TaxTMI 
TaxTMI 
2013 (9) TMI 120
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....its parent company. Besides these, Interra India also enters into direct contracts with end customers. 3. The Transfer Pricing Officer at Page 2 brought out the portfolio of the assessee in the following words:- "Interra IT India has significant expertise in developing distributed enterprises software. It delivers high-quality, robust and scalable software services and solutions using multi-tiered client-server architecture. The software solutions can be distributed between IBM Mainframes, Unix Platforms and Microsoft Windows 2000 and XP. In many projects, the engineers in Interra have successfully applied their ingenuity in marrying legacy applications on the IMB Mainframe to today's web-based client-server techniques to provide cost-effective solutions to complex problems. The entire effort is backed by considerable experience in the state-of-the-art technologies like Microsoft DNA (Distributed Internet Architecture). Universal Data Access (UDA), MTS, IIS, COM/DCOM/COM+, OLAP AND COMTI. The team uses a host of development tools like Visual C++, Visual Basic and Visual InterDev, SQL server 7.0, Essbase. Interra India has recently started developing intranets and Microsoft....
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....nbsp; 5. In the Transfer Pricing analysis the assessee stated that it has entered into direct contracts with Voxiva Inc. and also with domestic customers. It had used TNMM as a method and for this purpose took the operative profits divided by total cost as the profit level indicator. The assessee relied upon the internal comparables by using TNMM analysis and found that PLI 7.63% of "internal uncontrolled transaction" was lesser than the PLI of the "international controlled transaction" entered by the assessee with Interra India, which was found to be 8.98%. 6. Alternatively, the assessee benchmarked the international transactions entered into with its associated enterprise (AE), using TNMM method, with external comparable companies. 7. 52 external comparable companies were identified by the assessee and PLI was found at (-) .33% and it was concluded that the assessee's controlled transactions with it's AE, which was 8.98% PLI, was higher and hence at arm's length. The assessee used multiple year data. 8. The Transfer Pricing Officer rejected the use of multiple year data by the assessee. He relied on the Special Bench decision in the case of Aztec Software & Technology....
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....lization adjustment was rejected, on the ground that against total expenditure of Rs. 21 crores (approximate), expenditure on personnel was Rs. 12.87 crores, which amounts to 61% and such percentage is comparable to the results of the NASSCOM-CRISIL survey on the matter. The assessee's fresh search which threw up nine comparables and which were sought to be included as additional evidence was rejected on the ground that the fresh search was embarked upon to achieve biased results. 16. The assessee's argument on res judicata was rejected by relying on the decision of the Tribunal in the case of M/s. Carraro India Ltd. Vs. DCIT (2008-TIOL-519-ITAT-DEL). 17. The argument for grant of adjustment for risk at 5%, on the ground that the assessee is a captive service provider is rejected on the ground that, the assessee is exposed to all kinds of risks like, technological risk, government policies risk, environmental risks, security risks etc. The Transfer Pricing Officer also held that, being a captive service provider is itself a big risk as the assessee is dependent on only the AE. He also referred to other risks like human capital risk, intangible etc. Further the TPO held that r....
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....ofit and negative ROGsales, ROG, related party transactions without appreciating the selection or rejection should be based on FAR analysis and not on financial results. 2.5 That the assessing officer / TPO erred in applying the abovementioned additional filters without raising any objection to the search process as adopted by the appellant in the Transfer Pricing Documentation. 2.6 That the assessing officer / TPO erred on facts and in law in applying inconsistent approach by eliminating loss making companies or companies with declining profit without eliminating the companies having significantly high margins. 2.7 That the assessing officer / TPO erred on facts and in law in applying the filter of wages to sales of 45-65% after relying on Nasscom-CRISIL survey, without appreciating the fact the wages constitute 52.78% of appellant's total turnover. 2.8 That the assessing officer / TPO erred on facts in rejecting the claim of the assessee that the companies having wages to sales ratio within the band of 42%-62%, (i.e. +/- 10%) should be selected so as to benchmark the international transactions undertaken by the appellant. 2.9 That the assessing officer / TPO er....
