9911796707
Advanced Search 
TMI Blog2018 (4) TMI 1755X X X X Extracts X X X X X X X X Extracts X X X X ..... mation Technology Enabled Services by the Assessee to its holding company. The Assessee is a company engaged in the business of providing contract Software Development Services (SWD Services) and providing Information Technology Enabled Services (ITES) to its holding company in Netherlands BV as a captive service provider. The transaction of rendering software development services and ITES to holding company was a transaction with an Associated Enterprise (AE) and was therefore an international transaction. As per the provisions of Sec.92 of the Act, income from international transaction has to be computed having regard to Arm's Length Price (ALP). 3. The details of the international transaction between the Assessee and its AE in AY 2010-11 were as follows: Particulars Amount in Rs. Provision of S WD services 357,68,61,693/- Provision of ITeS 104,03,22,271/- 4. SOFTWARE DEVELOPMENT SERVICES SEGMENT: It is not in dispute between the Assessee and the revenue that the Transaction Net Margin Method (TNMM) was the Most Appropriate Method (MAM) for determination of ALP and that the profit level indicator to be adopted for comparison of the Assessee's profit with that of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 24,62,86,639/- was added to the total income by the AO in his draft assessment order dated 11.3.2014 as addition on account of shortfall being adjustment u/s.92CA of the Act. 7. The Assessee filed objections to the draft assessment order by the AO before the Disputes Resolution Panel (DRP). The DRP in its directions dated 3.12.2014 rejected the objections of the Assessee and confirmed the addition on account of shortfall being adjustment u/s.92CA of the Act. The AO passed a fair order of assessment making the addition on account of determination of ALP by the TPO. Aggrieved by the addition made in the fair order of assessment, the Assessee has raised several grounds of appeal challenging the addition on several counts. However, at the time of hearing of the appeal, the learned counsel for the Assessee submitted that if 5 out of the 10 comparables chosen by the TPO viz., (i) Infosys Ltd., (ii) Kals Informations Systems Ltd., (iii) Persistent Systems Ltd., (iv) Tata Elxsi Ltd.; and (v) Persistent System and solutions Ltd., are excluded and if the arithmetic mean of the profit margin of the remaining 6 companies when compared with the price charged by the Assessee, then the price ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as observed that this company having brand value as well as intangible assets cannot be compared with an ordinary entity provide captive service. The Tribunal further held that this company provides end to end business solutions that leverage cutting edge technology thereby enabling clients to enhance business performance. This company also provides solutions that span the entire software lifecycle encompassing technical consulting, design, development, re-engineering, maintenance, systems integration, package evaluation and implementation, testing and Infrastructure management service. In addition, the company offers software product for banking industry. Thus, this company is engaged in diversified services including design as well as technical consultancy, consulting, re-engineering, maintenance, systems integration as well as products for banking industry. (2) KALS Information Systems Ltd.: In Paragraphs 21 to 23 of its order the Tribunal held that this company was software product company and not a software development service provider such as the Assessee. In coming to the aforesaid conclusion the Tribunal referred to a decision of the Tribunal in the case of Trilogy E-Busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the software development service segment. 10. Respectfully following the decision of the Tribunal we hold that the aforesaid 5 companies be excluded from the final list of comparable companies for the purpose of arriving at the arithmetic mean of comparable companies for the purpose of comparison with the profit margins of the? In this regard we are also of the view that the plea of the learned DR for a remand of the issue to the DRP on the ground that the DRP has not given any reasons in its directions cannot be accepted. The DRP has endorsed the view of the TPO in its directions and therefore the reasons given by the TPO should be regarded as the conclusions of the DRP. If the above 5 comparable companies are excluded the arithmetic mean of the remaining comparables would be as follows: SI. No. Name of the Company Mark up on costs-unadj (in %) Mark up on costs-WC -adj (in %) 1 Larscn & Toubro Infotech Ltd. 19.33 19.63 2 Sasken Communication Technologies Ltd. 17.36 18.24 3 R S Software (India) Ltd. 10.29 10.95 4 Thinksoft Global Services Ltd. 17.05 14.58 5 Mindtree Ltd. (seg) 14.83 13.42 ARITHMETIC MEAN 15.77 15.36 The computation of ALP would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (seg) 43.39 42.98 4 Informed Technologies India Ltd. 26.15 27.09 5 Infosys BPO 31.23 34.40 6 Cosmic Global Ltd. 14.97 17.11 7 Jeevan Scientific Technology (seg) 21.05 16.74 8 Nittany Outsourcing Services Ltd. 30.67 32.54 9 Microland Ltd. -2.14 -2.06 ARITHMETIC MEAN 25.69 25.49 12. Computation of arm's length price by TPO and the adjustment made: Arm's Length Mean Margin 25.69% Less: Working Capital Adjustment 0.20% Adjusted mean margin of the comparables 25.49% Operating Cost Rs. 90,84,33,028/- Ann's Length Price (ALP) 125.49 % of Operating