TaxTMI 
TaxTMI 
2013 (7) TMI 843
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....43(3) read with section 144c of the income-tax act, 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 econo....
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.... The AO/ DRP has erred, by not making suitable adjustments to account for differences in the risk profile of the appellant vis-a-vis the comparables. 15. The AO/ DRP has erred 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 a....
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....mparables TPO observed that as per information available in the public domain, it is a software development and consulting company. It is based in India with offices in U.S. The Company has a varied base in Australia, US, Africa, UK and the European Unions with major focus in travel and insurance industry. The TPO observed that Annual Report of the 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 para....
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....companies for software services. Hence, we remit this issue to the file of the Assessing Officer to examine as to whether the assessee's contention that this comparable is a software product company, is correct or not. If the same is found to be software product company, then same will be liable for exclusion from the comparable. II. Kals Infosystems Ltd. 7. The TPO in this regard has 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 o....
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....ftware development services provider), it would defeat the whole purpose of doing an FAR analysis. Therefore, unless adequate breakup of software development services and software products is obtained, the aforesaid company should not be selected as a comparable." 8. The TPO observed that assessee has argued that the company has shown inventory and that a pure software services provider would not be able to disclose such details as it does not carry any such inventory or work in progress. However, the TPO was not in 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 ....
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....riology that this Company is software product company. Hence, it has been submitted that this company should not be considered as comparable. 10. We have heard both the counsel and perused the records. We find that it is true that TPO has himself rejected the software product companies as comparable in the analysis of transaction related to software services. Assessee has allegedly that this company develops products and also provides services, but there is no breakup available between these two items in its annual report. As against he above, 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....
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.... no link between the margin and the turnover of the company. Companies having much lower turnover than Infosys have higher or similar margin and vice-versa. He further referred to analysis of Infosys which showed that even when it had a very low turnover the margin was almost the same. 14. Similarly, the TPO further noted that assessee's argument that brand has helped in better margin is also not correct. He observed that there is no linkage between the two. Companies like Kals, Celestial Biolab, Softsol, etc. with much lower turnover and with no brand name have earned margins 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 f....
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....named "Infy's premium pricing power for projects dips", it is written that "in my mind, the premium pricing for us was between10 and 15%. It would have come down a bit, but we still command premium. Today it is definitely not 15%", SD Shibulal, COO of Infosys said in an interview last month. In many ways, Infosy's relationship with large customers such as BT and Goldman Sachs helped it bill its premium positioning in the past. IV. WIPRO LTD. 18. This Company was rejected in the TP document saying that it is 'functionally different'. However, TPO noted that no reasons were given in the Annexures. He observed 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 c....
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....how the amalgamation has changed the functionality of the company particularly when software segment has been considered by the TPO. Secondly, even if amalgamation has been there the same has not impacted whatsoever on the profitability. The margins of the company in the software as well as consolidated levels have remained almost the same as in preceding year (s) viz around 28-30%. In view of the above discussion TPO observed that this company shall be retained as a comparable. 20. TPO further observed that assessee's objection that comparable having abnormally high margin should not be selected is not correct. He referred 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....
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....ough it is included in its Transfer Pricing Study. It is further submitted that since the matter has been remanded back by ITAT to TPO, proceeding for preceding years are not finalised and that cannot become the basis for inclusion of com parables. The com parables need to be included in the comparable set purely on the basis of comparability of its functions, assets and risk vis-a-vis tested party and not on the basis of the what has been done by the assessee of the TPO in the earlier year. Further, it is also submitted that Infosys* was not considered as a comparable by the Appellant in its transfer pricing documentation for the present year i.e AY 2008-09. It was reviewed based on latest available 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 earlie....
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....ly on the basis of turnover but also due to functional differences which is exactly the case of the appellant. It is submitted that there are wide differences in the functions performed, risk assumed and assets employed by Wipro and Infosys vis-a-vis assessee. In this regard assessee placed reliance on the decision of Hon'ble Delhi ITAT in Agnity India Technologies Pvt. ltd. Vs ITO, New Delhi (ITA No 3856(Del)/2010) where similar chart has been placed by the assessee tabulating the differences between functions, risk and assets. Tribunal after duly considering the submissions of assessee reached the following conclusion at para 5.2: "It is argued that the case of the assessee is not comparable with Infosys Technologies Ltd., the reason being that the latter is giant in the area of development of software and it assumes all risks, leading to higher profit. On 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 compani....
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....ies India Private Limited Vs ACIT (ITA No. 7821/M um/2011) the Hon'ble ITA T held as follows: 7.4 The parameter for identifying comparable entity has to be seen from the angle of functions formed by the company, size of the company in terms of the sales revenue, stage of business cycle and company's growth cycle. In the case of Infosys, there are huge intangible assets which as per the information provided by the learned AR are valued at Rs. 69, 552 crores, which comprises of brand value itself at RS.22, 915 crores. Based on such fund 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' i.e.,....
