TaxTMI 
TaxTMI 
2013 (11) TMI 199
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....cing adjustment at Rs. 7,12,20,987/- after duly recording elaborate reasons in his impugned order. Accordingly, a draft assessment order, incorporating, among others, transfer pricing adjustment of Rs.7.12 crores as determined by the TPO was served on the assessee on 31.12.2010. 2.1 Being aggrieved, the assessee company had approached the Dispute Resolution Panel [DRP] for relief. The DRP had, for the reasons recorded in its directions u/s 144C of the Act dated 26.9.2011, virtually upheld the order of the TPO with regard to ALP. In respect of the assessee's claim for exemption u/s 10A of the Act, the DRP, for the reasons recorded in its impugned order under dispute, declined to interfere with the draft order of the AO. Subsequently, the AO, in his final assessment order dated 3.10.2011, determined the assessee's income at Rs. 24,16,52,915/- as proposed in his draft assessment order. 2.2 Aggrieved, the assessee has come up with the present appeal before us. The assessee had filed five concise grounds of appeal and various sub-grounds. Ground nos.1, 2.1, 3.1., and 4.15 are general and no specific adjudication is called for; and, hence, the same are dismissed. Ground Nos.3.2 and....
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.... Tech Park premises under STPI scheme only by way of transfer of plant & machinery earlier used by the Branch Office. Further, in the preceding year i.e., the year in which the assessee purchased this unit, the assessee has added some new plant & machinery (computer and software) worth Rs. 8.13 crores as against plant & machinery worth Rs. 7.75 crores acquired through slump sale. So, old plant & machinery constitutes 48%. Therefore, this condition of forming a unit by way of acquiring plant & machinery other than that previously used has not been satisfied. 14. in this context, it is also relevant to refer to sub-clause (7A) of sec. 10A which provides for eligibility of claim to the amalgamated company or the resulting company in the situations of transfer of eligible undertakings by amalgamating or de-merged company in a scheme of amalgamation or demerger. Under this clause, the transfer of old plant & machinery of an eligible undertaking or the whole of undertaking to anew owner i.e., amalgamated or the resulting company is specifically allowed for continuance of benefit only in a situation of amalgamation or demerger. However, the other situation of t....
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....d commenced operations of this unit from July 1, 2003 and has been claiming relief u/s 10A of the Act since the financial year 2003-04 onwards. In pursuance of the acquisition of the said Unit, it was claimed, the assessee is eligible for unexpired period of tax holiday as it had not set up any new unit. Reliance was placed on the following case laws: • DCIT v. LG Soft India (P) Ltd - ITA Nos.623 & 847/Bang./2010 dated 19.5.2010; • CIT v. Yokogawa India Ltd. [2012] 341 ITR 385 & • Board's Circular No.1/2013 dated 17.01.2013. It was, therefore, pleaded that since the AO was not justified in denying the assessee's legitimate claim u/s 10A of the Act, the same requires to be allowed. 3.2.1 On the other hand, the learned D R supported the stand of the Assessing Officer. 3.3 We have carefully considered the rival submissions, perused the relevant materials on record and also documentary evidences produced by the learned A R in the shape of voluminous paper books. It is an un-denying fact that the said STPI unit was earlier owned and run by the IBO of NDS UK which was purchased by the assesse....
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....establishment of non-resident company/foreign company but later on, it was converted into a subsidiary company. But for the above change of the organizational status, the same unit continued to function throughout the time. Therefore, it is quite fruitless to argue that the organizational change has caused conversion of the existing unit to a new unit. There is no such splitting up or reconstruction of a existing business in the case of a branch establishment becoming a subsidiary establishment. The assessee's unit satisfied all the conditions stipulated in the Act and was entitled for the benefit. Therefore, as rightly held by the CIT (A), a mere organizational change is not a ground to hold that the assessee has violated the conditions stated in 10A(2)(ii). It is a case of only change in the name and style. It is clearly possible to state that there was no violation of the conditions laid down in sec 10A(2)(iii) as well." 3.3.2 Further, the Hon'ble jurisdictional High Court, in the case of Yokogawa India Ltd. (supra), after analyzing the issue comprehensively and also extensively quoting the provisions of section 10A of the Act, had ruled that "The relief under this section is....
