9911796707
TMI Blog2017 (1) TMI 1215X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Hon'ble Dispute Resolution Panel ("DRP"). Each of the ground is referred to separately, which may kindly be considered independent of each other. That, on the facts and circumstances of the case and in law, 1. the AO/TPO has erred in making an addition of INR 49,981,078 to the total income of the Appellant by rejecting the transfer pricing ("TP") analysis undertaken by the Appellant and making an adjustment under section 92CA (3) of the Act without returning a finding about existence of any of the circumstances specified in clauses (a) to (d) of sub-section (3) of section 92C of the Act. 2. the AO/TPO has erred by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act' read with the Income-tax Rules, 1962 ("the Rules"), and modifying the same for the determination of the Arm's Length Price ("ALP") of the Appellant's international transactions to hold that the same are not at arm's length. 3. The AO/ TPO has erred in: a) Using data for a single year instead of multiple year data; and (b) Determining the arm's length margins / prices using data pertaining only to financial Year ("FY") 2007-08 which was not a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee, a company incorporated under the Companies Act, 1956, is a wholly4 owned subsidiary of 'Comverse Network System Inc., USA'. During the relevant assessment year, the assessee was engaged in the provision of sales and post sales support services, software development services, professional and maintenance services to its Associated Enterprises (AEs) in the field of telecommunication network including voicemail systems, Billings and other related hardware etc. The assessee filed its return of income electronically on 30/09/2008 declaring loss of Rs. 6,44,33,875/-, which was further revised to loss of Rs. 7,28,17,072/- on 31/03/2010. The case of the assessee was selected for scrutiny under 'Computerized Assisted Selection of Scrutiny' (CASS) and notice under section 143(2) of the Act was issued and complied with. The Assessing Officer made a reference to the Transfer Pricing Officer (TPO) under section 92CA(1) of the Act for determining the Arm's Length Price (ALP) under section 92CA(3) of the Act in respect of the International Transactions entered into by the assessee. According to the transfer pricing study, report submitted by the assessee under section 92E of the Act, follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt the adjustment to ALP, as directed by the DRP, the Assessing Officer passed the impugned order under section 144C read with section 143(3) of the Act on 23/10/2012. Aggrieved with the adjustment to the ALP sustained by the DRP, the assessee is in appeal before the Tribunal raising the grounds as reproduced above. 2.5 Before us, the Ld. counsel of the assessee argued only issue of exclusion/inclusion of comparables in respect of both segments and issue of claim for working capital adjustment in software development segment. The grounds No. 4 to 9 are in respect of exclusion/inclusion of comparables and ground No. 11 is in respect of claim of working capital adjustment. As other grounds were not pressed before us, same are dismissed as infructuous. 3. First we take up the ground No. 11, wherein the assessee has challenged the finding of the AO/TPO in not allowing the working capital adjustment. The facts in respect of issue in dispute are that the assessee argued before the TPO that suitable adjustment on account of differences between the working capital intensities of the assessee viz-aviz comparables be allowed. The assessee filed computation of working capital adjustment fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the financials, hence working capital adjustment was not given to the assessee. As far as finding of the TPO on the issue in dispute is concerned, we are agreed with the Ld. counsel of the assessee that if the TPO was agreed in principle for allowing the working capital adjustment, then he should not have denied the same merely on the ground of non-matching of working capital adjustment with financials. He could have allowed an opportunity to the assessee and get the financial corrected. Further, the DRP observed that the issue of working capital would be relevant when there is a situation of inventory remaining tied up or receivable is being held up. The DRP held that though situation might not be so relevant to the service industry. It was observed that the assessee as also the comparables used would launch into project only when they have been awarded a contract and it is not as if those parties manufactures goods that awaits buyers. The DRP further observed that the working capital adjustment would be required only when the varying levels of working capital deployed is actually making a difference to the margin earned by the assessee and the company and the assessee had n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parables cases at par with each other. We are unable to comprehend any reason or rhyme to restrict the grant of working capital adjustment only in the case of manufacturers or traders. What is true for these categories of businesses is fully true for a service provider as well. It is a different matter that in the case of service provider, no working capital adjustment would be required towards higher or lower inventory, but the same may be warranted in respect of higher or lower trade receivables/payables. Since the authorities below have rejected the assessee's contention for grant of working capital adjustment at the threshold, which in our considered opinion is not correct, we set aside the impugned order and remit the matter to the file of the TPO/AO for examining the assessee's claim for grant of working capital adjustment on merits and thereafter, allow the same, if it is available. Needless to say, the assessee will be allowed an adequate opportunity of hearing." 