Cost Rs. 113,99,92,607/- Price Received Rs. 104,03,22,271/- Shortfall being adjustment u/s. 92CA Rs. 9,96,70,336/- 13. The difference between the price charged by the Assessee and the ALP determined by the TPO viz., Rs. 24,62,86,639/- was added to the total income by the AO in his draft assessment order dated 11.3.2014 as addition on account of shortfall being adjustment u/s. 92CA of the Act. 14. The Assessee filed objections to the draft assessment order by the AO before the Disputes Resolution Panel (DRP). The DRP in its directions dated 3.12.2014 rejected the objections of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (supra), inasmuch as the said company was also involved in providing ITES to its AE and the TPO had chosen same comparable companies that were chosen by the TPO in the case of the Assessee. His submission was that the decision rendered by the Tribunal in the case of Goldman Sachs Services (P.) Ltd. (supra) would be equally applicable to the Assessee in the present case also. The learned DR submitted that the DRP in its directions has merely accepted with the reasoning of the TPO and therefore the issue of exclusion of these companies should be directed to be examined afresh by the DRP. 16. We have considered the rival submissions. In the case of Goldman Sachs Services (P.) Ltd. (supra), this Tribunal considered the comparability of the 5 companies which the Assessee seeks to exclude from the final list of comparable companies chosen by the TPO. The functional profile of the Assessee and that of the Assessee in the case of Goldman Sachs Services (P.) Ltd. (supra) is identical inasmuch as the said company was also involved in providing 1TES to its AE and the TPO had chosen same comparable companies. In me aforesaid decision the Tribunal held on the comparability of the 3 companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Net Margin for IT enabled services: Particulars Margin (%) Net Margin of the Appellant 14.52 Arithmetical mean of margins of the comparables 18.70 + 5% of the Appellant's margin 20.25 - 5% of the Appellant's margin 8.80 Thus, since the arithmetical mean of the working capital adjusted margins of the above 6 comparables (18.70%) is within +/- 5% of the NCP margin of the Appellant (14.52%), the TP adjustment made by the TPO insofar as it relates to the ITE Services provided by the Assessee to its AEs in FY 2009-10 is liable to be deleted. Therefore, the other grounds raised in the Assessee's memorandum of appeal insofar as it relates to the ITE Services provided to its AEs in FY 2009-10 are not adjudicated at this stage. However, the Assessee is at liberty to urge the said grounds m any future proceeding, appellate or otherwise, and in these proceedings at a future point in time. 18. In Gr. No. 18, the Assesses has prayed for a direction that the credit for Taxes deducted at sources has not been properly allowed by the AO. In this regard it was submitted that for AY 2010-11, the Assessee was entitled to a total credit of TDS of a sum of Rs. 1,18,40,477/-, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tudy selected 14 comparable companies whose arithmetic mean of OP/TC was arrived at 13.08%. Since the profit margin of the Assessee was more than the arithmetic mean of OP/TC of the 14 comparables selected by the Assessee, it was claimed by the Assessee that the price charged by it in the international transaction was at Arm's Length. The Transfer Pricing Officer (TPO) to whom the determination of ALP was referred by the AO, accepted 1 (Mindtree Ltd.) out of the 14 comparable companies suggested in the TP study by the Assessee as comparable with the Assessee. The TPO on his own selected 9 other companies as comparable companies with the Assessee. Thus a final set of 10 comparable companies was chosen by the TPO as comparable companies. The arithmetic mean of profit margin of these companies after and before adjustment towards working capital adjustment selected by TPO was as follows: SI. No. Name of the Company Markup on Total Costs (WC-unadj) (in %) Markup on Total Costs (WC-adj) (in %) 1 Datamatics Global Services Ltd. 14.57 17.87 2 Genesys International Corpn. Ltd. 30.09 28.60 3 ICRA Techno Analytics Ltd. 17.24 19.07 4 Infosys Ltd. 43.10 45.01 5 Larsen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ftware (India) Ltd. 7 Sasken Communication Technologies Ltd. 8 Spry Resources India Pvt. Ltd. 27. Pursuant to the directions of the DRP, the AO passed the final assessment order wherein the TP adjustment stood reworked at a lesser figure than what was originally suggested by the TPO. The AO passed a fair order of assessment making the addition on account of determination of ALP by the TPO as modified by the DRP. Aggrieved by the addition made in the fair order of assessment, the Assessee has raised several grounds of appeal challenging the addition on several counts. However at the time of hearing the learned counsel restricted his arguments to exclusion of 4 comparables out of the 8 comparable companies that remain in the final list of comparable companies after the directions of the DRP viz., (a) Genesys International Corpn. Ltd., (b) Infosys Ltd., (c) Larsen and Toubro Infotech Ltd., and (d) Persistent Systems Ltd. 28. The learned counsel for the Assessee submitted before us that the comparability of the 3 companies out of the aforesaid 4 companies which the Assessee seeks to exclude from the list of comparable companies chosen by the TPO viz., Infosys Ltd., Larsen & Toubr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tware development