TMI Blog2015 (12) TMI 1759X X X X Extracts X X X X X X X X Extracts X X X X ..... elopment services, thus companies functionally dissimilar with that of assessee need to be deselected from final list. Deduction u/s.10A - adjustment of losses - Held that:- Losses of section 10A units have to be adjusted against taxable profits of other units after deduction under section 10A has been allowed in respect of each of the profitable unit under section 10A. Reducing the telecommunication expenditure from the export turnover of the eligible units, the while computing deduction under section 10A - Held that:- As decided in assessee's own case 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 soft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9. The assessee has raised as much as 15 grounds of appeal challenging the various additions on account of transfer pricing adjustments of ₹ 149,22,84,130/- and certain other disallowance and additions made under other corporate heads. 2. At the outset, the Ld. Counsel Shri M P Lohia submitted that, so far as ground no. 1 is concerned, the same is general in nature and ground no. 2, 3, 4 and 9 are not pressed accordingly, these grounds are treated as dismissed being not pressed. Effective issue raised vide ground no. 5 to 8 is on account of transfer pricing adjustment ₹ 149,22,84,130/-, which are being taken up first. 3. The brief facts qua the issue of transfer pricing adjustment are that assessee, Capgemini India Pvt. Ltd. is an Indian Company owned substantially by Capgemini US LLC, a company incorporated in USA. The assessee company is engaged in the business of providing software development export services mainly to its Associated Enterprises (AEs) i.e. Capgemini Group Companies and third parties. The main service line of the assessee company includes, software technology services; IT outsourcing services; and customizes service software development servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I for the relevant assessment year was worked out to 12.79%. In the transfer pricing study report, the assessee selected 21 comparables having weighted average margin based on 3 years data at 13.78%. Later on, at the stage of the transfer pricing proceedings, the assessee on the basis of single year data of the same set of comparables, worked out the average arithmetic mean at 10.39%. From such a profit margin, the assessee sought marketing adjustment of 0.9% and risk adjustment of 6.50%. The comparables selected by the assessee along with their margin were as under:- Sr. No. Name of Company Operating profits on operating costs for FY 2007-08 (%) 1 Akshay Software Technologies Limited 7.30% 2 Aztecsoft Limited 6.31% 3 Goldstone Technologies Limited 27.03% 4 Helios Matheson Information Technology Limited 36.05% 5 Indium Software (India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s were confronted to the assessee to submit its objection. Finally after considering the assessee s objection/submission, the TPO finally selected set of 17 comparables which included 4 comparables chosen by the assessee company, the arithmetic mean of profit margin of these comparables were arrived at 24.97%. Thereafter, the TPO further allowed the benefit of working capital adjustment to the assessee and accordingly, the adjusted margins of the comparable companies were determined at 23.79%. The final lists of TPO s comparables with the adjusted margins are as under:- Sr. No. Name of Companies OP/TC 1 Acropetal Technologies Ltd (IT Segment) 27.09% 2 Ancient Technology (Holdings) Ltd (Earlier know as Flextronics Software Systems Ltd) 7.03% 3 Avani Cimcon Technologies Ltd. 25.31% 4 Bodhtree Consulting Ltd. 20.73% 5 E-Infochips Ltd. 29.50% 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is no dispute. These 7 companies with the operating margin are as under:- Sr. No. Name of the Company Operating margins on costs 1 Infosys Technologies Ltd 41.20% 2 Wipro Ltd (Wipro Technologies Segment) 30.56% 3 Ancient Technology (Holdings) Ltd (Earlier known as Flextronics Software Systems Ltd.) 7.03% 4 Mindtree Ltd. (Earlier Mindtree Consulting Ltd) 15.89% 5 Persistent Systems Ltd 28.87% 6 Sasken Communication Technologies Ltd (Software Services Segment) 13.15% 7 LGS Global Ltd (Formerly Lanco Global Systems Ltd) 26.53% Arithmetic Mean 23.32% 6. Mr. Lohia, submitted that if the lower turnover filter of ₹ 100 crores is accepted in view of Tribunal order, then, the assessee is o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rivate Limited in ITA No. 1204 of 2011 held that Infosys Technologies Ltd. should be excluded as a comparable from the captive service providing company, because Infosys is full risk bearing entrepreneurial entity and cannot be compared with interest mitigated captive unit. Thus, the Infosys should be removed from being comparable company. Catena of various Tribunal decision were also filed wherein the Infosys have not been held to be comparable with the captive software service provider companies. 