9911796707
TMI Blog2019 (6) TMI 1444X X X X Extracts X X X X X X X X Extracts X X X X ..... A No.6098/Mum/2018 for A.Y.2014-15 is taken up for adjudication first. 2. The ground No.1 raised by the assessee is general in nature and does not require any specific adjudication. 3. The brief facts of the assessee are that the assessee filed its return of income for A.Y.2014-15 on 30/11/2014 declaring total income of Rs. 155,49,76,710/-. The assessee company i.e Emerson Electric Company (India) Private Limited ('Emerson') is in the business of providing engineering support services including configuration engineering, framework design and graphical design, largely in connection with industrial automation projects undertaken by other Emerson group members. Emerson also provides IT services including database administration and help desk support to various members of the Emerson group. Emerson also maintains manufacturing and distributions operations. Emerson conducts its business through following segments: a) Manufacturing segment - This segment is engaged in trading of tools which are used in elevator applications. b) Distribution segment - This segment is engaged in importing ultrasonic welding and cleaning equipment and accessories from group companies and sellin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Report ('TPSR') is as follows: Sr. No. Name of the company OP/TC (%) 1 Axis-IT&T Ltd. 12.48 2 Cades Digitech Pvt. Ltd. 0.98 3 COWI India Pvt. Ltd. 15.24 4 Hepatica Technologies Pvt. Ltd. -5.33 5 Acropetal Technologies Ltd. -EDS (segmental) 22.50 Mean margin 9.17 4.1.1. Accordingly, it was concluded that the international transaction of engineering and related service segment were at arm's length. 4.2. The ld. TPO asked the assessee to furnish the profitability of each of the three divisions in respect of engineering and related services segment. The assessee furnished the segmented statement before the ld. TPO vide its submission dated 14/06/2017 as under:- Engineering and related services - business division wise profitability Particulars FCEC EEEC EIC Total Amount (in INR) Segment revenue(a) Revenue from operations 28,51,93,726 3,25,90,93,366 1,48,38,23,394 5,02,81,10,486 28,51,93,726 3,25,90,93,366 1,48,38,23,394 5,02,81,10,486 Segment Expenses (b) Personnel cost 14,68,49,349 1,46,21,13,437 79,82,19,593 2,40,71,82,379 Depreciation an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the above, the ld. TPO worked out the adjustment in EIC division to ALP as under:- Particulars Amount (Rs.) Operating Revenue (A) 148,38,23,394 Operating Cost (B) 138,20,54,621 Arms length mean margin (C) 16.31% ALP of international transaction (D) 16,07,37,978 Adjustment over operating income (D-A) 12,36,14,584 4.5. The ld. DRP upheld the action of the ld. AO in disregarding aggregation approach of all the three divisions under engineering segment by observing as under:- "It is noted that the similar disallowances made by TPO in AY 20132014 (as discussed above) had been upheld by the DRP .Further it is seen that assessee has been not be able to file the evidence to prove that the three divisions of the assessee are engaged in the similar activity so as to form the unified series of transactions or that they charge the same price or incur same costs. Though the divisions are engaged in providing engineering design and the related services ,the actual work done/functions performed by the three divisions are dissimilar and the same carries different risks. The variations of the level of return received by the assessee in these three areas clearly reveals the variati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the comparable companies. Hence, the assessee was justified in adopting aggregated or bundled approach in respect of aforesaid three divisions in its engineering and related services segment. The ld. AR also argued that the assessee had followed a similar approach of determining ALP of international transactions pertaining to engineering and related services segment on an aggregated basis from A.Yrs. 2006-07 to 2012-13 and the same has been accepted by the ld. TPO in earlier years after due examination of the international transactions of the assessee. It was pleaded that there is no change in the functions performed, assets employed and the risks assumed by the assessee in A.Y.2014-15 i.e. the year under appeal vis-à-vis the previous assessment years. Hence, it was pleaded that the ld. TPO was not justified in taking the divergent view during the year under appeal alone. 