TaxTMI 
TaxTMI 
2012 (6) TMI 388
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..../-. 2. The factual matrix relating to first issue is that 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.  ....
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....tion Panel) and filed its objections. The DRP mostly rejected the objections of the assessee and directed the TPO to verify the comparables in respect 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....
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.... ground that, 'provision for doubtful debt, and 'doubtful advances' are part of normal business operation and it should not be reduced from the operating expenses as done by the TPO and if this is added to the operating cost then the working would be as follows :- Particulars As per TPO As per Appellant Segment Operating Revenues (A) 112,01,72,651 112,01,72,651 Segment Direct 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....
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.... as its functions are different from the assessee which is into purely software services. On the other hand, learned CIT DR provided us the extract of annual report of the company as found in the public domain, wherein the profit-loss account reveals that the income from sale of service was Rs. 13,62,00,676/- whereas the sale on products was only Rs. 50,75,000/- on 31st March, 2007, whereas on 31-3-2006, there was no income from products. Thus, its main operations was for services and is a perfect comparable for bench marking. (iv) Infosys 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 a....
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....at all. He also relied upon the decision of the ITAT Mumbai in the case of Maersk Global Service Centers (India) P. Ltd. v. Asstt. CIT [IT Appeal No. 8558 of 2011, dated 29-2-2012] and also the decision of the ITAT Hyderabad Bench in the case of Dy. CIT v. Deloitte Consulting India (P.) Ltd., [2011] 12 taxmann.com 500 (Hyd.) that Wipro cannot be taken for comparability analysis with the companies like assessee. Learned CIT DR reiterated the same arguments as given in the case of Infosys. (vi) Flextronics Software Systems Ltd. : 6.6 Learned AR submitted that this company is also involved in 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 ana....
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.... operating profit of an uncontrolled party engaged in comparable transactions. There is no quarrel at this stage that out of 27 tested parties selected by the TPO for comparability analysis, 19 entities have not been objected to by the learned AR. Only 8 parties which are appearing from Sl.No.20 to 27 as given in table at para 5 of this order, have been disputed by the AR before us. So, we have to examine as to whether these entities can be taken for comparability analysis for determining the 'arms length price' of the assessee. We, therefore, proceed to analyze each and every comparables as have been objected 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....
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.... to look into and examine the same. 7.2 Lucid Software Limited : It has been submitted before us that this company, besides doing software development services, is also involved in development of software product. The learned AR has tried to distinguish by pointing out that product development expenditure in this case is around 39% of the capital employed by the said company, and, therefore, such a company cannot be considered as tested party. Even as per the information received in response to notice under Section 133(6), the company has described its business as software development company or pure software development 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 c....
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....nd valuation, the profit of Infosys is predominantly due to its premium branding. It is India's No.2 software service exporter and Third in the world as an IT Service company. It is a giant company which is evident from its revenue fund from the sales which itself is more than Rs. 13145 crores and expenditure on advertisement/sales promotion and expenditure on R & D is at Rs. 69 crores and Rs. 167 crores respectively, whereas in the case of the assessee the revenue is only 10.7 crores with no expenditure on advertisement, sales and promotion etc., which are borne by the associated enterprises. Even from the test of 'FAR' ie. 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 asses....
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....s comparable case which can be taken into consideration for comparing the profit ratio. 7.7 Tata Elxsi Limited.: From the facts and material on record and submissions made by the learned AR, it is seen that the Tata Elxsi is engaged in development of niche product and development services, which is entirely different from the assessee company. We agree with the contention of the learned AR that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable 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 ....
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....of the DRP, the claim of depreciation of the assessee was enhanced from Rs. 1,25,12,235/- to Rs. 1,38,17,680/-. The learned AR relied upon the decision of ITAT Delhi Bench in the case of Nestle India Ltd. v. Dy. CIT, [2007] 111 TTJ 498/[2009] 27 SOT 9, that the depreciation of rate of UPS should be taken at 15%. He referred to various details of usage of UPS as given in paper book at page 245 to 252. On the other hand, learned CIT DR relied upon the findings given by the DRP. 12. We have carefully considered the rival submissions and also the finding given in the impugned orders. From the details and material placed on record, it is seen that the UPS have been used 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 dat....