9. Regarding Wipro Ltd also, he submitted that the said company should not be considered as a comparable mainly on the ground that : Firstly, the company is engaged in various services, other than software development services like BPO services, consumer products, software products etc. Secondly, segmental information is also not available in the public domain and whatever information which was made available by the Department that does not match with the revenue details of each stream of the income as provided in the Product Description Schedule of the Annual Report of the company. Further, the annual report of the company shows that, 68% of the revenue comprises of sale of pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Not Available Not Applicable Profits attributable to brand 3,134 (As per handout Not Available Not Applicable Risk Profile Operates as a fullfledged risk bearing entrepreneurial entity Operates as a fullfledged risk bearing entrepreneurial entity Operates as a risk mitigated captive service provider. 10. After explaining the above functional difference, Mr. Lohia submitted that in the assessment year 2007-08, the Tribunal has decided the exclusion of these two comparables against the assessee and has held that Infosys and Wipro can be compared with the assessee company for the purpose of bench marking the assessee s ALP margin. He submitted that, however, the earlier decision of the Tribunal should not be followed in this year for the various reasons which has been highlighted in the following manner :- Sr. No. Tribunal s observation in AY 2007-08 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arable. Thus, it is submitted that Infosys can no longer be considered as a comparable selected by the assessee and has to be considered as the TPO s comparable. Thus, the observation of the Hon ble members in AY 2007- 08 that the Assessee has rejected its own comparables, shall not apply in the year under consideration. Accordingly, we humbly request your Honour s to consider our plea against inclusion the said comparables. 3 The turnover of the company should not have an impact on its profitability The turnover and margin of Infosys and Wipro are higher than that of the assessee whereas the turnover of the other two comparables are lower. As we have observed earlier, the assessee is a part of a multinational group, well established in this field and has been rated as one of the top 50 companies in the world as per NASSCOM database. Therefore, there is no reason that its margin should be lower than any Indian company, how big it may be. (Refer Para 5.3.10) The Assessee whishes to state that Infosys and Wipro other than being giant companies have huge brand value and own significant in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on cannot be applied in the present case for rejecting the Infosys or Wipro, because the turnover of the Agnity company was ₹ 16.09 crores which cannot be compared with the established player like Infosys. On the other hand, the assessee is huge Multinational corporation having turnover of more than ₹ 1,600 crores and it is also leveraging and helping its AEs to build a huge brand. Thus, the assessee itself has a huge turnover and, therefore, it has rightly been included in the comparability list of TPO. He drew our attention to the various business descriptions of the comparables and that of the assessee. In AY 2009-10, these two companies were again included by the TPO, however, the same was not contested by the assessee, because even after taking their margins, the assessee s margin fell within the range of 5%, hence, the said issue was considered as academic. Thus, he submitted that, in view of the precedence of the earlier years, these two comparable companies have rightly been included in comparable analysis and consistency should be followed. 13. We have carefully considered the rival contentions put forth by the parties, perused the relevant finding given i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e adopted for selecting the comparables. Such a cap of minimum turnover has been put for limited purpose to ensure that the selected comparables should be of certain critical mass for carrying out proper comparability analysis and there margins can be compared qualitatively. We agree with the proposition of the Tribunal laying down the minimum turnover filter of ₹ 100 crores in the case of the assessee, because the selection of the comparables has to be seen both on quantitative and qualitative criteria. A turnover of a company most likely has a bearing on its comparability as the size of a transaction in absolute value or in proportion to the activities of the companies might affect the relative competitive positions of the buyer and the seller. The size of the two companies and relative economies of scale under which they operate have a huge bearing while carrying out the comparability analysis of price or profit margin. It also affects the FAR analysis (ie., functions performed; assets employed; and risks assumed) to a great extent Thus, for initial screening of