is taken as the arms length margin. (Please refer Annexure-B enclosed with the Order of the Transfer Pricing Officer dt. 29.10.2010 for details of computation of PLI of the comparable). Based on this, the arms length price of the software development services rendered by the taxpayers .....

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Price @ 123.69% of operating cost ₹ 8,81,73,131/- Price charged in the international transactions ₹ 7,95,98,205/- Shortfall being adjustment U/s 92CA ₹ 85,74,926/- The above shortfall of ₹ 85,74,926/- is treated as transfer pricing adjustment u/s 92CA. If any filter or criteria applied by the taxpayer for search of comparables is accepted or any filter or criteria applied by the TPO is relaxed, the entire accept/reject matrix changes resulting in a new comparable set incl .....

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nd support activities is determined at ₹ 8,81,73,131/-, instead of ₹ 7,95,98,205/- charged in its international transactions, resulting in an adjustment to the extent of ₹ 85,74,926/-. Summary of Transfer pricing adjustments Segment Arm s length Price Shown Adjustment Software Development Services ₹ 8,81,73,131/- ₹ 7,95,98,205/- 85,74,926/- Thus, the above amount of ₹ 85,74,926/- is treated as transfer pricing adjustment for the F.Y. 2006-07. No deduction u/s .....

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erest and tax is considered for computing the operating margins. But, the incomes and expenses related to the operations of the relevant financial year alone is considered for the computation of operating margins of the comparables. For example, the following incomes which are non-operating in nature and nothing to do with the operations of the company are excluded from operating revenues. i. Interest ii. Dividends iii. Provision no longer written back iv. Gain on sale of assets/investment v. In .....

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xpenses written off, public issue expenses written off are not considered as operating expenses as the comparison of the profits should be at same level for the comparable and that of the tax payer. Further, foreign exchange gain/loss has been taken as operating income/loss. The ld TPO also commented on provision for doubtful debt and provisions for return back to decide the arm s length price (ALP). The ld TPO considered the objection raised by the assessee on comparable proposed by him and mod .....

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under: Arithmetic mean PLI : 26.20% Less: Working capital adjustment : (-) 0.18% Arm s length Margin : 26.38% Arm s length price: : Operating Cost Rs. 9,83,18,995/- Arm s Length Margin 26.38% of the Operating Cost Arm s Length Price (ALP) 126.38% of operating cost ₹ 12,42,55,545/- Price received vis a vis the Arms Length price: The price charged by the payer to its Associated Enterprises is compared to the Arms Length price as under: Arm s length price (ALP) @ 126.38% of operating cost &# .....

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U/s 10B would be allowed to the tax payer as per provisions of Section 92C(4) of the Act. The draft order in both the years was served on the assessee thereafter the assessee filed its objection before the Dispute Resolution Panel-1, New Delhi (DRP) U/s 144C(2)(b) of the Act on different dates. The DRP passed its order U/s 144C(5) on 08/08/2011 in A.Y. 2007-08 and on 18/07/2012 in A.Y. 2008-09 by considering the assessee s submissions. The DRP considered the assessee s total objection-22 in A.Y. .....

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nge of arithmetic mean on the basis of three comparables. The assessee submitted that the transaction was within the arm s length price. The DRP rejected the assessee s submission by considering the Hon ble Delhi ITAT s decision in the case of Vedaris Technologies Ltd. i.e. comparable can be one or more than one. 8. The ld DRP held that the assessee has not demonstrated how the earlier years circumstances have affected the margin in the current year. As per Rule 10B(4) of the Rules for benchmark .....

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10 had recomputed the ALP on the basis of direction issued by the DRP. The Assessing Officer calculated the ALP at ₹ 8,83,79,859/-. The assessee charged ₹ 7,95,98,205/- and exchanged dues amounting to ₹ 4,55,795/-. The difference being adjusted U/s 92CA had been computed at ₹ 83,25,858/-. The same was added in the income of the assessee. Similarly in A.Y. 2008-09, this ALP was calculated by the Assessing Officer after considering the direction of DRP and TPO at ₹ 12 .....

