TMI Blog2016 (5) TMI 1412X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellant, Nokia Siemens Networks India Pvt. Ltd. (formerly Siemens Public Communication Networks Pvt. Ltd.), (hereinafter referred to as the assessee ), by filing the present appeal sought to set aside the impugned order dated 31.10.2011 passed by the AO/DRP/TPO qua the assessment year 2007-08 on the grounds inter alia that :- 1. That on the facts and circumstances of the case and in law, the impugned order of assessment framed by the learned Assistant Commissioner of Income-tax, Circle 13(1), New Delhi (hereinafter referred to as 'the learned AO') pursuant to the directions of the Hon'ble Dispute Resolution Panel - II (hereinafter referred to as 'the Hon'ble DRP') under section 143(3) read with section 144C of the Income-tax Act, 1961 (,Act'), is a vitiated order having been passed in violation of principles of natural justice and is otherwise arbitrary and is thus bad in law and is void ab-initio. 2. That on the facts and circumstances of the case and in law, the learned AO / DRP has erred in making an addition of ₹ 171,224,237 to the total income of the appellant on account of adjustment in the arm's length price of the inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the risk profile of the Appellant vis-avis the comparables. 10. That on the facts and circumstances of the case and in law, the learned TPO/ AO has erred in not providing the benefit of the arm's length range as provided under proviso to Section 92C of Act for purposes of computing the arm's length price under Section 92F of the Act. 11. Based on the facts and circumstances of the case and in law, the learned AO has erred in holding that waiver of deferred sales tax loan amounting to ₹ 2,48,88,643 represents remission of trading liability, liable to taxation under the provisions of section 41 (1)(a) of the Act. 11.1 Without prejudice, based on the facts and circumstances of the case and in law, the Hon'ble DRP / learned AO has erred in not following the ratio of Special Bench decision in the case of Sulzer India Limited (133 TTJ 385). 11.2 Without prejudice, based on the facts and circumstances of the case and in law, the learned AO has erred in not appreciating that waiver of deferred sales tax loan was in fact settled as per the provisions of Rule 127 A of the West Bengal Sales Tax Rules, 1995 which provides for settlement of such loan at equival ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only software segment of the assessee company is in dispute whereas there is no dispute qua the telecom segment. 4. Assessee company as a tested party has been characterized as provider of software and development services to its AEs which has used Transactional Net Margin Method (TNMM) as most appropriate method for its benchmarking of international transaction. Search for uncontrolled comparables was made using Prowess and Capitaling Database by the assessee in its Transfer Pricing Study. Assessee company taken 11 comparables for its TP study. TPO by applying the filters rejected all the comparable companies chosen by the assessee except Persistent Systems Ltd. TPO has selected 26 companies as comparables duly detailed at para 15.2.1 of his order. The assessee company computed its Profit Level Indicator (PLI) at 16.71% on cost whereas TPO computed the same at 21.11% on cost on the basis of reply filed by the assessee company. 5. Assessee company is primarily engaged in manufacturing of telecommunication equipment and software development services. TPO concluded that average export revenue of 26 selected comparables is at 93.55% of their total revenue and the 26 selected com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sales (Rs. cr.) OP to Total cost % Product sales (Rs./% of sales) RPT (Rs. cr.) % of RPT over Sales Export (Rs. Cr.) % of exports over Sales Onsite Revenues R D (Rs. Cr.) % of r d over sales Mktg. (Rs. Cr.) % of mktg. over sales % of salary/sales Data base 1. Accel Transmatic Ltd. (Seg.) 9.68 21.11% 0 0.6 6.20% 9.43 97.42% 3.28% 0 0.00% 0.04 0.41% 37.90% P (Seg.) 2. Avani Cimcon Technologies Ltd. 3.55 52.59% 0 0.07 1.97% 100 100% 0 0 0.00% 0.05 1.41% 41.78% P 3. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0.60% 69.74% P (EF) 10. Infosys Technologies Ltd. 13149 40.30% 538/4.1% 664 5.05% 12939 98.40% 51.70% 167 1.27% 719 5.47% 45.84% P 11. Ishir Infotech Ltd. 7.42 30.12% 0 1.63 21.97% 7.08 95.42% 0 0 0.00% 0.57 7.68% 48.25% P 12. KALS Information Systems Ltd. (Seg.) 2.00 30.55% 106/3% 0 0.00% 2 100% 0 0 0.00% 0.08 4.00% 36.62% C (EF) 13. LGS Global Ltd. (Lanco Global Solutions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0. R S Software Ltd. 101.04 13.47% 0 0.85 0.84% 97.17 96.17% 68.77% 0 %0.00 1.83 1.81% 64.62% P 21. R Systems International Ltd. (Seg.) 112.01 15.07% 2.68/2.39% 12.77 11.40% 105.36 94.06% 8.55% 0.63 0.56% 0.93 0.83% 56.32% P 22. Sasken Communication Technologies Ltd. (Seg.) 343.57 22.16% 0 3.94 1.15% 262.66 76.45% 21.43% 0 0.00% 32.26 6.48% 57.03% P 23. SIP Technologies Exports Ltd. 3.80 13.90% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Export of finished goods ₹ 8,97,30,310/- Import of fixed assets ₹ 2,34,86,131/- Royalty ₹ 3,82,68,828/- Purchase of software ₹ 42,93,294/- Commission income ₹ 16,93,62,494/- Commission charges ₹ 1,59,65,014/- Training charges ₹ 41,90,100/- Reimbursement of expenses paid ₹ 7,41,61,364/- 12. The ALP of aforesaid international transactions is to be determined. Assessee company has earned an operating profit margin of 8.24% on sales of telecom equipment manufacturing segment and 8.7% operating profit margin to cost ratio on software development segment. 