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....er in order to maintain parity between the numerator and the denominator. The AO is, therefore, directed to exclude the foreign currency expenses from the export turnover and also reduce the same from the total turnover of the assessee while computing the deduction u/s 10A of the Act. It is ordered accordingly. 3.4.2 Therefore, ground nos. 2.2 and 3.3 to 3.4 in the concise grounds of appeal are allowed. (II) Transfer Pricing Adjustment (A) Software Research and Development 4. In this segment, the assessee had received a sum of Rs. 87,63,09,582/- from its Associated Enterprises (AE). As stated earlier, the assessee was providing software development services with the area of net work, telecom and data communication for its AE. The assessee in the transfer price study/documentation had adopted TNMM as the most appropriate method and selected 19 companies as comparables. Using operating profit margin basis on cost as a profit level indicator and the data for the Financial Years 2004-05, 2005-06 and 2006-07, the operating net margin based on cost on the comparables was arrived at 14.49%. The details of the comparables selected by the assessee and their margin are as under: ....
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....rables and its margin was worked out at 25.14%. After providing for the working capital adjustment of 2.25%, the adjusted arithmetical profit level indicator was arrived at 22.89% for the comparable. Accordingly, the ALP was determined at Rs. 94,46,48,982/- whereas the price shown by the assessee being only Rs. 87,63,09,582/-, the adjustment was made for an amount of Rs. 6,83,39,400/-. The details of the Companies selected by the TPO as comparables, their arithmetical mean and the calculation of the ALP of the assessee are as under:- Sl. No. Name of the Company Sales (Rs. Cr.) OP to Total cost % 1 Accel Transmatic Ltd.(Segment) 9.68 21.11% 2 Avani Cimcom Technologies Ltd. 3.55 52.59% 3 Celestial Labs Ltd. 14.13 58.35% 4 Datamatics Ltd. 54.51 1.38% 5 E-Zest Solutions Ltd. 6.26 36.12% 6 Flextronics Software Systems Ltd. (Segment) 848.66 25.31% 7 Geometric Ltd. (Segment) 158.38 10.71% 8 Helio & Matheson Information Technology Ltd. 178.63 36.63% 9 iGate Global Solutions Ltd. 747.27 7.49% 10 Infosys Technologies Ltd. 131.49 40.30% 11 Ishir Infotech Lt....
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....e development services Given the above background, with respect to the provision of software development services, the Appellant, during the course of hearing has placed reliance on the Honourable Bangalore Income-tax Appellate Tribunal's ("ITAT") ruling in the case of Trilogy E Business Software India Private Limited v. DCIT (ITA No.1054/Bang/2011) dated November 23, 2012. 2.3.1 Companies rejected on account of turnover filter In the aforesaid ruling, the Honourable ITAT has rejected the following companies selected as comparable companies by the transfer pricing officer as not comparable on application of turnover filter. No. Company Name Turnover (Crores) Order Reference 1 Flextronics Software Systems limited 848.66 Refer page 15 and 16 of the aforesaid Bangalore ITAT's order 2 Igate Global Solutions Ltd. 747.27 3 Infosys Technologies Ltd. 13,149.00 4 Mindtree Ltd. 590.35 5 Persistent Systems Ltd. 293.74 6 Sasken Communication Technologies Lt....
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.... Transmatic Limited 9.68 21.11 1.27 -The company has revenue from software products also, hence in the absence of segmental details, the company cannot be considered as a comparable company. '- Margin of the company represents abnormal circumstances and profits. '- Reliance was placed on Telcordia Technologies India Pvt. Ltd. (ITA No. 7821/ Mum./ 2011) (Mumbai ITAT). '- Please refer page 27 and 28 of the order. 2 Avani Cimcon Technologies Limited 3.55 - Biotech company, hence rejected as a comparable company. '- Reference was made to Teva Pharma Pvt. Ltd. (ITA No. 6623/ Mum./ 2011) (Mumbai ITAT). '- Please refer page 30 to 33 of the order. 3 Celestial Labs Ltd. 14.13 4 Datamatics Ltd. 54.51 1.38 2.39 5 E-Zest Solutions Ltd. 6.26 36.12 0.26 Rejected on application of turnover filter of Rs. 1 to Rs. 200 Crores. Please refer page 15 and 16 of the order. 6 Flextronics Software Systems Ltd. 848.66 7 Geometric Ltd. 158.38 10.71 1.43 8 Helios & Matheson Information Technology Limit....
