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TMI Blog2018 (1) TMI 1351X X X X Extracts X X X X X X X X Extracts X X X X ..... is bad in law and void-ab-initio. 2 That on facts and in law, the Learned AO has erred in computing the total income of the Appellant at INR 33,20,95,411 as against the returned income of INR 28,10,94,267 by making an upward adjustment of INR 4,89,94,226 and INR 20,06,918 with respect to transfer pricing ("TP") and corporate tax matters, respectively. Part I - Transfer Pricing Grounds 3 That on facts of the case and in law, the DRP/TPO/AO have erred in rejecting the economic analysis undertaken by the Appellant by conducting a fresh economic analysis for international transaction pertaining to provision of IT back office support services ("impugned transaction"). 4 That on facts of the case and in law, the DRP/TPO/AO have erred in rejecting certain companies and adding certain companies to the final set of alleged comparable companies on an ad-hoc basis, thereby resorting to cherry picking of comparable companies for benchmarking the impugned transaction. 5 That on facts of the case and in law, the DRP/TPO/AO have erred in selecting companies in the final set of alleged comparables which have different business / operating models as compared to the Appellant for the impu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parables for impugned transaction and in the process inter-alia neglected the Indian transfer pricing regulations, international guidelines on transfer pricing and judicial precedence in this regard. 11 That on facts of the case and in law, the DRP and TPO/AO have erred by not considering that the adjustment to the arm's length price, if any, should be limited to the lower end of the 5 percent range as the Appellant has the right to exercise this option under the second proviso to section 92C(2) of the Act. 12 That on facts of the case and in law, the DRP/ TPO/AO have erred in using single year data for financial year ("FY") 2009- 10 of alleged comparable companies without considering the fact that the same was not available to the Appellant at the time of complying with the transfer pricing documentation requirements and disregarding the Appellant's claim for use of multiple year data for computing the arm's length price. 13 That on facts of the case and in law, the DRP/TPO/AO have erred in erroneously allocating the indirect costs on the basis of the respective segmental revenue of the Appellant and redetermined the operating margin of the Appellant for the impugned tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Length Price (ALP) of international transactions to the Ld. Transfer Pricing Officer (TPO). The Ld. TPO vide his order dated 20/01/2014 under section 92CA(3) of the Act, computed arm's length price (ALP) of the international transactions by making adjustment of Rs. 21,54,03,221/-. On the basis of the order of the Ld. TPO, the Assessing Officer proposed addition of Rs. 21,54,03,221/-. The Assessing Officer also proposed reduction in deduction of Rs. 20,06,918/- under section 10A of the Act in view of the re-allocation of director's salary amount in STP and non-STP units. The Assessing Officer issued a draft assessment order on 24.03.2014 proposing above two additions. The assessee filed its objections to the draft assessment order before the Ld. DRP. After considering the submission of the assessee, the Ld. DRP issued directions on 11/11/2014 to the Assessing Officer. The Assessing Officer after incorporating the direction of the Ld. DRP, issued final assessment order under section 143(3) read with section 144C of the Act on 15.12.2014. Aggrieved with the said order, the assessee is in appeal before the Tribunal raising the grounds as reproduced above. 3. The ground Nos.1 and 2 ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ering. The 3 phases of Product Engineering are Product Definition, Product Development and Servicing. In the Product Definition (Conceptualization) phase, a value proposition and a product prototype are developed based on customer feedback from the servicing phase, surveys, competitive analysis, the product leader's vision for future and CDS's overall vision for the product category. Then, marketing research is performed to test the value proposition and the marketing feasibility of a product prototype; The product leadership team and product engineers will work with the marketing research team to address software engineering issues and technical feasibility. When the prototype is finalized the next phase of the lifecycle begins. The second phase is Product Development, which is a 5 step process involving determination of the requirements, design, implementation; verification and release. Again, each stage is a collaborative effort among the Product Engineering Team, the Marketing Team and Product Management to ensure that the product is on track to meet the value proposition framework. Product Engineering is a generic term to identify software architecture development, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce India generates and makes available documentation for the software developed and transferred. The software "developed by Cadence India is subsequently integrated into the final software product by CDS and other Cadence group entities. Project management Although the day-to-day management of the project is undertaken by Cadence India, CDS is responsible for the overall project management. CDS regularly conducts meetings to analyse the progress and monitors the project plan. Quality control, testing and integration Cadence India is responsible for ensuring that requisite quality/ performance standards are complied with while rendering services. 