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2015 (9) TMI 1398 - ITAT DELHI

2015 (9) TMI 1398 - ITAT DELHI - TMI - Transfer pricing adjustment - Held that:- Accel Transmatic Ltd. - in this case, the assessee does not have any objection in making this company i.e, software segment of Accel Transmatic Ltd. as a comparable to that of the assessee.

Avani Cimcon Technologies Ltd. was rightly included in the list of comparables as find from the description of business activity of this company as reproduced on internal page 90 of the TPO’s order, that it is a pure s .....

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ed.

Flextronics Software Systems Ltd. (Seg.) - exclusion of this company from the list of comparables as the year ending of this company is not coinciding with that of the assessee and it is not known as to how the TPO has adopted the relevant figures for comparison.

Geometric Limited (Seg.) - The assessee has no objection to the inclusion of this company in the list of comparables.

Helios & Matheson Information Technology Ltd. - direct the exclusion of this comp .....

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ite and offshore services, etc., cannot be compared with the assessee.

Ishir Infotech Ltd. - exclusion of this company from the list of comparables as functional difference of this company vis-a-vis the assessee. So, the assessee’s objection is upheld.

KALS Information Systems Ltd. (Seg.) exclusion from the list of comparables

LGS Global Ltd. (Lanco Global Solutions Ltd.) - The assessee has no objection to the inclusion of this company in the list of comparables. .....

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) -rect the exclusion of this company from the list of comparables because of exceptional financial results due to mergers/demergers etc.

Mindtree Ltd. - The assessee has no objection to the inclusion of this company in the list of comparables.

Persistent Systems Ltd. - Because of the merger of subsidiary into this company, we hold that the financial position of this company cannot be construed as normal capable of a good comparison

Quintegra Solutions Ltd.,R S .....

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g.) - we direct the exclusion of this company from the list of comparables as the nature of activity carried out by the assessee in question is nowhere close to that of Tata Elxsi Ltd.,

Thirdware Solutions Ltd. (Seg.) - A perusal of the annual report of Thirdware Solutions Ltd. reveals that the said company has made income from sale of licence to the tune of more than ₹ 1 crore, which means the company is into production of software products which apparently cannot be a comparab .....

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hnologies Ltd. - uphold the decision of TPO to include this comparable in the list of comparables.

Asit C Mehta Financial Services Ltd. (earlier known as Nucleus Netsoft & GIS Ltd., Caliber Point Business Solutions Ltd., HCL Comnet Systems & Services Ltd. and Informed Technologies India Ltd. - we find that in this list of comparables considered by the TPO, the assessee itself had accepted eleven (11) comparables as comparable with that of the assessee. In such a scenario, we are of t .....

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compared with the low end service provider like the appellant in this case.

Infosys BPO Ltd. - is into high end service to financial industries, manufacture and telecom, so on that account it should be excluded cannot be countenanced because we are not able to find any functional dissimilarity with that of the assessee in this case. So, we uphold the action of the TPO to include this company as a comparable

Maple eSolutions Ltd. and Triton Corp Ltd. - Both companies directe .....

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ied upon for the computation of PLI of this comparable. Therefore, due to this extra ordinary events taking place in the instant financial year of this company, we are of the opinion that this company should be excluded from the list of comparables

Aditya Birla Minacs Worldwide Limited (earlier known as Transworks Information Services Ltd.), Apex Knowledge Solutions Pvt. Ltd., Appollo Healthstreet Ltd., Cosmic Global Ltd., Datamatics Financial Services Ltd. (Seg.), Flextronics Ltd. (S .....

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ate Bench in Motorola Solutions India Private Limited (2014 (10) TMI 358 - ITAT DELHI ) wherein in an identical matter, the Tribunal has given direction as afore-stated when the TPO repelled similar contention of the assessee. Since the risk adjustment sought by the assessee has also been turned down by the TPO on similar reasons, it has to be set aside and a computation exercise as envisaged under Rule 10B(1)(e)(iii) need to be done. Therefore, we restore this matter back to the file of the TPO .....

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essment order dated 07.09.2011 passed under section 143 (3) read with section 144C (5) of the Income-tax Act, 1961 (hereinafter referred to the Act ) in pursuance to the direction of the DRP-I, New Delhi for the assessment year 2007-08. 2. The assessee, Avaya India Private Limited is a subsidiary in India of Avaya International LLC. During the financial year ( FY ) 2006-07, the assessee has provided software development and back office support services to the Associated Enterprises (AEs) under t .....

