TMI Blog2016 (8) TMI 1195X X X X Extracts X X X X X X X X Extracts X X X X ..... issue, it is our considered opinion that both these issues required restoration to the file of the TPO for reconsideration and reexamination and it is ordered accordingly. - ITA No. 6856/Del/2015 - - - Dated:- 24-8-2016 - SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER For The Assessee : Sh. Himanshu S. Sinha, Adv. For The Revenue : Sh. Amrendra Kumar, CIT DR ORDER PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER: The present appeal has been preferred by the assessee against the order passed u/s 143(3) of the Income Tax Act, 1961 read with directions issued by the Hon ble Dispute Resolution Panel (DRP) u/s 144C(13) of the Income Tax Act, 1961 (in brief the Act ). 2. The brief facts of the case are that the assessee is a company incorporated under the Indian Companies Act, 1956 and was incorporated in 1992 and is engaged in the business of distribution and sale of Digital Switching Equipment, Cellular Exchange Equipment and Other Telecommunication Equipment and also provides related services. The assessee also provides Contract Software Development (CSD) Services and Technical Support Services (TSS) to its Associated En ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .71% 13 12.18% 7.68% 4 7.28% 4. During the course of Transfer Pricing assessment proceedings, the Transfer Pricing Officer (TPO) while accepting all other international transactions to be at arm s length, rejected the economic analysis undertaken by the assessee for its CSD Services Segment and TSS Segment. The TPO proceeded to undertake a fresh analysis, wherein he applied certain new quantitative filters to exclude certain companies selected by the assessee and included certain additional companies. The TPO also rejected the assessee s claim for working capital and risk adjustment. A summary of the adjustments proposed by the TPO in both the segments is as per the chart below: Particulars PLI used Margin earned by the Appellant Arm s Length margin determined by TPO Adjustment proposed by the TPO (in INR Crores) CSD Services OP/TC 7.71% 26.72% 128.51 TSS OP/Operating R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1.48% 2. Akshay Software Technologies Limited 0.16% 3. E-Infochips Limited 56.44% 4. Infosys Limited 43.53% 5. Larsen Toubro Infotech Limited 18.40% 6. Mindtree Limited (Segment) 10.74% 7. Persistent Systems and Solutions Ltd. (Merged) 22.12% 8. Persistent Systems Ltd. 23.08% 9. R S Software (India) Ltd. 16.20% 10. Sankhya Infotech Limited (Segmental) 26.20% 11. Sasken Communication Technologies Ltd. 24.36% 12. Tata Elxsi Lgtd. (Segment) 13.00% 13. Wipro Technologies Limited 54.42% 14. Zylog Systems Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d TSS segment; 3.4 Upholding the incorrect approach adopted by the ld. TPO of undertaking a fresh comparability analysis without providing any basis for additional/revised filters or by adopting economically and commercially inappropriate filters while determining the ALP for the Appellant s CSD services segment and TSS segment. 3.5 Incorrectly excluding certain companies that were selected by the Appellant in its TP documentation/fresh search in its CSD services segment and TSS segment which were functionally comparable to the Appellant in terms of functions performed, assets employed and risks assumed by the Appellant in the aforementioned segments. 3.6 Incorrectly including certain companies that were primarily engaged in development of software products thereby owning significant intangibles or engaged in diversified business operations with no segmental information available in their annual reports and/or having highly volatile margins, in the final comparable set for determining the ALP for the Appellant s CSD services segment. 3.7 Incorrectly including certain companies that were primarily engaged in high end consultancy and engineering services, in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orementioned TP adjustments. 5. That on facts and in the circumstances of the case and in law, the directions issued by the Hon ble DRP are flawed as they include certain prima-facie mistakes/errors apparent from record for which, the Appellant has filed a rectification application u/s 154 of the Act before the Hon ble DRP and the same is pending adjudication. 