TMI Blog2016 (1) TMI 115X X X X Extracts X X X X X X X X Extracts X X X X ..... he DRP for passing a speaking order in respect of all the grounds raised before it and has to deal with each of the comparables contested above by the assessee. Needless to say that when considering the arguments in respect to selection of the comparables, the DRP must keep in mind the following aspects:- (a) Companies with extra ordinary circumstances, like those which suffered events like merger/demerger, impacting the financial results could not be treated as comparables; (b) Companies which are functionally dissimilar cannot be taken as comparables; (c) Companies acting merely as intermediary having outsourced its activity cannot be considered as comparables; (d) Companies whose directors were involved in fraud cannot be taken as comparable, as their financials are not reliable. The aforesaid aspects may be kept in mind by the DRP while addressing the objections in respect to inclusion / exclusion of comparables and pass a speaking order after giving adequate opportunity to the assessee. - Decided in favour of assessee for statistical purposes - ITA No.5520/Del./2011 - - - Dated:- 18-9-2015 - SHRI J.S. REDDY, ACCOUNTANT MEMBER AND SHRI A.T. VARKEY, JUDICIAL ME ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted Reimbursement of expenses paid 4,73,41,015 Accepted 4. During the course of TP assessment proceedings, at the Transfer Pricing Officer's ('TPO') asked for current year i.e. FY 2006-07 data, so fresh search results were submitted by the assessee. A summary of the fresh search results for the ITES and the CSD services is as follows: Table: Benchmarking analysis based on Fresh Search for FY 2006-07 Particulars CSD services ITES No of comparables 10 15 Mean unadjusted OP/TC of comparables 9.06% 5.34% Mean working capital adjusted OP/TC of comparables 8.16% 3.52% Assessee s OP/TC 15% 5. The TPO proposed an adjustment of Rs.l,30,44,743 to the income from the CSD segment and an adjustment of ₹ 7,55,13,180 to the income from the ITES segment. The above adjustment made by the TPO to the income of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Lucid Software Ltd. 19.37% 16.21% 15. Mediasoft Solutions Ltd. 3.66% 0.87% 16. Megasoft Ltd. (Seg) 60.23% 50.21% 17. Mindtree Ltd. 16.90% 14.54% 18. Persistent Systems Ltd. 24.18% 22.21% 19. Quintegra Solutions Ltd. 12.56% 8.46% 20. RS Software (India) Ltd. 13.47% 12.33% 21. R Systems International Ltd. (Seg.) 15.07% 12.43% 22. Sasken Communication Technologies Ltd. 22.17% 20.21% 23. SIP Technologies Exports 13.90% 9.91% 24. Tata Elxsi Ltd. (Seg.) 26.51% 25.26% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 28.78% 27.97% 18. IServices India Pvt Ltd 49.47% 47.79% 19. Maple Esolultions Ltd. 34.05% 29.54% 20. Mold- Tek Technologies Ltd 113.49% 113.97% 21. R Systems International Ltd. (Seg.) 20.18% 17.74% 22. Spanco Ltd. (Seg.) 25.81% 19.05% 23. Triton Corp Ltd. 34.93% 27.01% 24. Vishal Information Technologies Ltd. (Coral Hub Limited) 51.19% 41.58% 25. Wipro Ltd. (Seg.) 29.70% 29.40% 26. Nittany Outsourcing Services Ltd. 11.50% 10.02% Mean OP / TC 29.42% 26.29% 7. Aggrieved wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No.5637/Del/2011)(AY 2007-08) Tata McGraw Hill Education Pvt. Ltd (ITA No.5857/Del/2011) (AY 2007-08), LGS Global Ltd (formerly known as Lanco Global Systems Ltd (ITA No. 1885,/Hyd/2011) CAY 2007-08). (iii) Felxtronics Software Systems Limited ('Flextronic') (Segmental) 8.6 Ld. AR submitted that details show that this comparable company owns products and took our attention to Exhibit 3. According to ld. AR, Flextronics has launched a new product in FY 2006-07 named CAS (Converged Active Solution), and also has a few other products namely ASN Wimax Gateway called ASN Lite. Company develops software products and provides software consulting services for use in the tele-commuications industry and also sells telecommunication equipment and provides services in business process outsourcing. 8.7 Ld. AR submitted that segmental information was not available, however, in its segmental data disclosure, the Company has disclosed data for 'products and services' as a composite segment and therefore, no bifurcation is available between the two activities of the Company. 