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l transactions with its AEs :- Particulars Transaction Value Rendering Software Services 79,63,36,195 Payment towards back office support services 2,52,31,537 Rendering Marketing Support Services 1,51,40,548 Purchase of assets 2,68,39,539 Reimbursement of expenses 3,07,02,640 However, it was pointed out by the ld AR, that TPO has accepted the transaction in respect to rendering market support services, purchase of assets and reimbursement of expenses. The dispute is only in regard to rendering s .....

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argin 12.68% 9.71% 5. The TPO rejected the filters adopted by the assessee in the TP documentation and imposed additional filters for the selection of comparables. The TPO took 26 companies as comparables for software development service and 25 comparables for IT enabled services (ITES). 6. The TPO arrived at the following arm s length operating profit margin for software and back office support services segments :- Particulars Software Services Back Office support services No. of companies 26 2 .....

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ftware services segment and ₹ 44,11,464/- to back office support services segment. Thus, the total transfer pricing adjustment made in the assessee s case was ₹ 9,14,91,419/- thereby assessing the total income at ₹ 20,03,30,080/- as against ₹ 10,88,38,664/- disclosed by the assessee in the return of income filed on 18.10.2007. 10. The final set of comparables in both IT segment and ITES segment is as follows :- IT SEGMENT Sr.No. Comparable OP / TC 1. Accel Transmatic Ltd. .....

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Ltd. 19.37 15. Mediasoft Solutions Ltd. 3.66 16. Megasoft Ltd. (Seg.) 60.23 17. Mindtree Ltd. 16.9 18. Persistent Systems Ltd. 24.52 19. Quintegra Solutions Ltd. 12.56 20. R S Software (India) Ltd. 13.47 21. R Systems International Ltd (Seg) 15.07 22. Sasken Communication Technologies Ltd. (Seg.) 22.16 23. SIP Technologies & Exports Ltd. 13.9 24. Tata Elexi Ltd. (Seg.) 26.51 25. Thirdware Solutions Ltd. (Seg.) 25.12 26. Wipro Ltd. (Seg.) 33.65 ITES SEGMENT Sr.No. Comparable OP / TC 1. Accen .....

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3 11. Flextronics Ltd. (Seg.) 8.62 12. Genesys International Corporation Ltd. 13.35 13. HCL Comnet Systems & Services Ltd. (Seg.) 44.99 14. ICRA Techno Analytics Ltd. (seg) 12.24 15. Informed Technologies India Ltd. 34.32 16. Infosys BPO Ltd. 28.78 17. IServices India Pvt. Ltd. 49.47 18. Maple eSolutions Ltd. 34.05 19. Mold - Tek Technologies Ltd. (Seg.) 113.49 20. R Systems International Ltd (Seg) 20.18 21. Spanco Ltd. (Seg.) (earlier known as Spanco Telesystems & Solution Ltd.) 25.81 2 .....

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11 for AY 2007-08 order dated 26.08.2014 (hereinafter referred to as Toluna ) wherein the TPO selected Accel Transmatic Ltd. as a comparable to the said company (Toluna). In that case, the coordinate Bench appreciated the fact that the said company (Toluna) was also into software service segment and repelled the contention of Toluna against making it a comparable and the coordinate Bench of this Tribunal directed the inclusion of the software service segment of Accel Transmatic Ltd. in the list .....

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rable was confirmed in Toluna (supra). We find that in Toluna (supra), the co-ordinate bench while repelling similar objections, held as under :- 17.1. The TPO found this company to be engaged in software development. Notice u/s 133(6) was issued to the company to get complete information. According to the TPO, this company qualified all the filters. The assessee argued before the TPO that this company was into software products and the segmental results were not available. The TPO rejected such .....

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aterial on record, we find from the description of business activity of this company as reproduced on internal page 90 of the TPO s order, that it is a pure software development service provider. In the absence of any other specific objection against this company, we are of the considered opinion that this company has been rightly included by the TPO in the list of comparables. The assessee fails. We, in the light of the aforesaid order of the co-ordinate Bench, are also of the opinion that TPO .....

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submitted that this comparable was excluded in Toluna (supra). We find force in the said contentions of the ld. AR. In Toluna (supra), the co-ordinate bench while accepting the contentions of the AR, held as under :- 18.1. The TPO included this company in the list of comparables by observing that it was rendering mainly software development services. 18.2. After considering the rival submissions and perusing the relevant material on record, we find from the annual accounts of this company, a co .....

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o the assessee which is, also albeit in software development, but is doing it on contract basis without having any I.P. rights in the software developed by it. It is further relevant to note that this company has been held to be not comparable by the Dispute Resolution Panel (DRP) in its Directions for a subsequent year, a copy of which is available on record. Thus this company can t be considered as functionally similar to that of the assessee. We, therefore, direct to exclude this company from .....

