9911796707
TMI Blog2025 (4) TMI 795X X X X Extracts X X X X X X X X Extracts X X X X ..... research and development (R&D) support services segment and business support services does not satisfy the arm's length principle envisaged under the Act. In doing so, the Ld. TPO/Ld. AO has grossly erred in: 2.1. disregarding the arm's length price ('ALP') as determined by the Appellant in the Transfer Pricing (TP) documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('the Rules'); 2.2. disregarding multiple year/ prior years' data as used by the Appellant in the TP documentation and holding that current year [i.e. Financial Year ('FY) 2006-07] data for comparable companies should be used despite the fact that the same was not necessarily available to the Appellant at the time of preparing its TP documentation; Purchase of raw material 2.3. failing to appreciate that the international transactions of the Appellant relating to import of components for manufacture of electrical equipment would meet the arm's length principle on a transaction-by-transaction basis and disregarded selection of overseas tested party on account of incorrect appreciation of facts and material place on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce to the directions of Hon'ble ITAT (ITA no 5728/Del/2011, order dated 22.11.2012) by not allowing to the Appellant the deduction u/s 10A amounting to Rs 2,85,03,926 and in doing so has gravely erred in: 4.1. Not following the rectified order of Hon'ble ITAT dated 19.02.2015 passed u/s 254(2) of the Act in the Appellant's own case for the Assessment Year 2007-08 wherein Ld. AO has been directed to verify the claim of the Appellant u/s 10A of the Act as per the original return of Income. 4.2. Not appreciating the submission filed by the Appellant on facts and merits of the case, and ignoring the fact that Appellant is eligible to claim deduction under the provisions of section 10A as per form 56F obtained by the appellant and having duly been furnished to Ld. AO/DRP and in fact such claim was duly made in original return though withdrawn in revised return on account of divergent view of the Courts on deduction/exemption under section 10A of the Act. 4.3. Not following the Jurisdictional High Court decision in the case of CIT v. TEI Technologies (P.) Ltd. 361 ITR 36 (Delhi) holding the view that the provisions of section 10A of the Act are in the nature of exemptio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. E-content/e-catalogue 11.14 11. Business support services 5.25 12. Research and development support services 45.55 13. Reimbursement of expenses(recoverable) 13.22 14. Reimbursement of expenses(payable) 5.64 2.2. The summary of economic analysis of the impugned international transactions undertaken by the Company during the financial year (FY") 2006- 07 with its associated enterprises ("AEs") has been presented in the table below: Summary of economic analysis in Transfer Pricing ("TP") study S.No. Nature of international transactions Method applied Profit Level Indicator("PLI") Tested party margin Arm's length margin (TP report) 1. Import of components ("Manufacturing import") Transactional Net Margin Method ("TNMM") Operating Profit/Sales ("OP/Sales") 11.70% 10.67% Export of manufacturing goods ("manufacturing export") 7.82% 2. Contract Research and Development ("Contract R & D") segment TNMM Operating Profit/Total cost ("OP/TC") 5.02% 10.37% 3. Provision of Business Support Services TNMM 4.32% 9.28% Based on the above results, it is the stand of the assessee that the international transactions undertaken during the su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the first round of proceedings before ITAT, the assessee submitted various additional evidences pertaining to its manufacturing segment in order to support the 'transaction by transaction analysis approach' followed by the assessee to determine the ALP of the international transactions pertaining to manufacturing segment. Furthermore, the assessee also submitted its various contentions on the filters applied by the TPO, comparables accepted/rejected by the TPO with respect to Contract R&D services segment and BSS segment, following various jurisprudences. Thereafter, the Co-ordinate Bench of ITAT vide its order dated November 22, 2012 accepted the contention of the assessee and directed the AO/TPO to analyze the additional evidences submitted by the assessee with respect to its manufacturing segment and set aside the entire matter for fresh consideration including the matters pertaining to Contract R&D services and BSS segment of the assessee. The relevant extract from the order passed by the ITAT has been encapsulated below:- "5. Considering the above submissions we find that in the case Kyungshin Industrial Motherson Ltd. (Supra) the primary contentions of the assessee involve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... follows: Manufacturing segment-The TPO proceeded to reject all the additional evidences submitted before the ITAT to support transaction by transaction approach and its various submissions before