9911796707
TMI Blog2016 (12) TMI 1655X X X X Extracts X X X X X X X X Extracts X X X X ..... solution Panel - II, New Delhi ("DRP"), erred in making an addition to the Appellant's total income of INR 5,45,17,350 (i.e. INR 2,07,82,181 based on the provisions of Chapter X of the Income-tax Act, 1961 ('the Act') and INR 3,37,35,169 based on the other provisions of the Act.) 1. Transfer Pricing adjustment 1.1 On the facts and in the circumstances of the case, the Ld. TPO/ AO has erred in misconstruing the directions of Hon'ble DRP issued under section 144C( 5) of the Act while issuing final assessment order under section 143(3) read with section 144C(13) of the Act resulting in incorrect transfer pricing adjustment of INR 2,07,82,181 instead of INR 23,98,098. 1.2 On the facts and in the circumstances of the case and in law, the Ld. TPO has erred and the Hon'ble DRP has further erred in upholding / confirming the action of the Ld. TPO of disregarding, without material defects, the benchmarking analysis and comparable companies selected by the Appellant based on the contemporaneous data in the transfer pricing study report maintained as per section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('the Rules') and the various submiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se notice. Accordingly, the change in the approach followed by the Ld. TPO clearly demonstrates a biased state of mind and is against the principle of natural justice. 1.9 On the facts and in the circumstances of the case and in law, the Hon'ble DRP and the Ld. AO/ TPO has erred not granting reasonable and adequate opportunity to the Appellant. 2. Denial of claim under Section 10A of the Act 2.1 That on the facts and in the circumstances of the case and in law, the Ld. AO has erred in denying and the Hon'ble DRP has further erred in confirming the disallowance of Appellant's claim of deduction under Section 1 OA of the Act amounting to Rs. 3,37,35,169/-. 2.2 That on the facts and circumstances of the case and in law, the Ld. AO has erred in holding and the Hon'ble DRP has further erred in confirming the action of Ld. AO, that there is no export of software by the Branch in India to the Head Office. 2.3 That on the facts and circumstances of the case and in law, the Ld. AO has erred in holding and the Hon'ble DRP has further erred in confirming the action of Ld. AO, that the Appellant is not a separate taxable entity and as a consequence a person cannot earn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d assets TNMM 1,34,73,082 6. Purchase of finished goods TNMM 169,44,92,221 7. Sale of fixed assets CUP 2,53,66,396 8. Reimbursement of expenses (Received) CUP 40,90,599 Total 196,18,03,618 4. Assessee company's international transactions relating to Software Development Services (SDS) and IT Enabled Customer Support Services (ITES) segments have been disputed by the ld. Transfer Pricing Officer (TPO). Assessee company, in order to benchmark its international transactions relating to SDS segment adopted Transactional Net Margin Method (TNMM) as the most appropriate method with Operating Profit / Total Cost (OP/TC) as Profit Level Indicator (PLI) and by utilizing multi-year data chosen 18 comparables having average margin of 13% as against assessee company's margin of 12% and claimed its international transactions at ALP. However, TPO while using current year's data by applying filters of wages to cost, persistent losses, related party transactions (RPT) of more than 25% in turnover chosen 11 comparables having margin of 21.64% and computed the difference in ALP at Rs. 87,71,509/-. 5. In case of ITES segment, taxpayer also adopted TNMM as th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t: The taxpayer has objected to the TPO's action in not allowing adjustment on account working capital. According to the taxpayer the TPO was not justified in denying the claim on the ground of non availability of data about payables and receivables. It was submitted that such data is available and working capital adjustment can be computed. 75. We find merit in the taxpayer's above contention. For the purposes of proper comparability differences in the prices charged by the assessee and the comparables arising on account of different levels of working capital are required to be eliminated. The OECD guidelines also support this view. The guidelines say that in a competitive environment, money has a time value. In a competitive environment the price should include an element to reflect the different payment and receipt term and compensate for the timing effect. Guidelines further say that making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables with an assumption that the difference should be reflected in profits. Though guidelines say that as a matter of routine such adjustment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne balances of assessee company only. So, in the given circumstances, we restore the matter to the TPO to compute working capital adjustment margin of comparable companies for software development and ITES segment of the assessee by taking into consideration the segmental position in respect of consolidated entity level position afresh by providing an opportunity of being heard to the assessee. So, grounds no.1.1 is determined in favour of the assessee. GROUNDS NO.1.2 TO 1.9 12. For benchmarking the international transactions qua Software Development Segment (SDS), the assessee challenged the selection of three comparables, namely, Infosys Technologies Limited, KALS Information System Limited and Tata Elxsi Limited by the TPO benchmarking the international transaction qua software development segment and sought exclusion of three companies, namely, Vishal Information Technologies Limited (now known as Coral Hub Limited), Triton Corporation Limited and Maple eSolutions Limited in ITES segment on account of functional dis-similarity. We would take aforesaid comparables selected by the TPO for benchmarking SDS segment transactions one by one. SOFTWARE DEVELOPMENT SEGMENT INFOSYS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the software development services rendered by Infosys are onsite (i.e., services performed at the customer's location overseas). And offshore (50.20%) (Refer page 117 of the paper book) than half of its service, income from onsite services. The appellant provides only offshore services (i.e., remotely from India) Expenditure on Advertising/Sales promotion and brand building Rs.61 Crores Rs. Nil (as the 100% services are provide to AEs) Expenditure on Research & Development Rs. 102 crores Rs. Nil Other 100% offshore (from India) 6. Learned counsel for the Revenue has submitted that the tribunal after recording the aforesaid table has not affirmed or given