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ied services, such as, Design and Development, Feature Enhancement, Product Modernization, Offshore Software Development, Custom Software Development etc. and that segmental data are unavailable. However, the assessee was candid enough in stating that this comparable was confirmed in Toluna (supra). We find that in Toluna (supra), the co-ordinate bench while repelling similar objections, held as under :- 20.1. The annual report of this company was available, but, the functionality was not clear. .....

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of the assessee company, because it is also engaged in rendering software development services to outsiders. The ld. AR needlessly tried to distinguish this company by contending that the services rendered by it were different from that of the assessee. We do not find any force in this submission. The comparability of a company is tested on various parameters and a view is taken as to its comparability or otherwise by considering the entirety of the facts and circumstances. Simply because the n .....

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erial or engineering services and treated it as comparable to the assessee rendering software development services. Merely because the nature of service rendered by this company within the overall software development services, is not identical, will not make it incomparable, when it is otherwise similar to that of the assessee on all other scores. As such, we hold that this company was rightly included by the TPO in the list of comparables. The assessee fails. We, in the light of the aforesaid .....

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filter as R&D is 4.6% of the sales. He submitted that this company develops products and provides software consulting services and segmental data disclosure provides data for products and services as a composite segment and therefore, no bifurcation is available between the two activities. He also submitted that this company has high turnover of approx ₹ 848 crores which is 10 times to the assessee s turnover. He submitted that this comparable was excluded in Toluna (supra). We find fo .....

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nt revenue of ₹ 847.2 crore, the TPO held this company to be comparable. The assessee s objection that this company had incurred huge R & D expenses and, hence, should be ignored, did not find favour with the TPO. The DRP approved the view taken by the authorities below on the comparability of this case. 21.2. After considering the rival submissions and perusing the relevant material on record, we find this company to be not comparable to that of the assessee. The reason for our this d .....

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n figures of Products and services are combined, it cannot be ascertained as to how much contribution was made by the product division or the service division to the overall revenue of the Product and services segment. As the assessee is admittedly not engaged in selling its software products, such a company cannot be considered as comparable. It can be seen from the annual report of this company, a copy of which is available on page 88 of the paper book, that it consolidated its existing produc .....

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not comparable and direct its exclusion from the list of comparables. The assessee succeeds. In the light of the co-ordinate Bench finding, as afore-stated, we direct the exclusion of this company from the list of comparables. So, the assessee s objection is upheld. (vii) Geometric Limited (Seg.) The assessee has no objection to the inclusion of this company in the list of comparables. (viii) Helios & Matheson Information Technology Ltd. Ld. AR contended that this company cannot be compared .....

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. He submitted that this comparable was excluded in Toluna (supra). We find force in the said contentions of the AR. In Toluna (supra), the co-ordinate bench while accepting the contentions of the AR, held as under :- 23.1. The TPO noticed from the annual accounts of this company that it was engaged in the software development services and also qualified employee cost filter. The assessee objected to its inclusion by, inter alia, contending that the PLI of this company was incorrectly worked out .....

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r services, Maritime practice and Executive education information systems, etc. From the above narration of the nature of services rendered by this company, it can be seen that the same is not at all comparable to that of the assessee. It can further be noticed that the TPO has taken the figures of this company which represent Income from software sales and services . Obviously, the assessee is not engaged in software sales. In view of our above discussion while dealing with the comparability of .....

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x) Infosys Technologies Ltd. Ld. AR contended that this company cannot be compared with the assessee company because the company owns significant software products and is engaged into various diversified business operations. Its high turnover of ₹ 13,149 crores which is 157 times the size of the assessee. He also submitted that this company has substantial intangible assets valued at ₹ 89,069 crores which includes brand value of ₹ 31,617 crores. It also involves in significant .....

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giant company in terms of risk profile, scale, nature of services, revenue ownership of branded/proprietary products, onsite and offshore services, etc., cannot be compared with the assessee. Our view is fortified by the judgment of the Hon ble jurisdictional High Court in the case of CIT vs. Agnity India Technologies Pvt. Ltd. [(2013) 219 Taxman 26 (Del)] in which Infosys Ltd. has been held to be not comparable to a company that was engaged in the business of development of software for parent .....

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return on account of marketing intangibles and hence, is not comparable to the assessee. Ld. AR submitted that this comparable was excluded in Toluna (supra). We find force in the said contentions of the AR. In Toluna (supra), the co-ordinate bench while accepting the contentions of the AR, held as under :- 26.1. The AO included this company in the list of comparables by observing that it qualified 25% employee cost filter and all other filters on the basis of information received u/s 133(6). T .....

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ee. The assessee s objection that employee cost of this company was 4% only, is not correct because of the exercise carried out by the TPO indicating that the employees cost was more than 25%. The ld. DR has taken us through the Annual accounts of this company which show that some part of the employees cost was also included in Administrative expenses apart from direct Establishment expenses. It can be seen that the company has included Professional fees of ₹ 3.41 crore along with Director .....

