TaxTMI 
TaxTMI 
TaxTMI 
2013 (7) TMI 843
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.... 1961 ('the act') after considering the initial adjustments proposed by the learned Transfer Pricing Officer (TPO) in his order passed under section 92ca(3) of the act and the directions of the Hon'ble dispute resolution panel ('DRP') in that respect. Each of the ground is referred to separately, and may kindly be considered independent of each other. That, on the facts and circumstances of the case and in law, 1. The AO / DRP has erred in making an addition 251,958,313 to the total income of the appellant on account of adjustment in the arm's length price (ALP) of the international transactions related to contract it-e bled service contract software developments services entered into by the appellant with its associated enterprises (collectively referred to as 'impugned transactions'). 2. The DRP has erred in concurring with findings of the AO/ TPO and disregarding, without appropriate justification, the economic analysis undertaken by the appellant for establishing the alp of the impugned transactions. 3. The AO/ TPO has erred in conducting a fresh economic analysis for determination of the alp of the impugned transactions and holding tha....
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.... in not providing the benefit of the arm's length range as provided under proviso to section 92C of Act for purposes of computing the arm's length price under section 92F of the act. 16. The AO has erred by disallowing freight charges and hotel expenses under section 40(a)(ia) of the act without appreciating the fact that the appellant was not required to deduct tax on the payment of such expenses. without prejudice to this fact, AO has erred by not enhancing the deduction under section 10A of the act to the extent of the above disallowances as the same increased the income of the STP undertaking, despite clear directions from DRP in this regard. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal. The Appellant prays for appropriate relief based on the said grounds of appeal and facts and circumstances of the case." 3. As regards the above grounds of appeal, ld. Counsel of the assessee submitted that the assessee's grievance is confined to inclusion of four comparables in software services segment. It has been argued that these comparables have been w....
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....e Company was not available. RPT information was not available. Hence, notice u/s. 133(6) was issued to the Company to get complete information. TPO further observed that as per the replyreceived from the company, it qualifies all the filters applied by the TPO. Hence, the same was proposed as comparable. The assessee objected to the same for the following reasons:- "Unreliable information and non availability of information in public domain. The aforesaid company has been considered as a comparable by your office after obtaining financial information for the period ended 31st March, 2008 under section 133(6) of the Act. In this regard, the assessee wishes to state that information provided by the company was not available in public domain and hence should not be used for the purpose of comparability. Kindly refer paragprah 5 and various sub paras under it which contains the Assessee's contentions against the use of information gathered u/s. 133(6). Earning super normal profits The assessee submits that Avani is earning super-normal profits and should be rejected while arriving at the ALP. The assessee has in section 9 of this submission mentioned various judicial deci....
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....s observed that this comparable was rejected by the assessee in the transfer pricing document saying that 'functionally different'. However, no reasons were given in the Annexures. TPO observed that this Company is mainly into the software development. As per the information submitted by the company in response to section 133(6) notice, it is into two segments (i) software development services and (ii) training. The segmental details were also submitted. It qualified all the filters applied by the TPO. Hence, it was proposed as a comparable. The assessee raised following objections against these comparables. "Kals Info Systems Limite (KALS) Your goodself has proposed the aforementioned company to be considered as a comparable. However, on review of the annual report of the company for the year ended 31st March 2008, it is observed that the company in into provision of software development services as well as sale of software products: "Inventories" under the Schedules to the financial statements on page 16 of the annual report discloses "Software development" as inventory and work-in- progress. It is to be noted that a pure software services provider would not be able....
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.... agreement with the proposition. He observed that this is factually incorrect and many software development service companies disclose inventory or work in progress or unbilled revenue. In this regard, TPO referred to the financial of Infosys. TPO further observed that there has been main argument is that the company has revenues by way of sale of products and training, but the break up is not available. TPO observed that it is apparent that the assessee did not read the notice issued by the TPO properly. The relevant information furnished by the Company as communicated to the assessee was reproduced below:- "Description of our business activities during the F.Y 2007...08 and F.Y 2008-09 The core of our business may be classified as that of Pure Software Development Service Provider. In essence we get project (software development ) orders from our clients drawn from various verticals such as Insurance, Telecom, Manufacturing etc. We execute the project through the entire SDLC (Software Development Life Cycle) In most cases i.e. starting from design to delivery, testing and training. In some instances especially in the insurance vertical - we use ready made object libraries (co....
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...., TPO has referred to the report obtained u/s. 133(6). From the above, TPO has observed that use of readymade object libraries is only 3.4 to 6.96% and training constitutes only 4.24-7.01% of its revenues for the Financial Year 2007-08 to 2008-09. Thus, the revenues from software development services constitute more than 75% of the total revenues. Hence, it qualifies the services income filter which has been accepted by the tax payer also. As regards the decision of the Tribunal relied by the assessee, the same is not relevant here, because the TPO has considered the financial results and product profile of the company for the 2007-08 & 2008-09. III. Infosys Technology Ltd. 11. On this comparable the Assessing Officer noted that the Annual Report is available for the financial year 2007-08. Based on the information submitted by the Company, it qualifies all the filters supplied by the TPO. Hence, this company was proposed as comparable to the assessee. The assessee did not accept this proposition. It was submitted that Infosys has non comparables services as compared to the assessee. In this regard, reference was made to the Infosys diversified services offering, product offering....
