TaxTMI 
TaxTMI 
2012 (5) TMI 414
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....ring and has arbitrarily rejected the claim of the appellant. This fact is evidence from the directions given by DRP. The appellant prays that the direction given by the DRP and followed by the Assessing Officer is contrary to provisions of law and the additions made may be deleted. 3. On the facts and circumstances of the case the appellant has established beyond iota of doubt that the Trigent Software Inc. (AE) has not retained any margin in respect of the Software Development Work by the appellant in India. As regards the payment made to Trigent Software Inc. (AE) the appellant had established with proof and evidences that the amount paid is based on the arms length principle and is comparable to the other similar transaction. The DRP has not dealt with the issues which was raised before them. The appellant prays that the direction given by the DRP and followed by the Assessing Officer is contrary to provisions of law and the additions made may be deleted. 4. On the facts and circumstances of the case the appellant prays that on the similar facts in earlier assessment years the income tax department has accepted the claim of the appellant in no adju....
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....ing Arm's Length Price (ALP) of the international transaction between the Assessee and TSI to the Transfer Price Officer(TPO) viz., the transactions of providing software services to the US clients through TSI for which the assessee had received a sum of Rs. 15,44,99,316/-. The assessee in support of the price that it had paid to TSI filed a Transfer Pricing Report in Form 3CEB. The assessee had adopted the Comparable Uncontrolled Price Method (CUP). 4.1 The TPO was of the view that the comparables relied upon by the assessee were companies that were located in Denmark and Switzerland, besides two Bangalore based Indian Companies. The other comparable instance was of a company in Massachusetts (USA). According to the TPO geographical location would affect the price and, therefore, the comparables adopted by the assessee were not proper. The TPO, therefore, rejected the CUP method adopted by the assessee. The TPO also was of the view that the contractual differences have not been brought out and necessary factoring done by the assessee. The AO was of the further view that the Transfer Net Margin Method (TNMM) was the most appropriate method that could be adopted. 4.2 The TPO c....
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....nbsp; 2,06,80,038 OP/TC 10.16% ALP OP/TC 20.68 ALP Profit 3,78,08,119.80 Differential profit 1,71,28,081.80 Total software development charges received from the AE 15,44,99,316.00 ALP Sales Value 17,16,27,398 95% of ALP Value 16,30,46,028 Adjustment of Rs. 1,71,28,081.80 was proposed to be made considering the average margin earned by software companies as calculated above. 4.3 In reply to the query of the TPO the assessee pointed out that there was no margin to TSI in the transaction as the invoices raised by the assessee on TSI and the invoices raised by the TSI on the US clients are for identical consideration. The assessee also pointed out that there was no arrangement between the assessee and TSI whereby any element of revenue is distributed between the assessee and TSI. The assessee also pointed out that this business model was followed for the past 10 years and the Department in the transfer pricing proceedings as well as in the regular Income Tax proceedings has accepted the factual aspect and no addition has been made. Without prejudice the assessee subm....
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....rgin also depends on the capacity utilization of space because of high rents and people because of wastage of salary. The assessee also submitted that the comparable companies considered by the TPO had different business model than that of the assessee as listed below: a. KALS info has IP based products for Insurance sector. So their margins are higher. b. Flextronics have design engineering, manufacturing etc. Also they have embedded software division. So their margins are higher. c. Sasken has its own IP and licensing In mult1media, 3G wireless besides the software development. So their margin is better than pure play software development. d. Accel Transmatics is embedded software for electronics. Trigent is not in that field. e. Megasoft has IP based products. f. Infosys a 9000 Crore company has different revenue and cost model. It was argued by the assessee that the samples taken by the TPO for comparison were not comparable with the business model and other factors of the assessee and it would not be proper to adopt TNMM model. 5. The TPO however was not satisfied with the explanati....