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....assessing officer / TPO erred on facts and in law in not appreciating that the income of the appellant is exempt under section 10A of the Income Tax Act and hence, there could not be any motive for the transfer of profits outside India. 2.20 That the assessing officer / TPO erred on facts and in law in not following the transfer pricing order passed in the immediately preceding assessment year even when there is no change in the facts of the appellant's case. 2.21 That the assessing officer / TPO erred on facts and in law in applying operating results for the relevant previous year as opposed to the contemporaneous data available at the time of making Transfer Pricing documentation which is in complete disregard of the contentions of the assessee. 2.22 Without prejudice, that the assessing officer / TPO erred in law in not allowing variation to the extent of (+/-)5%, while determining the arm's length price of the 'international transactions' 3. That the assessing officer erred on facts and in law in denying deduction amounting Rs.I,93,30,9451- under section 10A of the Income-tax Act, 1961 ('the Act') in respect of profits of Noida Unit, i.e. the....
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....e laws:- (i) Mentor Graphics (Noida) Pvt. Ltd., 109 ITD 101. (ii) E-Gain Communication Pvt. Ltd., 118 ITD 234 (iii) Aztec Software India Pvt. Ltd., 107 ITD 141 (iv) Sony India Pvt. Ltd., 114 ITD 448. (v) Philips Software, 26 SOT 226 (vi) Quark Systems Pvt. Ltd. Vs. DCIT (ITA Nos. 100 & 115/CHD/2009). 25. The TPO has selected the companies with very high operative profit margin and ignored or rejected other companies having low margin or loss. It was argued that selection of only high profit margin company and rejecting the loss making/low profit companies as comparable companies has distorted the results. 26. On application of filter of wages/sales ratio, he submitted that the survey referred to by the TPO was not available in the public domain and that the range of 42% to 62% may be considered as it would be (+)/(-) 10% range. He further submitted that without prejudice the assessee company was essentially a software development company and not an ITES/BPO company and hence, this filter cannot be applied. 27. On excluding comparable companies with negative ROG-Sales i.e. (a) Genesys International Corpn. Ltd. (OP/OC - 3.49%); & (b) Compulink Systems Ltd. ....
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.... Ltd., 30 SOT 95 (Mum.). 30. He argued that the assessee is engaged in low end software service maintenance function and that it is a contract service provider and hence it would have lesser margins when compared to other software companies. He vehemently contended that the assessee cannot be expected to earn more profit than what has been earned from the combined operations of the two entities i.e. the assessee and its AE while dealing with unrelated parties. 31. That the assessee has low capacity utilization and sought adjustment for the same by relying on Rule 10B(3) as well certain decisions of the Tribunal which under certain circumstances have accepted such claims for adjustment. 32. One of the main contentions of Mr. Ajay Vohra is that the T.P. adjustment cannot exceed the amount of margin retained by the AE. He furnished a chart which gives the total revenues of the A.E., cost incurred and profit declared and it was argued that the adjustments if any, cannot exceed the profits combinedly derived, for the reason that notional income cannot be brought to tax. 33. He relied on the following case laws:- (i) Sony India P. Ltd. Vs. CBDT, 288 ITR 52 (Delhi). (ii)....
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....trolled party, is only 8.76 lakhs, which, if analyzed, would not be a correct comparable. To demonstrate his point he argued that when an organization is selling 1 lakh tons of Tea to an AE and ½ ton of Tea is sold to a third party, then there cannot be a comparison as the transaction with the third party is economically insignificant. He further submits that if such comparables are allowed, it would give scope for tax avoidance and evasion by assessees, by indulging in small sample sales to third party, so as to demonstrate that the transactions with the AE are at arm's length. He pleaded that insignificant transaction cannot be taken into account. 40. He relied on Rule 10B(2)(d) for the proposition that size of market is to be considered. He relied on the decision of ITAT, Pune Bench `A' in ITA No.1296/PN/10 in the case of Brinton Carpets Asia Pvt. Ltd. vs. DCIT, for the proposition that small value transactions cannot be taken as comparables. Significant volume difference between the two segments has to be considered as a factor for selection of comparables. He argued that domestic transactions cannot be compared with export transactions and hence benchmarking should n....