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....s which are either higher than Infosys or almost the same. TPO further observed that brand may bring more revenues but not necessarily higher margins. TPO further observed that any brand comes with a cost i.e. huge expenses are required to be incurred to build brand value. Thus, the brand may generate revenue, but with a cost compensating any extra benefit, if any derived from such effort. Assessing Officer further referred to the ITAT, Vishakapatnam decision in the case of LG Polymers India Pvt. Ltd. (2011-TII-97-ITAT-Vizag-TP) which has held that brand name is only one of the factors but not the only factor which affects profitability. Hence, the TPO held that the assessee's argument that companies having large scale of operations and brand name have better margins is without any basis, thus liable for rejection. 15. TPO further observed that there is no denial of the fact that Infosys sells Software Products for banking in the name of Finacle. But, the revenues from software products are of only Rs. 597 crores crores out of its operating revenues of Rs. 15,648/- crores. Hence, the TPO observed that the Revenue from software products constitute only 3.82% of the operating re....
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....that the company qualifies all the filters supplied by the TPO. The assessee objected to this proposition. The Assessee submitted that Wipro is engaged in providing IT services and trading of IT products to its clients and there is no breakup of revenues between IT services and products. Assessee further submitted that no information of IT services, BPO services and software products revenue break up is available in the public domain at the stand alone financial statement level. Further, at the consolidated level, comparable services constitute only 70 percent of consolidated revenues. Hence, Wipro should be rejected as functionally different and should not be considered as comparable. Further it was submitted that in the company's annual report it was stated that company is engaged in selling and servicing high-end IT products and then maintaining them over its life cycle. It was further submitted that Wipro has undergone an amalgamation during the financial year 2007-08. It was submitted that TPO has himself excluded companies having peculiar economiccircumstances. It was further submitted that Wipro was earning abnormally high profits and should be rejected while arriving a....
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....red to several ITAT decision wherein comparables having high margin were considered acceptable. He observed that in comparability analysis loss or so called higher margin is not a determining factor unless there are any peculiar economic circumstances in such a case. He observed that just like loss making companies, super normal profits making companies are also part of the industry and hence, cannot be rejected merely because they have earned such profits. 21. Assessee in submissions before us submitted that Wipro cannot be considered as comparable to the assessee on account of the following differences and functions performed, assets used and risks undertaken by the two entities. Parameter Appellant Wipro Functional profile Captive contract service provider Full risk bearing entrepreneurial entity Nature of services Routine software services Diversified operations encompassing Application Development Maintenance (ADM) Services, Testing Services and Consulting Services Intangible assets employed No intangible assets Intangible including brand Exception circumstances during the year None The company underwent a merger (Directors Report F.Y. 2007-08) The Scheme of Am....
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....ailable information and found to be functionally not comparable and hence, rejected. Reliance in this regard is placed on Special Bench decision of Chandigarh bench in the case of DCIT Vs MIs Quark Systems Private limited [2010­TIOL- 31-ITAT-CHD-SB] which held the following: "....Accordingly on facts and circumstances of the case, we hold that taxpayer is not estopped from pointing out that Datamatics has wrongly been taken as a comparable As we have noted earlier as well, the transfer pricing was in the initial stages in this year and we are inclined to take a rather liberal approach by giving assessee an opportunity to make out its case properly and place all the relevant facts before the tax authorities so that proper arms length price can be determined in accordance with the law the proceedings before the tax authorities are not adversarial proceedings and the assessee should not therefore be placed at under advantage because of his inadvertent and bonafide mistakes .. " ii. Functional differences of the Wipro and Infosys with that of assessee: In this regard, it is submitted that there are various decisions of the tribunal where com parables have been rejected on the....
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....the other hand, the assessee is a captive unit of its parent company in the USA and it assumes only limited risk. Having considered these points, we are of the view that the case of aforesaid Infosys and the assessee are not comparable at all as seen from the financial data etc. of the two companies mentioned earlier in this order. Therefore, we are of the view that this case is required to be excluded" Further reliance in place on the decision of Triniti Advanced Software Labs (P) Ltd. ITA No. 11291Hydl2005 which excluded Wipro at para 9 "M/s WIPRO is a large industrial giant undertaking working independently with principles to principle relationship. On the other hand, the assessee is dependent contractor. " In light of the above, it is submitted that Wipro and Infosys should be rejected because it is functionally not comparable to the Appellant. Attention is drawn to ACIT, Mumbai Vs Maersk Glbal Service Center (India) Pvt ltd (ITA No. 377 4/Mum/2011) ('Maersk Global'), in which the ITAT held as follows: - ".....Insofar as WIPRO BPO Solutions Limited is concerned, we find that their turnover is eleven times greater than that of the Assessee. This company having ....
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....tively, 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' i.e., 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 Private Limited' (ITA NO.3856/Delhi/2010), 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 find....