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of 25% to reject companies having employee cost ratio of less than 25%. In this regard, the appellant, submits the following before your Honors: The appellant had applied similar filter for earlier A.Y. i.e. 2006- 07. The ld TPO during the assessment proceedings calculated the +/- 15% range from the employee cost ratio of the assessee (74.15% for A.Y. 2006-07) and accordingly selected comparable companies having employee cost to total cost ratio in the range of 59.15% to 89.15%. In case of appe .....

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d be used in order to arrive at close comparables. He relied on the decision in the case of Avaya India (P) Limited Vs. ACIT (ITA No. 5150/Del/2010). He further submitted that the following additional companies selected by the TPO as comparable to the appellant should be rejected on the salaries and wages cost ratio criteria i.e. rejecting companies having employee cost ratio less than 50% for F.Y. 2006-07. Sr. No. Name of the company % of Salary Cost to sales on page 261 of the Appeal Memo (Pag .....

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3% 10. The ld Sr. DR vehemently relied on the order of the TPO as well as DRP. She drawn our attention on page No. 14 & 15 of DRP and argued that this filter had been used a starting point to carry out more thorough functional analysis. Since wages constitute a main cost components so this comparison would given close comparables. Therefore, she prayed to confirm the order of the Assessing Officer. 11. We have heard the rival contentions of both the parties and perused the material available .....

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appeal on this ground. 12. For grounds No. 12 and 13 for A.Y. 2007-08, the ld AR for the assessee has submitted that the ld TPO and consequently the ld Assessing Officer had additionally considered the dissimilar companies as comparable to the appellant. The appellant had analysed these companies in detail and provided the detailed reasons for rejection of these companies. Sr. No. Company Name Margin as per TP Order Employee cost/Sales percentage Reason for inclusion by TPO Relevant pages of TPO .....

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(Refer page 484 of the paper book 1) II. The company fails related party filter - Related Party Transactions as a percentage of service income-60.45% (standalone basis). Therefore, it is apparent that the company fails the RPT filter applied by the Appellant and as applied by the TPO. Therefore, the company should be rejected as comparable. (Refer page 1 to 5 of the additional compilation I) III. The company does not have break up of software services revenue - The company has following four seg .....

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) 49.70% 41.78% Based on the information received from the company u/s 133(6) of the Act, the company is considered as comparable Page 36 (Ground No. 15) and Page 183 (TP order; Para 13.2) of the Appeal Memo I. The company fails to satisfy employee cost filter - Fails to satisfy the Employee Cost Filter applied by the Appellant. Ratio of employee cost filter to sales is 41.78% (Refer page 484 of the paper book I). II. The company is functionally different - The website of Avani makes it clear th .....

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the same as previous year the company should be rejected as functionally different. - Further, the Appellant would like to bring you Honour s kind attention to the fact that the learned TPO has considered this company as comparable in Appellant s own case for A.Y. 2006-07. However, the Hon ble Jaipur Tribunal in Appellant s case for A.Y. 2006-07 has rejected his company from the final set of comparable companies on the basis of Appellant s contention that the company is into sale of software pro .....

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loyees cost filter to sales is 25.69%. (Refer page 484 of the paper book I) II. The company is cherry picked - Cherry picking of this company (not covered is search process carried out by the Appellant as well as learned TPO also). III. The company is functionally different - Functionally different (Refer page 629 to 638 of the paper book I for relevant extracts reproduced from the annual report evidencing the functional profile of the company and page No. 639 to 644 of paper book I for extracts .....

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science and Industrial research and hence the company s economic circumstances are at absolute divergence from the Appellant and therefore the company is not a suitable comparable for analysis. - It is apparent from Page 23 of the annual report the company for F.Y. 2006-07 (Refer page 8 to 9 of the additional compilation I) as that the company has received loans from DSIR. Thus, based on the DRP directions for A.Y. 2008-09, the company should be rejected as non-comparable. - Refer page 510 to 51 .....