service provider such as the Assessee in that case. (b) Larsent & Tourbro Infotech Ltd., was excluded from the list of comparable companies by relying on the decision of the Delhi Bench of ITAT in the case of Saxo India (P.) Ltd. v. Asstt. CIT [2016] 67 taxmann.com 155 (Delhi - Trib.). The discussion is contained in paragraphs 4.8 to 4.10 of the Tribunal's order. The Tribunal held that L & T Infotech Ltd., was a software product company and segmental information on SWD services was not available. The Tribunal also noticed that the appeal filed by the revenue against the tribunal's order was dismissed by the Hon'ble Delhi High Court in ITA No.682/2016. (c) Persistent Systems Ltd., was excluded from the list of comparable companies on the ground that this company was a software product company and segmental information on SWD services was not available. The Tribunal in coming to the above conclusion referred to the decision rendered by ITAT Delhi Bench in the case of Cash Edge India (P.) Ltd. v. ITO ITA No.64/Del/2015 order dated 23.9.2015 and the decision of Hon'ble Delhi High Court in the case of Saxo India Pvt. Ltd. (supra). The findings in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngibles equivalent to 10.42% of its total turnover. 32. The TPO however has regarded this company as a comparable company by observing that this company develops software for mapping and geospatial services and operates a few development centres in India. The company is predominantly into software development services. The intangibles in the possession of the company are only the GIS database which is only depreciation. It does not add significant value to the company. 33. The objections as put forth before the TPO were reiterated before the DRP. The DRP in paragraphs 6.2.2 & 6.2.3 of its directions dealt with this issue as follows: "6.2.2 The functions of the Assessee company have been examined in detail. A financial product on which the settlement system of bank runs is a real time system. It is very complex. Any bug or problem in it can crash the entire banking system of several nations. The Assessee's claim of providing only basic software services is rejected. 6.2.3 The Panel holds that the software for financial product is much more complex than a geospatial software. Therefore, the panel holds that the Genesys is a valid comparable." 34. The learned counsel for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as follows: SI. No. Name of the Company 1. Mindtree Ltd. 2. RS Software (India) Ltd. 3. Sasken Communication Technologies Ltd. 4. Spry Resources India Pvt. Ltd. The arithmetical mean of the working capital adjusted recomputed margins of the above comparables would fall within the +/-5% range of the Appellant's NCP margin of 12.63% for provision of SWD services. Consequently, the international transaction of provision of SWD services by the Assessee to its AEs in FY 2011-12 can be concluded as being at arm's length. Therefore, the other grounds raised in the appeal in relation to its international transaction of provision, of SWD services do not require any adjudication at this stage. However, the Assessee is at liberty to urge the said grounds in any future proceeding, appellate or otherwise, and in these proceedings at a future point in time. 37. ITES Segment: It is not in dispute between the Assessee and the revenue .that the Transaction Net Margin Method (TNMM) was the Most Appropriate Method (MAM) for determination of ALP and that the profit level indicator to be adopted for comparison of the Assessee's profit with that of comparable companies was Operat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /- was added to the total income by the AO in his drat assessment order dated 29.2.2016 as addition on account of shortfall being adjustment u/s. 92CA of the Act 40. The Assessee filed objections before the DRP against the addition made on account of adjustment to ALP. The DRP gave the following directions: (i) The DRP accepted the Assessee's contentions that Accentia Technologies Ltd. is not comparable to its ITE service segment and accordingly, directed its exclusion from the list of comparables. (ii) The DRP, however, rejected the Assessee's contentions that Universal Print Systems Ltd., Infosys BPO Ltd., TCS E-Serve Ltd, BNR Udyog Ltd., and Excel infoways Ltd. are not comparable to it and consequently upheld their inclusion in the list of comparables. (iii) The DRP also suo motu excluded Informed Technologies India Ltd. and Jindal Intellicom Ltd. from the list of comparables to the Assessee although it had not objected to their inclusion before the DRP. (iv) In addition, the DRP directed the TPO to recompute the margins of the Assessee and the comparables after treating foreign exchange fluctuations as being operating in nature. 41. List of Comparables post th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the aforesaid three companies with a company engaged in providing ITBS such as the Assessee. The functional profile of the Assessee and the Assessee in the case of Baxter (I) (P.) Ltd. (supra) are identical inasmuch as 7 out of the 10 companies chosen by the TPO in the case of the Assessee were chosen as comparable in the case of Baxter (I) (P.) Ltd. (supra). The Tribunal held on the comparability of the three companies Infosys BPO Ltd., TCS E-service Ltd. and Excel Infoway Ltd., as follows: (i) In paragraph 23 of its order the Tribunal held that Infosys BPO Ltd., is not comparable with a company providing ITES because of brand value and extraordinary events in the previous year relevant to AY 2012-13 viz., acquisition of an Australia based company which had effect on its profits. (ii) In paragraphs 24 & 25 of its order the Tribunal held Excel Infoway Ltd., as not comparable because of consistent diminishing revenue. The figures of diminution revenue are given in paragraph 24 of its order. (iii) In paragraphs 21 & 22 of its order the Tribunal held that Excel Infoway Ltd., was liable to be excluded because it was also engaged in the business of software testing, Verificati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITES company. The Assessee also submitted that this company fails the employee cost filter. The employee cost filter requires that the employees cost incurred by the company must be more than 25% of its revenue. 