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....nue filter applied by the TPO. As regards the assesse's objections of extra ordinary circumstances TPO observed that the assessee has not adduced any evidence from the Annual Report or otherwise how this event had an influence on pricing or the margin earned by the company for the F.Y. 2007-08. Hence, the TPO held that the above comparable has been rightly included. 26. Now the assessee has submitted before us that Company with extraordinary event such as merger and amalgamation should be rejected. It has been submitted that during the financial year 2007-08 Geosoft Technologies (Trivandrum) Limited and Iridium Technologies India Pvt. Ltd. were merged with ATL. Also, Accentia purchased the business of Thunga Software Private Limited, GSR Systems Inc., GSR Phsician Billing services Inc., Denmed Transription Services Inc. and Accential FZE. It has been submitted that such a restructuring undertaken by ATL is an exceptional circumstances and has resulted in volatility in revenues and margins, as evident form the table below:- Financial Year Sales (In Rs.) % Change in sales 2006-07 287,231,663 - 2007-08 509,346,944 77.33% 2008-09 801,440,931 57.35% Hence, it has been ....
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....ropetal has a state of the art R&D incubation centre which clearly points out towards the high end service delivery model which the company follows. However, TPO did not consider that the Company is functionally dissimilar. He observed that the Company is providing IT enabled services. The IT Enabled Service are thus services that are rendered using information technology. Further the Company in its reply categorically stated that it is registered with STPI and is into ITES. Assessing Officer further referred to the CBDT Circular SO 890 (E) dated 26.9.2000, which had given a detailed list of product and services that could be claimed under ITES for the purpose of 10A & 10B as under:- "The information technology enabled products or services to mean: i) Back Office operative. ii) Call Centres iii) Content development or animation; iv) Date processing v) Engineering and design. vi) Geographic Information System Services. vii) Human Resources Services viii) Insurance Claim Processing. ix) Legal databases. x) Medical Transcription. xi) Payroll; xii) Remote Maintenance. xiii) Revenue accounting. xiv) Support Centres, and xv) Web site services. Referring ....
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....rocessing and data analytics services which is similar to the services of the assessee and therefore, it cannot be said that the business activity of the assessee and this company are materially and substantially different, which cannot be compared especially as the services of both are in the nature of ITES. In this regard, we find that the identical view has been expressed by the ITAT, Mumbai Bench in I.T.A. No. 4547/Mum/2012 vide order dated 1.3.2013 in the case M/s Willis Processing Services (I) Pvt. Ltd. vs. DCIT." 32. From the above, we note that as per the Notification of CBDT dated 26.9.2000 the various products and services are notified in the category of IT enabled products and services. We find that engineering and design services are very much included in the said list. The decision of Tribunal as referred above states that these services are in the nature of ITES. Thus, on the basis of above exposition of the ITAT, we do not find any cogency in the assessee's submissions that these companies; KPO Services are distinct from BPO services and not comparable. Hence, we affirm the inclusion of these two comparables. IV. Genesys International Limited 33. On this issue....
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....ve considered the submissions. We find that the above issue has already been adjudicated by us in the preceding paragraphs in relation to Acropetal and eClerx Services. Geographical Information System are very much included in the CBDT Circular NO. SO 890(E) dated 26.9.2000 which has given a detailed list of product and services which could be claimed under ITES for the purpose of Section 10A and 10B. The assesses argument that CBDT Notification as mentioned above should be considered only for the purpose of determining eligibility for tax exemption is not acceptable. The said Circular has been duly relied upon in ITAT decision cited above. Hence, based upon the reasoning mentioned in the above paragraphs and also relying upon the said precedents as well as precedent from the ITAT, Mumbai Bench, in the case of Wills Processing (Supra), we hold that TPO was correct in adding this as a comparable. V. Vishal Information Information Technologies Ltd.- Ltd.-Now Known as Coral Coral Hub Limited. 38. As regards this comparable, Assessing Officer considered the same as comparable. Assessee objected to the same on the ground that it has not comparable cost structure. In this regard, it wa....
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.... by the same Bench in the case of case of RAMgreen Solutions Private Limited vs. ACIT vide order dated 22.3.2013 in I.T.A. No. 6286/Del/2012 (A.Y. 2008-09) (Supra). In this case the Tribunal has held as under:- "19. Further, as regards the outsourcing issue is concerned, we agree with the DRP that outsourcing of routine non-discretionary functions, call centre, data entry, claim processing etc. to other parties is very common feature of ITeS industry. There is no dispute that the assessee derives its entire revenue from ITeS segment. The financial results shows that the company earns income from single revenue stream of IT Enables services. In this regard, we find that the ITAT, Hyberadbad in the case of Deloitte Consultant Pvt. Ltd. (Supra) on the same issue has held as under:- "It appears that the VITL has outsourced the manpower and the cost of outsourcing appears to have been included in the other heads of the expenditure instead of wages­employee cost. Moreover, the intangibles will not materially affect the price or profit earning. By outsourcing the manpower, the VITL would have incurred more cost compared to the assessee company, thus resulting in lesser operating p....