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....licable only in respect of reference received for A.Y. 2006-07 and not for subsequent assessment years." 6. For the reasons given above the TPO made an adjustment of Rs. 1,71,28,081/-. The AO adopted the adjustment made by the TPO and made an addition of the said sum to the income declared by the assessee in the draft order passed under section 144C(1) of the Act dated 27/11/09. The assessee filed objections in Form No. 35A before the Dispute Resolution Panel II, (DRP) Mumbai to the draft order of the AO. The DRP vide its direction dated 19/8/2010 was of the view that the additions proposed to be made in the draft assessment order has to be upheld. Consequent to the same the AO passed the final order dated 1/9/2010 making an addition of Rs. 1,71,28,081/-. 7. Aggrieved by the aforesaid order of the A.O the assessee has preferred the present appeal before the Tribunal. 8. We have heard the submissions of the learned counsel for the assessee and the learned D.R. The learned counsel for the assessee at the outset drew our attention to the application of the assessee for admission of additional evidence. The documents sought to be filed as additional evidence before the Tribuna....
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....r not comparing OP to TC of Tringent with - iGate Global Solutions Ltd. IGate Tringent 1. Revenue : Rs. 128.61 Cr. Revenue : Rs. 20.35 Cr. Op. Profit: Rs. Cr. Profit : 2.07 Cr. Op to TC : 18.09% Op to TC : 11.3% (IT Services + Staffing) 2. iGate emphasizes on its domain knowledge in the areas of Banking, insurance, financial Services, Mortgage, Retail, Manufacturing, Health care, etc. IT Services has plain/vanilla coding services. Tringent has expert coders/programmer but do not have domain experts. Tringent gets its domain knowledge from the client and develops the application based on it. 3. Since iGate has specialized knowledge in various industries, its rates will be higher and has better margins. Since Tringent does not specialize in any domain, and offers vanilla services, there is heavy competition and as a result the margins are low. 4. Revenue of 527+ Cr. It is 25 times the size of Trigent. Not comparable to Tringent due to its size. Reasons for not comparing OP to TC of Tringent with -Infosys Infosys Tringent 1. Revenue : Rs. 9,028 Cr. Revenue : Rs. 20.35 Cr. Op. Profit: Rs. 2,989 Cr. Profit : 2.07 Cr. ....
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.... for not comparing OP to TC of Tringent with-Mindtree Consulting Ltd. Mindtree Tringent 1. Revenue : Rs. 448.79 Cr. Revenue : Rs. 20.35 Cr. Op. Profit: Rs........ Cr. Profit : 2.07 Cr. Op to TC : 14.67% Op to TC : 11.3% (IT Services + Staffing) 2. Mindtree is into IT Services in the field of Business Intelligence, Technology consulting, Enterprise application & SAP Technologies. They are also into Product Engineering Services, Data Analytical Solution, IMTS and Independent Testing. IT Services has plain/vanilla coding services. Tringent has expert coders/programmer but do not have domain experts. Tringent gets its domain knowledge from the client and develops the application based on it. 3. Their specialization extends to Media Planning, IT Infrastructure Management & Trade Promotion Analytics. Tringent has plain Vanilla coding services in Java, Net C++ etc. 4. Revenue of 449 Cr. It is 22 times the size of Tringent. Not comparable to Tringent due to its size. Reasons for not comparing OP to TC of Tringent with- Persistent Systems Ltd. Persistent Tringent 1. Revenue : Rs. 209.18 cr. Revenue : Rs. 20.35 Cr. Op. Profit: Rs. 6....
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....ystems Tringent 1. Revenue : Rs. 79.42 Cr. Revenue : Rs. 20.35 Cr. Op. Profit: Rs. Cr. Profit : 2.07 Cr. Op to TC : 22.20% Op to TC : 11.3% (IT Services + Staffing) 2. R Systems is in domain space and SAP services. They have domain knowledge in mobile voice, TV and data management. They also have domain in financial services including credit card services. Since they are in domain space and also service SAP ERP systems, their margins are much better than Tringent. IT Services has plain/vanilla coding services. Tringent has expert coders/programmer but do not have domain experts. Tringent gets its domain knowledge from the client and develops the application based on it. Since Tringent does not specialize in any domain, and offers vanilla services, there is heavy competition and as a result the margins are low. 3. Revenue : 79.42 Cr. This is 3.9 times Tringent's revenue. Not comparable to Tringent due to its size. Reasons for not comparing OP to TC of Tringent with- Sasken Communications Ltd. Sasken Tringent 1. Revenue : Rs. 240.03 Cr. Revenue : Rs. 20.35 Cr. Op. Profit: Rs. Cr. Profit : 2.07 Cr. Op to TC : 13.90% Op to TC ....
