TaxTMI 
TaxTMI 
2012 (6) TMI 388
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....the assessee which is 'Telcordia Technologies India Pvt. Ltd.', is wholly owned subsidiary of 'Telcordia Technologies Inc. USA,' which is mainly engaged in providing various kinds of software and services for Internet Protocol, wire line, mobility and cable networks, helping various communications companies. The assessee company was engaged in the business of marketing products and technical support services and software development related services in India. For providing the said services, the assessee earned a compensation which equalled to its total operating cost of providing the services plus a mark-up of 15%. Looking to the nature of its working, the assessee company can be termed as "captive service provider" having least complex operations and for lesser share of risks. During the relevant assessment year, the assessee company's international transactions with the associate enterprises (AEs) were as follows :- Sl.No. Description of the transactions Amount(Rs.) 1. Import of capital goods 1,88,85,183 2. Fees for Marketing Services 5,36,48,151 3. Fees for Technical Support Services 6,68,54,541 4. Fees for Software Deve....
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....t of three entities namely, Bodhtree Consulting Ltd. (Seg.), Helios & Matheson Information Technology Ltd. and TVS Infotech Ltd.. The other companies and the result of operating profit margins were confirmed by the DRP. After giving effect to the DRP's directions to the comparables, the Assessing Officer finally took the arithmetic mean of 27 comparables which worked out to 24.72%. Based on this, the arms length price for international transaction from the AEs was determined after making adjustment of Rs. 88,49,974/-, which was added to the income of the assessee. Against this addition, the assessee has come before us, in this appeal. 5. Learned AR appearing on behalf of the assessee submitted that out of 27 comparable companies, 19 of such entities are not contested and the percentage of operating profit shown by them are accepted. However, for the balance 8 companies, the learned AR submitted his exhaustive objections as to why such comparable cannot be taken into consideration. Based on such objections, the learned AR finally analyzed the arithmetic mean of all the comparables at 18.38% as against 15%, declared by the assessee in the following manner :- Sl. No. Name of Co....
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....t Expenses(B) 100,75,62,812 100,75,62,812 Apportioned Common Expenses(C 3,93,34,570 3,93,34,570 Less : Proportionate non- operating expense (D)' Provision for doubtful debts : Rs.5,08,06,788 Provision for doubtful advances: Rs.3,39,47,774 7,33,93,613 Seg. Operating Expenses(E=B+C-D) 97,35,03,769 104,68,97,382 Seg. Operating Profit (F=A-E) 14,66,68,882 7,32,75,269 Operating profit to Total Cost (F/E) 15.07% 7.00% The learned AR also objected that the figure of doubtful debts taken at Rs. 5,08,06,788/- seems to be, prima facie, wrong because as per the balance sheet of the said company the figure of doubtful debts is Rs. 4,49,82,345/-. In support of this, he drew our attention to page 137 of the paper book. On the other hand, learned DR submitted that debts and advances cannot be part of operating expenses and consequently operating profit, hence, they have been rightly excluded by the TPO. (ii) Lucid Software Limited : 6.2 The contention of the learned AR is that, the Lucid Software Company though described as Software Development Company, is mainly dealing in selling of software products, which is reflected in the website of the said company....
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....sys Technologies Ltd ('Infosys'). : 6.4 Learned AR strongly objected to include the aforesaid entity as comparable party on the ground that Infosys is a very large company and is operating as a full-fledged enterprise as compared to the assessee, which is a captive service provider and operating at a minimal risk. Based on the annual report of the Infosys, he submitted that it has substantial intangible assets which have been valued by the company at Rs. 69,552 crores which comprises of brand value itself at Rs. 22,915 crores. It is a No.2 software service exporter having substantial investments in intangibles, economic value added and has a high focus on R&D. Its operating revenue goes on a staggering figure and it owns products which are sold on premium all over the world. A comparison of function and profile has been given to demonstrate that it is not comparable at all in the following manner :- Basic/ Particular Infosys Technology Limited Appellant Risk Profile Operate as full-fledged risk taking entrepreneurs Operates at minimal risks as the 100% services are provided to AE Nature of Services Diversified-consulting, application design, development, re-enginee....
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....development of software product and providing software consulting service for the use in telecommunication industries and also sales telecommunication equipments. Besides this, it is providing services of business outsourcing (BPO). Being product and service company, it cannot be taken as comparable. On the other hand, learned CIT DR submitted a copy of profit and loss account of the company, obtained from the public domain, which revealed that services constitute almost 90% of its sales and product sales is only 10%, hence, TPO has rightly taken the said company for comparability analysis and the contention of the assessee should be rejected. (vii) Tata Elxsi Limited: 6.7 Learned AR submitted that the software development services rendered by Tata Elxsi are for product development services, innovation design, engineering and visual computing labs, which is different from what the assessee company is mostly involved. He strongly contended that the innovation design and visual computing labs are entirely not comparable. The company is involved in product design and engineering for automotive, consumer goods, electronic and visual computing labs and undertakes content development ....