any finding on the differences. This is partly correct as the tribunal has stated that Infosys Technologies Ltd. should be excluded from the list of comparables for the reason latter was a giant company in the area of development of software and it assumed all risks leading to higher profits, whereas the respondentassessee was a captive unit of the parent company and assumed only a limited risk. It has also stated that Infosys Technologies Ltd. cannot be compared with the respondent-assessee as seen from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erous companies are available for comparability. So, in the given circumstances, we are of the considered view that Infosys Technologies Limited is not a valid comparable in this case, hence ordered to be excluded. KALS INFORMATION SYSTEMS LIMITED (KALS) 16. Assessee sought exclusion of KALS on ground of functional dis-similarity as it is engaged in executing end to end project through the entire value chain of Software Development Life Cycle (SDLC) right from design to delivery, testing and training as has been incorporated by ld. DRP at page 9 of its order. The ld. AR for the assessee contended that so far as functions performed by the assessee company are concerned it only confines to cutting and testing in India whereas intangibles are created in the US and relied upon Global Logic India Limited vs. DCIT (order dated June 6, 2015) (order available at page pages 313 to 321 of the compendium of case laws), NetHawk Networks India Pvt. Ltd. (order dated November 6, 2013) (order available at page pages 322 to 328 of the compendium of case laws) and LG Soft India Private Limited (order dated March 22, 2013) (order available at page pages 369 to 375 of the compendium of case laws). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it cannot be considered as comparable to any other software company due to its complex nature of business. The Hyderabad Bench of ITAT by following the decision of ITAT, Mumbai Bench held that due to complex nature of business as admitted by TEL itself, it cannot be treated as a valid comparable. Moreover, when numerous software development companies are available for comparability to benchmarking international transaction, the TEL having complex business model cannot be a valid comparable in assessee's case. 21. Coordinate Bench in Global Logic India Pvt. Ltd. (supra) also examined the issue of comparability of TEL also with Global Logic India Pvt. Ltd. which is also a software development company though the TPO in TEL observed that it has two segments, namely, software development service segment and system integration of supports segment but assessee's objection that it is functionally different has been set aside. 22. Coordinate Bench thrashed the issue threadbare and came to the conclusion that sine TEL offers integrated hardware and package software solution, the same cannot be considered as comparable with the assessee company which is simply providing software related se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent cost structure as compared to a business model where services are outsourced. There was no material for the Tribunal to conclude that the outsourcing of services by Vishal would have no bearing on the profitability of the said entity." 25. Assessee's case is covered by Rampgreen Solutions Pvt. Ltd. (supra) because VITL's expenditure on employment cost was very small as against the proportionate cost of the assessee company which uses its own infrastructure and having permanent work force of its employees. Moreover, VITL outsourced most of its work to the other vendors/service providers as against the assessee company wherein services are rendered by employing own work force and by using its own infrastructure. So, on the basis of different cost structure, VITL is not a valid comparable for benchmarking the international transactions qua ITES segment . TRITON CORPORATION LIMITED AND MAPLE eSOLUTIONS LIMITED 26. Assessee sought exclusion of both these companies on the grounds inter alia that Triton Corporation Limited acquired 100% stock in Maple eSolutions Limited during the assessment year under consideration; that Directors/management of the company were involved in fraud d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rporation Limited wherein there is a steep downfall in the income (sales and other income) for the year ending 31.03.2010 which is Rs. 7.59 lakhs as against Rs. 4099.43 lakhs in the previous year ending 31.03.2009. Furthermore, it is categorically mentioned in Director's report that for most of the year, IT and ITES operations of the company continued to be suspended due to ongoing global crisis and unfavourable market conditions. In these circumstances, we order to exclude Triton Corporation Limited and Maple eSolutions Limited from the list of comparables for benchmarking international transactions. CORPORATE GROUNDS GROUNDS NO.2.1, 2.2, 2.3, 2.4, 2.5, & 2.6 32. Ld. AR for the assessee contended that the benefit of section 10A was granted to the assessee company in Assessment Year 2003-04 and continued upto AY 2006-07 and further relied upon the judgment passed by Hon'ble jurisdictional High Court in the case of DDIT vs. Virage Logic International (ITA No.1108/2007 order dated 09.11.2016) & Ors. However, on the other hand, ld. DR relied upon the order passed by ld. DRP/AO. 33. Undisputedly, the revenue has been extending the benefit of section 10A to the assessee company si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equently the particulars of the price or cost reported by the assessee were not binding or conclusive but rather they attained finality in the assessment proceedings, after due addition. It underwent further inquiry/ scrutiny under Chapter X of the Act. 13. It is undoubtedly aphorism that a legal fiction ought to be taken to its logical conclusion and the mind should not be allowed to boggle. This merely implies that a fiction should logically take a direction; the train of thought however cannot divert elsewhere. The absence of a "deemed export" provision in Section 10A similar to the one in Section 80HHC does not logically undercut the amplitude of the expression "transfer of goods" under Section 80-IA(8) - which is of now part of Section 10A. Such an interpretation would defeat Section 10A(7) entirely. 14. For the above reasons, the Court is of the opinion that substantial questions of law framed are to be answered in favour of the assessee and against the Revenue. The ITA Nos. 1108/2007, 1249/2009 and 173/2016 are, accordingly, dismissed. It is clarified, however, that the AO is at liberty to give tax effect as a consequence of the interpretation adopted by this Court." T ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