13. Following comparables companies selected by the TPO in his transfer pricing study, though initially disputed by the ld. AR for the assessee for inclusion in the final list of comparables, but, during the course of argument, the ld. AR for the assessee has fairly co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), ordered to exclude this comparable company by making following observations :- 18.2. After considering the rival submissions and perusing the relevant material on record, we find from the annual accounts of this company, a copy of which is available on page 41 of the paper book, that it is engaged mainly in the developing the software products in the shape of tools etc., which are protected using the patent. This company developed a tool, CELSUITE to drug discovery in finding the lead molecules for drug discovery. As this company is engaged in developing software tools after enough research and development activity and the tools so produced by it are its intellectual property, it cannot be considered as comparable to the assessee which is, also albeit in software development, but is doing it on contract basis without having any I.P. rights in the software developed by it. It is further relevant to note that this company has been held to be not comparable by the Dispute Resolution Panel (DRP) in its Directions for a subsequent year, a copy of which is available on record. Thus this company can t be considered as functionally similar to that of the assessee. We, therefore, d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o it, the instant assessee is not selling any software products, but, is doing the job assigned to it on cost plus basis. The contention of the ld. DR that since the majority of the revenue from `Product and services segment was from the services segment and, hence, this company should be considered as comparable, is bereft of any force. When figures of Products and services are combined, it cannot be ascertained as to how much contribution was made by the product division or the service division to the overall revenue of the Product and services segment. As the assessee is admittedly not engaged in selling its software products, such a company cannot be considered as comparable. It can be seen from the annual report of this company, a copy of which is available on page 88 of the paper book, that it consolidated its existing product portfolio and took steps to expand into further technologies by increasing the momentum in key initiatives in WIMAX, IMS, SIP ISS/ESS domains. This company has its own products such as ASN, WIMAX, Gateway Product with ASN Light. It is further relevant to note that the year ending of this company is not coinciding with that of the assessee and it is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by relying upon TOLUNA (supra). Perusal of the annual report at page 283 apparently goes to prove that this comparable company has four divisions, namely, Transmatic Systems, Ushus Technologies, Accel Animations Studios and Accel IT Academy. Ld. DRP rejected the argument addressed by the assessee company by making the following observations :- 48. Accel Transmatic Limited: It is argued that the information of this company is unreliable and it also fails employee cost filter as per the information available in public domain. We find no force in this argument of the taxpayer. It seems that before the TPO no objection was raised by the taxpayer against its selection. The taxpayer in its reply dated 08.07.2010 did not offer any comments against this comparable (page 53 of the TPO's order). As regards the onsite filter, on the basis of information received u/s 133(6) this company passes this filter. Similarly, there is no force in the argument of the taxpayer that the employee cost is less than 25% of the sales. On page 55 the TPO has given the segmental details of this company where from it can be seen that the employee cost is more than 25% of the sales. In any case, as di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxpayer in its reply dated 08-07-2010 objected to it as under : 8.1 Avani Cimcon Technologies Ltd. ( Avani ) The assessee submits that Avani is earning super profits and such companies should be rejected while arriving at arm s length price. The assessee wishes to bring to your office's notice the following judicial decisions: E-Gain Communication Pvt. Ltd. (ITA No.1885/PN/ 2007) Ruling of the Hon ble Pune ITAT in the case of E-Gain Communication Pvt. Ltd. (supra) while reviewing the comparability analysis of some companies: A cursory look at the chart ill the assessment order of 20 compatibles would reveal that the margin of profit shown by Thirdware Solutions Ltd. and WTI Advanced Technology is extraordinary at 67.65 per cent and 54.72 per cent respectively. Therefore, it was necessary for the tax authorities to examine whether these entities have rightly been taken as comparables for application of Most Appropriate Method . . Quark Systems Private Limited (supra) Ruling of the Hon ble Chandigarh ITAT, Special Bench in the case of Quark Systems Private Limited (supra) while reviewing the comparability analysis or super profit companies: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lying on the specific information collected from the company u/s 133(6) which divulged that this company was a purely software development company engaged in providing software development and consulting IT services to its clients. This company was concentrating on internet enabled business information systems in a wide range of industries. Resultantly, this company was included in the list of comparables. 