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TMI Blog2015 (5) TMI 1090X X X X Extracts X X X X X X X X Extracts X X X X ..... roviding savings, retirement and pension products and life and health insurance in Canada, US, UK and Asia. This group also operates mutual funds and investment management businesses. The assessee provided Software development and maintenance support services and also back office support services to its associated enterprises (AEs) for assistance in their projects. The assessee reported four international transactions in Form No.3CEB consisting of `Provision of software development and maintenance support services' with the transacted value of Rs. 30,08,48,648/-; `Provision of back office support services' with the transacted value of Rs. 5,65,34,293/-; and `Provision of F&A support services' with the value of Rs. 24,51,728/-. In order to demonstrate that its international transactions were at arm's length price (ALP), the assessee applied the transactional net margin method (TNMM) with the Profit level indicator (PLI) of Operating Profit to Total Cost (OP/TC). On a reference made by the AO, the Transfer Pricing Officer (TPO) noticed that the segment of `Provision of back office support services' was no different from the segment of `Provision of financial and accounts support serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d `Provision of F&A support services'. For the purposes of computation of ALP, the TPO merged the international transaction of provision of back office support services with the provision of F&A support services and treated the two as one international transaction. The assessee has not raised any serious objection to the said merger of these two international transactions made by the TPO. In our considered opinion, the TPO has rightly merged these two transactions as both such services fall in the realm of provision of back office support services. As such, we will proceed to determine the correctness of the approach adopted by the authorities in determining the ALP of the `Provision of software development and maintenance support services' segment and the merged segment of `Provision of back office support and F&A support services', one by one. A. Provision of software development and maintenance support services. 5. The assessee reported the value of this transaction at Rs. 30.08 crore with OP/TC at 13.23%. The TPO changed the composition of comparable companies and without allowing the working capital adjustment claimed by the assessee, computed the ALP of this transaction at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bringing the case of the assessee at par with the other otherwise functionally comparable entities. We, therefore, agree in principle with the grant of working capital adjustment. 8. The view taken by the Dispute Resolution Panel (DRP) for computing such adjustment on the basis of daily average of working capital deployed by the tested party and also each of the comparables, is not tenable because of the order passed by the Delhi Bench of the Tribunal in the case of Navisite India Pvt. Ltd. Vs. ITO (ITA No.5329/Del/2012). Vide its order dated 31.5.2013, the Tribunal has held that the components of the working capital deployed should be considered on annual basis with the average of opening and closing. We, therefore, hold that the entitlement of the assessee to the working capital adjustment, cannot be denied. 9. Notwithstanding the allowability of the working capital adjustment, we are unable to countenance its calculation given by the assessee at its face value because of an important factor. It is an undisputed position that the assessee made up its accounts on an entity level. It was only for the purposes of showing that its international transactions were at ALP, that it bi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it is sine qua non to ascertain the nature of services rendered by the assessee under this segment. This segment has two classifications, namely, Software development services and Maintenance support services. Software development services refers to the development of modules by the assessee and also parts of modules for software being used by its overseas group entities. Maintenance support services refer to the services including bug fixing, carrying out maintenance and support services of software used by its overseas group entities. The assessee entered into a Services Agreement dated 1.4.2006 with Sun Life Ireland, under which, it became responsible for providing software development and maintenance support services to its overseas group entities. These services were to be provided under the directions issued by Sun Life Ireland. For this purpose, the assessee got compensation from Sun Life Ireland on the basis of cost plus mark-up. Revenue from software development services accounts for approximately 20% of total revenue under the software development and maintenance support services earned by the assessee and the remaining 80% is towards software maintenance support servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nctional 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 Avani Cimcon having intellectual property rights over some of the products developed by it, can be compared with the assessee on an entity level. We, therefore, order for the elimination of this company from the list of comparables. KALS Information Systems Ltd. (Seg.) 15. This company was not chosen by the assessee as its comparable. However, the TPO included it in the list by discussing its comparability jointly with that of Avani Cimcon Ltd. and Thirdware Solutions Ltd. The sum and substance of the reasoning adopted by the TPO for considering this company as comparable is that it is also a software development and consulting company, meeting the filters adopted by him. 16. 