potential comparables quantitative filter of turnover should be applied so as to evaluate in qualitative terms t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on catena of decisions wherein these two comparable companies have been held to be excluded from companies providing software programming services, especially in the cases of captive service provider. Some 20 decisions of Tribunal including that of the Delhi High Court in the case of Agnity India Technologies Private Limited (supra) have been filed and relied upon. The department s case on the inclusion of these two comparables are that, firstly, it is squarely covered by the decision of the Tribunal in the assessee s own case and there being no change in material facts and circumstances, no different view should be taken and secondly, the decision of Delhi High Court in Aginity s case would not be applicable on the facts of the present case. From the perusal of the Tribunal order for the assessment year 2007-08, we find major reason for rejecting the assessee s contention for exclusion of these two comparables was that, they were selected by the assessee itself in its own transfer pricing study report and hence, the assessee was fully aware of their work profile and its own profile while selecting these companies. Further, the assessee has raised no plea either before the TPO/DRP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to why the comparables chosen by it were not correct, it cannot be said that the assessee is out rightly precluded from raising such objections. The ultimate aim of the transfer pricing provisions is to determine the appropriate ALP, which can be done only by bench marking with the proper comparables based on FAR analysis and under the prescribed methods. If in the course of the proceedings, it is found that certain comparables do not stand the test of functional analysis or for some other reasons, then the same should be excluded and we do not find any reason in the contention raised by the ld. DR that they should be included simply because the assessee had included the same. The initial onus of duty is cast upon the assessee to carry out the selection of proper comparables based on FAR analysis and by adopting suitable transfer pricing method and then analyse its transaction to show the correct arm s length result. Thereafter, it is axiomatic that the taxing authorities / TPO, should scrutinize the assessee s report on arm s length result and the entire process of arriving at the ALP, whether they are based on transfer pricing principles and statutory provisions or not. If he him ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unctions having huge variation in turnover, a qualitative analysis has to be carried out for comparability analysis and see the material factors for choosing it as a comparable for benchmarking the controlled transactions. Thus, we are of the opinion that qualitative analysis assumes great significance for selecting or rejecting the comparables. While dealing with the arguments of the ld. Counsel in the foregoing paragraphs, we have already incorporated the analysis of Infosys Technologies Ltd. and Wipro vis-a-vis the assessee giving quantitative and qualitative parameters of difference. The main distinguishing features which can be gauged are firstly, the presence of huge intangibles and brand value in the case of Wipro and Infosys whereas in the case of the assessee which is a captive service provider, there are no such intangibles; secondly, both the comparables are full-fledged risk bearing entrepreneurial entity whereas, the assessee operates as a risk mitigated service provider; thirdly, both these companies also have significant R D activities which has led to creation of significant intellectual property and branded products. These factors go to affect significantly the pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... corporate tax grounds. In Ground no. 10, assessee has raised the following ground :- DRP has erred in reducing the losses of Chennai unit at ₹ 11,35,20,100/- and Kolkata unit at ₹ 84,80,844/-, aggregating to ₹ 12,20,00,944/- from the deduction allowable to the Appellant under Section 10A of the Act. 22. Facts in brief on the impugned issue as submitted by the assessee are that, during the year under consideration, Capgemini India Private Limited owned and operated nine software units, namely, Mumbai I (non 10A unit), Mumbai II (section 10A unit-5th year of claim), Mumbai III (section 10A unit-4th year of claim), Bangalore unit (section 10A-4th year of claim), Kolkata unit (section 10A unit-3rd year of claim), Pune I (Non 10A unit), Pune 2 (section 10A unit-7th year of claim), Hyderabad (section 10A unit- 5th year of claim), Chennai (section 10A unit-8th year of claim). The Assessee claimed Section 10A deduction in respect of Mumbai II, Mumbai III, Bangalore unit, Pune 2 and Hyderabad. No deduction under section 10A has been claimed in respect of Mumbai I and Pune I unit as they are not eligible for deduction u/s.10A and in respect of