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....4 Operating profit/operating cost of the appellant company (%) 14.41 4.3.1 The learned DR on the other hand has given a rebuttal, which reads as follows:- (I) Position on Software Development Services (TP Adjustments):- The assessee in his last arguments on the issue has now raised the ground of applicability of turn over filter on the basis of case of E Triology Business Software India Pvt. Ltd. v. DCIT (ITA No. 1054/B/2011) dated 23.11.2012. (a) The first and foremost condition to be satisfied by the assessee is to demonstrate as to how the activities especially the nature of its software activity is similar to that of M/s E Triology Business Software India Pvt. Ltd and whether the same was taken as a comparable in its study. The AR does not appear to have made a case on this account. (b) In view of the application of the turn over filter to the instant case, it may be submitted that the appellant itself has not applied any turnover filter in ....
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....w of the information provided by the learned CIT DR obtained from the public domain, we hold that the 'Celestial Labs Limited' is a good comparable case, whose operating profit can be taken for comparability analysis in determining the arms length price for the assessee. Accordingly, the Assessing Officer is directed to include this company for comparability analysis. It may please be appreciated that if the Bangalore ITAT has followed the decision of Mumbai ITAT in the case of Teclordia for rejecting Avani Cincom then the Bangalore ITAT ought to have followed the decision of Mumbai ITAT in the very same case of Telcordia for accepting Celestial Labs Limited. The functional profile of both Trilogy E Business Software India Private Limited and Telcordia Technologies Limited is the same. Further the finds of Hon'ble ITAT Bangalore, in rejecting Celestial Labs Limited relying upon Teva Pharma are also not correct. It may appreciated that Teva Pharma was engaged in the business of providing contract research, business development, pharma and technical services and contract testing services. In the case ....
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....er: 4.4.1 The assessee had not applied any turnover filter in its transfer pricing study. The TPO, however, has concluded a fresh transfer price study by selecting 26 companies as comparables with a turnover of more than Rs. 1 crore thus applying a lower turnover filter of Rs.1 crore. The TPO has failed to apply upper turnover filter as held in various Tribunal's rulings. The size of the comparable is an important factor in comparability. The ICAI TP guidance note has observed that the transaction entered into by a Rs. 1000 crores company cannot be compared with the transaction entered into by a Rs. 10 crores company and the two most obvious reasons are the size of the two companies and related economies of scale under which they operate. The TPO's range had resulted in selection of companies as comparable such as Infosys which was 277 times bigger than that of the assessee. The Bangalore Bench of the Tribunal in the case of Genisys Integrating Systems (India) (P.) Ltd. v. DCIT - ITA No.1231/Bang/2010 relying on Dun and Bradstreet's analysis had held that turnover range of Rs. 1 crore to Rs. 200 crores is appropriate. The said proposition has followed by the earlier Benches of t....
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....l as the decisions referred to by the ld. counsel for the assessee clearly lay down the principle that the turnover filter is an important criterion in choosing the comparables. The assessee's turnover is Rs.47,46,66,638. It would therefore fall within the category of companies in the range of turnover between 1 crore and 200 crores (as laid down in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010) . Thus, companies having turnover of more than 200 crores have to be eliminated from the list of comparables as laid down in several decisions referred to by the ld. counsel for the assessee. Applying those tests, the following companies will have to be excluded from the list of 26 comparables drawn by the TPO viz. Turnover Rs. (1) Flextronics Software Systems Ltd. 848.66 crores (2) iGate Global Solutions Ltd. 747.27 crores (3) Mindtree Ltd. 590.39 crores (4) Persistent Systems Ltd. 293.74 crores (5) Sasken Communication Technologies Ltd. 343.57 crores (6) Tata Elxsi Ltd. 262.58 crores (7) Wipro Ltd. 961.09 crores (8) Infosys Technologies Ltd. 13149 crores" 4.4.4 In view of the above said reason....
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....mparable". 4.5.1 In conformity with the findings of the co-ordinate Bench of the Tribunal in the case of Trilogy E-Business Software India (P.) Ltd. (supra), we are of the considered view that Avani Cimcom Technologies Ltd. and Celestial Labs. Ltd. cannot quality as comparables in the case of the assessee under consideration. It is ordered accordingly. 4.5.2 After excluding from the TPO's list of comparables, the companies having turnover exceeding Rs. 200 crores and two companies which are functional dissimilar to that of the assessee, the following 16 companies in TPO list are retained as comparables: Sl. No. Name of the Company 1 Accel Transmatic Ltd.(Segment) 2 Datamatics Ltd. 3 E-Zest Solutions Ltd. 4 Geometric Ltd. (Segment) 5 Helio & Matheson Information Technology Ltd. 6 Ishir Infotech Ltd. 7 KALS Information Systems Ltd. 8 LGS Global Ltd. (Lanco Global Solutions Ltd.) 9 Lucid Software Ltd. 10 Media Soft Solutions Pvt. Ltd. 11 Megasoft Ltd. 12 Quintegra Solutions Ltd. 13 R S Software (India) Ltd. 14 R Systems International Ltd. (Segment) 15 S I P Technologies & Exports Ltd.....