6.2. It was pleaded that the ld. TPO had taken conflicting views, as on one hand, he alleged that the services under three divisions of engineering and related services segment are different and the benchmarking approach of the assessee is flawed, but at the same time, the ld. TPO selected the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nancial analysis and buy out assistance. These services are not undertaken on standalone basis and are ancillary to the engineering design services rendered by the division. * Customer approaches the AEs for supply of certain products. The engineering services in relation to the products are outsourced to the division. * Based on specification received from the AEs, designs are developed for the product and shared with the AEs for their inputs and approvals. * The division carries out modifications if any based on inputs provided by the AEs. * Post AEs approval, a prototype for testing purposes is developed. Third party vendors identified by the AEs are engaged to manufacture the prototype and the prototypes are tested by the division. * The designs and test reports are shared with the AEs. * AEs share the designs with customers for approvals. * Post customer approvals, the AEs manufactures and supplies the products to the customers 6.3. The ld. AR pleaded that the Emerson Group is structured in a manner that generally each entity focuses on one business platform. The AEs receive orders from customers for products in the business platforms they deal with. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... produced above, it is very clear that assessee in EIC division subsequent to AEs approval, develops proto type for testing purposes. The assessee does not manufacture the proto type. The third party divisions identified by the AEs are engaged to manufacture the proto type and the proto types are tested by the assessee in its EIC division falling under engineering and related services segment. Later these designs and test reports are shared with the AEs and the AE in turn shares the same with the customers for approvals. Post customer approvals, the AEs manufacture and supply the products to the ultimate customers. Hence, the observation made by the ld. DRP that assessee in EIC division is engaged in manufacturing activity is incorrect and not emanating from the facts available on record. In any case, we find that even if the observation of the ld. DRP that EIC division is completely different from ECEC and EEC division is to be accepted, still we hold that there is no segmental data available for comparables having EIC division alone for the purpose of benchmarking. Hence, the comparison made by the ld. TPO and upheld by the ld. DRP ignoring the aggregated approach deserves to fail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt FAR analysis of each unit with existing comparables is practically not possible due to the common management and interlacing of funds. " 6.8. We also find that when the transactions are closely linked to each other, as in the case of the assessee before us, under the engineering and related services segment, it would be relevant in this regard to go into provisions of Indian transfer pricing regulations and other regulations as under:- Indian TP regulations Rule 10A of the Income Tax Rules, 1962 ('the Rules') defines transactions as - "includes number of closely linked transaction" 17. Other guidelines and regulations Further, we referred to other guidelines and regulations for guidance on aggregation of the international transactions and the relevant paras are reproduced below for your reference. a) Organisation for Economic Co-operation and Development Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines) Para 3.9 of the OECD Guidelines state that "Ideally, in Order to arrive at the most precise approximation of fair market value, the arm's length principle should be applied on a transaction-by-transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... performed by them taking into account assets employed or to be employed and risks assumed by such enterprises; Rule 10D of the Rules inter-alia states as follows: "10D (i) Every person who has entered into an international transaction shall keep and maintain the following information and documents, namely:- (a).... (b).... (i) a description of the methods considered for determining the arm's length price in relation to each international transaction or class of transaction, the method selected as the most appropriate method along with explanations as to why such method was so selected, and how such method was applied in each case;" Section 92C of the Act reads as follows: "92C. (i) The arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe namely...." 6.10. Based on above extracts from the Rules and the Act, it can be concluded that international transactions can be aggreg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to fall within the ambit of a comparable company. In this regard, from the perusal of the annual report of the said comparable, we find from page 468 of the paper book, that the total export earnings in foreign exchange towards professional fees for 31/03/2014 i.e. A.Y.2014-15 was only Rs. 50.21 lakhs whereas the total revenue of the said comparable was Rs. 27.63 Crores which works out to 1.81% of total revenue. We find that filters applied by the TPO and mentioned in pages 5 to 9 of his order, hence, this comparable deserves to be rejected on this count itself. 