9911796707
TMI Blog2014 (11) TMI 1159X X X X Extracts X X X X X X X X Extracts X X X X ..... Payment of Headquarters' Fees under the Service Agreement 7,797,910 2,825,500 TNMM 3 Receipts for providing software services 20,162,438,459 15,584,696,950 TNMM 4 Allocation of various costs to Assessee 347,374,901 298,131,795 - 5 Reimbursement of expenses incurred by various Cap Gemini entities on behalf of Assessee 198,780,013 174,396,814 - 6 Reimbursement of out of pocket expenses incurred by Assessee on behalf of Cap Gemini Group entities 2,637,911,454 2,189,543,752 - 7 Payment of training charges to Cap Gemini group entities 20,621,736 18,538,031 TNMM 8 Purchase of software and e-training licenses from overseas third party vendors under globally negotiated contract 8,625,970 1,576,246 TNMM 9 Bank guarantee charges paid 3,680,045 - TNMM 10 Professional fees paid to Group entities 2,547,130 - TNMM Total 18,285,109,074 3. The assessee submitted its TP Study report for the current year, wherein the assessee had entered into the following international transactions: Sr. No International transaction with its Associated Enterprises (AEs) Total value of transactions AY 2009-10 1 Trademark License fee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rable under TNMM. Accordingly, average profit margin of the 21 comparables came to 14.31%, considering weighted average margin on three years data, from financial years 2006-07, 2007-08 & 2008-09. 7. This basis of bench making was rejected and the AO gave a fresh list of comparables. 8. The AO, while examining the comparables as provided by the assessee observed, that some of those were inadequate. The AO, therefore, observed that certain comparables, were taken as adequate and he added certain comparables according to him, would lead the results to functionally similar. The AO, therefore, excluded those companies whose revenue from services activity was less than 75% of the total operating revenues: * "Companies whose data is not available for the FY 2008-09 are excluded. As per the Rule 106 (4), it is mandatory to use the current year data i.e. the data for the FY 2008-09. The proviso to Rule 1 O (4) says that data for earlier two year can also be used if it is shown that such earlier year's data had an influence in determining the transfer price. Further, the use of earlier year data is in addition to the current year data, provided the conditions are satisfied. This v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... last "three years up to and including FY 200809 are excluded. Because these companies have peculiar economic circumstances which are not in line with industry trend. * Companies whose employee cost is less than 25 % of the revenues are excluded. It has been held in judicial pronouncements that if the ratio of employee cost to sales is very low, it is an indicator that the company is not a software developer. Hence, it would be proper to apply a filter that rejects companies that have a ratio of employee cost to sales of less than 25%. * Companies having different financial year ending (i.e. not March 31, 2009) or data of the company does not fall within 12 month period i.e. 01-04-2008 to 31-03-2009, are rejected. If a tested party ends its financial year in March, then taking companies whose financial year ends in March will be an appropriate filter and may lead to a proper comparability. * Companies that are functionally different from the taxpayer are excluded. Companies that are having peculiar economic circumstances are excluded. Any other peculiar circumstances of a company which is divergent from the taxpayer and the environment in which the taxpayer and the com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct 1627.2 Operating expenses 37627.4 Operating Profit 14421.6 OP/TC(PLI) 38.33% Sasken Communication Technologies Ltd. (Source: Annual Report 2008-09) Description Amt. (Rs in Lacs) Amt. (Rs. in Lacs) Sale of software services 47974.68 Add: :misc Income 7.86 Operating revenue 47982.54 Total expenditure debited in P/L a/c. 43754.34 Less: Provision for doubtful deposits 36 Less: Exchange Loss 3845.08 Less: Provision in diminution in assets 831.39 Less: Exceptional items 1519.7 Operating expenses 37522.17 Operating Profit 10460.37 OP/TC(PLI) 27.88% 12. On this basis, the AO computed PLI at 27.88% as compared to 14.13% submitted by the assessee. 13. The issue was taken before the DRP. 14. Before the DRP, the assessee reiterated all his submissions made before the TPO/AO. 15. The DRP rejected the objections raised by the assessee, primarily on the ground of functional test. According to the DRP, turnover, profitability would not be a good ground to accept the comparable. 16. On these primary observations, the DRP rejected the obje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd deleted". 29. Based on the above, the assessee pleaded before the DRP "the Mumbai Tribunal in Assessee's own case for AY 2007-08 (order enclosed as Annexure 5has held that CG India, being an established player in the business of software development cannot be compared to companies with turnover of less than Rs. 100 crores. Without prejudice to the fact that CG India wishes to rely upon its search parameters as per its transfer pricing documentation, on applying the principles laid down by the Tribunal in the said order, the arithmetic mean margins of the comparables identified by TPO reduces from 29.03% to 22.63% (statement showing the computation of arithmetic mean enclosed as Annexure (6) Reasons for rejection of Infosys Limited ("Infosys") as a comparable to the Assessee are provided below: - The learned TPO had considered Infosys to be comparable to the Assessee in complete disregard of the fact that Infosys owns significant amount of brand/ proprietary products vis-à-vis the Assessee which does not own any intangibles - Moreover, it is an established position that a full risk bearing entrepreneurial entity like Infosys cannot be compared to a risk mitiga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is just 5%. It has been pointed out that the employees if sent overseas have certain dead hours, which cannot be properly utilized as can be done in the home country. But this argument as rightly pointed out by the Id. CIT-DR does not support the case of higher margin in case of onsite work because dead hours would mean less output with the same employee cost, which would in fact reduce the margin. No material has also been placed before us to show that the margin in case of onsite work is higher". and further observed, "Reverting back to the new comparables submitted by the assessee at the level of DRP, we find substance in the submissions by the Id. Sr. Counsel that TPO had not given sufficient opportunity for study and selection of new comparables as order was passed within a week of issue of show cause notice. Therefore, the new comparables selected at the level of DRP should have been considered. DPP has not considered the new comparables without giving any reason. In our view, it would be appropriate to take as many comparables as possible that the mean margin is closer to the correct margin because no two companies can be said to be exactly identical and small difference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... layed payments or the domestic buyers who delayed payments. Working capital adjustment therefore, is not allowable to the assessee". The AO also placed reliance on the decision of ITAT Mumbai in the case of Symantec Software Solutions Pvt. Ltd. to deny the adjustment as asked for by the assessee. 