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ge the TPO s calculation before the DRP on this issue. As such, it becomes apparent that there is no merit in this objection again taken up before us which has already been successfully dealt with by the TPO. Insofar as the assessee s objection about the related party transactions is concerned, we have discussed this issue thoroughly while dealing with the comparable case of Accel Transmatics Ltd. (supra) in which it has been held that filter of 25% of RPT is good enough to make a controlled tra .....

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KALS Information Systems Ltd. (Seg.) Ld. AR contended that this company cannot be compared with the assessee company because the company fails on software service revenue filter and has significant revenue from product. This company has no segmental details available. Ld. AR submitted that this comparable was excluded in Toluna (supra). We find force in the said contentions of the AR. In Toluna (supra), the co-ordinate bench while accepting the contentions of the AR, held as under :- 27.1. The T .....

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revenues from software products and training. In view of the fact that the assessee is not engaged in imparting any training on commercial basis or selling its software products, we hold that the financials of this company under this segment cannot be compared with the assessee. The contribution by the sale of software products or training to the overall revenue of this segment cannot be precisely ascertained to determine the question of its comparability. As such, this case is directed to be ex .....

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r to the assessee company and this company is a product company focusing on Advanced Non-Destructive Testing Technologies and also has developed proprietary software named Muulam . Ld. AR submitted that this comparable was excluded in Toluna (supra). We find force in the said contentions of the AR. In Toluna (supra), the coordinate bench while accepting the contentions of the AR, held as under :- 29.1. The TPO noticed that this company was a pure software development services company and did not .....

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les. 29.2. After considering the rival submissions and perusing the relevant material on record, it can be seen that the assessee categorically objected before the TPO to the effect that this company was mainly into software product business having license f such products. The TPO ignored the assessee s submissions despite the fact that sufficient material taken from the website of this company was placed before him in support of the contention. It can be seen from page 192 of the paper book, be .....

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mpany from the list of comparables. So, the assessee s objection is upheld. (xv) Mediasoft Solutions Ltd. The assessee has no objection to the inclusion of this company in the list of comparables. (xvi) Megasoft Ltd. (Seg.) Ld. AR contended that this company cannot be compared with the assessee company because the company has undergone significant restructuring during the relevant FY and owns intangibles. It also failed on different financial year end filter as applied by the TPO. He submitted t .....

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iled arguments already submitted, such a comparable cannot be compared with a cost plus captive unit like the assessee. Ld. AR submitted that this comparable was excluded in Toluna (supra). We find force in the said contentions of the AR. In Toluna (supra), the co-ordinate bench while accepting the contentions of the AR, held as under :- 31.1. The TPO, on perusal of data of this company available in the Prowess and also on consideration of information received u/s 133(6) observed that this compa .....

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f which is available on page 193 of the paper book, that the financial results for the year include the business performance of Visual Soft Technologies Ltd. w.e.f. 1st October, 2006 consequent to the amalgamation. The Mumbai Bench of the Tribunal in Petro Araldite (P) Ltd. vs. DCIT [(2013) 154 TTJ (Mum) 176] has held that a company cannot be considered as comparable because of exceptional financial results due to mergers/demergers etc. Since the financial results of Megasoft Ltd. have the impac .....

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s. (xviii) Persistent Systems Ltd. Ld. AR contended that this company cannot be compared with the assessee company because the company has undergone significant restructuring during the relevant FY and the company also derives its income from the sale of software services as well as products. Ld. AR submitted that this comparable was excluded in Toluna (supra). We find force in the said contentions of the AR. In Toluna (supra), the coordinate bench while accepting the contentions of the AR, held .....

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his company cannot be construed as normal capable of a good comparison. Following the Mumbai Bench decision in Petro Araldite (P) Ltd. (supra), we direct the exclusion of this company from the list of comparables. The assessee succeeds In the light of the co-ordinate Bench finding, as afore-stated, we direct the exclusion of this company from the list of comparables. So, the assessee s objection is upheld. (xix) Quintegra Solutions Ltd. The assessee has no objection to the inclusion of this comp .....

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FY and the company also failed on R&D filter and also owns of intangibles. Ld. AR submitted that this comparable was excluded in Toluna (supra). We find force in the said contentions of the AR. In Toluna (supra), the co-ordinate bench while accepting the contentions of the AR, held as under :- 37. After considering the rival submissions and perusing the relevant material on record, we find that this company acquired Botnia Hitec Oyoy, Finland and its two wholly owned subsidiary companies dur .....