6. That on facts and in the circumstances of the case and in law, the order issued by the ld. TPO for giving effect to the directions of the Hon ble DRP is incomplete for which, the Appellant has filed a rectification application u/s 154 of the Act before the ld. TPO as the ld. TPO while issuing the aforementioned order, has grossly erred in: 6.1 not completely following the directions of the Hon ble DRP wherein it had issued specific directions to exclude M/s Wipro Technologies Limited (selected by the ld. TPO as a comparable for benchmarking the Appellant s CSD services segment) after verifying the Appellant s claim that the said company neither appears in the TP documentation Accept Reject matrix submitted by the Appellant before the ld. TPO nor its financial data for the captioned AY was available in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment which were incorrectly rejected by the TPO are as under: 10.01 Allied Digital Services Ltd. as per the TPO the said comparable fails the export filter. However, it is the assessee s contention that for the purpose of comparability, it is essential to consider the functional comparability rather than the customers geographical location. The ld. AR submitted that the use of the filter is objected to on the ground that whether the tax payer earns its revenue from the domestic market or from the overseas, its function remains the same. The ld. AR further submitted that a company providing software services will charge the same rate from a client that is located in India or overseas. The ld. AR drew our attention to Rule 10B and submitted that since by applying this filter the profitability is being materially affected, the same should not be applied. 10.02 Helios and Matheson Information Technologies Ltd. as per the TPO this comparable fails the different financial year ending filter. However, it is the assessee s contention that the company files quarterly financial statements with the stock exchange which were available in the public domain and the details for the year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ume production, Software Consulting and manufacturing EVM and VDB Electronic Board etc. The ld. AR further submitted that the schedule pertaining to the income statement of E-Infochips for AY 2011-12 shows that the company has a varied Revenue mix i.e. it earns revenue from Software Development, Hardware Maintenance and Information Technology Consultancy Services. It was further submitted that no segmental information was available in the annual report of the company as regards the revenue from sale of products and revenue from Software Developments and hence, one cannot be deduce revenue from Software Services and the impact of the revenue from the software products on overall profit from the common pool of income from both the streams of software products and software services. The ld. AR also submitted that during the relevant assessment year E-Infochips had a significant AMP/Sales Ratio of 15.74% whereas the assessee company did not undertake any AMP expenditure. The ld. AR also submitted that E-Infochips had an abnormal growth rate of 96% and also a volatile OP/TC margin trend which could be attributed to the fact that E-Infochips was pre-dominantly a consulting and engineerin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing and products, application design, development, reengineering and maintenance, system integration, package evaluation and implementation and business process management etc. The Ld. AR also submitted that Infosys had a significant turnover of ₹ 25385 crores which was approximately 35 times the assessee s turnover of ₹ 728 crores. It was further submitted that Infosys developed/owns proprietary products like Finacle, Infosys Actice Desk, Infosys iProwe and Infosys mConnect and owns significant intangibles. It was further submitted that Infosys had significant R D expenditure of ₹ 527 crores and advertising/sales promotion and brand building expenditure of ₹ 84 crores, whereas the assessee does not undertake any R D and AMP expenditure. The Ld. AR also submitted that Infosys has been rejected as a comparable by the ITAT in the case of assessee s predecessor company Alcatel Lucent Technologies India P. Ltd. for AY 2003- 04 and 2004-05. The Ld. AR also relied on the following decisions for the preposition that companies with high turnover have to be rejected decision of the Hon ble Delhi High Court in the case of M/s Agnity India Technologies P. Ltd. (ITA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India (P) Ltd. vs. ITO [IT(TP)A (reference no. No. 1119/Bang/2011)], Intoto Software India Pvt. Limited, Hyderabad (ITA No. 