35. The issue was taken before DRP before whom it was pointed out that the ITAT in its own case in 2007-08 has allowed the working capital adjustment. The DRP simply sustained the order of the AO on the issue, without referring to the decision of the ITAT in its own case. 36. Before us, on the issue of working capital adjustment, the AR submitted that the ITAT in its order had observed, "The assessee has also requested for working capital adjustment. The case of the assessee is that working capital does have an impact on the profitability of the company and more accounts receivable in case of a company would mean relatively lower profit. Therefore, the companies could be considered as fully comparable if they hold the same level of account receivable and account payable. The TPO has, however, rejected the claim of working capital adjustment which has been upheld by the DRP. The reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce between the invoice amount booked at the time of accrual and the cash amount actually as a result of the prevailing exchange rates on the respective dates. Thus, foreign exchange fluctuation (loss or gain) does not impact the income from operations as recognized by these companies and accordingly is to be considered non-operating in nature. In addition to the above, foreign exchange fluctuations being a post facto outcome, the level of foreign exchange fluctuations is essentially dependent on the efficient functioning of a company's treasury team and not a reflection of a company's business operations. Additionally, the treatment of AE transactions when they were conducted would be on invoice value at the then conversion rate of foreign currency and not on a possible increase/decrease of conversion rate in future. Accordingly, the same being non-operating in nature is directed to be excluded while computing the operating margins of all comparables while carrying out the comparability analysis". 41. The issue became subject of appeal in S Narendra vs ACIT ITA No. 6839/Mum/2012 Rushab Diamonds vs ACIT ITA No. 7217/Mum/2012 Wills Processing Service(India) Ltd. vs. D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch and particularly at paragraph 17 of the judgment covers the point". 48. Respectfully following the order of the Bombay High Court, we direct the AO to recompute the exemption under section 10A in view of the decision of Hon'ble Bombay High Court in the case of the assessee. 49. Grounds are allowed for statistical purposes. 50. Ground no. 20 pertains to exclusion of telephone expenses from the computation of exemption under section 10A. 51. The AO/TPO disallowed the expense and the DRP observed, "The dispute in objection number 16 to 18 pertains to reduction of telecommunications expenses from export turnover of the units eligible for deduction under section 10A. Similarly, now 19 and 20 pertain to reduction of expenditure incurred in foreign currency from the export turnover of the units eligible for deduction under section 10A 11.1 The submissions have been considered carefully. The assessee has not explained or demonstrated before us the reasons and purpose of the telecommunication expenses and expenses incurred in foreign currency. Nothing has been bought on record this year to demonstrate that the telecommunication expenses were not attributable to the delivery of co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... according to us, does not raise any substantial question of law. The primary contention was that the expenses which the Assessing Officer desired to pick were not incurred in relation to export and, therefore, cannot be termed as deduction permissible from export turnover. These expenses have been incurred for the purposes of the business of software development at the software units in India. It is that finding which the Assessing Officer was unable to controvert or unable to bring any contrary material to disprove the same. It is in that light that the Tribunal found that the Assessing Officer could not have insisted on the deduction. It is that exercise undertaken by the Assessing Officer which has not been upheld but rather disapproved by the Tribunal. This is a finding purely on the facts and pertaining to the business of the assessee. The facts pertaining to the assessee's business of software development, the charges and which are claimed to have incurred, are in relation to the business of software development within India. They could not be said to be costs deductible from export turnover for the purposes of Section 10A of the Act. In such circumstances, we are of the opin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... follows: "Based on the facts and in the circumstances of the case and in law, the Appellant respectfully craves leave to prefer an appeal against the order passed by the Income-tax Officer, Range 10(2), Mumbai ('Learned AO'), under Section 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 ('Act'), in pursuance of the directions issued by the Dispute Resolution Panel -I, Mumbai ('Hon'ble DRP'), on the following ground: On facts and in the circumstances of the case and in law, the AO has: 1. Erred in not granting the foreign tax credit to the extent of Rs. 61,93,566, claimed by the Assessee while computing the income tax liability of the Assessee, even though the said claim was accepted by the AO, itself in the Assessment order; 2. erred in not granting credit for tax deducted at source to the extent of Rs. 10,93,70,202/- and advance tax to the extent of Rs. 1,60,00,000/- while computing the income tax liability of the Assessee". 65. The AR submitted that against both the issues, the assessee has filed rectification application under section 154 before the AO, which is still lying undisposed off. 66. We find that the issue is subject matter of assessment proceedings. We, t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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