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opment services alongwith Software Development services. (Refer page 518 and 647 of the paper book I) 5 Helios & Matheson Information Technology Limited ( Helios ) 35.17% 35.67% As per information provided in the annual report, it is into software development services and qualifies all the filters applied by the learned TPO for serving as comparable companies Page 39 & 40 (Ground No. 15) and Page 208 and 209) (TP order : Para 13.9) of the Appeal Memo I. The company fails to satisfy the e .....

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p of revenue from software services and software sales has been provided in the financial statements and therefore this company should not be accepted as functionally comparable. (Refer page 658 of the paper book I) - Very high turnover compared to Appellant s turnover- 183.51 crores. (Refer page 658 of the paper book I). 6 Infosys Technologie s Limited ( Infosys ) 39.73% 45.84% The learned TPO has stated in the TP order that this company is comparable selected by the tax payer in its TP documen .....

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Cost Filter applied by the Appellant. Ratio of employee cost filter to sales is 45.84%. (Refer page 484 of the paper book I) II. The company is functionally different (Refer page 10 to 15 of the additional compilation I) - The company offers software products for the banking industry, business consulting and business process management services. Finacle TM, its universal banking solution, partners with banks across the global to power their innovation agenda enabling them to differentiate their .....

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upport, package enabled consulting and implementation, technology consulting and other solutions, including business process management and solutions, product engineering solutions, infrastructure maintenance services, operations and business process consulting, testing solutions, and systems integration services. These offerings are provided to clients across multiple industry verticals inclouding banking and capital markets, communications, energy, manufacturing and retail. The company also pr .....

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0 to 15 of the additional compilation I) - As per the information given in annual report for F.Y. 2006-07, the company filed 15 patent applications in US and 66 patent application in India. The company also owns proprietory product- Finacle, which addresses core banking, treasury, wealth management, consumer and corporate ebanking, mobile banking and web-based cash management requirements. The appellant does not own any intangibles/proprietory products. IV. Significantly high turnover - Very hig .....

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Employee Cost Filter applied by the Appellant. Ratio of employee cost filter to sales is 48.25%. II. The company is functionally different - As per the financial statements and response to the notice u/s 133(6), the company fails the employee cost filter (Rs. 2,935,065/- ₹ 7,42,09,887 = 3.96%). As per Schedule 15 of the Profit and Loss a/c for the year ended 31 March 2007, it is clearly evident that Establishment expenses (Rs. 2,935,065) grouping contains all the employee related salary an .....

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the organization. As the professional fees are paid to third parties, it implies that the company is not undertaking software development activity services by itself, rather outsourcing the same to others. - There is contradiction in the information presented in the Annual report (where professional fees appears under Schedule 16- Administrative expenses and not under Schedule 15 consisting of the employee costs) and the company s reply to the notice issued u/s 133(6) of the Act wherein the same .....

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more than 75% revenue from software development services. . The learned TPO has stated in the TP order that Infosys, being a software development service provider, also has unbilled revenues which is similar to inventory. Page 42 (Ground No. 15) and Page 213 to 217 (TP Order: Para 13.13) of the Appeal memo. I The company fails to satisfy the employee cost filter - Fails to satisfy the Employee Cost Filter applied by the Appellant. Ratio of employees cost filter to sales is 36.62% (Refer page 48 .....

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adequate in relation to the size of the company and the nature of its business. (c) The company is maintaining proper (records of inventory). The discrepancies noticed on verification between the physical stocks and the book records were not material. However, the same have been properly dealt within the books of accounts. - Also, Inventories under the Schedules to the financial statements on page 15 of the annual report (Refer page 668 of the paper book I) discloses Software development as inv .....

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and Software Products and a Training Centre engaged in training of Software professionals on online projects. (emphasis supplied) - Revenue recognition under the Notes to the financial statements on page 18 (Refer page 669 of the paper book I) of the annual report clearly states: The company derives its revenues primarily from software services and software products. - Fixed assets under the schedules to the financial statements shows Software LA Vision as a fixed asset. - Further, according to .....