6.13. We also find that this comparable i.e., Certification Engineers International Ltd., is a wholly owned subsidiary of Engineers India Ltd., which is not in dispute before us. We find that the Hon‟ble Jurisdictional High Court in the case of CIT vs. Thyssen Krupp Industries India Pvt. Ltd., in ITA No.2218/2013 reported in 385 ITR 612 (BOM) had accepted the finding of the Tribunal for Engineers India Ltd., is a Government company. The relevant operative portion of the said decision of Hon‟ble Bombay High Court supra is as under:- Re question (b) :- (a) The grievance of the respondent assessee befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee. We direct the ld. TPO accordingly. Accordingly, the grounds raised by the assessee in ground No.2 under engineering and related services segment are disposed off as per the aforesaid findings and directions. 7. Provision of IT Support and Related Services:- Ground No.3 of the assessee appeal:- 7.1. The brief facts of this issue are that assessee is engaged in providing ITeS services for the in-house consumption of the AEs, primarily in the nature of database management, administration and help desk support services. In order to benchmark the international transactions of ITeS, TNMM was selected as the most appropriate method. The margin of the assessee under ITeS segment is determined as follows: Particulars Amount (Rs.) Operating Revenue 60,45,06,948 Add: Voluntary adjustment by Appellant 2,60,95,326 Total Operating Revenue 63,06,02,274 Operating Cost 55,63,52,032 Operating Profit 7,42,50,242 Assessee's Margin 13.35% 7.1.1. The arithmetic mean of the margins of the 11 comparable companies selected by the assessee in TPSR is 13.85% and accordingly, it was concluded that the international transaction of ITeS were at arm's length. 7.2. The ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... typesetting and data digitization services for overseas publishers. The company has a 100% Export Oriented Unit in Bengaluru, and units registered under the Software Technology Park of India (STPL) scheme that are located in Chennai, Delhi, Gurgaon and Dehradun. The Company also operates through its branch in United States of America. The company provides publishing services relating to typesetting of books and journals, composing of yellow page advertisements and catalogues, data coding, conversion, indexing, editing, copy editing, editorial services, software development, maintenance and support to global publishers. b) MPS Ltd. is engaged in developing of software projects such as Digicore and Digitrak. c) MPS Ltd. has incurred outsourcing costs which indicate that it follows different business model. d) From the annual report of the said comparable it is noted as under:- "MPS Ltd., provides content creation production, transformation and technology services to global academic, scientific and educational publishers. The company has a team of more than 2,860 employees based in offices in Bengaluru, Chennai, Gurgaon, Noida and Dehradun in India and at Portland, Oregon, Or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it cannot raise such an objection before the TPO. It is the TPO who has adopted this company as comparable. On such adoption, the assessee has every right to raise the objections as regards the functional differences between the assessee and comparable. It is the bounden duty of the TPO to consider the said objections in accordance with law. As brought out by the assessee, the assessee is in the TT enabled services, whereas the said company Apex Knowledge Salutation Pvt. Ltd., is in the business of E-publishing which cannot be said to be in the same line of business. The functional differences are likely to affect the profit marking capacity of both the companies. In view of the same, we are of the opinion that this company is also to be excluded from the list of comparables." 9.3. In view of the above, we hold that the comparable chosen by the ld. TPO, M/s. MPS Ltd., is functionally not comparable with that of the assessee and accordingly, we direct the ld. TPO to exclude the same from the list of comparables. 10. Exclusion of Excel Infoways Ltd., We find that the assessee has pleaded before the ld. TPO that this comparable was indeed considered by the assessee in its accept / ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out bound sales, marketing, voice, email response, real time chart, knowledge management and other value added services. 