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2019 (4) TMI 289

Limited - Related party transactions, as reported in the annual report by Sonata Software Limited, is indeed more than 50% of sales and therefore, this company does not pass the related party filter applied by the TPO. - E Infochips Bangalore Ltd. company is primarily engaged in software development and IT enabled services which is considered as the only one reportable segments and therefore there is no segmental information available with respect to the software development activities as well as IT enabled services. In view of this the above comparable is required to be excluded from the comparability analysis of the software development service segment of the assessee. - Infinite Data Systems Private Limited is engaged in a wide variety of services including software technical consultancy services etc. It is our considered opinion that these services cannot be compared with software development services provided by a captive service provider like the assessee in the absence of segmental information. - Infosys limited has a huge brand value, it has huge turnover, and its Finacle' Software is a leading product in banking industry. Therefore, it is functionally differe .....

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by the Assessing officer, the Transfer Pricing Officer (TPO) passed order dated 21.01.2014 under section 92CA of the Act. The TPO accepted the Functions Assets and Risk analysis (FAR) as described in the Transfer Pricing (TP) study filed by the assessee. There is no dispute between the parties that the most appropriate method is Transactional Net Margin Method (TNMM) and the Profit Level Indicator (PLI) is OP/TC. The assessee had selected 18 companies with an average margin of 10.04 % and had reported that its international transactions are at Arm s Length Price (ALP) considering its own margin at 11.08%. The TPO requested substitution of multiyear data with single year data, upon which the assessee selected 13 comparables with mean margin of 8.82 % and, thus, claimed that its international transactions are at arm s length. The TPO recorded that the TP study has not been rejected and that it has been only modified by use of current year data and some appropriate filters. The TPO issued show cause notice modifying some of the filters applied in the transfer pricing study and accepted 10 out of the 13 comparables. The TPO also added another 6 comparables as detailed in the TP order. .....

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as: a. Turnover less than INR 5 crores b. export turnover less than 75% of operating revenues c. different accounting year and d. employee cost less than 25% of total cost 5. The learned TPO/AO/DRP have erred in erroneously rejecting the comparable companies selected by the appellant and adding certain companies to the final set of comparable companies on an ad hoc basis, thereby resorting to cherry picking of comparables to determine ALP. 6. The learned TPO/AO/DRP have erred in selecting certain companies (which are earning supernormal profits) as comparable to the appellant. 7. The learned TPO/AO/DRP have erred in passing an order which has computation errors in the margin of comparable companies used in determination of arm s length margin. 8. The learned TPO/AO/DRP have erred in treatment of operating and non operating items while computing margins of the appellant and comparable companies. 9. The learned TPO/AO/DRP have erred in not acting in conformity of directions passed by Hon ble DRP and thereby not granting benefit of working capital adjustment to the appellant. 10. The learned TPO/AO/DRP have erred in not making suitable adjustment to account for differences in risk pr .....

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s error in considering data for only one of the related parties and, perhaps inadvertently, ignoring the related party transactions reported with other entities appearing on the very same page of the annual report for the purposes of applying the Related party transactions filter. Drawing our attention to page 173 of the paper book containing the annual reports of the comparable companies, it was pointed out that Sonata Software Limited reported related party transactions with several Associated Enterprises. It was submitted by the Ld. AR that the TPO inadvertently appears to have considered data relating to some of the entities but failed to consider the complete information. Thus, it was submitted that the conclusion reached by the TPO that this company had related party transactions less than 25% was not correct. The learned counsel also relied on the decision of the coordinate bench of Tribunal in case of Freescale Semiconductors India (P) Ltd (ITA No 1263/DEL/2015), wherein at paragraph 18, the coordinate bench set aside the matter to the TPO for testing related party transaction filter. The Ld. Counsel submitted that in the case of Freescale Semiconductors India (P) Ltd a rem .....

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ngaged in software development and IT enabled services which is considered the only reportable business segment….. . It was the contention of the Ld. Counsel that as the segmental profitability details were not available, this company is not comparable to Kaplan India Private limited. The Ld. Counsel further invited our attention to schedule 8 on page 12 of the paper book containing Annual reports of comparables, wherein technical subcontractors cost is reported. It was the contention of the learned counsel that E Infochips Bangalore engages sub-contractors and, hence, the business model was different as compared to the business model of a captive service provider like the assessee/appellant. Our attention was also drawn to paragraph 9.1 of the Transfer Pricing order and it was submitted that though all these contentions were raised before the TPO, the same were rejected without even obtaining any information under section 133 (6)of the Act. By drawing our attention to page 152 of paper book volume 1, wherein objections filed before the Ld. DRP were placed, it was contented by the learned counsel that though all these aspects were also brought to the notice of the Ld. DRP, t .....

