TMI Blog2019 (8) TMI 1394X X X X Extracts X X X X X X X X Extracts X X X X ..... as part of network division for bench marking the international transaction which means that this segment should be taken with the main network division of aggregated approach for bench marking. TP Adjustment - ITES Segment - Remote network Management services - Held that:- even the Legislature accepts that two segments cannot be mixed up, which means that most of the comparables used by the TPO have to be rejected. In all fairness, we deem it fit to restore the matter to the file of the TPO with a direction to use only those comparables which fit in Rule 10TA(e) of the Rules and decide the issue afresh after giving reasonable and fair opportunity of being heard to the assessee. The assessee shall be at liberty to bring any new comparables which fit into Rule 10TA(e) of the Rules. - ITA No. 2810/DEL/2014 - - - Dated:- 23-8-2019 - SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER, And SHRI PAVAN KUMAR GADALE, JUDICIAL MEMBER Assessee by: Shri Deepak Chopra, Adv, Shri Amit Srivastava, Adv, Shri Ankul Goyal, Adv Revenue by: Shri Sanjay I Bara, CIT-DR ORDER PER N.K. BILLAIYA, AM:- This appeal by the assessee is preferred against the order dated 14.02.2014 fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total 138,42,90,124 7. The AO passed the draft assessment order dated 22 March 2013. The appellant filed its objections under section 144C(2)(b) of the Act with the DRP against the transfer pricing adjustment proposed by the TPO/AO. The DRP provided certain relief (i.e. rejected certain noncomparable companies selected by TPO, corrected computational errors committed by TPO and allowing the benefit of working capital adjustment) to the appellant which resulted in reduction of quantum of transfer pricing adjustment. The AO passed the final assessment order dated 14 February 2014 in conformity with the DRP directions wherein the transfer pricing adjustment was INR 129,47,16,038/-. 8. Summary of the international transactions analyzed in the TP study report is as under: 9. We will first take up the Transfer Pricing adjustment in respect of Software Services Segment. 10. At the very outset, the ld. counsel for the assessee stated that similar comparables were used by the TPO in assessment year 2008-09 and the Tribunal excluded 7 comparables out of the bouquet of comparables selected by the TPO. It is the say of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparables similar in line of exclusion in assessment year 2008-09: i) CAT Technologies Ltd ii) Infosys Technologies Ltd iii) Larsen Toubro Infotech iv) LGS Global v) Mindtree Ltd vi) Persistent Systems vii) R.S. Software viii) Tata Elxsi 15. A perusal of the order of the co-ordinate bench in ITA No. 333/DEL/2013 shows that the aforementioned comparables were excluded from the final set of comparables. The relevant findings of the co-ordinate bench in respect of each comparable reads as under: i) CAT TECHNOLOGIES LTD 47. This company was objected by the assessee on the ground that it is engaged in diversified set of services and also that the segmental data is not available, but the Ld. that TPO included this company in the set of comparables. 48. From page No. 94 of the paper book where the segmental reporting is mentioned, we found that the company is dealing in Medical Transcription, Training software development and consultancy services. Further vide Note No. 7 to the notes on accounts it is stated that the company considered whole of India as a single geographical segment. Vide page No. 94 at schedule No. 9, the software developmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt held Infosys Ltd. to be non-comparable with Agnity India Technologies Pvt. Ltd. The facts of the instant case are similar to the extent that the extant assessee is also not owning any branded products and having no expenditure on R D etc. When we consider all the above factors in a holistic manner, there remains absolutely no doubt that Infosys Technologies Ltd. is not comparable with the assessee company. Respectfully following the judgment of the Hon'ble jurisdictional High Court in Agnity India (supra), we hold that Infosys Technologies Ltd., cannot be treated as comparable with the assessee company. This company is, therefore, directed to be excluded from the list of comparables. 80. The diversified activities of business, its deployment of capital, resources and the brand name make this company not comparable with the assessee and, therefore, this company has to be excluded from the final set of comparable companies for benchmarking international transaction related to software segment. iii) LARSEN TOUBRO INFOTECH 89. This company also was originally offered as a comparable by the assessee itself but now the assessee is challenging the said company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n exceptional circumstances during the year, i.e. the company has written off Goodwill, which arose on account of merger of Lanco Global Systems Inc. 88. In view of the vast functional diversity of this company as is evident from the offerings of the LGS service and solution to be found at page No. 935 of its annual report coupled with the fact of the exceptional circumstance occurred during the year, we are of the considered opinion that this company is not a good comparable with the assessee and on that score it has to be excluded from the final set of comparable companies for the present year under consideration. v) MINDTREE LTD 91. Assessee sought the exclusion of this company on the ground of functional dissimilarity. However Ld. TPO included it on the ground that this company is deriving revenue from both software as well as ITES and sufficient segmental information is not available in the financial statements. Under the head the business performance , at page No. 1010 of the paper book it is revealed that this company is structured into two business units that focus on software development R D services, and IT services. It also offers IT Strategic Consul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... domestic. Item number 'L' at page No. 1166 under the heading segment reporting policies reads that the company has disclosed the segment information only on the basis of the consolidated financial statements which shall be presented together with the unconsolidated inertial statements. 