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....ed to by the learned AR. 7.1 R Systems International Ltd (Segment) : So far as inclusion of this entity for comparability analysis, the learned AR has accepted the same. However, he is disputing the working of the operating profit as done by the TPO. His main contention is that the provision for doubtful debts and provision for doubtful advances are part of the operating expenses and should be deducted while working out the operating profit from the operating revenue. We are unable to agree with the contention of the learned AR that the provision for doubtful debts and provision for doubtful advances are part of the operating expenses. The operating expenses are the expenses which are incurred to earn operational income and, thus, the expenses which have direct nexus with the revenue has to be considered as operational expenses. The doubtful advances and doubtful debts cannot be considered as normal expenses as they are dependent upon number of factors in relation to the trade/business transactions. Accretion of a debt and write off depends upon the wisdom of the business enterprise with regard to timing of its identification and claim as expenditure. Similarly, doubtful advances....
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....ent service provider. This information itself is very vague as the segmental details of operating revenue has not been made available to examine how much is the ratio of sale from software product and sale of software service and development. Looking to the fact that it has developed a software product named as "Muulam" which is used for civil engineering structures and the product development expenditure itself is substantial vis-a-vis the capital employed by the said company, this criteria for being taken as comparable party, gets vitiated. For the purpose of comparability analysis, it is essential that the characteristics and the functions are by and large similar as that of the assessee company and T.P. analysis/study can be made with fewest and most reliable adjustment. If a company has employed heavy capital in development of a product then profitability in the sale of product would be entirely different from the company, who is involved in service sector. Therefore, this company cannot be treated as having same function and profitability ratio. In our view, due to non-availability of full information about the segmental details as to how much is the sale of product and how ....
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..... function performed, assets employed and risk assumed, comparability analysis miserably fails in this case. The comparison of function and profile as has been reproduced in para 6(iv) above, mostly shows that the profit level indicators in relation to return of cost, return of sales and return of assets are huge between Infosys and the assessee company and therefore, the Infosys cannot be treated as comparable entity for making comparability analysis with the assessee company. The comparability of Infosys Technology of the company as that of an assessee has been dealt with ITAT Delhi Bench in the case of 'Agnity India Technologies (P.) Ltd. (supra), wherein it was held that Infosys is a giant in the area of development of software and it assumes all risks, leading to higher profit and cannot be compared with the company which is a captive unit of its parent company assuming only limited currency risk. In view of the above finding, we hold that the Infosys cannot be taken as a comparable for determining the arms length price in the case of the assessee. 7.5 Wipro Ltd.-IT Services Segment('Wipro') : This company is also a global IT Company having varieties of service a....
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....rable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company fit for comparability analysis for determining the arms length price for the assessee, hence, should be excluded from the list of comparable parties. 7.8 Avani CincomTechnologies Ltd.('Avani Cincom'): Here in this case also the segmental details of operating income of IT services and sale of software products have not been provided so as to see whether the profit ratio of this company can be taken into consideration for comparing the case that of assessee. In absence of any kind of details provided by the TPO, we are unable to persuade ourselves to include it as comparable party. Learned CIT DR has provided a copy of profit loss account which shows that mainly its earning is from software exports, however, the details of percentage of export of products or services have not been given. We, therefore, reject this company also from taking into consideration for comparability analysis. 8. Further the learned AR also submitted that the benefit under Section 92 C (2) for +/- 5% range should be given and if adjustment as per the assessee is made then ....
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....sed for various kinds of office equipments and plant and machinery. This issue has been discussed and dealt with by the ITAT Delhi Bench in the case of Nestle India Ltd (supra), wherein following findings have been given with regard to depreciation of computer and depreciation of UPS :- "The expression "computer" has not been defined in the Act. However, it has been defined by s.2(1)(i) of the Information Technology Act, 2000. As per the said Act, "computer" means any electronic, magnet, optical or other high speed data processing device or system which performs logical, arithmetic and memory functions by manipulation of electronics or magnetic or optical impulses and include all input-output processing, storage, computer software or communication facilities which are connected or related to the computer in a computer system or computer network... ....Whereas the UPS, is defined by Webopedia Computer Dictionary, stands for uninterruptible power supply. Thus, the UPS mainly ensures uninterrupted power supply to computer network and also regulated the flow of power to avoid any kind of damage to the computer network. It is, thus, a source of alternative supply of power to the compu....