8.8 Ld. AR relied upon the following case laws :- Toluna India (ITA No.5645/De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Also, the ld. AR submitted that the company provides various diversified services, like, application management services, ITESBPO services, executive education- info system, etc. 8.15 The case laws relied upon by the ld. AR are as under :- Toluna India (ITA No.5645/Del/2011) (AY 2007-08) Motorola Solutions India Pvt Ltd (ITA No.5637/Del/2011)(AY 2007-08) PTC Software (India) Pvt. Ltd. (ITA No.1605/PN/2011) (AY 2007-08) (vii) Ishir Infotech Limitd ('Ishir') 8.16 Ld. AR contended that this company fails employee cost filter and took our attention to Exhibit 7, which are as follows :- Particulars Amount Sales (A) 74,209,887 Salary and staff welfare (B) 2,935,065 Director s remuneration (C) 1,00,000 Total Employee cost (D=B+C) 3,935,065 Employee cost / sales (D/A) 5.30% 8.17 Ld. AR relied on the following case laws :- DE Shaw India Software Pvt Ltd (ITA No. 2071/Hyd/2011)(AY 2007-08) Virtu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isual Soft Technologies Limited, w.e.f. October 1, 2006 has been amalgamated with the financial performance of the company. (x) Persistent Systems Limited ('Persistent') 8.21 Ld. AR submitted that the merger took place in this year and took our attention to Exhibit 19. He submitted that as per the annual report of Persistent, it has undergone significant restructuring during the relevant FY wherein a subsidiary, Control Net (India) Private Limited was merged into the company. 8.22 The ld. AR relied upon the decision in the case of Tata McGraw Hill Education Pvt Ltd (ITA No.5857/Del/2011)(AY 2007-08). 8.23 Ld. AR submitted that the company derives its income from the sale of software services as well as products. Since the annual report does not provide any further break-up of income into products and services, the Company cannot be treated as functionally comparable to the assessee. He submitted that the segmental information is also available. 8.24 He relied on the following case laws :- Intoto Software India Put. Ltd. [ITA.No.1196/Hyd/201)(AY 2005- 06) ITA No.1197/Hyd/2010 (AY 2005-06), ITA.No.2102/Hyd/2011 (AY 2007-08) (xi) Sasken Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Global Ltd (formerly known as Lanco Global Systems Ltd (ITA No. 1885/Hyd/2011)(AY 2007-08) Toluna India (ITA No.5645/Del/2011)(AY 2007-08) 8.33 Ld. AR submitted that also, Infosys owns products/ IPR and leverages on its premium banking solution Finacle R as evidenced by its annual report for IT 2006-07 and the company also undertakes significant expenditure on R D as is evident from its annual report. He submitted that standalone segmental information for software development services is not available. 8.34 Ld. AR relied on the following case laws :- Axsys Health tech Ltd. (ITA.No.2076/Hyd/2011)(AY 2007-08) Agnity India Technologies Private Limited (ITA 1204/HC/2011) Pyramid IT consulting (ITA NO. 5401/DEL/2012)(AY 2008-09) 3DPLM Software Solutions Ltd (IT (TP) A.No.1303/Bang/2012)(AY 2008-09) Bearing Property Services P. Ltd (ITA NO.1124/Bang/2011)(AY 2008-09) (xiii) Wipro Limited (Seg.) (Wipro) 8.35 Ld. AR submitted that this comparable company is a giant Company and took our attention to Exhibit 13. He submitted that the sales/ turnover of Wipro for FY 2006-07 is INR 9,669 crores (considering only the IT services segment) as against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons (India) Pvt. Ltd. (ITA No.2380/PN/2012)(AY 2008-09) TNS India Pvt Ltd (ITA No. 604 419/Hyd/2014) (AY 2009-10) 9.3 Ld. AR submitted that the following comparables fails TPO filters :- (xv) Asit C. Mehta Financial Services Limited ('Asit') 9.4 Ld. AR submitted that this comparable fails employee cost filter and took our attention to Exhibit 15. He submitted that the company fails the employee cost to total cost filter of 25% as applied by the TPO. Ld. AR further submitted that the company has an employee cost to sales ratio of 24.79% as under :- Sales (Operating) 63,415 Employee Cost 15,720 Employee cost/ Sales 24.79% 9.5 He relied on the decision in the case of Zavata India Private Limited (ITA No.1781/Hyd/2011) (AY 2007-08). 9.6 Ld. AR submitted that the company is engaged in the provision of high-end services in the nature of GIS services and mobile assets tracking. Further, the company is engaged in providing portfolio management services and investment services. 9.7 Ld. AR relied on the decision of Avineon India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;) 9.15 Ld. AR submitted that this comparable company is engaged in the business of High End KPO Services. He submitted that the data analytics services performed by Eclerx is functionally different and are more value adding and high end in nature compared to the routine outsourced service functions performed by the assessee under ITES segment. He submitted that the segmental data not available and company also states it is not comparable to BPO and also owns significant JP. 9.16 Ld. AR relied on the following case laws:- Zavata India Private Limited [TS-156-ITAT-2013-HYD)-TP] (AY 2007-08 Stream International Services Pvt Ltd [TS-312-ITAT-2014-Mum)- TP](AY 2007-08) Cognizant Technology Services Pvt. Ltd. (ITA Nos.2106/Hyd/2011) (AY 2007-08) and (1864/Hyd/2012)(AY 2008- 09) Capital IQ Information Systems (India) Pvt. Ltd vs. DCIT [TS- 720-ITAT-2012-HYD)-TP7)(AY 2007-08) Maersk Global Service Centres (India) Pvt Ltd (ITA No. 