3.2.3 Thus in case of service industry, the working capital adjustment has been justified in respect of higher or lower trade receivables/payables. 3.2.4 We also find that in subsequent assessment year 2011-12, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of four comparables chosen by the assessee. The final list of comparables considered by the TPO is as under: 4.1.2 The grievance of the assessee is against the inclusion of following five companies in the final list of comparables selected by the TPO: (i) Awani Cimcon Technologies Ltd (ii) celestial labs Ltd (iii) Infosys Ltd (iv) KALS Information Systems Ltd(segmental) and (v) Wipro Ltd. 4.2 Before proceeding further on the issue of accepting/rejecting of the above comparables, we would like to consider submission of both parties in respect of the profile and nature of services provided by the assessee. The learned counsel submitted as under: "In its TP documentation, the appellant had reported four services, viz. sales and postsale support service, software development service, professional service and maintenance service. For the purpose of transfer pricing assessment, the TPO has aggregated the three segments (pertaining to software development services, professional services and maintenance services) as 'software development' segment. The nature of service rendered by the Appellant are as under: "Software development division: This division is engaged in preparing te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 133 (6) of the Act by the TPO, but the same were rejected by the TPO. The DRP also rejected the claim of the assessee by upholding the action of the TPO. 4.3.2 Before us, the learned counsel of the assessee referred to pages 419 to 422 of the Annual Report compilation and submitted that said company is not comparable with the assessee due to following reasons: (i) that 'AvaniCimcon' is functionally dissimilar to the assessee, as it was engaged in a wide array of services including development of software products and back-office support services and no separate segmental information is available. (ii) that from the profit and loss account of the said comparable, it is seen that it was engaged in sale of products and also in the rendering of the services. (iii) that in the decision of Sun Life India service centre private limited (ITA No. 5799/Del/2012 for assessment year 2008-09, the the Tribunal Delhi bench held that AvaniCimcon, a software product company having intellectual property rights or some of the products developed by it, cannot be compared with the assessee company at entity level, which was engaged in providing software development and maintenance services to i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge, Travel Solutions, Insurance Solutions, Customer Appreciation, etc. Similar view has been taken by the Mumbai Bench of the Tribunal in the case of Net Hawk Networks India Pvt. Ltd. Vs. ITO (ITA No.7633/N/2012). Vide its order dated 6 11.2013, the Tribunal for the assessment year 2008-09 has noticed AvaniCimcon Ltd., to be a Product based company and not providing software development services. No contrary material has been placed before us by the Id. DR to show the functional profile of this company matching with the assessee. When contrasted with the assessee company, which is engaged in providing software development and maintenance services to its group concerns, we fail to see as to how a software product company like AvaniCimcon having intellectual property rights over some of the products developed by it, can be compared with the assessee on an entity level. IT A No.5799/Del/2012. We, therefore, order for the elimination of this company from the list of comparables." 4.3.5 We don't agree with the contention of the learned CIT(DR) in not allowing the learned counsel to raise objection regarding functional dissimilarity. It is well within his right to raise such issue befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee need to be revisited by the TPO/AO and, therefore, matter needs to be restored back to the TPO/AO. 4.3.8 We have considered the rival submission of the parties and perused the relevant material on record. On perusal of the Annual Report of the company available on page 423 to page 464 of the Annual Report compilation of the assessee, we find that the company was engaged in the field of IT/bio informatics, biotechnology and consultancy work and offered enterprise resource planning solutions, Data warehousing, business intelligence solutions and bio services like clinical data management, gene sequence analysis, molecular modeling, design and development of drug molecules dedicated to health sector to government, institution Pharma and Biotech companies, hospitals and medical centres. On page 431 of the Annual Report compilation, the intellectual property rights of the company in various software like RATNA, VYASA, DHANVANTRI, SAHKAR are mentioned. 