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.... Not comparable to Tringent due to its size. Reasons for not comparing OP to TC of Tringent with- R.S. Software India Ltd. R.S. Software Tringent 1. Revenue : Rs. 91.57 Cr. Revenue : Rs. 20.35 Cr. Op. Profit: Rs. Cr. Profit : 2.07 Cr. Op to TC : 15.69 Op to TC : 11.3% (IT Services + Staffing) 2. The Company specializes in various domains like IT Services has plain/vanilla coding services. Tringent has expert coders/programmer but do not have domain experts. Tringent gets its domain knowledge from the client and develops the application based on it. *Gift/Loyalty/Risk Modeling *Residual Management/Payment Gateway *Merchant Boarding The company offers customizable products in these area. Since Tringent does not specialize in any domain, and offers vanilla services, there is heavy competition and as a result the margins are low. 3. Since the company has domain expertise and products, the margins are better. 5. Revenue : 188+ Cr. It is 9 times the size of Trigent Not comparable to Tringent due to its size. Reasons for not comparing OP to TC of Tringent with- Accel Transmatic Ltd. ....
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....ners who can bring in domain expertise or other values. 4. Megasoft has many commercial installations to its credit. They demonstrate their expertise in their domain so clients may pay them premium to get their domain experience and expertise. c. Trigent does not get paid for its domain knowledge. Rather they get their domain/expertise knowledge from their clients, so they need to charge lower price to get their business. Reasons for not comparing OP to TC of Tringent with- Flextronics Software Systems Ltd. Flextronics Tringent 1. Revenue : Rs. 595.12 Cr. (Rs. 812.38 as per Balance Sheet) Revenue : Rs. 20.35 Cr. Op. Profit: Rs. 246.11 Cr. Profit : 2.07 Cr. Op to TC : 27.24% Op to TC : 11.3% (IT Services + Staffing) 2. Flextronics designs, builds and ships complete packaged products for its OEM customers and provides services to support customer end -to-end supply chain requirements. Flextronics also provides services in manufacturing, logistics, procurement, design, engineering and ODM services across a wide range of products and customer segments. IT Services has plain/vanilla coding services. Tringent has expert coders/programmer but do not ....
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....ld be used by the TPO. 11. We have considered the rival submissions. Before us there is no dispute that the TNMM is the most appropriate method for determining the ALP of the international transaction. The main dispute is with regard to the comparability of the comparable relied upon by the TPO. In this regard the relevant provisions of the Act have to be noticed. "Determination of arm's length price under section 92C. 10B. (1) For the purposes of sub-section (2) of section 92C, 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, in the following manner, namely :- (a) to (d)** ** ** (e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled....
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....s of such differences. (4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into : Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared." 12. A reading of the provisions of Rule 10B(2) of the Rules shows that uncontrolled transaction has to be compared with international transaction having regard to the factors set out therein. The main objection taken by the assessee before us is that the TPO erred in applying the overall operating profits of the comparable companies. The ITAT Mumbai in the case of UCB (P.) Ltd. v. Asstt. CIT [2009] 121 ITD 131/30 SOT 95 had an occasion to deal with a case where TNMM method was adopted by taking the overall operating profits of an assessee with the overall operating profits of certain other companies. The Tribunal on such approach held as follows: "75. In ou....
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....en performed between the assessee and the comparable companies. Any difference in the function and risk which will affect profitability ought to be identified and adjustment made to arrive at the ALP. Without analysis of the above, we are of the view that the choice of comparable companies itself would become questionable. Besides the above, the difference between the assessee and the comparable companies in terms of function and risk as set out in the table above needs to be considered. The data provided by the assessee before us in this regard relates to the period for which TP study is to be undertaken and therefore there can be no objection to considering the same. We are of the view that so long as the data available before the TPO in the course of proceedings pursuant to the order of the tribunal is contemporaneous in point of time and is otherwise comparable, we do not see why the TPO should be precluded from looking into such data. 14. The question whether the overall profitability of the comparable companies can be taken as the yardstick is again a matter which will depend on the functions performed by the comparable companies and to what extent they are similar to that....