233 of 2014). The Ld. CIT DR submitted that L T also deals only in services and there were no products and the impact of acquisition on the margins is only miniscule and hence, the company cannot be rejected as a comparable. (v) Persistent Systems and Solutions Limited The Ld. AR submitted that Persistent Systems and Solutions Limited is a wholly owned subsidiary of Persistent Systems Ltd.. This company is engaged in diversified services such as software consultancy, software product development and system integration services unlike the assessee who is only involved in CSD activities. It was further submitted that this company is a part of Special Economic Zone and is entitled to various incentives provided by the Government. It was also submitted that segmental accounts in respect of various segments have not been disclosed in the accounts/annual report of this company, wherein the revenues and expenses have been presented in a consolidated form. The Ld. AR also referred to notes on accounts for revenue recognition and submitted that this company i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el/2013), Planet Online Pvt. Ltd. (ITA No. 464 and 608/Hyd./2014), 3D PLM Software Solutions Ltd. (ITA No. 1303/Bang/2012). The Ld. AR also relied on the decision of the Hon ble High Court of Andhra Pradesh in the case of CIT II Hyderabad vs. Intoto Software India P. Ltd. (ITA No. 233 of 2014), wherein it has been held that software product companies owning intangibles could not be compared with the software development services provider. The Ld. AR also submitted that companies facing an extra ordinary event, having volatile margins and having no segmental information cannot be selected as a comparable. He relied on the following decisions in support of his argument Zavata India Private Limited, Hyderbad vs. DCIT (ITA No. 1781/Hyd./2011), Symphony Marketing Solutions India Pvt. Ltd. vs. ITO (ITA No. 1316/Bang/2012), NTT Data India Enterprise vs. ACIT (ITA No. 1612/Hyd./2010), Capital IQ Information Systems (India) Pvt. Ltd. vs. DCIT (ITA No. 1961/Hyd./2011), Petro Araldite Private Limited vs. DCIT (ITA No. 6217/Mum/2012). The Ld. CIT DR submitted that from the perusal of the annual report revenue from product is not evident and hence, the company should remain in the list of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DCIT (ITA No. 1054/Bang/2011), Transwitch India P. Ltd. vs. DCIT [ITA No. 948/Bang/2011, TS-105-ITAT-2012(Bang)-TP], First Advantage Offshore Services Pvt. Ltd. (ITA No. 1252(Bang)/2010), CSR India (P) Ltd. vs. ITO [IT(TP)A (reference no. No. 1119/Bang/2011)], Intoto Software India Pvt. Limited, Hyderabad (ITA No. 233 of 2014). The Ld. CIT DR submitted that the assessee cannot be given the liberty to pick and choose case laws and reliance should be placed on annual reports rather than judicial precedents where the annual reports give segmental data. He submitted that in this case the segmental data was very much available in the annual report and the same should not be ignored and accordingly, this company cannot be rejected as a comparable. (viii) Sasken Communication Technologies Limited The Ld. AR submitted that the TPO has contended that this company s income from sale of software products is only 9.4% of the total revenue. However, in absence of any segmental details pertaining to the corresponding costs, Sasken should not have been selected as a comparable. Ld. AR further submitted that this company is a provider of tele communication software services and solution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that the same shows consolidated revenues and expenses of software services and products. The Ld. AR further submitted that significant intangible is owned by the company as would be evident from the fixed asset schedule as appearing in the annual report. It was also submitted that the company had made acquisitions during the year as would be evident from the annual report. The Ld. AR further submitted that this company has significant R D activities and also a significant AMP expenditure of 5.28%. The Ld. AR pointed out to the fixed asset schedule and submitted that it includes product development costs amounting to 18.75 crores (at net book value) and hence, this goes on to prove the fact that this company is a software product development company. The Ld. AR further submitted that this company had a volatile OP/TC margin trend. The Ld. AR also submitted that Zylog has been considered as incomparable in Saxo India