4.3.9 From the above, we find that the above company is engaged in diverse field of bio-informatics and related fields in addition to the ERP solutions and, thus, it cannot be said to be functionally similar to the software develo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he fact that such services are widely varied and dissimilar to those rendered by the assessee. The only segmental information is on the basis of geographical/industry segment. (iii) that the company is an industry leader and is significantly large scale of operations (turnover of Rs. 15, 648 crores as against the appellant's turnover of Rs. 22 crores) . (iv) that the company has significant brand value and intangible assets as against the assessee which is a captive service provider. (v) that in the case of Sun Life India Service Centre India Private Limited for AY 2008-09( ITA No. 5799/Del/2012) , the company was rejected as a comparable to a captive service provider. (vi) that the finding of the Tribunal was also followed in following rulings: (a) Toluna India Private Ltd. (ITA No. 5645/DEL/2011) (b) 3DPLM Software Solutions (ITA No. 1303/BAN/2012) (c) Ciena India Private Ltd. (ITA No. 3324/DEL/2013) (d) NXP Semiconductors India Private Ltd. (ITA No. 1174/BAN/2011) (vii) that the exclusion of Infosys is sought not only on account of huge turnover or but also on account of several functional dissimilarities between the assessee and Infosys as the assessee does not der ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso a captive service provider with a limited number of employees at its disposal and also not owning any branded products with no expenditure on R&D etc. When we consider all the above factors in a holistic manner, there remains absolutely no doubt in our mind that Infosys Technologies Ltd. Is incomparable to the assessee company. Respectfully, following the judgment of the Hon'ble jurisdictional High Court in Agnity India (supra), we hold that Infosys Technologies Ltd., cannot be held as comparable." 4.3.14 In view of our discussion above, we are of the opinion that the company is functionally dissimilar to the assessee, and accordingly, we direct the AO/Transfer Pricing Officer to exclude the above company from the list of comparables. (4.) KALS Information Systems Ltd (segment) 4.3.15 The TPO selected the company at segment level as in his view it passed all filters and was engaged in the software development activities. The DRP confirmed the action of the TPO. Before us, the learned counsel of the assessee referred to pages 719, 722, 723 and 726 of the Annual Report compilation and submitted that the segmental details, i.e., application software, which was selected with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e as well as from sale of software products. The relevant part of the finding of the Tribunal is reproduced as under: "We have gone through the Annual report of this company which is available at pages 24 onwards of the paper book. Schedule no. 16 comprising Notes to the Financial Statements gives background of this company to be 'engaged in development of software and software products since its inception. ' This company consists of STPI unit engaged in development of software and software products Page of the paper book contains segmental information of this company which has been divided into two parts, namely, 'Application software segment' and 'Training segment'. It is the 'Application software segment' of this company, which has been adopted by the TPO. The development of software and all software products have been clubbed under the 'Application software' segment. Since the figures of this company taken by the TPO for making comparison with the assessee include the effect of software products as well, apart from software development services, the same cannot be considered as comparable for the same reasons as assigned above for eliminating AvaniCimcon Ltd. A pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng focus to strengthen the portfolio of Centre of Excellence (COE) and innovation projects and part of this focus, over 600 people were engaged. On perusal of page 561 of the Annual Report compilation, we find that the company has been granted 40 registered patent and 62 pending applications. As against the intellectual property rights owned by the company and R&D activities, the assessee was only a captive service provider to its AE. In the case of 3-D PLM software solutions(supra) , the Tribunal has observed as under: "We have heard both parties and carefully perused and considered the materials on record. We find merit in the contentions of the assessee for exclusion of this company form the set of comparables. It is seen that this company is engaged both in software development and product development services. There is no information on segmental bifurcation of revenue form sale of product and software services. The TPO appears to have adopted this company as a comparable without demonstrating how the company satisfies the software development sales 75 percent of total revenue filter adopted by him. Another major flow in the comparability analysis carried out by the TPO is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ended warranty and post warranty services on products sold directly by Comverse's AEs to customers in India." 38. The appellant is remunerated on a cost-plus basis by its AE for such services and it carries out limited and routine functions and mitigated from all risks. Any intangible/technical know-how of its own and relies solely upon training and know-how of its AE for provision of such services." 