17.2. After considering the rival submissions and perusing the relevant material on record, we find from the description of business activity of this company as reproduced on internal page 90 of the TPO s order, that it is a pure software development service provider. In the absence of any other specific objection against this company, we are of the considered opinion that this company has been rightly included by the TPO in the list of comparables. The assessee fails. 27. During the course of argument, the ld. AR for the assessee has failed to stick to the argument earlier addressed before ld. TPO/DRP that this company has insufficient segmental information. So, in view of the segmental information available in the annual report as well as finding returned by the coordina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee fails. 29. So, in view of the findings returned by the coordinate Bench, comprehensive order passed by the ld. TPO showing segmental detail and the fact that this company is functionally similar vis- vis assessee company, we are of the considered view that this company is a valid comparable for transfer pricing adjustment in this case. (vi) INFOSYS TECHNOLOGIES LIMITED : 30. Assessee opposed the inclusion of this company in the final list of comparable on the grounds inter alia that this is functionally dis-similar; that it has large scale of operation vis- -vis assessee company; that it has a brand impact to determine the premium pricing; that it has a different model of revenue recognition and this comparable company has been rejected in assessee s own case in AY 2011-12 in case of TOLUNA (supra). Moreover, this comparable company has been rejected by the TPO in assessee s own case in AY 2011-12. 31. Coordinate Bench in the case cited as TOLUNA (supra) examined comparability of the assessee company vis- -vis TOLUNA (supra) which is undisputedly dis-similar to assessee company and found the same to be not a valid comparable by returning followin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A (supra) examined this company to be taken as a valid comparable vis- -vis assessee company, which is undisputedly similarly situated as assessee company and directed to retain this company as a valid comparable by returning following findings :- 26.2. Having heard both the sides and perused the relevant material on record, we find this company to be comparable to that of the assessee. The assessee s objection that employee cost of this company was 4% only, is not correct because of the exercise carried out by the TPO indicating that the employees cost was more than 25%. The ld. DR has taken us through the Annual accounts of this company which show that some part of the employees cost was also included in Administrative expenses apart from direct Establishment expenses. It can be seen that the company has included Professional fees of ₹ 3.41 crore along with Director s salary, etc., under the head Administrative expenses . When this objection was taken by the assessee before the TPO that the employee cost was only 4% viewing only the Establishment expenses in isolation without considering the employee cost included under the head Administrative expenses , the TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... financials of this company under this segment cannot be compared with the assessee. The contribution by the sale of software products or training to the overall revenue of this segment cannot be precisely ascertained to determine the question of its comparability. As such, this case is directed to be excluded. The assessee succeeds. 39. Perusal of the annual report of this company available on file goes to prove that software development segment of this company also includes revenues from software and training whereas assessee company is not engaged in imparting any training or selling its software product to attract revenue. So, the finances of this company are not comparable with the assessee company. In view of the matter, we hereby direct that this company is not a valid comparable. (ix) LGS GLOBAL LIMITED (LANCO GLOBAL SOLUTION LIMITED) 40. This company having 15.75% OP/TC has been selected by the TPO as a comparable company as it qualifies all the filters applied by the TPO. During the TP proceedings, the assessee has not raised any objection for inclusion of this company vide its letter dated 08.07.2010. However, before ld. DRP, assessee raised the sole objecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any revenue by way of sale of product/licence. So, by respectfully following the findings returned by the coordinate Bench, we hereby direct to exclude this company from the list of comparables for TP adjustment. (xi) MEGASOFT LIMITED : 44. This company was not in the accept/reject matrix of search process in the TP study. It has OP/TC for the financial year 2006- 07 at 60.23%. TPO retained this company as a comparable despite objections raised by the assessee on the grounds inter alia that this company is functionally dis-similar being into the sale of software product along with provision of software development services; that the information provided by the company u/s 133(6) of the Act is not reliable nor it is available in the public domain and again relied upon the case of TOLUNA (supra). The coordinate Bench to exclude this company from the list of comparable for comparability with TOLUNA (supra), a similarly situated company as that of the assessee, returned the following findings :- 31.2. Having heard the rival submissions and perused the relevant material on record, we find from the Director s report of this company, a copy of which is available on page ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his company cannot be construed as normal capable of a good comparison. Following the Mumbai Bench decision in Petro Araldite (P) Ltd. (supra), we direct the exclusion of this company from the list of comparables. The assessee succeeds. 