the TPO during the remand back proceedings on the basis of his own conjecture and surmises. However, TPO accepted the contention of the assessee to restrict the TP adjustment in respect of its manufacturing segment to the quantum of international transactions entered with the AE and provided proportionate relief to the assessee. Contract R&D support services and BSS segment- In respect of R&D support services segment and BSS segment, the ITAT vide order dated November 22, 2012 (Supra) had set aside the matter back to the file of TPO/AO to decide the matter afresh. However, no effect was given to such directions by TPO during the remand back assessment proceedings and TPO simply followed the earlier order without adjudicating on any of the issues pertaining to contract R&D support services and BSS segment. 8. The AO passed the draft assessment order incorporating the order passed by the TPO. Aggrieved with the draft assessment order, the assessee filed objections before the Dispute Reso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as follows:- * Functional difference between manufacturing sub-segments The assessee is operating through different business models in its 4 segments, viz. Manufacturing Import, Manufacturing Export, Manufacturing Local and Manufacturing Hyderabad. The summary of the FAR profiles of the 4 subsegments has been presented under for the Bench's ready reference: Summary of FAR analysis for manufacturing sub-segments of SEIPL Particulars Manufacturing Import-License manufacturing Manufacturing Export-contract manufacturing Manufacturing Local-Independent operations Manufacturing Hyderabad-Start up manufacturing unit A. Functions Performed Forecasting of demand 🗸 x 🗸 x Contract and pricing negotiation 🗸 x 🗸 x Product design x x 🗸 x Procurement of raw material 🗸 🗸 🗸 🗸 Quality check of raw material 🗸 🗸 🗸 x Manufacturing of products 🗸 🗸 🗸 🗸 Inventory management 🗸 x 🗸 🗸 (limited) Marketing and sales 🗸 x 🗸 x Technology function x x 🗸 x Functions relating to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal costs incurred in servicing the AEs orders. In addition, if the products made by the Company comply with the AE's product and quality specifications, SEIPL has guaranteed purchases of the goods from its AEs. Therefore, the contract manufacturer bears limited risks associated with holding finished goods and selling them as compared with a licence manufacturer for the fact that the contract manufacturer has assured buyer and assured return. * Full-fledged Manufacturing Segment (Manufacturing Local): In this segment, SEIPL is operating as a full-fledged manufacturer, responsible for providing the space, machinery and team to manufacture the parts, as well as all materials and goods necessary for production of goods for third party independent customers. In doing so, SEIPL assumes all risks associated with selling the products. In the present case, it can be concluded that Transfer Pricing provisions are not applicable to this segment. * Start-up Manufacturing Segment (Manufacturing Hyderabad); This segment pertains to the newly set up Hyderabad facility of SEIPL, wherein the Company only carried out the initial phase of manufacturing activities from November 2006 to March ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stment tries to isolate the interest effects (taking into account the time value of money) that result from the opportunity costs of holding working capital. The interest effects in the comparable company's data are not completely eliminated but rather adjusted to the Company's level of interest effects. The interest effects in the comparable company's data are not completely eliminated but rather adjusted to the Company's level of interest effects. Prime-lending rate ('PLR') is used as the appropriate cost of capital because it can be determined with reasonable accuracy and is the best available estimate of the cost of capital. For this purpose, the PLR is secured from CMIE (i.e. Center for Monitoring Indian Economy) and Reserve Bank of India publications. In this context, the assessee places reliance on: (i) the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, July 2017; (ii) Rule 10B(3) of the Income Tax Rules, 1961; (iii) Recent rulings in the case of Demag Cranes & Components (India) Pvt. Limited ITA [No.120/PN/2011], Mentor Graphics (Noida) Pvt. Ltd. [112 TTJ 408] ('Mentor Ruling), E-Gain Communication ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in adherence to the principles of arm's length and then analyse pricing policy of the assessee in the light of the said evidence which was not in the possession of the assessee earlier. It is needless to mention over here that while deciding the issue afresh the A.O. will afford opportunity of being heard to the assessee." It is to be noted here, that the ITAT remanded hack all the grounds relating to the transfer pricing adjustment to the file of the AO/TPO for fresh adjudication. During the remand back proceedings, various submissions were filed before the TPO containing the contentions with respect to both service segments. A Summary of the submissions filed has been provided below for the Bench's ready reference: S.No. Date of submission Particulars 1. October 07, 2014 Application u/r 29 of the Rules seeking permission to file additional evidences before the ITAT, including the detailed list of all additional evidences. 