Kolkata unit and Ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and ITAT order for AY 2009- 10. Ld. DR also accepted that this issue is covered in favour of the assessee by the order of the Tribunal order. The relevant observation of the Tribunal in the assessment year 2006-07 reads as under:- We have perused the records and considered the rival contentions carefully. The dispute is regarding set off of loss of a s. 10A unit against the taxable profit of other units. The assessee had four 10A units in respect of which deduction under s. 10A was allowable and one non-s.10A unit wax exempt, loss from s. 10A unit has to be ignored or alternatively the loss has to be adjusted against the profit of another s. 10A unit before allowing deduction under s. 10A. We have gone through the provisions of s. 10A and find that as per the provisions in force prior to asst. yr. 2001-02, the profit and gain from the eligible undertaking was not to be included in the total income which meant that the income from the eligible unit was exempt from tax. However, provisions were amended with effect from asst. yr. 2001-02 and as per the amended provisions, the profit and gain derived by an eligible undertaking are required to be deducted from the total income. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision Bench of this Court in the case of Hindustan Unilever Ltd vs Deputy Commissioner of Income Tax anr., reported in [2010] 325 ITR 102. The parties agree that the discussion of the Division Bench and particularly at paragraph 17 of the judgment covers the point . 26. Accordingly, respectfully following the decision of the Hon ble High Court, the ground no. 10 as raised by the assessee is treated as allowed. 27. In ground no. 11, the assessee has challenged that DRP has erred in reducing the telecommunication expenditure aggregating to ₹ 12,01,53,644/- from the export turnover of the eligible units, the while computing deduction under section 10A of the Act. 28. The assessee is engaged in development and export of computer software and not in providing technical services outside India. The assessee has not separately charged its clients telecommunication expenses incurred by it. Therefore, such expenses are not included in the export turnover of the eligible units. As per the definition given in clause (iv) of Explanation 2 to section 10A, export turnover does not include freight, telecommunication charges or insurance attributable to the delivery of the articl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed. 29. Ground no.12 is general in nature and no adjudication is called for accordingly dismissed as it becomes infructuous. 30. In ground no. 13, the assessee has challenged that, the DRP has erred in reducing the expenditure incurred in foreign currency aggregating to ₹ 94,54,13,470/- from the export turnover of the units eligible, while computing deduction under Section 10A of the Act. The facts in impugned issue are that, assessee is engaged in development and export of computer software and not in providing technical services outside India. Assessee submitted copies of Audit Report under section 56F in respect of each of the eligible / unit, wherein the Chartered Accountants had certified that CG India's eligible unit was engaged in the development and export of computer software. Before the AO the assessee submitted that wordings attributable to the delivery of computer software outside India are not present in the second limb of the definition regarding the expenses incurred in foreign exchange. Therefore, CG India submitted that the second exclusion in respect of expenses incurred in foreign exchange would not be applicable in respect of export turnover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s then also it cannot be held that no disallowance u/s 14A can be made because, ultimately such investments would yield exempt income and further the disallowance cannot be restricted to exempt income only, because there can be expenditure directly attributable to investments which may not yield exempt income immediately but in future. The concept of income includes loss has to brought in such circumstances. 36. After considering the rival contentions and on perusal of the impugned order, we find that so far as disallowance of interest of ₹ 1,86,089/- is concerned, the same cannot be made as admittedly, the assessee has huge surplus funds which are interest free and, therefore, no disallowance of interest should be made. As regards the indirect expenses, the same has been disallowed under Rule 8D by the AO in a mechanical way, without satisfying himself after looking into the nature of accounts of the assessee and the nature of expenses debited in the books of accounts as per mandatory requirement of section 14A(2). If assessee s investments are only in subsidiary companies and mutual funds, then it cannot be held that assessee might have incurred huge expenditure. The ass ..... X X X X Extracts X X X X X X X X Extracts X X X X
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