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Ltd. The assessee has no objection to the inclusion of this company in the list of comparables. (xxiv) Tata Elexi Ltd. (Seg.) Ld. AR contended that this company cannot be compared with the assessee company because the company is functionally dissimilar and engaged in the provision of specialized embedded software development services to the customers. Further, he submitted that the company has termed the services provided by it as unique and nonrepetitive in nature involving development of embe .....

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in as to why this company be not included in the list of comparables, the assessee stated that the nature of activity done by this company was different inasmuch as it was engaged in R&D activities also which resulted in creation of intellectual property. Not convinced with the assessee s submissions, the TPO included this segment of the company in the list of comparables. 39.2. After considering the rival submissions and perusing the material on record, we find from page No.206 of the paper .....

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that of Tata Elxsi Ltd., we hold that this company cannot be included in the list of comparables. Accordingly, this company is directed to be excluded. The assessee succeeds. In the light of the co-ordinate Bench finding, as afore-stated, we direct the exclusion of this company from the list of comparables. So, the assessee s objection is upheld. (xxv)_Thirdware Solutions Ltd. (Seg.) Ld. AR contended that this company cannot be compared with the assessee company because the company is functional .....

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f license of software products as pointed out by the ld. AR. We have heard both the parties and perused the material available on record. A perusal of the annual report of Thirdware Solutions Ltd. reveals that the said company has made income from sale of licence to the tune of more than ₹ 1 crore, which means the company is into production of software products which apparently cannot be a comparable to assessee dealing with contract software development and not into sale of any product. T .....

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e cost incurred in the IT services and as such, on an approximation, the revenue earned by the company from the sale of products would be ₹ 84,24,37,99,640. He submitted that this company fails on R&D filter and substantial turnover and also there is no standalone financial data for FY 2006-07. Ld. AR submitted that this comparable was excluded in Toluna (supra). We find force in the said contentions of the AR. In Toluna (supra), the co-ordinate bench while accepting the contentions of .....

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bles on the basis of certain parameters, which are fully applicable to the instant assessee as well. It is, therefore, directed to exclude this company from the list of comparables. The assessee succeeds. In the light of the co-ordinate Bench finding, as afore-stated, we direct the exclusion of this company from the list of comparables. So, the assessee s objection is upheld. II. ITES SEGMENT (i) Accentia Technologies Ltd. The TPO repelled the objections of the assessee and placed reliance on th .....

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vices delivery besides offering Software As A Service ( SaaS ) Model in the healthcare outsourcing area. He further submitted that it also developed software products such as Business Process Outsourcing Management ( BPOM ) solutions and HealthDox (HRCM Solution), apart from IT enabled services. Our attention was also brought to the pertinent fact that TPO has himself admitted that Annual Report of this company is not available so assumption is that segmental information for Accentia was unavail .....

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that it is into medical transcription and the TPO has held it to be comparable by stating as below : The company was not part of the companies considered by the taxpayer in the accept/reject matrix given by the taxpayer as Appendix D to the TP report. However, the company s data is available in the Capitaline database. The Annual Report is not available for the FY 2006-07. 133(6) notice was issued. As per the reply received form the company it has ITES segment which is into medical transcriptio .....

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a different cord. The Special Bench of the Tribunal held that even though there appears to be a difference between BPO and KPO Services, the line of difference is very thin. The Tribunal was of the view that there could be a significant overlap in their activities and it may be difficult to classify services strictly as falling under the category of either a BPO or a KPO. The Tribunal also observed that one of the key success factors of the BPO Industry is its ability to move up the value chain .....

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s performed in the international transactions with uncontrolled transactions to attain relatively equal degree of comparability. 34. We have reservations as to the Tribunal s aforesaid view in Maersk Global Centers (India) Pvt. Ltd. (supra). As indicated above, the expression BPO and KPO are, plainly, understood in the sense that whereas, BPO does not necessarily involve advanced skills and knowledge; KPO, on the other hand, would involve employment of advanced skills and knowledge for providing .....

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cting comparables without making a conscious selection as to the quality and nature of the content of services. Rule 10B(2)(a) of the Income Tax Rules, 1962 mandates that the comparability of controlled and uncontrolled transactions be judged with reference to service/product characteristics. This factor cannot be undermined by using a broad classification of ITeS which takes within its fold various types of services with completely different content and value. Thus, where the tested party is no .....

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t of a service (higher in value chain) that may possibly be rendered subsequently. 35. As pointed out by the Special Bench of the Tribunal in Maersk Global Centers (India) Pvt. Ltd. (supra), there may be cases where an entity may be rendering a mix of services some of which may be functionally comparable to a KPO while other services may not. In such cases a classification of BPO and KPO may not be feasible. Clearly, no straitjacket formula can be applied. In cases where the categorization of se .....