10.2. The ld. DRP while upholding the action of the ld. TPO observed as under:- "The claim of the assessee that this company is shifting focus form BPO/ITeS to Infra activity is not relevant because assessee is relying upon the certain activities which have transpired in the company during FY 2014-15 and not FY 2013-14; (ii) So far as the segmental accounts of the company are not reliable is concerned, the assessee has not brought out any tangible material in this regard; (iii) Profitability of the company cannot be sole criteria for selection of rejection of the company. 10.3. We find that the aforesaid facts and figures remain undisputed before us and we find that the turnover of the said comparable from its ITeS / BPO segment was Rs. 5.28 Crores for the A.Y.2014-15, whereas the turnover of the assessee under ITeS segment was Rs. 60.45 Crores. This admittedly does not fall within the turnover filter range fixed by the ld. TPO itself which is Rs. 6.45 Crores to 604.50 Crores. Hence, we hold that the said comparable fails on the turnover filter applied by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad not conducted a structured search for comparable companies and had instead resorted to cherry picking of comparables based on the order for the A.Y.2013-14. The ld. DRP accordingly directed the ld. TPO to conduct a fresh search for determining the final set of comparable companies in IT segment. During the remand proceedings, the assessee submitted a fresh search conducted wherein four new companies which qualified all the filters applied by the TPO were identified. Further the ld. TPO identified four new comparable companies through a fresh search conducted in the data base. Thus, the TPO finally selected 12 comparable companies out of which six companies were originally considered by him in his order, two companies from the fresh search conducted by the assessee during the remand proceedings and four companies from the fresh search conducted by the ld. TPO. The ld. TPO accepted the submission of the assessee in respect of exclusion 2 companies namely 1) Suryajyoti Infotech Ltd., and 2) Citixsys Technologies Ltd., The ld. DRP accepted the submission of the assessee for inclusion of two comparables namely 1) Kireeti Soft Technologies Ltd., and 2) Priya Softweb Solutions Pvt. Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lete range of activities such as requirement mapping, conceptualisation, development and testing etc. It was also pleaded before the ld. TPO during remand proceedings and this company is also engaged in software project development and has developed projects namely "Free AS AIR" which offers complete solutions for preparing, signing, sending and managing documents online. 13.1.1. We find that the ld. DRP had held that this company is only in the activity of software development and consultancy receipts for exports and in domestic tariff. 13.1.2. The ld. DRP observed that there is no mention of BPO services in the website of the said company and that the reference made by the Statutory Auditor is a mistake since the company is into business process management through software development and it is not a BPO. We find from page 1043 of the paper book containing the corporate information in the annual report for the year ending 31/03/2014 wherein it is categorically mentioned that this company is engaged in development of software and providing BPO services to customers based outside India. We also find from page 1044 of the paper book containing the accounting policy in respect of " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 1069 of the paper book. We also find from note No.27 in page 1069 of the paper book which is notes forming part of the financial statements for the year ending 31/03/2014, the said company under the caption "earnings in foreign exchange" had reflected export of goods / services calculated on FOB basis to the tune of Rs. 32,96,59,883/-. We find that there is no segmental break-up available with regard to sale of software and revenue derived from the software development services in order to make it comparable with the assessee herein in IT segment. We find that reliance in this regard had been rightly placed by the ld. AR on the co-ordinate bench decision of Pune Tribunal in the case of Pubmatic India Pvt. Ltd., in ITA No.655/Pun/2017 for A.Y.2012-13 order dated 09/03/2018 wherein it was held as under:- 18. We have heard the rival contentions and perused the record. The first aspect is the functional comparability of concern which has been finally selected to be comparable. In respect of Infobeans Systems Pvt. Ltd., the financials of said concern clearly reflect that in addition to providing software development services to its associated enterprises, it had also earned foreign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ries of Rs. 11,59,834/-. We also find from the profit and loss account that the sum of Rs. 3,28,274/- has been reflected as income towards changes in inventories of finished goods, work in progress and stock in trade. All these points collectively go to prove that the said company is also engaged in the sale of products apart from software development. From the perusal of the entire annual report of the said company, we find that there is no segmental data available for the revenue stream in respect of revenue from software development and revenue from sale of products. Hence, in the absence of segmental data for the software development segment alone, the same cannot be held to be comparable with the assessee in IT segment. Accordingly, we direct the ld. TPO to exclude the same from the list of comparables. 