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.... 45. On the range of 45% to 65% of wages to sales ratio, selected by the TPO, as against 42% to 62% range of wages to sales sought by the assessee, the learned DR submitted that the TPO has gone by the FAR analysis, NASSCOM survey and this is a reasonable range. On a query from the Bench as to why range of 50% to 55% should not taken when the assessee has shown wages to sales ratio of 52%, both the parties did not respond with a cohesive answer. 46. In the case of Genesys International Corpn. Ltd., being a comparable, he submitted that the data of subsequent years cannot be relied upon and only current year data has to be taken for which proposition he relied on the decision of Delhi Bench in the case of Mentor Graphics, 109 ITD 101 (Del). He also relied on the decision of Pune Bench in the case of Honeywell Automation (India) Ltd. vs. DCIT, (ITA No.18/PN/2011). 47. On Soft Pro Systems he relied on the findings of the AO and argued that the same should be taken as a comparable. On fresh comparables he submitted that the AO has rightly not allowed the same for the reason that the assessee is picking up comparables with the objective to achieve such results which would lead to....
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....elied on the order of the Assessing Officer. 53. The learned DR strongly disputed the contention of the assessee that it is in low end software maintenance services. He referred to the assessee's Transfer Pricing Study to demonstrate that the contention of the assessee is not correct. 54. The learned DR distinguished the case laws relied upon by the assessee by submitting that what was stated was that the adjustment cannot exceed the combined turnover of the assessee as well as the A.E. and that no reference was made to the combined profits. On the issue of taxing notional profit, he submitted that such an eventuality would not arise if the assessee uses to determine ALP and discloses proper profits. 55. The learned counsel for the assessee in reply submitted that internal comparables are the most preferred comparables for benchmarking the international transactions. He argued that each software service assignment is not of significant value, whether it relates to the AE or to the unrelated party and hence are comparable transactions. Similar software services were rendered to domestic customers and could be taken as a comparable. Referring to the Rules he submitted that s....
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....e companies that was considered on case to case basis to differentiate companies engaged in software development from the companies engaged in trading of software. On reliance placed on Sony (India) Ltd. he submitted that the Tribunal observed that losses are normal business instances and that comparable companies cannot be rejected merely on the basis that it has incurred loss. On Sap Labs (India) Pvt. Ltd. and Quark Systems Ltd., he submitted that the Tribunal held that extreme cases cannot be considered. On reliance placed on the decision of Mentor Graphics (supra) it was submitted that the Tribunal objected to the use of future data only because the TPO was drawing inferences merely on the basis of assumptions and surmises. In the case of ADP Pvt. Ltd. (supra) he submitted that the case is distinguishable for the reason that the assessee is using data of subsequent years only for the purpose of analyzing the trend of turnover and profitability of the comparable companies just to demonstrate that such companies are not suffering from any extra-ordinary circumstances. On Honeywell (supra) the provisions for future loss made, was held as that which cannot be considered for the pur....
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....the transactions. He pleaded that in the current year the argument that the transactions are miniscule and economically insignificant cannot stand. 60. The arguments on comparables are as follows - Re: Companies inappropriately selected by the TPO as comparable (ground No.2.4 - 2.18) Sl.No. Company Name OP to Total Cost % Reasons for rejection Ref. Pg. no 1. Avani Cimcon Technologies Ltd. 50.29 * Earning extraordinary profits. 2. Celestial Labs Ltd 58.35 * Employee cost only 23.36% of sales. Does not satisfy the filters applied by the TPO. * Rejected by the DRP in assessment year 2008-09 in the case of Interra Infotech, a sister concern of the appellant and engaged in provision of identical services. * Functionally not comparable, engaged in IT & ITES, Biotechnology andmanufacturing business. Segmental results of IT division are not available. * Even within the software domain, the company is primarily a software product company. It owns proprietary products such as Cell vision, CLL TOX etc. * Super normal profit. Pg 244, 248, 251 250 3. Flextronics Software Systems Ltd. (Seg.) 25.31 * very high turnover of Rs....