47. Following the decision rendered by the coordinate Bench in the case of TOLUNA (supra), we hereby direct to exclude this company form the final list of comparable on ground of merger which has impacted the financial result of this company necessary for comparison for transfer pricing adjustment. (xiii) R SYSTEMS INTERNATIONAL LIMITED (SEGMENTAL) 48. This company has been selected as a comparable by the TPO having OP/TC for the financial year 2006-07 at 15.07% despite objections raised by the assessee that this company is deriving revenue from both product and software services and as such is functionally dis-similar. However, on the other hand, ld. DR contended that this company is a valid comparable with correct percentage of OP/OC at 15.07% and relied upon the case of TOLUNA (supra). 49. Coordinate Bench examined the comparability of this company with TOLUNA (supra), a similar situated company as assessee in this case, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ta Elxsi Ltd., we hold that this company cannot be included in the list of comparables. Accordingly, this company is directed to be excluded. The assessee succeeds. 53. Keeping in view the fact that this comparable company is developing hardware and software for embedded products, such as, multi-media and some other electronics etc. and is also making some programmes developing technology in the form of intellectual property. So, the functional profile of the assessee company vis- -vis comparable company is dis-similar and makes it incomparable for transfer pricing. So, we hereby direct to exclude this company from the final list of comparables. (xv) THIRDWARE SOLUTIONS LIMITED : 54. This is TPO s own comparable finding place in the final list of comparables despite objections raised by the assessee inter alia that this company is not a software service provider and that TPO/DRP have used unaudited segmental data relating to software development profit segment by the assessee company in response to the notice u/s 133(6) of the Act. 55. However, undisputedly the ld. TPO has used segmental data of this comparable company relating to software development profit segment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t as a valid comparable for correct transfer pricing adjustment. So, we hereby order to exclude this company from the final list of comparables. 58. In view of what has been discussed above, the impugned order is set aside and the case is restored to the ld. TPO/AO for redetermination of ALP of international transactions undertaken by the assessee during the year under assessment in the light of the directions given hereinbefore. COMPARABLE COMPANIES SOUGHT TO BE INCLUDED BY THE ASSESSEE FOR BENCHMARKING ITS INTERNTAIONAL TRANSACITON : (i) GOLDSTONE TECHNOLOGIES LIMITED : 59. This is assessee s own comparable which has been rejected by the TPO on the grounds inter alia that the assessee has not taken into account the data pertaining to financial year 2006-07; that the assessee has failed to explain the export earnings as well as onsite revenues as the same was not available or clear from the annual report; that this comparable company is into IT enabled services and not into software development services and as such is functionally dis-similar. 60. From the findings returned by the ld. TPO at page 33 of the TP order, it is apparently clear that the TPO has reje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f certain expenses goes to prove that he has apportioned the same by considering the letter dated December 22, 2010 filed by the assessee that no expenditure except for an amount of ₹ 33,45,506/- that has been allocated to the STP unit of the assessee company, in respect of which tax holiday u/s 10A has been claimed and the assessee has not submitted detail of any other expenses incurred by the Head Office and equated to the 10A unit. AO further observed that the contention of the assessee that no other expenditure has been incurred, cannot be accepted. So, the findings returned by of the AO are comprehensive based upon the material relied upon by the assessee. 65. Then ld. DRP rejected the argument addressed by the assessee by returning following findings :- 134. It is submitted before us that the assessee's STP unit in Bangalore has separately maintained its administrative, HR and other support functions. Separate employees, bank account and office infrastructure was maintained by the assessee in respect of this STP unit. Therefore, most of the costs / expenses incurred by the assessee were directly relatable to the STP unit and were directly charged to the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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