5.4 The assessee reported following international transactions: International Transactions Method Value (INR) Provision of software research and development services TNMM using Operating profit as PLI Operating Cost 1,57,79,32,410 Provision of IT back office support services TNMM using Operating profit as PLI Operating Cost 42,69,64,705 Provision of pre-sales marketing and postsales technical support services TNMM using Operating profit as PLI Operating Cost 34,16,72,056 Payment of bank guarantee TNMM us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7.15 6 Jindall Intellicom Pvt. Ltd. 18.67 7 Omega Healthcare Limited 15.31 8 E4e Healthcare business services Pvt. ltd. 21.01 9 Caliber point Business Sol. Ltd. 21.92 10 Axia IT & T Ltd. 13.51 5.9 Ld. TPO rejected seven comparables selected by the assessee as under: Sl. No. Comparables TPO's Comments 1 CG VAK Software and Exports Limited (Segmental) Fails turnover filter 2 Informed Technologies Limited Turnover is less than Rs. 5 crores 3 R Systems International Limited Financial year ending other than March 31 4 Caliber Point Business Solutions Ltd This comparable has different financial year ending. Rejected. 5 Axis-IT&T Limited. It fails export sales filter. Rejected. 6 Omega Healthcare Limited No annual report is available in public domain 7a Microgenetics System Ltd. Sales less than 5 crore, fails turnover filter 5.10 Further Ld. TPO used following new comparables: SL. No, Company Name 1 Accentia Technologies 2 Eclerx Services Ltd. 3 Fortune Infotech Ltd. 4 Igate Global Solns. Ltd. 5 TCS E Serve Intnl. Ltd. 6 TCS E-Serve Ltd. 7 Infosys BPO 5.11 The compar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f comparables are adjudicated as under: 6. First we take up the issue of exclusion of companies considered comparable by the Ld. Transfer Pricing Officer (A) TCS E-serve International Ltd. 6.1 Before us, the Ld. counsel relying on the submission made before the Ld. TPO and the Ld. DRP, submitted that due to peculiar economic circumstances, the company need to be excluded. He submitted that pursuant to acquisition by the Tata Group (page 258-259 of the annual report), there is exceptional rise in turnover (173 percent) and profit (283 percent). He further submitted that the company was engaged in providing technical services like software testing, verification and validation of softwares, transaction processing including processing, collection, customer care and payments to corporate and retail clients of Citigroup and voice-based services (page 3 of audited accounts of the company), which are functionally different from ITES services rendered by the assessee. According to the Ld. counsel for a variety of services rendered, no segment data was available (page 39 of the Annual Report of the company). The Ld. counsel further submitted to exclude the company on the ground of the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DRP in retaining the company as comparable was justified. 6.3 We have heard the rival submission and perused the relevant material on record. The contention of the Ld. counsel to reject the company as comparable on the ground of rise in turnover and profit as compared to last year, is not tenable. Under the transfer pricing provisions of the Act, the company is to be compared on the basis of FAR (functions carried out, assets employed and risk taken). Once the company is found to be comparable in FAR analysis, in our opinion rise in turnover or profit compared to earlier year cannot be a ground enough for its exclusion from the set of comparables. In normal business scenario, there cannot be a fixed rate of growth and fluctuations in the growth is normal part of business activity, which cannot be made a basis for exclusion of the company from the set of comparables, if otherwise it is functionally similar. 6.4 The second contention of the Ld. counsel that company is functionally dissimilar, is also not found to be correct. On page 31 of the Annual Report of the company, background and principal activities have been mentioned under Schedule 'N' of Notes To Account. The relevant e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tenable as the company was functioning in one segment of ITES only. 6.9 The contention of the Ld. counsel for exclusion on the ground of deemed RPT is also not acceptable. w.e.f. 01/01/2009, the Tata consultancy services Ltd is the holding company of the company and thus during the entire period under consideration i.e. 01/04/2009 to 31/03/2010, the transactions with Citigroup Companies cannot be held as related party transactions in the case of the company. We agree with the contention of the Ld. CIT(DR), that the assessee has not brought on record any evidence that the assessee company continued to provide services to the city group companies on the basis of agreements contracted prior to 01/01/2009. Even if, we consider that the services were provided under a long-term contract, still it cannot be deemed a related party transaction in view of the change of ownership. 6.10 Further, the contention of Ld. counsel of impact of 'Tata' brand on profitability of the company is also not tenable in view of the facts the no evidence has been brought on record as how the 'Tata' brand has impacted the profitability of the company. Further, the expenditure corresponding to contribution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tionally similar to the assessee. Accordingly, we hold that the company cannot be excluded on the ground of functional dissimilarity. 7.3 The arguments of the Ld. counsel on the issue of non-availability of segment information, deemed related party transactions and entity having access to Tata brand are identical to the arguments taken in the case of TCS e-serve international Ltd. Thus following our finding in the case of comparable TCS e-serve international Ltd, we reject these arguments taken in respect of TCS e-serve Ltd also. 7.4 In view of the discussion, we uphold the direction of the Ld. DRP in retaining, TCS e-serve limited as a valid comparable. (C) Accentia Technologies Ltd. 8. The Ld. counsel submitted that the company is functionally different from the assessee company. He referred to page 4, 5 and 39 of the Annual Report and submitted that the company was engaged in diversified services which include HRCM (using Saas Model), Knowledge Process Outsourcing (KPO) and Legal Process Outsourcing (LPO) and separate segment information for HRCM is not available. The Ld. counsel drawn our attention to page 73 of the Annual Report and submitted that the company owns