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re development and software product is not available); and Training. However, there is no bifurcation available between sale of software services and software products in the application software segment of the company. - Unbilled revenues cannot be equated to inventories. 9 Megasoft Limited ( Megasoft ) 52.14% 37.87% As per information provided by the company u/s 133(6), it is into software development services and qualifies all the filters applied by the learned TPO for serving as comparable c .....

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Blue Ally division) (Refer page 524 to 525 of the paper book I). The XIUSBCGI division does not engage in comparable activities. - The TPO has relied on information received under section 133(6) and concluded that major revenue (65%) in the products division (XIUSBCGI division) is from customization which is in the nature of software development services. Relying on the above the TPO has used company-wide margins mentioning that service revenues constitute more than 75% of the company-wide reven .....

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zation services is not appropriate. Further, if the XIUS-BCGI division )Products division) was actually similar to the Blue Ally Division (Consulting division) (as is being alleged by the learned TPO), the company would not have disclosed the two divisions as separate lines of businesses reporting is sufficient proof that these two divisions are functionally different. Considering the above, the company is functionally noncomparable on a companywide basis. If at all, the company is to be conside .....

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y is functionally different (Refer page 19 to 25 of the additional compilation I). - The company is engaged in providing outsourced Product Development which is different from IT outsourcing. The company on page 11 to 13 of the annual report (Refer page 20 to 22 of the additional compilation I) has explained in detail the difference between the two and hence the functional profile of the company is different from that of the assessee. - The company has also mentioned in the annual report that ou .....

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tware development services Page 46 & 47 (Ground no. 15) and Page 241 to 246 (TP order: Para 13.25) of the Appeal Memo I. The company is functionally different - The company operates in two segments: 1) Systems integration & support services- it caters to the domestic market and offers integrated hardware & packaged software solutions, sourced from principles and 2) Software development & services. - As per the Director s report and the Management Discussion and Analysis, the soft .....

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based on which the Appellant could compute the margin from software services activity and therefore the company is functionally different. II. Relied on replies for notice under section 133© - Relied on replies for notice under section 133(6) of the Act. The appellant submits that as per the company s response, the company is engaged in ITeS. - There is no sub-services break up/information provided in the annual report or the databases based on which the Appellant could compute the margin .....

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e called for and as segmental details were available for software development segment, the same is considered as comparable Page 47 & 48 (Ground no. 15) and Page 248 to 255 (TP order: Para 13.27) of the Appeal Memo I. The company fails to satisfy the employee cost filter - Fails to satisfy the Employee Cost Filter applied by the Appellant. Ratio of employee cost filter to sales is 42.13% (Refer page 484 of the paper book I). II. The company is functionally different - The company during the .....

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n I). - As per the company s response to the notice u/s 133(6) of the Act, The Company is engaged in all activities that are stated in the notice and they fall within the segment of Global IT Services and Products . The books are not maintained to give the break up for each of the streams of revenue specified in the notice. Accordingly, it is clearly evident that no break up of revenues between IT Services and products is available. - Further, as per page 42 of the Annual report of Wipro for the .....

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keting related intangibles and Technology related intangibles. - Segmental information at standalone level for F.Y. 2006-07 was not available in public domain and the learned TPO has obtained the same by exercising powers u/s 133(6) of the Act. - In addition to the above, it is observed that the segmental information provided is an extract of the transfer documentation report maintained by Wipro for F.Y. 2006-07. The mere fact that the segmental information is derived from the transfer pricing r .....

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rom the functions of the Appellant. - The company has also employed 550 people in R&D activities. The R&D efforts have contributed to 8.5% of the revenues. IV. Significantly high turnover - Very Huge turnover of ₹ 961 6.09 crores as compared to the Appellant. - Refer page 531 of the paper book I. The ld AR for exclusion of 12 comparables as referred above has relied upon recent decision of the Hon ble Delhi High Court in the case of CIT Vs. Agnity India Technologies Pvt. Ltd. in IT .....