5.2 The Ld. CIT(DR), on the other hand, referred to page -26 of the transfer pricing study and submitted that the sales and post sales support segment of the assessee was more of a technical in nature, which consisted software error analysis and bug fixing and therefore the work which was carried out by the assessee was in the nature of technical services/engineering services. He further referred to para-3.1 on page 141 of the Appeal Set and submitted that around 50 peoples were employed in post sales services which established that post sales services rendered were technical in nature and therefore the segment should be characterized accordingly. 5.3 We have considered the arguments of the rival parties on the issue of characterization of the segment of the assessee, however, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eismic data acquisition Mahindra Consulting Engineers Limited Mahindra Consulting Engineers Limited: - It is engaged in infrastructure consultancy services and provides services in multidisciplinary projects (such as special economic zones, water supply and sewerage, solid waste management, urban infrastructure, agriculture and horticulture infrastructure, social infrastructure, ports; harbor and offshore terminal, industrial infrastructure etc). - Owns technical knowhow and operated in a single business segment - The Hon'ble ITAT excluded in the case of Rolls Royce India Private Limited (ITA No. 6636/DEL/2015) and Emersons Process Management Power & Water Solutions India Private Limited (ITA No. 5343/DEL/2012) Kirloskar Consultants Limited: - It is engaged in engineering consultancy, project management services and architectural consultancy services Stup Consultants Private Limited Stup Consultants Private Ltd. - This company is engaged in civil engineering and architectural consultancy services, which are quite high-end and complex, and has no further segmental information available - The Hon'ble ITAT excluded in the case of Emersons Process Management Power and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he annual reports, we find that M/s Mahindra consulting Engineers Ltd is engaged in infrastructure sector by providing consultancy services in the areas of special economic zone, water supply and sewerage, solid waste management, urban infrastructure, Agri and Horti infrastructure, social infrastructure, ports and harbours and offshore terminals, industrial infrastructure etc. On perusal of page 97 of the compilation of the Annual Report, we find that M/s Kirloskar consultants Ltd was engaged in the area of engineering consultancy, project management services, architectural consultancy. The major assignment executed by the company are mentioned on page 98 of the compilation of the Annual Report, which are reproduced as under: "During the period under review, the Company has executed some major assignments which are as below: 1) Integrated project services for IT complex and 400 Bed Super Speciality Hospital under Project Engineering Division. 2) TEFR for a 18 MW power plant for Public Sector Undertaking, Market Research for an Air Cargo Logistic Company, Consumer Research for a Nationalized Bank in Market Research Division. 3) Execution of 2 water based package has been u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d thus there was no rationale behind TPO's exclusion of this company from the list of comparables. 5.11 Before us, Ld. CIT(DR) submitted that the TPO rejected the company as it was engaged in providing telecom solutions and producing mobile communication equipment and digital microwave communication equipments and providing turnkey project, hence the company was functionally not comparable to the assessee. Ld. CIT(DR) submitted that no segment report was available in the Annual Report of the company. He also referred to page 186 of the compilation of the Annual Report and submitted that revenue of the company was decreasing and it was incurring losses. He further referred to page 187 of the Annual Report compilation and submitted that losses of the company has resulted into erosion of 50% of its peak net worth during the immediately preceding four financial years and the company was continued to be a potentially sick company. He also submitted that the company defaulted in repayment of dues to financial institutions. The Ld. CIT(DR) referred to page 207 of the Annual Report compilation and submitted that the company had approached its lenders for corporate debt restructuring. In v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gment of the assessee. Further, the argument of the learned counsel that it was considered as comparable in preceding year also cannot be accepted because the functional comparability has to be made in the current year only and preceding year results cannot be precedent in Transfer Pricing comparison. Further, since the company has not been found functionally comparable at segment level, we are not adjudicated on the other arguments argued by the Ld. CIT(DR) on the issue of persistent loss-making company etc . Accordingly, we direct exclusion of the company from the set of comparables. 5. Exclusion of the other two companies i.e. ORG Informatics Ltd and Telecommunication Consultants Ltd, was not pressed before us. 6. We find that in view of our direction to exclude the comparables chosen the TPO and one comparable chosen by the assessee as well as exclusion of the remaining two comparables by the TPO not challenged by the assessee before us, has left with no comparable in the sales and post sale support segment for determination of arm's length price. In view of the above facts and circumstances, we restore the matter to the TPO for carrying out a fresh search and selection of co ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