sign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal is reproduced as under: "14.3 We have considered the rival submissions and also perused relevant finding given in the impugned order. Accentia Technologies Ltd. has two main business areas namely, health care receivable cycle management services and software products for BPOs. It earns substantial part of its income from coding activities which is primarily related to e-software development. Various streams of income shown in the annual report reflects that it has income from medical transcription, billing and collections, income from coding, etc. It is not in dispute that segmental information for each streams of income are not available, therefore, it would be very difficult to benchmark profit margin with the assessee-company, which is only rendering back office support services. Another important fact which is borne out/ from the its annual report is that, during the year under consideration, assessee has acquired business of Oak Technologies Inc. USA which has led to rapid increase in its customer base. Such acquisition definitely has an impact on the trading result and can distort profit margin. Thus, we hold that Accentia Technologies Ltd. cannot be included in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that all the activity reported might be in different verticals but the function carried out falls under the category of BPO or ITES only. He submitted that the company in the profit and loss account has reported its revenue from business process management services, which being ITES segment, no separate reporting for different verticals was required ,for selecting the company as comparable. On the issue of high brand value expenses, the Ld. CIT(DR) supported the finding of the Ld. DRP that the assessee has not brought on record any evidence of AMP expenditure incurred by the company resulted into higher profit. On the issue of large scale of operation, the Ld. CIT(DR) submitted that the turnover of the assessee was in the comparable range of the turnover of the company and it was not too low as compared to the comparable company. On the issue of acquisition of McCamish Systems LLC, the Ld. CIT(DR) submitted that the assessee has not demonstrated any effect on the PLI of the company. He further referred to page 121 of the Annual Report of the company and submitted that only member's interest had been purchased and there is no merger or demergers due to acquisition. He submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee failed to adduce any evidence as how the merger had impacted the profitability of the company. Further, we have observed from page 13 of the Annual Report of the company, which reads as under: "Consequent to the purchase of Members Interest in McCanmish Systems LLC ("McCamish"), Infosys BPO has become the sole member of McCamish with effect from December 4, 2009. During the period from December 4, 2009 to March 31, 2010 the company generated revenue of Rs. 38.02 Crore with a loss of Rs. 17.67 Croes................." 9.6 Thus, it is evident that acquisition of McCamish Systems LLC has contributed revenue of Rs. 38.02 crores and loss of Rs. 17.67 crores, therefore, there is no increase in exceptional profit due to acquisition of the said LLC. Thus, the contention of the Ld. counsel of having increase in the profitability due to acquisition, is not tenable. 9.7 In view of the above discussion, we uphold the direction of the Ld. DRP to retain the 'Infosys BPO Ltd.' as a valid comparable for backoffice support service transaction 10. Now, we take up the request of the assessee for inclusion of the two comparables . (A) CG VAK Software and Exports Ltd. 11. The Ld. coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quantitative level then comparability has to be done on qualitative level based on FAR analysis. If on FAR analysis it is found that there are differences on account of either assets deployed, risk assumed materially affecting the cost or margin then only comparability analysis fails in such cases. Further, under the TNMM, the comparability of an international transaction with an uncontrolled transaction is to be seen with reference to functions performed after taking into assets employed and the risk assumed. While reckoning the comparability analysis under TNMM, the main emphasis is into net margin realized on the transactions undertaken and not the price of the product or services. The transfer pricing rules under Rule 10B and 10C also contemplate for eliminating the material effects and to make reasonably accurate adjustment for eliminating the differences on account of such material effects. Mere circumstance of a company which otherwise confirm to the comparability analysis in terms of Rule 10B(2) and (3), huge profit or huge turnover ipso facto does not lead to its exclusion unless and of course it is shown that turnover or huge profit is on account of factor leading to a di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Ld. DRP in para-6.5.2 of their order and submitted that it is very difficult to carryout adjustment, assumptions, classification etc of the comparable to bring the transaction at par with the international transaction and therefore, such comparable should be eliminated from the set of comparables. 12.2 We have heard the rival submission and perused the relevant material on record. We find that the Ld. DRP in para-6.5.2 of their order has given finding on the principle whether comparable having different financial year should be considered or not. The relevant finding of the Ld. DRP is extracted as under: "6.5.2 DRP Findings: The issue of Comparables maintaining accounts in terms of period other than the financial year has befen considered by this Panel as under: 1. So far as the issue of requirement of data pertaining to the F.Y. as provided in rule 10B{4) is concerned, the submission of taxpayer that there is no impediment in law to use data even if the comparables do not maintain their accounts in terms of financial year, the same is correct. However, Rule 10B{4) is not to be read in isolation. This rule has been provided for the purpose of determination, analysis and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of such data for the purpose of comparability will be a matter of question mark. Also, some of the companies provide for depreciation at the end of the accounting period. Apportionment of such depreciation on prorata basis to a particular quarter or month will be a difficult proposition. 