TMI Blog2016 (5) TMI 1364X X X X Extracts X X X X X X X X Extracts X X X X ..... igh court of Delhi, on 23.3.2010, FBS India had transferred its Fidelity International Ltd. business undertaking to FIL India effective from 1.4.2009. 99.99% shares of FIL India are held by FID holdings (Mauritius) Ltd., Mauritius. FIL India provides services to FIL Group of companies and is engaged in providing IT and IT enabled services related to Fidelity Group s business activities and was compensated on a cost plus mark up basis. 3. The assessee company had filed return of income declaring total income of ₹ 9,94,50,836/-. The AO noted that assessee had entered into following international transactions during the year: S. No. International Transaction Amount (In Rs.) 1 Revenue from Software Development Services 1,415,633,844 2 Revenue from IT enabled services 997,425,829 3 Recharge to Group Companies 15,586,679 4 Recharge from Group companies 155,891,869 4. He, therefore, made a refere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome of the Assessee by INR 243,660,000 and in doing so have grossly erred in: 4.1. disregarding the ALP as determined by the Appellant in the TP documentation maintained by it in terms of section 92D of the Act read with Rule 10D of-the Income-tax Rules, 1962 (Rules') as well as fresh search and in particular modifying/ rejecting the filters applied by the Appellant and applying additional/ revised filters as per his capricious approach; 4.2. disregarding multiple year / prior years' data as used by the Appellant in the TP documentation and holding that current year (i.e. Financial Year 2009-10) data for comparable companies should be used despite the fact that the same was not necessarily available to the Appellant at the time of preparing its TP documentation; and 4.3. rejecting the economic and comparability analysis undertaken by the Assessee in its TP documentation/ fresh search and applying certain erroneous/ modified filters in determining the ALP; and 4-4. including high-profit making companies in the final comparables set for benchmarking a low risk captive unit such as the Appellant (disregarding judicial pronouncements on the issue) ; and 4.5. e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n facts and in law in charging interest under section 234B and 234D of the Act 8. At the outset ld. counsel for the assessee submitted that for the sake of brevity he is primarily pressing ground nos. 4.3 to 4.7. He pointed out that in the software development services segment he is primarily disputing three comparables and in the adjustment relating to IT segment, he is primarily disputing 4 comparables. 9. As regards adjustment directed for soft development services, ld. TPO noticed that the assessee had used TNMM as the most appropriate method in determining its international transactions and OP/TC was taken as the profit level indicator in the TNMM analysis. 10. Ld. TPO noticed that in the TP study the assessee had arrived at a set of 16 companies with an average margin of 10% by using multiple year data. He noticed that assessee s own margin of this segment was worked out at 12.98%. Thus, the assessee had concluded that its international transaction in regard to software development services were at arm s length. 11. As regards software development service segment, ld. counsel pointed out that in the TP study there were 16 comparables. However, after fresh search ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... integration, package evaluation and implementation and business process management etc. being carried out by this comparable. He further pointed out that the turnover of this comparable is ₹ 21,140 crores, which is approximately 150 times of the assessee s turnover which was only ₹ 142 crores. He further pointed out that this comparable has brand ownership, which it has acquired by incurring substantial marketing expenses. Further, it owns proprietary products like finacle, Infosys ActiceDesk, Infosys iProwe, Infosys mConnect. He pointed out that this company derived substantial portion of its revenue from sale of its proprietary products (including its flagship banking product suite Finacle ). On the contrary the assessee does not own any brand or proprietary products. He further pointed out that other distinguishing features from assessee were expenses incurred by Infosys on research and development which were ₹ 440 crores (Approx 2.1% of revenue), whereas assessee did not incur any expenditure on R D. Further, offshore revenue of this company was 98.7% (total sales ₹ 21,140 crores, out of which software export revenue was ₹ 20,871 crores). He poin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rther submitted that the transactions with Wipro and Citi Group entities fall in the ambit of sec. 92B(2) of the Act for the following reasons: i. Wipro Ltd., parent company of the assessee, executed an agreement with Citi Group Inc. for acquiring Citi Technology Services Ltd., now called Wipro Technology Services Ltd. ii. On 21.1.2009, Wipro Ltd. signed a master agreement with Citi Group Inc., for the delivery of technology Infrastructure Service and application development and maintenance services for the period of six years. iii. This shows that income from software development support and maintenance servicers was earned by Wipro Technology Services Ltd. from Citi Group Inc. by means of master service agreement entered into between Wipro Ltd. its parent company and Citi Group Inc., a third person. iv. Rule 10B(1)(e)(ii) that it is the net profit margin realized from a comparable uncontrolled transaction, which is considered for the purposes of benchmarking. v. Section 92B(2) provides that a transaction entered into by a enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n rejected in by the ITAT in the case of Equant Solutions India Pvt. Ltd. Vs. DCIT rendered in ITA no. 1202/Del/2015. 