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r. 14. We have heard the rival contentions of both the parties and perused the material available on the record. It is a fact that the TPO accepted the TNMM method as the most appropriate method for benchmarking the international transaction of appellant using OP/OC as a PLI. The objection of the assessee had not allowing use of multiple year of data for the purpose of determining of ALP has already been considered by the Coordinate Bench in ITA No. 27/JP/2011 for A.Y. 2006-07 and held by consid .....

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than other data for period not more than two years prior to such financial year may be used. Hence, the TPO was justified in directing the assessee company to conduct first search of the comparables during the transfer pricing proceedings as the Rule 10B(4) of the IT Rules require used of current year data for the purpose of comparability analysis. The assessee has given reasons for not considering 12 comparables considered by the TPO at page No. 261 to 264 of TPO order. Finally 26 comparables w .....

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6. Celestial labs limited 58.35% 55.10% 25.69% NC 7. Datamatics limited 1.38% -0.06% 61.59% -0.06% 8. E-zest solutions ltd. 35.63% 36.30% 61.50% 36.30% 9. Flextronics Software Systems limited (segmental) 25.31% 25.73% 46.31% NC 10. Geometric limited (Earlier Geometric Software Solutions Co. Limited ) 10.71% 10.22% 60.86% 10.22% 11. Helios and Matheson information technologies limited 36.63% 35.17% 35.67% NC 12. Igate global solutions limited 7.49% 6.20% 69.74% 6.20% 13. Infosys Technologies limi .....

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ems international limited (segmental) 15.07% 13.87% 56.32% 13.87% 23. Sasken communication technologies limited (segmental) 22.17% 21.75% 57.03% 21.75% 24. Tata Elxsi limited (segmental) 26.51% 26.87% 54.35% 26.87% 25. Thirdware solutions Limited 25.12% 22.19% 62.64% 22.19% 26. Wipro Limited (segmental) 33.43% 35.01% 42.13% NC Arithmetic 25.00% 23.69% 15.62% The ld AR s arguments for not considering these 12 comparables referred in Annexure-A in its submission has found logical as margin of thes .....

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mpanies. Finally, the comparables out of 26 comparables considered by the TPO and after considering the assessee s objection for non comparable cases in case of 12 comparables, the average meaning was worked out by the AR at 15.62%. The assessee has shown margin @ 11.66%. The assessee s argument is found convincing that these margins are within +\- of 5% of range. Therefore, the Coordinate Bench in A.Y. 2006-07 has considered the variation of ALP +\- 5% and held that no adjustment could be made .....

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sk profile of comparable companies. The assessee claimed various risk adjustments before the TPO such as market risk, service liability risk, credit and collection risk, man power risk, price risk, foreign exchange risk, Idle capacity risk, political risk, single customer risk and country risk, which has been considered by the TPO in her order and finally considered this issue from page No. 199 to 217 and finally concluded as under:- * The taxpayer is totally dependent on the AE for business. Th .....

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losing business entirely or losing volume of business. * the taxpayer is not compensated any amount for termination of agreement even if it is terminated without any cause. No independent enterprise would like to agree for a termination clause without compensation if it is terminated without any cause. * The AE is exposed to the market risk and any fluctuation in the business conditions of the AE affect the contractual terms between the AE and the taxpayer. Thus even if independent comparables .....

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wn that the MNCs are actually distributing their risks by opening captive offshore centers. * The independent entrepreneur has to incur expenditure on marketing, etc. which is debited to the profit and loss account. But, it is always not necessary that these risks reflected in the marketing, sales promotion expenses will automatically be compensated by increase in sales or higher margins. For example, increased marketing efforts in some segments of export market may not yield results for a softw .....

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based mainly on cost factors. By outsourcing to India, the overall cost of production of goods or services by the AE gets reduced which in turn increased the competitiveness of the AE in the market. Thus the taxpayer is not compensated for the reduction of risk attributable to the operations carried on by the taxpayer in India. * The risk profile of the comparables selected by the taxpayer, acceptable to the taxpayer and those selected by the TPO but not acceptable to the taxpayer is similar. * .....