4. Most important many of the companies maintaining accounts other than on financial year basis do not keep such data in public domain. Such inaccessibility of vital information in public domain may not render the comparison the warranted judicious effect creates a hurdle wherein the effort required to search for such comparables data for the financial year is not commensurate with the result. 5. In addition, in order to reach at such uncontrolled comparables, the taxpayer as well as the TPOs apply certain filters in accordance with the provisions of Rule 10B. For e.g. the filter of export income/ realization is applied for comparison of an international transaction involving export of goods and services; filter of related party transaction is applied for the purpose of identifying only those comparables which are functioning in a relatively uncontrolled environment. It is difficult to apporti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of a given period of a comparable uncontrolled transaction with controlled transaction. If the financials of the corresponding period is available then it cannot be rejected simply on the ground that it has a different financial year. As brought out on record by the Ld. Counsel before us submitted that the audited accounts of R- Systems for the year ending 31.12.2008 and for the quarter starting from 31.01.2008 to 31.03.2009 is available and once such an audited statement is available, then the proportionate working for 31.03 2009 can easily be deduced. If there are no major incident of factors disturbing the profit margin in that quarter, whose results are being worked out and the transactions of the Company are carried out in the normal course of business, then we do not find any reason to reject the comparable out rightly on the aforesaid ground. The working of PLI based on audited accounts as incorporated above clearly clinches the point. The Hon'ble P&H High Court in CIT Vs. M/s. Mercer Consulting India Pvt. Ltd., in the context of R-Systems only had made a very important observation which reads as under:- "27. The TPO excluded the case of R-Systems International Limit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the financial year of the assessee. What the Rule requires is that the data to be used in analyzing the financial results of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. Thus, so long as the data relating to the financial year is available, it matters not, if the financial year followed is different. In the case before us the data relating to the relevant financial year of R-Systems International Limited is available. 32. We are, therefore, entirely in agreement with the decision of the Tribunal that if the data relating to the financial year in which the international transaction has been entered into is directly available from the annual accounts of that comparable, the same cannot be held as not passing the test of sub-rule (4) of Rule 10 B." Thus, respectfully following the judgment of Hon'ble High Court, we hold that this company should be accepted as comparable company for the purpose of benchmarking the assessee's margin." 12.4 Since in the year under consideration also the company has been rejected on the ground of different financial ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levant observation of the Tribunal in ITA No. 39/Del/2013 for assessment year 2008-09 is reproduced as under: "26.1 After going through the decision of the Tribunal and the relevant finding given in the impugned order, we find that this precise issue has been dealt by the Tribunal in the assessee's own case. The relevant observation of the Tribunal is reproduced hereunder:- "14. In support of the grounds i.e. Ground Nos. 6 to 8, the Learned AR submitted that the Assessing Officer has erred in not correctly verifying the record submitted during the course of assessment proceedings contrary to DRP directions. He was not justified in disallowing income-tax holidays claimed by the assessee in respect of STP unit hi its 8th year of operation. The authorities below have also erred in allocating director's remunerations between STP unit and non-STP units by ignoring the facts placed on record and holding that the assessee intentionally debited director's salary to non-STP units to reduce its taxable income without appreciating the operating model being followed by the assessee. The Learned AR submitted that assessee's STP unit has its own finance/operational team whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remained that the assessee maintains its account in a manner that costs relating to STP and non-STP units are booked in the respective units; MD responsible for establishing/leading strategic R&D partnership and R&D central operations functions for NOIDA site where major portion ofR&D work was carried out; director financed responsible for finance and accounting, legal, tax and company secretarial compliance functions at Noida; STP unit at Bangalore since has its own core management staff and each person is responsible for their areas, the cost of such personnel are debited to their undertaking only; and appellant operates own cost plus model, hence, increase in cost in non-STPI unit will result in increase in Revenue and, therefore, results in increase in tax liability. Against the objection of the Assessing Officer that separate books of account are not maintained, the submissions of the assessee remained that as per the provisions of law, there is no requirement of maintaining separate books of account for a unit eligible to claim deduction under sec. 10A of the Act; and that it is the 8 year of claim of deduction under sec. IOA of the Act and the claim of deduction under sec. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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