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arable would not be warranted and the transfer pricing study must take that into account at the threshold. 36. As pointed out earlier, the transfer pricing analysis must serve the broad object of benchmarking an international transaction for determining an ALP. The methodology necessitates that the comparables must be similar in material aspects. The comparability must be judged on factors such as product/service characteristics, functions undertaken, assets used, risks assumed. This is essentia .....

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l set. The Ld. AR submitted that Allsec is a full fledged entrepreneur that operates in the open market under competitive conditions and a high risk environment. The ld. AR directed our attention to the risk profile of Allsec on Page 406 of SPB. The Ld. AR further contended that Allsec undertook significant amount of advertising expenditure in relevant FY and such investment may result in development of nonroutine marketing intangibles. Therefore, ld. AR submitted that a return for such intangib .....

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e have considered the rival submission and have gone through the material available on record and the case-laws cited by both the parties. We have gone through the annual report of the said company and we find that the said company is functionally similar to that of the assessee. Therefore, we find that the contentions raised before us cannot be a valid ground for rejecting the said comparable. So, we uphold the decision of TPO to include this comparable in the list of comparables. The assessee .....

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rty transactions, however, the related party transactions should be taken the least when there are reasonable comparables available before the TPO. In order to buttress his arguments, he cited the order of the coordinate Bench in the case of Motorola Solutions India Private Limited (supra) wherein the Tribunal had accepted the said contention of the assessee and held as under :- 56. We are in agreement with TPO in principle that this filter is appropriate to eliminate the companies which have co .....

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then no comparable having related party transactions should be considered. We are in agreement with ld. Counsel that only when sufficient comparables are not found, the related party threshold should be relaxed and ITA No. 5637/D/2011 99 only gradually to the extent that sufficient comparables are found, the limit should be relaxed. Therefore, we accept the assessee s plea that no sacrosanct threshold limit should be fixed for this filter. Ld. DRP has also noted that neither there is any judici .....

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hose comparables where related party transactions are to the extent of 15% because it is not the case of revenue that by applying the threshold limit of 15%, it will not get sufficient number of comparables. It was pointed out by the ld. AR that the aforesaid companies related party transactions are more than 15%. We find force in the said contention of the ld. AR and we find that in this list of comparables considered by the TPO, the assessee itself had accepted eleven (11) comparables as compa .....

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nformation Technologies Ltd. As regards the aforesaid two comparables [mentioned at sl.nos.(vii) & (viii)], The ld. AR at the outset itself pointed out that Eclerx and Vishal are into KPO services. According to him, although KPO services were ITES but the nature of these services were materially different than the services rendered by the assessee. It was asserted that eClerx is engaged in financial services in the nature of account reconciliation, trade order management services and has bee .....

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he total costs. According to the AR, this evidenced that Vishal s business model was different and Vishal had outsourced significant part of its operations. We have heard both the sides and perused the material available on record. The Hon ble jurisdictional High Court in the case of Rampgreen Solutions Pvt. Ltd. (supra) has held as under :- 36. As pointed out earlier, the transfer pricing analysis must serve the broad object of benchmarking an international transaction for determining an ALP. T .....

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ld not be taken as comparables for determining the ALP. Vishal and eClerx, both are into KPO Services. In Maersk Global Centers (India) Pvt. Ltd. (supra), the Special Bench of the Tribunal had noted that eClerx is engaged in data analytics, data processing services, pricing analytics, bundling optimization, content operation, sales and marketing support, product data management, revenue management. In addition, eClerx also offered financial services such as real-time capital markets, middle and .....

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uded to arrive at an ALP of controlled transactions, which were materially different in its content and value. In Maersk Global Centers (India) Pvt. Ltd. (supra), the Special Bench of the Tribunal had noted the same and had, thus, excluded eClerx as a comparable. It is further observed that the comparability of eClerx had also been examined by the Hyderabad Bench of the Tribunal in M/s Capital Iq Information Systems(India) (P.) Ltd. v. Additional Commissioner of Incometax (supra), wherein, the T .....

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ts work was outsourced to other vendors/service providers. The DRP and the Tribunal erred in brushing aside this vital difference by observing that outsourcing was common in ITeS industry and the same would not have a bearing on profitability. Plainly, a business model where services are rendered by employing own employees and using one s own infrastructure would have a different cost structure as compared to a business model where services are outsourced. There was no material for the Tribunal .....

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the BPO segment of Infosys has been considered which passes all the applied filters. The ld. AR contended that Infosys is functionally dissimilar as it provides high-end integrated services by assisting its clients in improving their competitive positioning by managing their business processes in addition to providing increased value. It was further contended that Infosys BPO has extremely turnover of approx. ₹ 649.51 Crores which renders it incomparable to the Appellant. It was also submi .....