21. Ld. CIT(DR) submitted that assessee has not contested the filters as adopted by ld. TPO. In this regard he referred to page 8 of TPO s order wherein he has discussed the comparables finally selected by him. Ld. CIT(DR) submitted that assessee is objecting to only those comparables where margin is high and, thus, cherry picking three comparables. However, assessee has accepted the reject matrix adopted by TPO. 22. Ld. CIT(DR) referred to ld. DRP s direction and pointed out that ld. DRP has considered all objections taken before it. He referred to page 6 of ld. DRP s directions and pointed out that one of the issue before ld. DRP was whether AO/ TPO s action, by applying various filters, was right in rejecting various comparables including new comparables. While considering this issue ld. DRP examined in detail various filters. He pointed out that Ld. DRP in para 7.21 has considered various case laws to buttress ld. TPO s contentions that high turnover was not a relevant factor. 23. Ld. CIT(DR) submitted that ld. DRP has considered the brand, R D and turn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ignored. In the case of Wipro Technologies Ltd., which is one of the comparable under consideration, there was an extraordinary factor, which was acquisition of Citi Technologies Services Ltd., renamed as Wipro Technologies Services Ltd. Though the company was taken over but the pricing arrangement continued as it was the old agreement. This definitely influenced on profitability of comparable but there was no filter which could filter ate this comparable from the list of comparables. In view of above discussion we are not inclined to accept the plea of ld. DR that merely because assessee has accepted the various filters, therefore, it cannot challenge the exclusion of comparables which passes all the filters on separate grounds., 27. The Hon ble Delhi High court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. Vs. CIT (ITA no. 16/2014 dated 16.3.2015), while considering the attributes of TNM method has observd in para 90 of the decision as under: 90. The strength of the TNM Method is that net profit indicators are affected by transactional differences in comparison with some other methods. This method is more tolerant to functional differences between con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gement and other back office support services to its group companies. It also undertakes software development services for developing software applications, which are used within the Equant Group. The IT enables network management and other back office support services performed by assessee primarily include remote monitoring and maintenance of Equant global network platforms and Further under the category of software development services implementation of quality customer networking solutions. services, coordination, remote configuration, and assessee is engaged in the providing routine contract software development services relating to the development and maintenance of application companies like HR and accounting. 30. From the above observations it is evident that this company was also undertaking software development services for developing software application which were used within the Equant group. Therefore, the functions carried out by this company were similar to that of assessee. Therefore, this decision is applicable to the facts of the case. We find that as regards Persistent Systems Ltd., Tribunal has observed in para 13 of the decision as under: 13. Persisten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the equity is owned by Wipro. Therefore, the entire revenue of this is much related party. It was further submitted that it has turnover of more than 24 times of the assessee and has huge brand value of Wipro and therefore it should be excluded. He further buttressed his claim of exclusion by submitting the volatile PLI of the company from 52.55 % to 80.81 % in a chart for three years. b. Ld. DR Relied on the order of TPO and DRP for the reason given for selection of this comparable. c. We carefully considered the rival contention regarding exclusion of this comparable. This company had agreed an agreement with CITI Technology Services Ltd, which is 100% subsidiary of Wipro Technology Ltd. The entire revenue during the year is covered by a master service agreement entered into by Wipro with CITI Group Services. Further, this company is also a subsidiary of Wipro Ltd., which company has a considerable brand name, therefore benefit accruing to this company from the brand name of Wipro cannot be denied. Therefore relying on the decision of the coordinate bench in the case of Agnity Technology Pvt. Ltd, in ITA NO.955jDelj2015 for Assessment Year 2010--11, wherein the Infosys ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. The group mainly operates in three business areas (i) Financial Services; (ii) Employer services; and (iii) technology. 