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.... Appellant 8.18% Re: Exclusion of companies identified as comparable by the assessee (ground 2.15 & 2.16): It was submitted that the TPO has wrongly excluded the following companies from the list of the comparable companies identified in the fresh search by the assessee company:- S.No. Companies Remarks Page Number 1. VMF Soft tech Limited The TPO has rejected this company on the basis that the company is predominantly outsourcing it's work and it fails the employee cost filter. However, the ratio of employee cost to revenue of this company is 54% which demonstrates the fact that it is performing significant functions in-house through it's own employees. Pg 453 2. Vision Computech Integrators Limited Related party transaction is in excess of 25% - However, actual RPT is 23.15% Pg 461 & 474 In view of the aforesaid, it was submitted that VMF Softech and Vision Computech satisfies all the filters of TPO and should be considered as comparable for the purpose of benchmarking the international transactions of the assessee. In respect of cases of Celestial Labs Ltd. and Megasoft Ltd. It was contended that ....
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..... While arguing the case none of the parties have spoken about the nature of business and the nature of transactions in each of these case laws cited by them. The decision given in those cases or the observation made have been referred to and it is claimed that they have precedenciary value. In Transfer Pricing our understanding is that the law and the rules have been prescribed and all the decisions cited by the parties were adjudicated based on the facts of each case. It is well settled that reliance should not be placed on any decision, without discussing the factual situation and as to how it will fit in. These are not legal principles, in the sense that it does not involve interpretation of law. Picking up samples or comparables, stating that in a given situation a particular methodology should be adopted for benchmarking a transaction or coming to a conclusion that particular method is most appropriate method etc. are not legal interpretations but only solution found by the Bench, in its own wisdom, given a certain fact situation. It is difficult to have a case where the functions, assets and risk of an assessee, are same as the case decided subsequently. Seldom two business ....
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.... be a speaking order, a decision which is not expressed & is not founded on reasons nor on consideration of the issues cannot be deemed to be a law declared, to have a binding effect under article 141; a summary disposal by the SC, without laying down any law, is not a declaration; when no reasons are given, dismissal simpliciter is not a declaration of law by SC. (vii) Dr. Nalini Mahajan vs. Director of Income-tax (Inv.), 257 ITR 123 (Delhi) for the proposition that a decision is only an authority for what it decides and not what can logically be deduced therefrom; even a slight distinction in facts may make lot of difference in decision making process; a point never considered in a decision shall not be an authority therefor. (viii) Gujarat Co-operative Bank Ltd. vs. CIT, 250 ITR 229 (Guj.) for the proposition that for SC's decision to be law has to be declared or stated vocally to support conclusion, not mere conclusion by which case is disposed of. (ix) CIT vs. Sun Engineering Works P. Ltd., 198 ITR 297 for the proposition that it is neither desirable nor permissible to pick out a word or a sentence from the judgment of this court, divorced from the context of the ques....
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....d whereas the references are made to only to a few pages during arguments. Numerous case laws are being relied upon though it is common knowledge that in transfer pricing they cannot be a precedent on facts and that those decisions are based on those particular facts. At best these case laws can be referred to for broad proposition on a given fact situation. Very few case laws are on the interpretation of law. In such cases we are bound by the legal propositions laid down therein. 67. Now we consider some other contentions of the assessee before we come to the aspect of rejection of internal comparables. Mr. Ajay Vohra argued that the transfer pricing adjustment at best cannot exceed the amount of margins retained by the assessee, as well as the A.E. In other words, he states that the transfer pricing adjustment cannot exceed the total profits earned by the group, as it would result in taxation of notional income. Reliance was placed on the judgment of the Delhi High Court in the case of Sony India Pvt. Ltd. and other case laws. He urged the Bench to lay down this proposition with as many caveats or conditionalities as the Bench may deem proper. 68. In our considered view no ....