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....nto customization of software products developed (which was akin to software development) internally and that the portion of the revenue from development of software sold and used for customization was less than 25% of the overall revenues. The TPO therefore held that less than 25% of the revenues of the comparable are from software products and therefore the comparable satisfied TPO's filter of more than 75% of revenues from software development services. Having drawn the above conclusion, the TPO did not bother to quantify the revenues which can be attributed to software product development and software development service but adopted the margin of this company at the entity level. In terms of Rule 10B(3)(b) of the Rules, an uncontrolled transaction shall be comparable to an international transaction if - (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or &....
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....e assessee in its transfer pricing study had adopted transaction net margin method (TNMM) as most appropriate method and had taken four companies as comparables. The arithmetical mean of four comparables using the data for the year end March 05, Mar 06 and Mar 07 was 6.32%. The details of computation of arithmetical mean of the comparables are as under : Company name Mar-05 Mar-06 Mar-07 Weighted average Crisil Research and Information Services Ltd. 8.68 5.19 - 6.48 Cyber Media Events Ltd. 0.52 9.53 - 2.77 IDC (India) Ltd. 11.71 14.50 - 13.40 Times Infotainment Media. 2.62 - - 2.62 Arithmetic mean 5.88 9.77 - 6.32 5.5.1 Since the net profit of the assessee was 15% and that of comparables being at 6.32%, the assessee stated the amount received from its associated enterprises for service rendered under this segment was at arms length price (ALP). 5.2 The TPO accepted the TNNM as the most appropriate method. However, he rejected the comparables selected by the assessee. The final comparables adopted by the TPO and its margin are as under : Sl No. Name of the company Operating reven....
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....tract in the name of NDS UK nor can the Appellant hold itself to bind NDS UK in any way. Further, the Appellant wishes to draw Your Honour's attention to the fact that the Appellant is not rendering services in the nature of commission agency. Commission agents are agents who conclude contracts by themselves or on behalf of some third party. The key feature for an agency is binding principal. If the mentioned feature is missing, there would be no agency and so no comparison to agents. In this regard, we wish to submit that NDS Pay-TV is not an agent of the associated enterprises to whom it renders pre-sales support and marketing services. Accordingly, categorization of the services rendered by NDS Pay-TV as being in the nature of commission agency services is inappropriate. 2.4.2 Selection of ICC International Agencies Limited by TPO Super Profits With regard to the comparables selected by the TPO, the Appellant wishes to submit that the margin computed for ICC International, selected as a comparable by the TPO, cannot be considered as comparable to the Appellant due to the detailed ....
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....ctions have been accepted to be at ALP for the subsequent years even though the same method has been followed by the assessee. When the facts and circumstances are the exactly the same, the Revenue cannot be permitted to take a different approach in two different assessment years. In view of the same, we deem it fit and proper to remit this issue of TP study to the file of the assessing authority with a direction to verify as to whether the similar transactions of the assessee with associated enterprises have been accepted by the TPO for the assessment year 2007-08 and 2008-09 and if it is found to be true, then the AO is directed to adopt the TP analysis conducted by the assessee for the relevant assessment year also to be at ALP and make the assessment accordingly.." As could be seen from the above extract, the Honourable ITAT has held that there has to be a continuity in the approach of the Revenue and once a transaction has been accepted to be at ALP in a subsequent year, the same should be applied for the prior year as well. In this regard, it is submitted that the Appellant's international transactions for the AY 2008-09....
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.... the impression that it is so authorised. All contracts shall be concluded by NDS UK and through its authorized officers and representatives." 5.4.1 It is clear from the above that the assessee has no authority to conclude contract in the name of its associate enterprise nor can the assessee hold itself to bind NDS UK in any way. The commission agents are agents who conclude contracts by themselves for and on behalf of some third party. The key feature for an agency is the binding principal. If the above mentioned feature is missing there would be no agency. Hence, categorization by the TPO of the services rendered by the assessee as being in the nature of commission agency is inappropriate. Notwithstanding the above, in the TP study conducted by the assessee, the comparables were selected to include also the business as commission agents. Therefore the TPO cannot be faulted for selecting as comparables, the companies which are engaged in commission agency business. 5.4.2 At this juncture, we recall the submission made by the learned AR that the assessee's international transaction in this segment for the assessment year 2008-09 had been accepted to be ALP and therefore the c....