TaxTMI 
TaxTMI 
2011 (1) TMI 875
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....eing with and upholding the Ld.TPO's action. 3. On the facts and in the circumstances of the case and in law, the Ld.AO erred in initiating penalty proceedings under section 271(1)(c) read with section 274 of the Act." 2. Ground No.1 is general and requires no adjudication. 3. As per ground No. 2, the Ld.Dispute Resolution Panel ("the DRP" for short) has erred in confirming the addition of Rs. 5911421 to the income of the assessee, as proposed by the Transfer Pricing Officer ("TPO", for short), by holding that the international transactions of the assessee pertaining to profession of Information Technology Enabled Services ("ITES") and Contract Software Development("CSD", for short), business segments do not satisfy the arm's length principle envisaged under the Income-tax Act. 4. The facts are that the assessee, Colt Technology Services India Pvt. Ltd. was incorporated in India on 1.4.2004. It is the first year of operation was 2004-05. As on 31.3.2006, 99.99% shares of the assessee were held by Colt Telecom BV, Netherlands. The balance shares were held by Colt Telecom - Europe Ltd., UK. During FY 2005-06, the assessee was also entitled t....
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....cally rejected Infosys Technology Ltd. and WIPRO Ltd. The TPO, however, took these two companies as comparables for benchmarking the international transactions of the CSD segment of the assessee. As such, the TPO arrived at an arm's length DP/TC margin of 27.03% and recommended an adjustment of Rs. 17173470 to the income of the assessee form its CSD segment. 9. In his Draft assessment order, the AO upheld the said adjustment of Rs. 17173470 to the income of the assessee form its CSD segment. 10. The assessee had filed detailed objections in this regard before the TPO. A copy of these submissions and objections dated 29.9.09 is at pages 198-217 of the assessee's paper book 1 ("APB 1", for short). The relevant portion thereof is at pages 202-210 of APB 1. For ready reference, this relevant portion of the assessee's submissions/objections is being reproduced hereunder: 5. Infosys Technologies Ltd. ('Infosys') and Wipro Ltd. (Wipro) As per the captioned notice. Your goodself has included two additional comparable in the final comparables set which were not included by the assessee in the results of the fresh search furnished vide submission dated February 5, 2009. These com....
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....nbsp; Offering by Function l Business Platforms l Customer Service Outsourcing l Finance and Accounting l Human Resource Outsourcing l Knowledge Services l Legal Services l Order managemen l Sourcing and Procurement Outsourcing" Hence, unlike the assessee, the company is extremely diversified and undertakes a wide range of services apart form software development. Since, the revenues and profitability for software development cannot be ascertained from the data in the annual report; this company should not be included in the final set of comparables. (b) Ownership of branded/proprietary products Further, based on a detailed examination of the annual report of the company for FY 2005-06, it i....
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....sed on the annual report for FY 2005-06, as much as half of the software development services rendered by Infosys are onsite (i.e. services performed at the customer's location overseas) (refer table below): Company Revenue split (Onsite vs. Offshore) Infosys Onsite-49.8% Offshore-50.2% Typically, onsite command higher billable rates and consequently it would not be appropriate to compare the assessee which earns its entire income from offshore services with Infosys which earns more than half of is services income from onsite services. (d) Comparison of turnover The importance of turnover/size as a quantitative filter for comparability analysis cannot be underestimated Greater size implies economies of scale and more bargaining power that may impact profitability of a company. Size of a company also matters while raising financial resources for investment/expansion purposes. In this regard, the assessee would like to place reliance on....
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.... FY 2005-06 is INR 9.028 crores as against the assessee's sales/turnover of INR 14.13 crores pertaining to the 'software development services' business segment. It would be absurd to compare the assessee with companies having turnover that is 639 times the size of the assessee. In this regard, it is worthwhile to note that the median sales of the 4 comparables (as proposed to be considered by your goodself) is INR 4,525 crores (almost 320 times greater than the sales of the assessee), whereas the median sales for the 20 comparables identified by the assessee in the fresh search is INR 13.85 crores (comparables to sales of the assessee at Rs. 14.13 crores). These statistics make it clear that the broader set of 20 companies relied upon by the assessee is more representative of assessee's economic conditions than the set of four comparables proposed by your goodself. (ii) Wipro Ltd. ('Wipro') Wipro should not be included in the final set of comparables for the following reasons: (a) Diversified nature of operations....
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....(despite it holding substantial inventory and being engaged in trading in finished goods), then surely VJIL deserves to be retained on the same ground. Further, within the domain of IT services, the company website provides information on the diverse nature of services provided by Wipro. In this regard, the relevant extracts from the website are produced below: "Business Technology Services l Business intelligence & Information Management l Portals & Content Management l Enterprise Business Integration l Enterprise Security Service l Business Process Management l Service Oriented Architecture l Legacy Migration l Enterprise Mobility Consulting l &....
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....ng l Application and Embedded software l Electronic hardware and VLSI design l Mechanical engineering design l Technical publications l Industrial automation and engineering l DSP & Multimedia l High performance computing Hence, clearly even within the domain of IT services, the company is diversified and not undertaking just software development but a far broader range of services which renders the company incomparable to the assessee. (b) Business restructuring during FY 2005-06 Moreover, during FY 2005-06 the company amalgamated with three other firms and also made overseas acquisitions. In this regard, the relevant extracts from the annual report are reproduced below: The Scheme of Amalgamatio....