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....the A.E. receives on such transactions. In other words the combine profits cannot exceed the combined Gross receipts. Similarly in the case of Li & Fung (India) Pvt. Ltd. Vs. DCIT (ITA No.5156/Del/2010), on those set of facts the Tribunal held that adjustment cannot exceed the amount received by the Associated Enterprises. This is not the case here. It is not the case of the assessee that combined profits of the assessee as well as the A.E. exceed the Gross receipts from the transactions by the A.E. Hence these case laws are not applicable. 73. In both these cases, it is nowhere stated that the adjustment should not exceed the combined profits of the group entity. When Transfer Pricing Study is done with appropriate comparables by adopting the most appropriate method, the question of Transfer Pricing adjustment being more than gross receipts from a transaction simply does not arise. The assessee as well as the Revenue authorities are bound to determined the ALP by applying the law and rules laid down and cannot be guided by extraneous parameters. 74. If the proposition of the assessee is accepted, then it would result in a situation where, when an Indian authority decides on ....
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....e matters, in which one view cannot only be said to be correct. Much depends on the facts of the case and the material evidence furnished. Hence, we reject the claim of the assessee on the ground that the same is not supported by proper data and material, without going into the issue as to which argument on risk adjustment made by each of the party is correct. 77. On the argument that the TPO has not made any adjustment in the earlier years and on the principle of consistency no adjustment should be made, we find that the Transfer Pricing Officer in the A.Y.2005-06 has not exercised his mind in the lines and in the manner in which the TPO has done in this year. The material available with the TPO in the current year is vastly different to the material available with the TPO in the earlier year. In such circumstances, the principle of consistency does not hold water. No doubt it is desirable that the Revenue Authorities be consistent but in cases where the subsequent officer is able to gather further material, which would require him to decide in a way different from the decision taken by the AO in the earlier year, who did not have the benefit of such material, and when the anal....
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....ernal comparables, the assessee argued that under the rules the margin of the single transaction has to be compared to the margin of another transaction, or at best the group of similar transactions and under those circumstances, the volume is not criteria for rejecting the internal comparables. Reliance was placed on Rule 10B(1)(e) and on the decisions of Mumbai Bench of the Tribunal in the case of Technimount ICB Pvt. Ltd. Vs. ACIT (ITA No.4608 & 5085/Mum/2010) as well as UCB India (P) Ltd. Vs. ACIT, 30 SOT 95 (Mum.). The Revenue relies on Rule 10B(2)(d). The learned DR also gave an extreme example of one lac ton of Tea sold being compared with 1 Kg. of sample Tea given as a sample. 81. In our considered opinion the requirement of transaction margins being compared at a transaction level or at the level of a class of similar transactions, does not warrant comparing miniscule transactions with large transaction for the purpose of benchmarking. Benchmarking of transactions at the transaction level does not warrant ignoring the principle or concept of materiality. The facts and circumstances of each case has to be seen. At the same time reliance placed by the learned DR on Rule 1....
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....icing Officer to make suitable adjustment and arrive at an appropriate arm's length price. 84. As we have taken this decision for the assessment year 2007-08 and though the internal comparables cited by the assessee for the assessment year 2006-07 cannot be considered significant on volumes, as the internal uncontrolled transactions for both the years are with the same parties and as the volumes for subsequent years are significant and as the nature of transactions with respect to the uncontrolled internal transactions for both the years are same, for the purpose of consistency, we are of the opinion that for the A.Y. 2006-07 also similar exercise need to be done by the AO/TPO. Our view is guided by our decision taken for the subsequent year. 85. In view of our decision, we do not consider it necessary to adjudicate the numerous other arguments raised by both parties as it would be an academic exercise. 86. Thus, we set aside these additions for both the assessment years under consideration to the AO/TPO for fresh adjudication in accordance with law. As we have upheld the contention of the assessee on the issue of internal comparables being taken for the purpose of benchma....