Private Limited (ITA No. 6148/Del/2015). The Ld. AR also relied on the decision of the Hon ble High Court of Andhra Pradesh in the case of CIT II Hyderabad vs. Intoto Software India P. Ltd. (ITA No. 233 of 2014), wherein it has been held that software product compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e which is a risk averse and, therefore, the profits of the captive unit would be less than risk taking companies and hence, an adjustment in this regard is required. The Ld. AR placed reliance on Motorola Solutions India P. Limited in ITA No. 5637/Del/2011, Intellinet Technologies India P. Limited in ITA No. 1237/Bang/2010 and Bearing Point Business Consulting Pvt. Limited in ITA No. 1124/Bang/2011 in support of assessee s claim for risk adjustment. 10.2.1 The Ld. CIT DR submitted that the assessee has failed to justify its claim for working capital adjustment and nothing had been demonstrated by the assessee to support its claim for the working capital adjustment. The Ld. CIT DR further submitted that the TPO had already given due consideration to this aspect and the issue needed no further adjustment. The Ld. CIT DR relied on the case of Ameriprise in ITA No. 2575/Del/2014 to support the contention that working capital adjustment need not be granted on the facts of this case. On the issue of risk adjustment, the Ld. CIT DR submitted that level of risk varies from company to company and the assessee could not substantiate the risk factor and hence, the claim was not tenable. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Ld. AR submitted that the TPO has held that under the application of TNMM as the most appropriate method, the difference in functional profile gets evened out and as such the company can be considered as a comparable. The Ld. AR submitted that this company is functionally dissimilar as it is engaged in rendering consultancy services in Water Resources, Power and Infrastructure and includes preliminary investigations, feasibility studies, field studies, engineering design, drawings and tendering process, project management operations and maintenance and institutional/human resource development. The Ld. AR also submitted WAPCOS is a Government of India undertaking with an abnormally high margin of 30.55%. The Ld. AR submitted that WAPCOS has been rejected as a comparable in the following cases Nortel Networks India Pvt. Ltd. vs. ACIT (ITA No. 4765/Del/2011 427/Del/2013), Hennes and Mauritz India Pvt. Ltd. vs. DCIT (ITA No. 4704/Del/2012), MCI Com India Pvt. Ltd. (Now known as Verizon India P. Ltd.) (ITA No. 4187/Del/2010), Yum! Restaurants (India) Ltd. vs. ITO (ITA No. 6168/Del/2012), Actis Advisers P. Ltd. vs. ACIT (ITA No. 6390/Del/2012), Shell India Markets Pvt. Ltd. (ITA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sactions and not on the entire turnover. The Ld. AR also relied on the following decisions in this regard T Two International P. Ltd. and Tara Jewels Exports P. Ltd. and Tara Ultimo P. Ltd. (ITA No. 5644, 5645 5646/Mum/2008) (AY 2004-05), IL Jin Electronics India P. Ld. Vs. ACIT (36 SOT 227), SMCC Construction India Ltd. vs. ACIT [2011] 44 SOT 63 (Del.), ACIT vs. Super Diamonds [2012] 53 SOT 243 (Mum.) and DCIT Vs. Twinkle Diamonds [2012] 53 SOT 243 (Mum.). 10.4.1 The Ld. CIT DR placed reliance on the TPO s order. 10.5 On the corporate tax grounds 1, 2 and 3 the Ld. AR submitted that in the draft assessment order the liquidated damages were disallowed on the ground that they were in the nature of penalty/fine. He drew attention to page 16 of the order of the Hon ble DRP for AY 2011-12 that the Hon ble DRP following its earlier decision for AY 2010-11 had directed the AO to verify the correctness of an allow the claim of the tax payer in this regard in this year also. The Ld. AR submitted that the AO has not given effect to the directions of the Hon ble DRP on this issue and prayed that suitable directions may be given in this regard. 