96. Further, in support of their plea that a company which is engaged in software development services, but, at the same time is also a software product company, is not a good comparable with the assessee, assessee placed reliance on Aircom (supra), in order to exclude this comparable company. The coordinate bench has rejected this comparable by making following observations:- 19.2. We have heard the rival submissions and perused the relevant material on record. It can be seen from the information supplied by this company u/s 133(6) of the Act, a part of which has been reproduced in the TPO's order, that this company 'has developed a few of its own products in the area of identity management connectors.' Revenue from product licences stands at ₹ 288.93 million as against the revenue from software development services at ₹ 4829.57 millions. Though this c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Having regard to the information furnished in the annual report of this company vide page numbers 1356, 1362, 1366, 1371, 1378 and 1380 of the paper book, we are convinced that that this company is not a pure software service provider but is engaged in development and sale of products and on the ground excludable from the final set of comparable companies for benchmarking international transaction related to software segment. viii) TATA ELXSI 108. At the outset it is brought to our notice that in assessee's own case for the assessment year 2007-08, a coordinate bench of this Tribunal considered the functional similarity of this comparable with the assessee and found that this company is not a suitable comparable in view of its different functions. 109. On a perusal of the order dated 18/05/2016 in ITA No. 5837/Delhi/2011 in assessee's own case, we found that this aspect of suitability of this company and its functional similarity was considered by this Tribunal. Vide paragraph No. 51 to 53 this Tribunal reached a conclusion that this comparable company is developing hardware and software for embedded products, such as, multimedia and other electronics e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es: i) Tata Consultancy Services ii) Thinksoft Global Services Ltd iii) Thirdware Solutions Ltd and inclusion of : i) CG-VAK Software Exports Limited. 18. We will now consider each comparable one by one. Tata Consultancy Services 19. The ld. counsel for the assessee stated that this company is functionally dissimilar as it provides wide array of services as, I.T. Solutions and Services, Enterprises Solutions, I.T. Infrastructure Services and BPO, etc. The ld. counsel for the assessee further pointed out that this company has received only 70% of revenue from software development and, therefore, fails service revenue filter. It is the say of the ld. counsel for the assessee that this company has undertaken significant R D activities and has substantial brand value with a different revenue recognition model. Being a giant industry with huge turnover and insufficient segment information and there being acquisition during the year which affects the profitability of the company, this company is not a good comparable and should be excluded. 20. Per contra, the ld. DR stated that the filters proposed by the TPO have been accepted by the assessee as the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It is the say of the ld. counsel for the assessee that no adjustment can be made for different revenue recognition model. Further, this company has incurred significant marketing and selling expenses. The ld. counsel for the assessee pointed out that because of the functional dissimilarity, this company was excluded by the Tribunal in the case of Conexant Systems Pvt Ltd in ITA No. 384 and ITA No. 453/HYD/2014 and Planet Online in ITA No. 464 and 608 of 2014. 25. The ld. DR submitted that the software validation and verification services are different verticals of software development services and, therefore, the same cannot be construed as functionally dissimilar. The ld. DR strongly placed reliance on the findings of the TPO. 26. We have heard the rival submissions and have given thoughtful consideration to the orders of the authorities below. We have also perused the Annual Report of this company. It is not in dispute that this company is engaged in the software validation and verification services to the banking and financial industry worldwide. It is also not in dispute that the revenue recognition of this company is such that no adjustment can be made. The undisputed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the findings given in assessment year 2008-09 and after affording sufficient opportunity of being heard to the assessee. Thus, Ground No 4 with all its sub grounds is partly allowed. TP ADJUSTMENT IN RESPECT OF MARKET SUPPORT SERVICES SEGMENT. 