2. October 08, 2014 Detailed submission including contentions in relation to contract R&D and Business support services segments. 3. January 22, 2015 Submission filed before the TPO providing clarifications on the non-time barring nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enues of 75% or more of their total export revenue from software development services. Thereafter, the assessee filed an appeal before the ITAT against the application of such filters by DRP. The ITAT vide order dated November 22, 2012 set aside the matter back to the file of AO. The TPO to decide the matter afresh. Without prejudice to the primary contention raised in the preceding paragraphs, the assessee's contentions with respect to filters adopted by the TPO/DRP and comparables are as follows:- a. Reasons for rejection of onsite revenue filter * This is a business exigency and can't be applied as a systematic filter. * Absence of authenticated information for application of such filter. * assessee wasn't provided with sufficient time to analyse the data obtained by DRP vide power granted under Section 133(6) of the Act for application for such filter. * TPO has himself discouraged the use of such data for performing comparability analysis. In this regard, the assessee further submits that having regard to above contentions of the assessee following comparables are ought to be included in the final set of comparables for contract R&D services. Companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue/total export revenue. Functional Similarity- Revenue from services consists of revenue earned from services performed for software development & consultancy, sublicensing fee, web development & hosting, etc. which is recognised as and when services are performed." 2. Indus Networks Ltd. (Software Services Segment) 2.06% As per the information submitted by the company u/s 133(6), it has three segments i) Software Services, ii) ITES and in Manufacturing. The revenue from software services does not constitute more than 75% of the operating revenues of the company. The company stated that software services include software development services and software Products. The segmental results are neither available. Hence, rejected. Functionally similar The relevant "Software Services" segment has been considered for the purpose of comparability and further as per the snapshot of the annual report, Indus is not engaged in dealing with software products. 3. V M F Soft Tech Limited 0.15% Based on the information gathered about the company it is seen that the company is functioning on job work basis. As the predominant work is outsourced, the company is functionally dissimilar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Ld. DRP/TPO- - RPT filter: -Export filter: -Persistent losses filter; and -Onsite revenue filter 3. Quintegra Solutions Ltd. ("Quintegra") Functionally similar-Engaged in providing software and application development services. Passes filters applied by the Ld. DRP/TPO- - RPT filter: -Export filter: -Persistent losses filter; and -Onsite revenue filter 4. iGate Global Solutions Limited ("igate") Functionally similar-iGate is an IT company engaged in providing software and application development services Passes filters applied by the Ld. DRP/TPO- - RPT filter: -Export filter: -Persistent losses filter; and -Onsite revenue filter Therefore, after a combined consideration of above contentions of the assessee, it would like to submit the proposed set for the reference of the ITAT: * Scenario 1-After working capital adjustment, accepting comparables selected by the DRP/ TPO (excluding Kals, functionally dissimilar), including comparables ought to be selected after rejection of onsite revenue filter and export sales filter and including functionally similar comparables rejected by DRP during the first round of assessment. * Scenario 2-Including addi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.48% Thus, as is evident from the above set of analysis, the assessee's margin (OP/TC) of 5.02% is at arm's length in view of section 92C(2) of the Act and hence this provides evidence that the international transaction of assessee pertaining to contract R&D service segment were in accordance with the arm's length standard required under the Indian Regulations. Thus, the assessee contends that in light of the above analysis, no further adjustment is warranted. 