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epreneurs Operate at minimal risks as the 100% services are provided to AEs Name of the services Infosys is engaged in providing high-end business process management services to the finance, manufacturing and telecom industry Operates as a low-end service provider Revenue 649.56 crores (TPO Order : Page no 5 of Annexure B to the TP Order) 2.52 crores Ownership of branded property Incurred substantial expenditure on brand building and advertisement expenses to the tune of ₹ 55,93,402 Nil On .....

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al on record and the case-laws cited by both the parties. We find that the Hon ble jurisdictional High Court in the case of Chrys Capital has repelled the exclusion of companies based on turnover provided the comparable is functionally similar. In this case, the submission of the AR that the Infosys BPO is into high end service to financial industries, manufacture and telecom, so on that account it should be excluded cannot be countenanced because we are not able to find any functional dissimila .....

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subsidiary of Haryana Fibres Ltd., whose promoters were involved in fraud as per newspaper report and the CBI report. The TPO mentioned that according to CBI bulletin of December, 2008, it was reported that the Rastogi family cheated Government of India to the tune of ₹ 54.00 crore in late 1980s and mid 1990s. Rastogi brothers had floated 14 firms for the purpose of export of bicycle parts to Russia and Hong Kong. They were arrested by the FBI and U.K. authorities and sentenced to impriso .....

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ase of first mentioned company. The TPO mentioned that the company is deriving revenue from ITES activities which are comparable to the business of the assessee. Thus, both the companies were included as comparables. The Ld. AR also contended that Maple eSolutions has become a subsidiary of Triton Corp Ltd as Triton Corp Ltd acquired 100% shares from Haryana Fibres Ltd w.e.f from 1st January, 2007. Our attention was drawn to Page no 552 of the Special Paper Book to the extract of the annual Repo .....

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ribunal has been consistently on the same ground have been discarding M/s. Satyam Computers from being a comparable. Likewise, in the case of ITO vs. CRM India (P) Ltd. (ITA No.4068/Del/2009 order dated 30.06.2011),the coordinate Bench of this Tribunal has excluded these two comparables by reasoning that, it would be unsafe to take their results for comparison of the profitability of the assessee. We concur with the said opinion of the coordinate Bench and we direct to exclude these two companie .....

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f amalgamation, which is approved by the High Court, so not necessarily all the items of expenses and income are merging. So, true and correct picture of profitability cannot be ascertained. Therefore, due to extra ordinary events taking place in the instant financial year of this company, we are of the opinion that this company should be excluded from the list of comparables. In view of the above, both the aforesaid companies are directed to be excluded. (xii) Mold - Tex Technologies Ltd. The D .....

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wings using 3D and 2D software. These services are high - end in nature and cannot be compared with the low-end services provided by the assessee such as accounting services, transaction processing, customer contact services etc. Our attention was drawn to the Annual Report extract on Page no 557 of the SPB where the comparable describes itself a KPO. The ld. AR took our attention to the Special Bench decision of the Tribunal in the case of Maersk Global Centres (India) Private Limited (ITA No.7 .....

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ass resources and skill sets. The Special Bench took into consideration that the said company is involved in providing high end services to its client involving higher knowledge and domain expertise in the field of graphic design representation. The ld. AR contended that as per the decision of Hon ble jurisdictional High Court in the case of Rampgreen Solutions Pvt. Ltd. (supra), the said company cannot be taken as a comparable to the assessee s company which is mainly involved in providing low .....

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pellant and observed that only the ITES segment of the comparable was selected for benchmarking purposes and there appears to be no infirmity in the order of the TPO. The Ld. AR submitted that Wipro undertook several acquisitions during the relevant year. To support the contentions, the Ld. AR directed our attention to Annual Report Page 22 and Page nos.61, 62 and 62 of the SPB where the details of these acquisitions have been given in the Annual Report: The relevant extracts of the Annual Repor .....

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the India based Quantech Global Services Ltd. for a cash consideration, which includes upfront payment of approximately USD 2 million. 2. CMango - Transactions consummated in April 2006 - US based CMango Inc and India based CMango India Private Limited for cash consideration which includes upfront payment of USD 20 Mn. 3. Europe based Retail Solutions Provider, Enabler. The consideration included upfront cash payment of approximately Euros 41 million. 4. Finland based Saraware Oy. For a cash con .....

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a cash consideration of USD 31 million. We partnered with Motorola, a global leader in Wireless Communication, to form a joint venture namely WMNETSERV Limited to deliver world class Managed Services to telecom operators in the area of network operations. We have considered the rival submissions and have gone through the paper book and records before us and the case laws cited by both the parties. We find at page 43 of the Annual Report which is regarding the functional profit of the acquired c .....