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in case of certain companies and segmental data not being available or conclusion that a certain company fails identical filter in such decided case, deserve to be followed. We note that Para 13 to 15 of the order of the ITAT in Freescale Semiconductors (supra) also support the case of the assessee. The same are extracted here in below for a ready reference: 13. The Ld. AR has also objected against the inclusion of the Einfo chips Bangalore Ltd. Assessee has objected before the Ld. transfer pricing officer that this company is functionally not comparable, segmental data are not available, it has abnormal supernormal profits, it has the fluctuating trends, it has a significant intangibles and fails 10% RPT Filter, the Ld. transfer pricing officer rejected the claim of the assessee stating that annual report of the above comparable company shows that it is functionally comparable as it develops software for its clients and do not perform any IT enabled services. The Ld. dispute resolution panel also confirmed the action of the Ld. transfer pricing officer. The Ld. authorised representative reiterated the same arguments which were raised before the Ld. lower authorities. Over and abov .....

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nalysis of the software development service segment of the assessee. Accordingly we direct the Ld. transfer pricing officer to exclude E info chips Bangalore Ltd. Therefore, in absence of any other information being brought on record by the TPO to support an alternate view and respectfully following decision of the coordinate bench in the case of Freescale Semiconductors India (P) Ltd (supra), we direct the TPO to exclude E Infochips Bangalore Ltd. from the final set of comparable companies. (iii) Infinite Data Systems Private Limited: The next comparable which was requested to be excluded is Infinite Data Systems Private Limited. The Learned counsel invited our attention to schedule 17 on page 37 of the paper book containing annual reports of the comparable companies and submitted that Infinite Data Systems Private Limited provides solutions that encompass technical consulting, design and development of software, maintenance, system integration, implementation, testing and infrastructure management services. Further, our attention was also invited to Para 17.2.14 on page 41 of the paper book containing annual reports, wherein under the heading Segmental Reporting it is stated that .....

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e relevant observations of the Bench are contained in Para 10 to 12 of the said order and the same are being reproduced here in under for a ready reference: 10. With respect to Infinite data systems private limited assessee objecting it on functional dissimilarity, services to single customer, abnormal supernormal profits, fluctuating trends and significant intangibles. The above objection of the assessee was rejected by the Ld. transfer pricing officer stating that assessee has not demonstrated how the services to a single customer is not comparable to it as assessee services are also to its single associated enterprise only. With respect to the functional dissimilarity same was also rejected. Other issues with respect to abnormal margins, supernormal growth have also been rejected. He also rejected the contention of the assessee that company owns significant intangibles in the form of software. Similar arguments were also advanced before us by the Ld. authorised representative stating that the Infinite data systems private limited should be excluded from the comparability analysis. For this he relied on the decision of the coordinate bench in ITA No. 1051/KOL/2015 for assessment .....

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s India (P) Ltd (supra), we direct exclusion of Infinite Data Systems Private Limited from the final set of comparable companies. (iv) Infosys Ltd.: Lastly, the Ld. Counsel for the assessee contented that Infosys Limited is not comparable to the assessee company. By inviting our attention to page 73 of the paper book containing annual reports, it was argued that Infosys Limited earned ₹ 925 crores from sale of software products, with reference to page 74 it was submitted that Infosys Limited incurred huge amount of selling and marketing expenditure and owned valuable brand which enabled it to earn higher margins. It was contended that segmental information was not available in the audited financials so as to enable determination of margins earned for software development services and sales of software products. The Ld. Counsel, therefore, contended that in absence of segmental information, Infosys cannot be compared to a captive service provider like the assessee. Our attention was invited to the decision of the coordinate bench in Freescale Semiconductors India (P) Ltd (ITA 1263/Delhi/2015), wherein at paragraphs 16 and 17, the coordinate bench has directed exclusion of Info .....

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comparable has been excluded in the case of the assessee for AY 2007-08 by the coordinate bench. 17. The ld DR relied upon the orders of the lower authorities. The ld DR could not point out that why we should not follow the decision in the assessee's own case without there being any change pointed out, hence, we respectfully follow the decision of the coordinate bench in assessee's own case for AY 2007-08 and directs the ld Transfer Pricing Officer to exclude the above comparable. Therefore, respectfully following the decision of the coordinate bench in Freescale Semiconductors India (P) Ltd (supra) we direct exclusion of Infosys from the final set of comparables. 4.1.0 In relation to Ground no 9, our attention was invited to paragraph 12 of the Transfer Pricing order, wherein the TPO has rejected the claim for working capital adjustment on the ground that such adjustment was not relevant to service industry. By drawing attention to paragraphs 16.6 and 16.7 of the Ld. DRP s directions, it was submitted that although the Ld. DRP directed grant of working capital adjustment, the same was not allowed to the assessee. Accordingly, it was prayed that appropriate directions be g .....

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