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee fails to report an otherwise comparable case, then the TPO is obliged to include it in the list of comparables, and in the same manner, if the assessee wrongly reported an incomparable case as comparable in its TP study and then later on claims that it should be excluded then, there should be nothing to forbid the assessee from claiming so, provided the TPO is satisfied that the case so originally reported as comparable is, in fact, not comparable. The Special Bench of the Tribunal in DCIT vs. Quark Systems Pvt. Ltd. (2010) 132 TTJ (Chd) (SB) 1 has also held that a case which was included by the assessee and also by the TPO in the list of comparables at the time of computing ALP, can be excluded by the Tribunal, if the assessee proves that the same was wrongly included. 19. Reverting to the facts of the instant case, we find that the assessee is only a captive unit rendering services to its AE alone without acquiring any intellectual property rights in the work done by it in the development of software. The Hon'ble Delhi High Court in CIT vs. Agnity India Technologies (P) Ltd. (2013) 219 Taxmann 26 (Del) considered the giantness of Infosys Ltd., in terms of risk profil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adopted by the TPO for comparison, it becomes vivid that it ceases to be comparable with the assessee's `Software development and maintenance support services' segment. The reason hardly needs any highlighting, being the income of this company also largely including revenues from exports from SEZ/STPI units apart from sale of licence. These distinguishing features make this company as noncomparable. We, therefore, order for the removal of this company from the list of comparables. Helios and Matheson Information Technology Ltd. 22. This company was included by the assessee in the list of comparables. Accordingly, the TPO treated it so. The comparability of this company was not challenged before the DRP. However, for the first time before the Tribunal, the assessee has come out with a contention that this company be removed from the list of comparables because it does not pass the filter of employee cost. 23. We are not inclined to accept this contention advanced on behalf of the assessee. The ld. DR, with reference to the relevant figures, has pointed out that this company passes the filter of employee cost. This submission put forward by the ld. DR, was not controverted on be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee under this merged segment of provision of services, we will now explore as to whether the above referred two companies are, in fact, comparable or not. Coral Hub (Vishal Information Technologies Ltd) 27. The assessee chose this company as comparable. As such, no objection was taken before the TPO against the inclusion of this company. However, the assessee argued before the DRP that this company was wrongly included. The DRP refused to accept the assessee's contention. That is how the assessee is aggrieved before us. 28. We are not inclined to accept the preliminary objections raised by the ld. DR against the inclusion of this company on the premise that the assessee had itself chosen it as comparable. The reasons given above while dealing with the case of Infosys Technologies Ltd., apply with full force here as well. 29. Coming to its functional comparability of this company, we observe from the Annual report of this company available at pages 114 onwards of the paper book that it is outsourcing its major activities. Such outsourcing charges constitute around 90% of the total operating cost. As against this, the assessee is engaged in providing the services unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le of the assessee as well as Cosmic Global Ltd., was brought to our notice. We, therefore, approve the view taken by the TPO in including this company in the list of comparables. 32. In view of our above discussion, we set aside the impugned order on the question of determination of ALP under both the segments and remit the matter to the file of AO/TPO for making a fresh determination of ALP in consonance with our directions given above. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. 33. The only other ground which survives for our consideration in this appeal is against not reducing lease line charges from `total turnover', after excluding it from `export turnover'. The assessee claimed the benefit of section 10A. Considering the mandate of Explanation 2 (iv) to section 10A of the Act, the AO opined that lease line charges amounting to Rs. 2,09,67,887/- were in the nature of telecommunication charges incurred in foreign currency attributable to delivery of computer software outside India. He, therefore, reduced this amount from `export turnover'. The assessee's contention for giving similar treatment to this amou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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