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4 cMango Inc and subsidiaries (cMango) Apr 06 Engaged in providing business management service solutions 5 mPower Software Services Inc.and its subsidiaries Dec. 05 Engaged in providing IT services in payments service sector 6 BVPENTE Beteiligungsverwaltung GmbHand its subsidiaries (New Logic) Dec. 05 Engaged in semiconductor Intellectual Property (IP) cores and complete system on chip solutions with digital, analog mixed signal and Radio Frequency (RF) design services India & AsiaPac IT Se .....

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sockets and miniature circuit breakers Others 9. Hydrauto Group AB (Hydrauto) Nov 06 Engaged in production, marketing and development of customised hydraulic cylinders solution for mobile applications. In the light of the aforesaid facts regarding acquisition made by this company, we find where there is amalgamation, then the accounts do not portray the correct picture in the profits due to the merging of accounts. So the financial results cannot be relied upon for the computation of PLI of this .....

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a Minacs Worldwide Limited (earlier known as Transworks Information Services Ltd.) (xv) Apex Knowledge Solutions Pvt. Ltd. (xvi) Appollo Healthstreet Ltd. (xvii) Cosmic Global Ltd. (xviii) Datamatics Financial Services Ltd. (Seg.) (xix) Flextronics Ltd. (Seg.) (xx) Genesys International Corporation Ltd. (xxi) ICRA Techno Analytics Ltd. (seg) (xxii) IServices India Pvt. Ltd. (xxiii) R Systems International Ltd (Seg) (xxiv) Spanco Ltd. (Seg.) (earlier known as Spanco Telesystems & Solution Ltd .....

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litical risk of the taxpayer combined with arithmetic mean price considered in the case of comparable companies nullifies the risk differential, if any, between the taxpayer and the comparable independent enterprises. 14. The DRP gave no directions in respect of the risk adjustment and held that the Appellant s objections were general in nature. 15. The Ld. AR placed reliance on para 116 - 121 of the decision of Motorola Solutions India Private Limited (supra) where the issue was discussed in de .....

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ned and recognized research institution across the world has also not been shown. The manner in which the risk adjustment is computed by the taxpayer is not followed by any country or organization of international repute like OECD. In fact, even the OECD is reluctant to take the risk adjustment as part of the guidelines as there are divergent views on this issue among the member countries of OECD and many countries feel that there is no straight jacket formula for risk adjustment as it depends e .....

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tal, which is the main driving source for revenues in the software service industry. 4. The taxpayer considered only listed companies. But, there is a method of computation of similar nature in the index. There is a manner in which unlisted companies beta would be calculated. 5. Wherever market data was not available, the beta is computed based on guideline companies from the small cap and madcap indices of BSE and NSE. But, the risk adjustment should always be based on the comparables selected .....

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realization of risk bringing down the profitability below the risk free rate of return. Thus, its profitability would have been more but for the risk undertaken. Thus, negative risk adjustment has to be considered and cannot be ignored. For example, when the Indian stock markets tumbled in 2007 and 2008, the equity investments given a negative return even though the risk free return is decent. So, it is to ignore negative risk adjustment. 7. The risk adjustment has to be computed based on the r .....

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evenue. 8. The taxpayer did not consider the differential risk adjustment i.e. it did not considered the weighted cost of capital of comparables to bring it in line with the taxpayer. 9. The beta of a captive software service provider is not zero as the return on capital fluctuates with revenues as the taxpayer is following cost plus method on expenses. 10. As discussed above, the taxpayer bears significant single customer risk and political/country risk, which may not be compensated adequately .....

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tax payer has assumed that operating expenses of the comparables would not change after risk adjustment. But, after giving effect to risk adjustment, the financial statements of the comparables should look like that of the tax payer i.e., stripping the risk component. So, the expenses pertaining to the risk like sales and marketing expenses, bad debts etc. should be removed from operating expenses and corresponding risk premium adjusted amount has to be reduced from the operating revenues. Hence .....

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equity in the total finances and risk level as evidenced by beta of the taxpayer. This differential is altogether is ignored making the entire exercise redundant. …............. 118.1 We have considered the submissions of both the parties and have perused the record of the case. We have perused the record of the case. We have also gone through the detailed written submissions filed by assessee from pages 92 to 104 of the written submissions The main contention of assessee is in regard to .....

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t company and its client in the case of software design and development services. Ld. TPO has observed that it is a fact that the independent enterprises have to bear the vagaries of market conditions. But since the software sector is growing at more than 30% CAGR (Compounded Annual Growth Rate) for the last 10 years, it is not showing or affected by any adverse market conditions. In the absence of adverse market conditions, the assessee has not shown how these market risks borne by the independ .....

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