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....appropriate for us to adjudicate this issue. Hence, we remit the issue of inclusion of these comparables to the files of TPO. The TPO shall consider the same afresh, after the decision of Special Bench is available. B. IT ENABLED SERVICES (i) Accentia Technologies Limited (ATL) 25. As regards this comparable the TPO noted that this company has ITES segment which is into medical transcription services and qualifies all the filters by the TPO. Hence, the company was proposed as a comparable. Assessee objected to this proposition. It was submitted that there were non-comparable services. It was year of exceptional circumstances. TPO did not agree with theabove. TPO has considered the company as a comparable because its revenue from ITES is more than 75% of the total revenue. In this regard, TPO referred to the Annual Report of the Company. He observed that the revenue from ITES is 80.87% of the total revenue of the company. Hence, the company passed the 75% revenue 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 ....
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....nies with extraordinary events such as merger and amalgamation should be rejected, if because of merger, de-merger the company becomes functionally different. However, as held in Wills Processing (Supra) above if the merger of the two functionally similar companies took place, the event of merger itself cannot be taken as a factor for exclusion of the said comparable. Accordingly, we direct the Assessing Officer /TPO to verify this fact and accordingly decide the comparability of this company namely Accentia Technologies Ltd. (ATL) II. Acropetal Technologies Limited 28. As regards this comparable, TPO observed that it has ITES Segment which qualifies all the filters supplied by the TPO. Hence, the Company was proposed as a comparable. The assessee objected to the same. It was submitted that Acropetal is engaged in the business of engineering design services and cannot be compared to the routine IT Enabled Services provided by the ATI. It was further submitted that the company's website states that Acropetal 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 consi....
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....r KPO should be included in the category of ITES services has been considered by this Tribunal in I.T.A. No. 6286/Del/2012 vide order dated 22.3.2013 in the case of RAMPgreen Solutions Private Limited vs. ACIT. In this case, the Tribunal has held as under:- 12. We have carefully considered the submissions and perused the records. As regards the functional difference, we note that there is no dispute on the point that assessee as well as eClerx Services Ltd. are in ITES services. As per the Notification of the CBDT dated 20.9.2000, the various products or services are notified in the category of ITES. Once a service falls under the category of ITES, then there is no sub-classification of segment. We note that even in the products and services notified by the CBDT, the KPO is not recognized as a separate service. The objection of the assessee is contrary to the services/products as notified by the CBDT under the category of information and ITES. Thus, we find that the KPO is a term given to the Branch of the BPO services where apart from the processing of the data knowledge is also applied. Even otherwise, this company provides data processing and data analytics services whi....
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....ement, and maintenance of data for GIS and other information management systems and all other services necessary for successful geospatial data implementation. Genesys has a highly specialized work force comprising of urban planners, cartographers, remote sensing scientists, photogrammetrists, civil engineers, field survey personnel and rocket scientists. 35. The Ld. Departmental Representative on the other hand relied upon the case of Wills Processing Services wherein Mumbai, ITAT held that based on notification no. SO 890(E) dated 26.9.2000 of CBDT all such services fall under ambit of ITES. 36. Against the above submissions in rejoinder it has been submitted by the assessee that assessee reference to the said Circular should be made for limited purpose of determining the eligibility of tax exemption under section 10 or 80HHE. It has been submitted that this Circular does not hold that services listed there as 'IT Enabled Services' are having same functional profile and are functionally comparable for transfer pricing purposes. Further it has been submitted that the matter was not properly argued before Mumbai, Tribunal Bench. 37. We have considered the submissio....
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....yments etc. Thus, as clarified by the company, the expenses under the head 'data entry and vendor payments' are towards personnel of vendors' working from the premises of the company. Hence, the taxpayer's argument that the company outsources its major work is incorrect and also clarified by the company as above. The company is thus rendering IT enabled services using its own assets and human resources (may not be on the roll of the company), and is functionally similar to the taxpayer. Recently, ITAT, Hyderabad in the case of Deloitte Consultant Pvt. Ltd. has upheld the inclusion of this company." 39. Now the assessee has submitted before us that this company outsourced its activities to external vendors and hence, follows a different business model vis-a-vis the assessee who employs its own personnel for rendering BPO services. Further, assessee has submitted that there are case laws of the Tribunal both in favour as well as against the above proposition. In light of the above, it has been submitted that this company should be rejected. 40. We find that the issue of comparability of Vishal Information System has been considered by this tribunal by t....
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....s comparable, Assessing Officer held that it qualifies all the filters supplied by the TPO. The assessee objected to the said inclusion on various grounds including different financial year end; inadequate information; non comparable services; non- existent company in the assessee's search matrix. However, the above objections were not accepted by the TPO. 43. Now the assessee has submitted before us that comparable with related party more than 25% should be rejected. In this regard, assessee has submitted that this company has a related party transactions in excess of 25 % of sales. This is a filter which has been applied by the Assessee and accepted by the TPO and DRP. But the assessee did not take this plea before the TPO and DRP. But based on information currently available assessee wishes to plead that on fact, the company should be excluded. 44. We have carefully considered the submissions. We find that assessee's grievance regarding the inclusion of the above comparable is that it had a related party transactions in excess of 25% which is a filter which has been applied by the assessee and accepted by the TPO and DRP. Assessee could not take this plea earlier. ....