48. The TPO at page-20 of his order has dealt with the above objections by observing as follows: (a) Pre-Press BPO unit provides back office support services. (b) This company has four major segments viz., Repro, Label Printing, Offset Printing and pre-press BPO. The employee cost of pre-press BPO was more than 25% of the revenue from pre-press BPO and therefore the employee cost filter is satisfied in the case of this company. (c) On the service revenue filter viz., the requirement that a comparable company must have revenue from rendering services of more than 75% of its total revenue, the TPO again held that the pre-press BPO segment's entire income is from services and therefore this objection is not to be accepted. 49. On objections by the Assessee before the DRP, the DRP confirmed the action of the TPO. One of the objection before the DRP was that this company did not figure in the list of companies engaged in ITES. On this objection the DRP held that thou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction. (2) For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of the Act to get required details from this company. As far as the argument that this company fails functional comparability, we find that none of the objections raised by the Assessee in this regard about lack of information about allied services performed by die pre-press BPO segment of this company and the break-up of the revenue from such allied services have been dealt with specifically by the TPO or DRP. Since the comparability of this company is being remanded to be TPO for consideration of adjustments as mentioned above, the objection with regard to functional comparability should also be looked into by the TPO in the remand proceedings on the basis of materials which he may gather u/s. 133(6) of the Act, The Assessee should be given opportunity of being heard by the TPO before the issue is decided by the TPO. 53. The next comparable company retained after the order of the DRP which the Assessee seeks to exclude is BNR Udyog Ltd. As far as this company is concerned, it was the objection of the Assessee before the TPO that the TPO ought not to have selected this company as comparable company for the reason that the related party transaction of this company at the entity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nancial years, which came to be written off by the company in FY 2011-12. According to the DRP the action on the part of the management of this company was prejudicial to die company and therefore this company would fail the comparability criteria considering the Functions, Asset and Risk, FAR analysis. It was contended by the learned counsel for the Assessee that when functionally this company was found to be comparable with the Assessee, the DRP ought not to have excluded this company on a ground which is not relevant while performing FAR analysis. It was also submitted that this company has been selected by the TPO as a comparable to the Assessee for the assessment years 2009-10 and 2010-11 and its inclusion for those assessment years has not been objected to by the Assessee in those years. The learned DR submitted that the proper course would remand the issue for fresh consideration by the DRP as the Assessee was not put on notice before exclusion of this company. We have considered the submissions and are of the view that when this company is consistently figuring in the list of comparables to assessees similarly placed to the Assessee the DRP has proceeded on irrelevant groun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessee for the assessment years 2008-09, 2011-12 and 2013-14 and its inclusion for those assessment years has not been objected to by the Assessee either. Moreover, it is consistently figuring in the list of comparables in companies providing ITES. We therefore direct inclusion of this company in the list of comparable companies. 57. The TPO is directed to consider the revised profit margins after considering the directions in this order and recomputed the ALP in the ITES segment No submissions were made on the other grounds raised in the appeal in relation to its transaction of provision of ITE services. The learned counsel for the Assessee however sought liberty to urge other grounds in any future proceeding, appellate or otherwise, and in these proceedings at a future point in time. We allow liberty to the Assessee as prayed for by the learned counsel for the Assessee. 58. In Ground No. 13, the Assessee has sought direction from this Hon'ble Tribunal to the AO to grant the entire FTC (Foreign Tax Credit) (i.e., credit for tax paid outside India on income which is also included in die total income in me return of income filed in India). According to the Assessee it wa ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