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n of the risk, which is discussed above and rejected. * The taxpayer s single customer risk and political/country risk more than offsets any other risk differential between the taxpayer and the comparable companies. * Different comparables can have different risk profiles and different profit margins. The proviso to Sec. 92C(2) of the Act provides for adopting arithmetical mean to the different prices. This provision neutralizes the effect of difference in the risk profile, if any between the ta .....

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the arithmetic mean price considered in the case of comparable companies nullifies the risk differential, if any, between the tax payer and comparable independent enterprises. 16. The ld AR of the assessee reiterated the same argument raised before the ld TPO as well as before the ld DRP. At the outset, the ld Sr. DR. has supported the order of the TPO/DRP and argued that these risk adjustments are only theoretically which cannot be quantified in terms of any calculation to conclude the exact a .....

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s if any risk as claimed by the appellant was concerned, it will be resulted in the arithmetic mean of all the companies as these risks adjustments also applicable on them. These additions have been confirmed by the ITAT in the cases of Vedaris Technology (2010-TII-10-ITAT-Del-TP), M/s Marubeni India Private Ltd. (2011-TII-36-ITAT-Del-TP), M/s ADP Private Limited (201TII-44-ITATHyd- TP), M/s Symantec Software Solutions Pvt. Ltd. (2011-TII-60-ITATMum- TP), M/s ST Micro Electronics (2011-TII-63-IT .....

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und of appeal. IT(TP)01/JP/2012 A.Y. 2008-09 18. The ground No. 8 of the appeal for A.Y. 2008-09 is against modifying the criteria used by appellant i.e. salary and wages cost ratio. The ld AR for the assessee in this regard has submitted as under:- The approach followed by the appellant in the TP report for A.Y. 2008-09 vis a vis the approach of learned TPO in the TP order are summarized below for your Honours ready reference: Sr. No. Approach adopted by the Appellant Approach modified/applied .....

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emporaneous data for identifying additional comparable companies 3. Type of companies identified as comparable Indian companies engaged in providing similar services as that of the Appellant Inappropriately exercising the powers under section 133(6) of the Act and relying on the data received from the companies in response to notice u/s 133(6) of the Act for identifying companies as comparable to the Appellant. 4. Filters i) Use of Contemporaneous and Multiple year data Use of non-Contemporaneou .....

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ilter rejected by the learned TPO 5. Operating Margins of comparable companies Comparing the risk bearing entities by claiming adjustment to account for the difference in risk assumed by the full-fledged bearing entities and the risk assumed by the appellant. Comparing full-fledged risk bearing entities with the Appellant s captive operations without accepting adjustment for the risk differences The learned TPO also inserted certain additional filters as under: Sr. No. Additional filter applied .....

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.94% 4. E-zest Solutions Limited 28.95% 5. Flextronics Software Systems Limited 8.07% 6. I gate global Solutions Limited 13.90% 7. Infosys technologies Limited 40.41% 8. KALS Information Systems Limited 41.94% 9. Lanco global systems limited 26.64% 10. Mindtree Limited 17.51% 11. Persistent Systems Limited 27.23% 12. Quintegra Solutions Limited 21.74% 13. R Systems International Limited 15.30% 14. R S Software (India) Limited 6.46% 15. Sasken Communication technologies Limited 13.44% 16. Softsol .....

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ken by the TPO @ 25% in this regard, the appellant submitted as under: The appellant had applied similar filter for earlier A.Y. i.e. 2006- 07. The learned TPO during the assessment proceedings calculated the +/- 15% range from the salaries and wages cost ratio of the assessee (74.15% for A.Y. 2006-07) and accordingly selected comparable companies having salaries and wages cost ratio in the range of 59.15% to 89.15%. In case of appellant, the salaries and wages cost ratio for current year is 63. .....

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48.88% to 78.88% to be considered (as applied by the learned TPO and considered by the Hon ble ITAT in the Appellant s own case for A.Y. 2006-07). In respect of the above, the appellant wishes to place reliance on the following judicial precedents: Avaya India (P) Limited Vs. ACIT (ITA No. 5150/Del/2010) In view of the above, the following additional companies selected by the TPO as comparable to the appellant should be rejected on the salaries and wages cost ratio criteria i.e. rejecting compan .....