10.5.1 The Ld. CIT DR submitted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evelopment of Software Products and Solutions for Product Design and Development, Quality Assistance and Certification, reengineering, sustenance and volume production, Software Consulting and manufacturing EVM and VDB Electronic Board etc and is functionally dissimilar. The ld. AR has relied on the decision rendered by the ITAT Delhi Bench in Saxo India Private Limited (ITA No. 6148/Del/2015), wherein the ITAT Delhi Bench has held that E-Infochips is to be rejected as a comparable on the ground that it earns income from software products and services and no segmental data is available. We do find from the FAR analysis that assessee company is functionally dissimilar to E- Infochips and hence finding support from the decision rendered by the ITAT Delhi Bench in Saxo India Private Limited (ITA No. 6148/Del/2015), we direct the TPO to exclude this comparable. (iii) Infosys Limited The Ld. AR has submitted that Infosys is engaged in providing software consulting and products, application design, development, reengineering and maintenance, system integration, package evaluation and implementation and business process management etc. and hence is functionally dissimilar. The Ld. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T II Hyderabad vs. Intoto Software India P. Ltd. (ITA No. 233 of 2014), wherein it has been held that software product companies owning intangibles could not be compared with the software development services provider, we direct the TPO to exclude this company from the final set of comparables. (vi) Persistent Systems Limited The Ld. AR has submitted that this company is engaged into diversified services including intellectual property led software solutions and software products focusing on cloud computing, business intelligence and analytics etc and is hence functionally dissimilar. The company also owns significant intangibles. A perusal of the profit and loss account of the company that the company had revenue streams from software services and products. It is seen that the revenues and expenses have been shown in a consolidated manner and no segmented disclosure has been made. It is also seen that that this company has acquired ownership of intangibles of around 50 crores. since the company is engaged both in rendering software development services as well as sale of software products, in absence of segmental details, this company could not be selected as a comparable. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formation Systems (TS-299- ITAT-2015(Bang)-TP). Further, non availability of segmental information in case of diversified operations renders a company not comparable, has been held in the following decisions Telcordia Technologies India P. Ltd. (ITA No. 7821/Mum/2011), Trilogy E-Business Software India Pvt. Ltd. vs. DCIT (ITA No. 1054/Bang/2011), Transwitch India P. Ltd. vs. DCIT [ITA No. 948/Bang/2011, TS-105-ITAT- 2012(Bang)-TP], First Advantage Offshore Services Pvt. Ltd. (ITA No. 1252(Bang)/2010), CSR India (P) Ltd. vs. ITO [IT(TP)A (reference no. No. 1119/Bang/2011)], Intoto Software India Pvt. Limited, Hyderabad (ITA No. 233 of 2014). Respectfully following these judicial precedents, we direct the TPO to exclude this company from the final set of comparables. (viii) Sasken Communication Technologies Limited It is seen that this company is a provider of telecommunication software services and solutions to network equipment manufacturers, mobile terminal vendors and semi-conductor companies. The company also delivers high end to end IT Solutions and provides full phone integration, IP led offerings in multi-media and offerings for the android markets. This company also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for working capital adjustment and risk adjustment is concerned, it is seen that the assessee has submitted a claim based on a computation which is based at page 393 of the Paper Book. It is also a fact on record that the Hon ble DRP has allowed the assessee s claim for working capital adjustment in assessee s own case in AY 2010-11. The Ld. CIT DR also agreed to the preposition that the issue may be restored to the file of the TPO for re-examination. On the issue of risk adjustment it was the Ld. AR submission that the issue may be restored for obtaining expert assistance. The Ld. AR also referred to the Capital Asset Pricing Method (CAPM) Computation submitted before the Hon ble DRP and submitted that the Hon ble DRP has not considered the computation at all. On overall factual matrix of the issue, it is our considered opinion that both these issues required restoration to the file of the TPO for reconsideration and reexamination and it is ordered accordingly. 11.4 Coming to the comparables in the TSS Segment it is seen that WAPCOS as well as Mahindra Consulting Engineers Ltd. have been objected to by the assessee on the ground of being functionally dissimilar. These two compa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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