2594/Mum/2014, [TS-13-ITAT- 2015 (Mum)-TP), ITAT Mumbai)(AY 2009-10) Market Tools Research Pvt Ltd (ITA No 11/ HYD/2012)(AY 2008-09) (xx) Genesys International Corporation Limited ('Genesys') 9.17 Ld. AR s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on Benefits (B) 66,881 Employee cost / sales (B) / (A) 7.59% 9.22 Ld. AR relied on the decision of Avineon India Pvt Ltd [TS- 30S-ITAT-2013-Hyd)- TP](AY 2007-08) 9.23 Ld. AR submitted that this company is a giant company and Rejected by the Tribunal following the principle laid down by Hon ble Delhi High Court in the case of Agnity India Technologies Pvt. Ltd. (ITA No. 1204/HC/2011) 9.24 Ld. AR submitted that the sales/turnover of the company is ₹ 649.51 Crore as against the assessee s sales / total turnover of ₹ 80 Crore from IT enabled services segment. 9.25 Ld. AR relied on the following case laws :- Zavata India Private Limited (ITA No.1781/Hyd/2011)(AY 2007- 08) Avineon India Pvt Ltd (ITA No.1989/Hyd/2011)(AY 2007-08) Capital IQ Information Systems (India) Pvt. Ltd (ITA No.1961/Hyd/2011)(AY 2007-08) Actis Advisers Pvt Ltd. (ITA No.5277/Del/2011 and ITA No. 958/Del/2012)(AY 2007-08), Agnity India Technologies P. Ltd (ITA No.1204/HC/2011) Market Tools Research Put Ltd (ITA No.1811/HYD/2012)(AY 2008-09) (xxiii) Wipro Limited (Segment) ('Wipro' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FY 09-10 FY20-11 FY 11-12 FY 12-13 OP/TC 46.58% NA NA 47.41% -6.85% 6.58% -3.63% 9.35 Ld. AR relied on the following case laws :- Pentair Water India Pvt Ltd (ITA No.03/PNJ/2013, ITA No.06/PNJ/2013, TS-153 ITAT-2014(PAN)-TP), [2014- TII- 108-ITAT-PANAJI- TP), ITAT Panaji) - AY 2007-08 9.36 Ld. AR submitted that the following comparable has different business model :- (xxvi) Information Technologies Limited (Coral Hub Limited) ('Vishal' Outsourcing company) 9.37 Ld. AR submitted that this comparable company has different business model and took our attention to Exhibit 23. He submitted that Vishal Outsources most of its services to third party contractors which is evidenced by the low employee cost to sales ratio of the company. Vishal has significant payment towards vendors and low personnel cost as a percentage of sales. He submitted that the intermediary functions of Vishal can only be compared to that of a distributor which takes title to service/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stency in the approach of TPO. 3.8 Including high-profit making companies in the final comparables set for Benchmarking a low risk captive unit such as the Assessee (disregarding judicial pronouncements on the issue), thus demonstrating an intention to arrive at a pre-formulated opinion without complete and adequate application of mind with the singleminded intention of making an addition to the returned income of the Assessee; 3.9 Including certain companies that are not comparable to the Assessee in terms of functions performed assets employed and risks assumed; 3.10 resorting to arbitrary rejection of low-profit / loss making companies based on erroneous and inconsistent reasons; 3.11 excluding certain companies on arbitrary/ frivolous grounds even though they are comparable to the Assessee in terms of functions performed, assets employed and risks assumed; DRP's Observation: 3.8.1 Grounds No. 3.8, 3.9, 3.10 and 3.11 deals with compatibility issue hence considered together. The comparables used in both segments have been put through a filtration process to arrive at a set which is broadly comparable with reference to FAR to that of the assessee. In the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edged by the TPO and distinction on facts and law made based facts of the case. In the circumstances, this being a general ground, the contentions are duly considered and no specific directions are being issued. 11. From a perusal of the above order of the DRP, it is clear that the assessee s objections / contentions against the inclusion/exclusion of the comparables has not been dealt by the DRP while exercising the appellate jurisdiction against a quasi-judicial order of the TPO, which exercise is sine qua non for deciding the issue as to whether a comparable is comparable to the FAR of the tested party i.e. assessee. Simply by observing that tested party is broadly comparable will not suffice. We are of the opinion that the DRP cannot absolve from its duty without going into the merits of the contention of the assessee as to whether a comparable company is comparable to it or not as envisaged by the Act and Rules governing the subject. Since the DRP has not met the contention of the assessee in respect of inclusion/exclusion of comparable in its order, we deem it fit to remand the matter back to the file of DRP for fresh adjudication. Ex consequenti, the DRP order is set asi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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