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for A.Y. 2008-09 are against considering dissimilar companies as comparable companies to the appellant for determining the ALP of the international transaction and selecting the companies having super normal profits as comparables to the appellant. In this regard, the ld AR further submitted that the ld TPO had considered the following dissimilar companies as comparables. The ld AR for exclusion of 7 comparables as referred above has relied upon recent decision of the Hon ble Delhi High Court in .....

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the record. It is a fact that the TPO accepted the TNMM method as the most appropriate method for benchmarking the international transaction of appellant using OP/OC as a PLI. The objection of the assessee had not allowing use of multiple year of data for the purpose of determining of ALP has already been considered by the Coordinate Bench in ITA No. 27/JP/2011 for A.Y. 2006-07 and held by considering the case of Mentor Graphics Noida (P) Ltd. 109 ITD 101, Aztec Software, 294 ITR 322 and the rec .....

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losed. The assessee also argued that these companies are dissimilar to the company of the assessee either employees cost, nature of business, functional differences etc., which was submitted before the TPO for not considering these comparables as comparable with the assessee. The TPO/DRP had not given any specific finding for not considering the assessee s explanation submitted during the course of assessment proceedings on dissimilar companies. Finally, the comparables out of 18 comparables con .....

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A.Y. 2006-07 has rightly held that the variation of ALP less than +\- 5% requires no ALP adjustment in the case of Shankar Exports Vs. Addl.CIT, 132 TTJ 107 and Ravi Kumar Rawat Vs ITO 134 TTJ 634. Therefore, we allow grounds No. 12 and 13 of the appeal in favour of the assessee. In result no adjustment is made in ALP. 21. For ground Nos. 10 & 12, the ld AR of the assessee further submitted that the ld TPO/A.O. considered the dissimilar companies to the appellant. It is further argued that t .....

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es. Therefore, he prayed that no adjustment is required on the basis of this computation. 22. At the outset, the ld Sr. DR has vehemently supported the order of the Assessing Officer and drawn our attention on TPO order page Nos. 48 to 81 and page No. 11 to 14 of the DRP order and for super normal profit, she drawn our attention on page No. 81 to 87 of the TPO order. 23. We have heard the rival contentions of both the parties and perused the material available on the record. The assessee raised .....

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asis of proper comparables. Therefore, we allow the assessee s appeal and no adjustment is required to be made in ALP during the year under consideration. 24. Ground No. 15 of the appeal for A.Y. 2008-09 is against comparing full-fledged risk bearing entities with the appellant s captive operations without making any risk adjustment for difference between the functional and risk profile of comparable companies. The assessee claimed various risk adjustments before the TPO such as market risk, ser .....

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AE for business. Thus, the taxpayer takes the risks associated with heavy dependence on a single customer. In common business parlance it is known as single customer risk . * The compensation model with the AE does not guarantee volume of business nor the period. The agreement can be terminated by any party at any time after giving a stipulated period notice. Thus the taxpayer is not free from the risk of losing business entirely or losing volume of business. * The taxpayer is not compensated an .....

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r has to incur expenditure on marketing, etc. which is debited to the profit and loss account. But, it is always not necessary that these risks reflected in the marketing, sales promotion expenses will automatically be compensated by increase in sales or higher margins. For example, increased marketing efforts in some segments of export market may not yield results for a software development company and thereby there may be a loss on this marketing effort which may bring down the overall profita .....

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risks but margins varied from 6.46% to 87.94% on cost. * The taxpayer s single customer risk more than offsets any other risk differential between the taxpayer and the comparable companies. * Different comparables can have different risk profiles and different profit margins. The proviso to Sec. 92C(2) of the Act provides for adopting arithmetical mean to the different prices. This provision neutralizes the effect of difference in the risk profile, if any between the tax payer and the comparable .....

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