15. The contentions of the assessee in respect of 'Business support service' segment is extracted as under:- "In this regard, the assessee would like to submit that during first round of assessment DRP included/excluded certain comparables from the final set on the basis of functional comparability. Thereafter, the assessee filed an appeal before the ITAT against the certain comparables wherein the assessee's contentions weren't accepted by the DRP/ TPO. The ITAT vide order dated November 22, 2012 set aside the matter back to the file of AO/ TPO to decide the matter afresh. Without prejudice to the primary contention covered in Section VI above, the assessee's contentions with respect to co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Datamatics has wrongly been taken as comparable. While admitting additional ground of appeal raised by the assessee to require us to consider whether or not Datamatics should be included in the comparable, we make no comments on merit except observing that assessee from record has shown it's prima-facie case" Thus, the jurisdictional ITAT Bench has un-equivocally stated that, merely because the assessee had included a comparable in its TP documentation, it could not be debarred from seeking rejection of that company at a later stage of assessment/appellate proceedings. Thus, the assessee contends that the high margins of the aforementioned companies during the relevant year are outcome of the extra-ordinary conditions faced by the companies during the year. Hence, the high profit companies deserves to be excluded from the final set of comparable companies, a. assessee's contentions against the rejection of certain comparable companies by DRP during first round of Assessment The Assessee would also highlight that in the first round of proceedings, the DRP/ TPO rejected Agrima Consultants International Ltd with OP/TC of -8.58% in FY 2006-07, submitted during fresh se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for determination of arm's length price of international transaction pertaining to Business Support Services Segment. Business Support services segment-Proposed set of comparables S.No. Name of company OP/TC Working capital adjusted OP/TC 1. Empire Industries Ltd. (Trading and indenting Segment) 24.03% 24.03% 2. Priya International Ltd. (Indenting) 16.00% 15.71% 3. Khaitan India Ltd. (Marketing Division) 8.67% 8.67% 4. National Small Industries Corp.Ltd. -4.85% -5.12% 5. ICRA Management Consulting Services Limited 15.75% 10.54% 6. Rediff.com India Limited 10.13% 8.10% 7. Agrima Consultants International Limited -8.58% -8.12% Arithmetic Mean 8.69% 7.69% Appellant's Margin 4.32% Thus, as is evident from the above analysis, the assessee's margin (OP/TC) of 4.32% is well within the arm's length requirement as per section 92C(2) of the Act, and this provides evidence that the international transaction of assessee pertaining to business support services segment were in accordance with the arm's length standard required under the Indian Regulations'. Hence, the assessee contends that no further adjustment is warranted in this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remarks on the functional comparability of the company The company is functionally similar to the Appellant and increasing trend in revenue itself is not an appropriate reason for rejection. Hence, it ought to be accepted. 3. Melstar Information Technologies Ltd. Rejected on the basis of onsite revenue filter and due to the company having declining revenues (please refer page 380 of the paperbook) * Onsite Revenue Filter-incorrect filter applied by the DRP. Comparable ought to be accepted after disregarding the filter. * Increasing trend in revenue, positive net worth -the company has increasing trend in sales and has positive net worth. Thus, TPO's rejection reason is invalid. (Please refer page 119 to 120 of the paper-book) Upheld the onsite revenue filter as a valid filter. (Please refer page 22 of the paperbook) No remarks on the functional comparability of the company The onsite revenue filter is arbitrary and should not be applied. Further, increasing trend in revenue itself is not an appropriate reason for rejection. Hence, it ought to be accepted. 4. ICRA Techno Analytics Ltd. Rejected on the basis of onsite revenue filter and functional dissimilarity (pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the filter -For the purpose of economic analysis, it is essential to consider functional comparability rather than geographical customer location. -Definition of uncontrolled transaction under Rule 10A(a) specifically mentions that such transaction can be between resident or non-resident. -All the three conditions of Rule 10B should be cumulatively satisfied for rejection of domestic companies. (please refer page 101 to 103 of the paper-book) Upheld the export filter as a valid filter. (please refer page 22 of the paperbook). No remarks on the functional comparability of the company The export filter has been arbitrarily applied and should be rejected for determining the ALP of the company. Hence, these comparables ought to be accepted. 