33. The business profile of the assessee has already been explained elsewhere. The appellant company also provides the following services to its AEs: i) Marketing support services ii) Network management services iii) Support services, and iv) Software services 34. Under the head Marketing and business development Marketing strategy functions are those activities that determine the positioning of a firm's product - in a market and that establish marketing techniques that bring the products to the customers' attention. NSN India conceptualises the marketing strategy for the sale of its products and services and undertakes functions such as customer lead identification, marketing and securing the orders for its products. NSN India conducts marketing activities such as performing market research, monitoring market demand, formulating marketing strategies and budgets. NSN India is responsible for deciding the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of providing services are very different. According to the TPO, cost base in respect of transaction of purchase and sale included mainly cost of material and there is little value addition. However, in respect of support services, the main cost itself comprises of salaries of employees and therefore, involves significant value addition. Accordingly, the TPO selected the following comparables to bench mark the market/business support services: Company Name Sales NW lnt/TC% Service% Emp% RPT% OP/OC OP/OC (w/o Fx) Apitco Ltd. 11.03 12.4 0.00 96.33 28.35 WA 37.70 37.70 3asiz Fund Service Pvt. Ltd. 3.74 4.30 0.32 84.62 35.50 2.94% 46.75 39.17 Cameo Corp.Serv. 24.37 3.42 5.35 100.00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices has gone to reduced margin, the same should be excluded for the purposes of bench marking the transactions with the AE. 41. The ld. counsel for the assessee further brought to our notice that the TPO has failed to appreciate that the cost of service to AE was only ₹ 36.32 crores ,which reflected in the operating margin ₹ 64.89 crores on operating cost to the assessee, which is far in excess of operating margin from the company selected by the TPO. 42. The ld. counsel for the assessee further drew our attention to the fact that this issue was raised before the DRP and arguments were made but could not be supported by any documentary evidence and hence the DRP did not give any direction to the TPO. The ld. counsel for the assessee pointed out that now the documentary evidences are available. Therefore, this issue should be remitted to the file of the TPO for fresh consideration as per working supported by certificate from the Chartered Accountant. 43. The ld. DR strongly supported the findings of the TPO though agreed for remittance to the file of the TPO for fresh consideration in the light of documentary evidences brought on record. 44. We have heard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... below: Type of Functions NSN India AEs Product Strategy and design Limited Yes Purchase function Yes Yes Production scheduling Yes Yes Technical assistance No Yes Pricing Yes Yes Marketing and business development Yes Yes Installation and commissioning Yes No Quality control Yes Yes Post sales support Yes No 47. During the TP assessment proceedings, the TPO found that the assessee has not bench-marked these services separately and combined them with other operations of network division. Being not satisfied with the action of the assessee, the TPO used the following set of comparables for bench marking of this segment: No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0.05 27.20 27.20 11 WAPCOS Ltd 223.92 75.21 0.41 100.00 27.92 0.00 25.57 25.57 12 Zipper Trading Enterprises Ltd. 1.02 1.04 1.16 93.58 62.35 WA 34.11 34.11 27.38 27.36 48. After considering the objections/submissions of the assessee, final set of comparables considered by the TPO for TSS is as under: No. Company Name Sales NW lnt/TC% Service% Emp% RPT% OP/OC OP/OC (w/o Fx) 1 Archohm Consulta 1.94 0.64 3.33 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Zipper Trading Enterprises Ltd. 1.02 1.04 1.16 93.58 62.35 #N/A 34.11 34.11 27.38 27.36 49. Based on the above, an adjustment of ₹ 1,01,23,623/- was made, which was confirmed by the DRP. 50. Before us, the ld. counsel for the assessee vehemently stated that TSS segment is an integral part of network division and hence the assessee has rightly bench marked the same by adopting aggregated approach. The assessee has received cost + mark up of 5%. The ld. counsel for the assessee further drew our attention to the Advance Pricing Agreement u/s 92CC of the Act dated 28.03.2016. It is the say of the ld. counsel for the assessee that though this agreement shall apply to five consecutive years commencing from the previous year 2013-14 and also apply to four consecutive roll back years commencing from the previous assessment year 2009-010 but the same has persuasive va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd other remote support services in nature of network support to its AEs. NSN India is reimbursed by NSN Finland on a cost plus 10% mark up basis for provision of services; NSN India invoices NSN Finland on a monthly basis; and The invoices are denominated in US Dollars. As per the Support Agreement, NSN India, at the request of its AEs, provides following services to it AEs: Data processing and customization services including analysis of global business data and customization of data/ information required for bid preparation; Network operations support services to AEs/its customers through operation of the global networks operation center; Technical and operational software support, including troubleshooting, problem diagnostics and resolution; Back-office data support for facilitating cost-effective sourcing and delivery of telecommunication infrastructure products / spares for AEs; Network remote integration services through operation of the global network integration center; Service product development for use by AEs; and Other remote delivery services as may be agreed from time to time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. 83.18 71.25 100 115.14 0 59.21 8 Igate Global 900.88 509.3 100 102.87 12.12 22.58 9 Infosys BPO Ltd. 1081.53 661.94 100 96.81 8.41 24.28 10 Omega Healthcare 57.53 21.82 100 99.91% #N/A 16.74 Average 36.67 57. Taking arm s length margin at 36.67%, adjustment of ₹ 31,74,61,300/- was made which was confirmed by the DRP. 58. Before us, the ld. counsel for the assessee vehemently stated that the assessee is a low end service provider and cannot be compared with high end service providers in this segment. It is the say of the ld. counsel for the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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