13.4. Exclusion of Nihilent Analytics Ltd., (Formerly know as ICRA Techno Analytics Ltd.) - Margin of 43.79% We find that assessee had argued that this comparable has got related party transactions more than 25% and range of services includes software development and consultancy, engineering design services, web development and hosting, business analytics and BPO servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the revenues are selected." Under this caption, the ld.TPO had also observed that related party transactions on revenue and expenditure side were considered for applying this criterion. This is the filter and credential applied by the ld. TPO, then it is incumbent on the part of the ld. TPO to consider all the aforesaid three transactions together while arriving at the RPT ratio i.e., a) Services rendered related parties is -Rs. 6.22 Crores b) Reimbursement of expenses by related parties - Rs. 0.6 Crores c) Reimbursement of expenses to related services - Rs. 0.4 Crores 13.4.2. If all the aforesaid three transactions are considered then the RPT to sales ratio works out to 25.88% which fails the RPT filter applied by the ld. TPO. Hence, the same deserves to be excluded on this count itself. In view of this, no opinion herein is given with regard to functional dissimilarities between this comparable and the assessee company which was argued by the ld. AR before us. 13.5. Exclusion of Cybercom Datamatics Information Solutions Ltd - Margin of 76.21% It was pleaded that this company is engaged in sale of software and hardware products, rendering of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the manner as follows: " Having heard both the parties and having gone through the material on record, we find that the TPO at page 37 of his order has brought out the differences between a product company and a software development services provider. Thus, it is clear that he s aware of the functional dissimilarity between a product company and a software development service provider. Having taken note of the difference between the two functions, the Assessing Officer ought not to have taken the companies which are into both the product development as well as software development service provider as comparables unless the segmental details are available." In view of the aforesaid fact-finding of the learned "^burial, this Court cannot re-appreciate the same. Accordingly, the appeal is dismissed. Miscellaneous petitions pending, if any, shall stand closed. No order as to costs. 13.5.1. We have already placed reliance on the decision of Pune Tribunal in the case of Pubmatic India Pvt. Ltd. supra which had also endorsed a similar proposition. Respectfully following the same, we direct the ld. TPO to exclude this company from the list of comparables. Accordingly, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat "companies who have export service income less that 75% of the sales were excluded". In other words, the ld. TPO had applied the filters that were chosen as comparable companies which has export revenue more than 75% of total revenue. From the perusal of the annual report of the said company as on 31/03/2014, we find that the said company had derived revenue from operations to the tune of Rs. 5,45,72,126/-, breakup of which are as under:- Sales Rs. 2,13,321/- Liasoning charges received Rs. 54,28,33,284/- Reimbursement of expenses Rs. 75,521/- Total Rs. 5,45,72,126/- 16.1. We find from note No.26 to the financial statements enclosed in page 1450 of the paper book under the caption "earnings in foreign currency", it is reflected that FOB value of sales was Rs.Nil. This goes to prove that the export earnings of this comparable company was Rs.Nil during the year. Hence, it could be safely concluded that the said comparable fails the export filter applied by the ld. TPO and accordingly deserves to be excluded from the list of comparable companies, accordingly, we direct ld. TPO to exclude Axis Integrated Systems Ltd., from the list of comparables. The ld. TPO is directed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee provided software development services to its AEs. TNMM was adopted as the most appropriate method to determine ALP of international transactions of IT segment. The margin of the assessee under IT segment was determined as under:- Particulars Amount (Rs.) Operating Revenue 16,96,35,715 Add: Suo moto adjustment by Appellant 61,85,680 Total Operating Revenue 17,58,21,395 Operating Cost 16,55,88,054 Operating Profit 1,02,33,341 Assessee's Margin 6.18% 23.1 The assessee selected 7 comparables engaged in similar services and the arthimetic mean margin of the comparable companies selected in TP study report was 6.18%, accordingly, it was concluded that international transactions of IT segment was at arm‟s length. 