8. V & K Softech Ltd. Rejected on export filter (please refer page 382 of the paperbook) 9. Vama Industries Ltd. Rejected on export filter (please refer page 382 of the paperbook) 10. Indus Networks Ltd. (software services segment) Rejected on the basis of functional dissimilarity and lack of segmental information (please refer page 379 of the paperbook) * Functionally similar- The relevant "Software Services" segment h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Information Services Pvt Ltd [TS-255-ITAT-2014(DEL)-TP] Systech Integrators India Pvt Ltd [TS-82-ITAT-2014(BANG)TP] Prana Studios Pvt Ltd [TS-10ITAT-2015(Mum)-TP] (please refer page 123 to 127 of the paperbook) Directed to ld.TPO to exclude the company from the final set of comparables after verifying the functional comparability (Please refer page 23 of the paperbook) Company ought to be rejected based upon the directions of the Ld.DRP. 15. SIP technologies & Exports Ltd. NA Functionally similar - Engaged in providing software development services. This comparable was also proposed by the Appellant in fresh search submitted before Ld. TPO. However, Hon'ble DRP hadn't adjudicated on the same during the first round of assessment. Passes filters applied by the Ld. DRP/TPO- -RPT filter; -Export filter; -Persistent losses filter; and -Onsite revenue filter (please refer page 128 to 131 of the paperbook) Not adjudicated upon The company is functionally similar to the Appellant and passes all filters applied by the Ld.DRP. Hence, it ought to be accepted. 16. Datamatics Ltd. NA Functionally similar - Consulting, Information Technology (IT) servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by DRP (Please refer page 348 of the paper book) * Functionally dissimilar -Engage in diversified services under payroll processing, trust fund administration and statutory compliance businesses. Further, due to a lack of segmental data availability, it cannot be held comparable to the BSS service segment of SEIPL. * Change in business profile during FY 06-07 Company shifted its business profile to focus on payroll business of the Company leading to abnormally high profits. (please refer page 154 to 155 of the paperbook) 3. Agrima Consultants International Ltd. Rejected on the basis of functional dissimilarity (please refer page 349 of the paper book) Functionally similar - engaged in undertaking feasibility reports for industrial clients. DRP's findings are incorrect. * No cogent reason given by Ld. DRP - Ld. DRP misconstrued the company's business profile, thus wrongfully rejecting it based on incorrect details. (please refer page 155 to 158 of the paperbook) The company is functionally similar to the Appellant and passes all filters applied by the Ld.DRP. Hence, the comparable ought to be accepted. 4. ICRA Management Consutlign Services Ltd. NA * ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by SCILs independent C.A. The ITAT in group company case further held that the profit margin of the non-AE segments should be compared with the profit margins of the AE segment as can be seen from paras 10.11 to 10.12 and 10.20 to 10.24 of the appellate order passed under s. 254(1) of the Act in the case of group company. The assessee thus contends that similar to the relief granted to the group company, the TPO requires to be directed to accept the sub-segments of the manufacturing segments as opined to be true and fair by the assessee's independent C.A. The TPO be further directed to compare the profits margins of these sub-segments. The assessee also relied upon certain decisions to support its contentions regarding the acceptance of sub-segments prepared by its independent C.A viz [1] CIT 8, Mumbai Vs. Tara Jewels Exports Pvt. Ltd. (ITA Num 1814 of 2013, Bombay High Court); [2] Lumus Technology Heat Transfer BV vs. DCIT (ITA No. 6227/Del/20212), dated 21/2/2014; and [3]. Hinduja Ventures Ltd. Vs ACIT, Mumbai (ITA No. 8866/Mum/2010 dated 02/04/2012). 19. With respect to the deduction claimed under s. 10A, the Ld. Counsel for the assessee contends that in the light of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Infrastructure Ltd. for determination of transfer pricing adjustments by the Tribunal in similar circumstances should apply mutatis mutandis. 23. The assessee has filed detailed submissions in writing as well as made lengthy oral submissions as broadly extracted in the preceding paragraphs. The objections of the assessee ranges from failure to apply ALP principles in the assessment order passed under challenge; failure to apply interpretation rendered by Co-ordinate Benches and in disregarding multiple year/prior years data used by the assessee. As further contended, plea towards international transactions relating to import of components for manufacturing of electrical equipment would meet arm's length principles on a transaction by transaction basis as canvassed by the assessee have been ignored. The contention towards selection of overseas tested party is also alleged to have been disregarded contrary to position of law and based on incorrect appreciation of facts. The assessee also asserts that the TPO has included certain companies that are not comparable to the assessee in terms of the functions performed, assets employed and risks assumed. Likewise, as contended, the TPO ha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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