36. Financial Services primarily includes fund management, retail and institutional services. FMR company acts as the investment advisor of Fidelity s mutual funds. Fidelity Brokerage Company provides a full range of investment and brokerage products and services to individual investors and institutional clients. Fidelity investment life insurance company offers a variety of annuity and life insurance products. It also develops, markets and supports all f the life insurance and annuity products that Fidelity offers. 37. For catering to the needs of Fidelity group the Indian unit i.e. the assessee undertakes to provide services for European Retail ( individual investors) and the Indian asset management company based in Mumbai. The back-office operations are segregated into onshore and offshore activity. Various functional owners of specific processes are spread globally. The assessee provides customer support services vide phone wherein it rsolves issues and concerns of customers in terms of their individual portfolio of investments. Further, it also pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re at the time of implementation and data centre management activities. Segmental details for income from transactions processing services not available in annual report. 48. He further pointed out that this company is engaged in the business process outsourcing( transaction processing) services to the Banking financial services industry, which is single segment and there is no separate segmental report of ITes segment. This company has only given its financial details of on geographical basis. 49. Ld. counsel further pointed out that turnover of this company is ₹ 1440 crores, whereas assessee s IT segment turnover is only ₹ 100 crores. Further, this company has the economic benefit on account of payment for TATA brand equity. He pointed out that brand equity payment made by the company were ₹ 4.2 crores whereas no branded or proprietary products are owned by FIL India. 50. Further offshore revenue export income/ sales is 74.67% whreas that of FIL India is 93.67%. Further AMP spent of this company is 0.15 crores whereas assessee has not incurred any expenditure on advertisement. He further pointed out that the company largely renders services to worldwi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce support services, which included remote monitoring and maintenance of Equant global network platforms and services, coordination, remote configuration and implementation of quality customer networking solutions. The assessee primarily undertakes to provide services for European and the Indian asset management company based in Mumbai. The assessee is primarily catering to the retail site (individual investor) to Fidelity Group business. Thus, broadly the functions performed by assessee are similar to that of Equant Solutions India Pvt. Ltd. (supra) and, therefore, this company deserves to be excluded. We find that functions performed by TCS-e-Serve Ltd. included rendering of technical services like software testing etc., which required skilled persons. As far as the objection regarding related party transaction is concerned, we are in agreement with the reasoning given by DRP that since this company was taken over by TCS group, therefore, there was no question of any separate details being given about related party transaction. However, keeping in view the various factors, pointed out by ld. counsel for the assessee, which we have noted earlier, this company cannot be taken as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chtel India Pvt. Ltd. (supra). 61. Having heard both the parties we find that at page 114 of the PB in the Annual Report of this company, it has been stated as under: Accentia has gone a long way from being a single location, single service firm to a multi location, diversified knowledge process Outsourcing Company, operating from multiple locations in India, USA, UK and the Middle East. Not resting at being the fastest growing Healthcare Receivables Cycle Management Company, we have now ventured into Legal Process Outsourcing, Data Processing Outsourcing and high end software services delivery, besides offering software. As a Service model in the healthcare outsourcing area. 62. Thus, it is clear that this company is primarily diversified knowledge process outsourcing company and coupled with the fact that extraordinary circumstance of amalgamation took place during the year, this comparable is directed to be excluded from the list of comparables. 63. As regards Infosys BPO Ltd., ld. counsel pointed out that the functions performed by this company are high end integrated services assisting in improving competitive positioning and managing business processes in additi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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