23.2. The ld. TPO rejected / modified the filters applied by the assessee in the TP study report and also introduced new filters. Based on the new / altered filters applied by the ld. TPO, the ld. TPO selected 10 comparables which included one comparable chosen by the assessee also. The average OP/TC of those 10 comparables was worked out by the ld. TPO at 28.23% and adjustment to ALP was made to the tune of Rs. 4,27,02,814/- as under:- Particular ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore us at the time of hearing stated that he would like to press the inclusion of aforesaid three comparables and exclusion of the following comparables namely i) Aspire Systems India Pvt. Ltd., 2) Cyber Infrastructure Pvt. Ltd 3) Ingenuity Gaming Pvt. Ltd., 4) Thirdware Solutions Ltd., 27. Let us now examine each of the four comparables which are sought to be excluded by the ld. AR. 27.1. Exclusion of Aspire Systems India Pvt. Ltd., We find that the assessee had argued before the ld. TPO that this company is functionally not comparable as it is engaged in diversified activities as under:- 1. Product Engineering & ISVs 2. Enterprise solution 3. Independent testing sendee 4. Business intelligence and analytics 5. Digital services 6. Product engineering for enterprises 7. Portals and content management 8. Infrastructure and application support service 9. Enterprises application (source: website extract) 27.1.1. Since, no segmental details were available with respect to revenue from software and other diversified services as above, the ld. AR pleaded that this company cannot be included in the list of comparables due to functional dissimilarities. We find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recognised on acceptance or renewal of contract and is accrued over the period of the contract. Revenue from sale of user licenses for software applications is recognised on e-delivery of software license key to end user. 27.3.2. Hence, it would be relevant to understand the break-up of revenue of Rs. 14225.84 between software services and other business norms in order to arrive at the margins of software segment and then make it comparable with that of the assessee. We also find from the profit and loss account of the said comparable that the said comparable has got purchase of stock in trade to the tune of Rs. 2482.34 lakhs thereby making it functionally uncomparable with the assessee. Hence, it could be safely concluded that the said company cannot be held as a comparable company with that of the assessee in view of functional dissimilarities and absence of segmental data of revenue or profits derived from software segment alone. Our view is also endorsed by the co-ordinate Bench decision of Delhi High Court in the case of ST Ericson India Pvt. Ltd., vs. ACIT in ITA No.4434/Del/2018 dated 26/09/2018 wherein it was observed as under:- Thirdware Solutions Limited 24. The Ann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the ld. DRP has arrived at an erroneous figure by considering the total turnover of the assessee instead of taking the turnover from software development segment alone for the purpose of comparability of assessee with the aforesaid three comparables. In view of this, we direct the ld. TPO to include these three companies in the list of comparables for benchmarking the international transactions of the assessee in IT segment.
27.5. We direct the ld. TPO to grant working capital adjustment in respect of final comparables to be chosen as per the aforesaid directions which is now well settled in law. Accordingly, the ground No.2 raised by the assessee in respect of software development segment are disposed off.
28. In the result, the appeal of the assessee in ITA No.531/Mum/2018 for A.Y.2013-14 is partly allowed for statistical purposes.
29. TO SUM UP:
i) In the result, the appeal of the assessee in ITA No.6098/Mum/2018 for A.Y.2014-15 is partly allowed for statistical purposes.
ii) In the result, the appeal of the assessee in ITA No.531/Mum/2018 for A.Y.2013-14 is partly allowed for statistical purposes.
Order pronounced in the open court on this 14/06/2019 X X X X Extracts X X X X X X X X Extracts X X X X
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