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.... Projects Wipro's innovation initiative has a full time team of 275 and CoEs have a full time team of 128 and about 100 leveraged resources. We fun 40 CoEs and 50 Innovation Projects Revenues from innovation for the year 2005-06 are $53 million. Our Technology & IP Innovations contributed $84. Business innovative solutions contributed about $41 million and Business & Productivity Tools innovative solutions contributed $36 million. The enabled opportunities from CoEs account for $48.2 million.' 'Generation, Incubation and Successful Execution Further, the fixed assets schedule (Schedule 5') in the company a financial statements includes 'Patents trademarks & rights' at a value of INR 731 crores and Technical know-how' at 103 crores. Therefore, unlike the assesse which is a routine captive service provider (not indulging in any R&D efforts resulting in violation of non-routine valuable intangibles). Wipro undertakes R&D and also owns intangible assets. On this ground alone the said company warrants exclusion from the final set of comparables chosen for bench....
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.... computation of the arm's length price vide order u/s 92CA(3) of the Act, the income of the assessee is computed as per the provisions of section 92CA(4) read with section 92CA(4) of the Act at Rs. 59411421. The basis of addition to the returned income of the assessee is on account of difference in the arm's length price of transactions as declared by the assessee and as computed in order u/s 92CA(4) of the Act. The ALP (arm's length price) declared by the assessee for international receipts for software development is at Rs. 141357964 whereas as per the order u/s 92CA(3) of the Act it is computed at Rs. 158531434 whereby making an addition of the difference of Rs. 17173470. Also the ALP (arm's length price) declared by the assessee for international receipts for the IT-enabled services is at Rs. 803214141 whereas as per the order u/s 92CA(3) of the Act it is computed at Rs. 84,54,52,092 whereby making an addition of the difference of Rs. 4,22,37,951. Hence, the income declared by the assessee is enhanced from the returned income of nil and computed at Rs. 5,94,11,421. The income computed as per the provisions of section 92CA of the Act is strongly based on the provisions of the....
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....p; (v) An adjustment of Rs. 5,94,11,421 has been made to the income of the assessee. (vi) The claim of assessee for risk adjustment has been examined and has not been accepted. 2.2 The assessee has objected the Transfer Pricing order and has claimed that the TPO has ignored the fact that the assessee is entitled to tax holiday u/s 10A of IT. Act and would not have any untoward motive of deriving a tax advantage by manipulating transfer prices of international transactions. The TPO has disregarded multiple years/prior years data. In ITES segment, the TPO has resorted arbitrary rejection of no profit/loss making companies and retained only high profit making companies as comparables. He has arbitrary substituted turnover filter of Rs. 5 crores against Rs. 1 crore as taken by the assessee. It has been stated that certain company have been excluded on the ground that they are functionally incomparable and that the TPO has failed to apply the wages/sales ratio filter in ITES segment. 2.3 The submissions made by the assessee have been considered but the same are not correct. The TPO has not selected new comparables but have short listed some companies out....
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....consistency requires that the same filter range should also be applied for identifying comparables for the 'IT enabled services' business segment of the assessee considering that the wages/sales ratio of the assessee (as computed by your goodself), is in any case based on the company-wide numbers, and could thus be equally applied to the IT enabled services' business segment. If the wages/sales ratio filter in the range of 30-60 per cent is applied to the set of comparables proposed by your goodself vide notice dated July 14,2009 (without prejudice to all other objections raised by the assessee against use of such set of comparables - refer the assessee's reply to the said notice vide submission dated August 3, 2009) for benchmarking assessee's 'IT enabled services' business segment, then the following result is achieved (refer table below) S.No. Company Wages/Sales Application of wages/sales ratio filter 30-60 per cent OP/TC 1. Allsec Technologies Ltd. 38.72% Accepted 28.73% 2. Nucleus Nelson and GlS (India) Ltd. 23.24% Rejected 35.89% 3. Galaxy Commercial Ltd. 51.70% Accepted 19.77% 4. Maple Esolutions Ltd. 30.9....
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....sp; evidence furnished by the assessee; (d) report, if any, of the Assessing Officer, Valuation Officer or Transfer Pricing Officer or any other authority; (e) records relating to the draft order; (f) evidence collected by, or caused to be collected by, it; and (g) result of any enquiry made by, or caused to be made by, it. (7) The Dispute Resolution panel may, before issuing any directions referred to in sub-section (5), - (a) make such further enquiry, as it thinks fit; or (b) cause any further enquiry to be made by any income tax authority and report the result of the same to it. (8) The Dispute Resolution Panel may confirm, reduce or enhance the variations proposed in the draft order so, however, that it shall not set aside any proposed variation or issue any direction under sub-section (5) for further enquiry and passing of the assessment order. (9) If the members of the Dispute Resolution Panel differ in opinion on any point, the point shall be decided according to the opinion of the majority of the members. (10) Every dir....