TaxTMI 
TaxTMI 
2013 (11) TMI 199
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.... 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 5 and its sub-grounds were not pressed; and, hence....
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....er 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 transfer of old plant & machinery through slump sale has not b....
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....een 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 assessee. This has been evidenced through a Business Purchase Agreement dated March, 30, 2006. Moreover, the ....
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....r 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 with reference to the STP undertakings and not to the assessee. In other words, the relief travels with the undertaking....
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....ency 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: Company name 2005 2006 2007* Weighted Average Bodhtree Consulting Limited 24.19 15.73 - 19.10 California Software Company Limited....
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....0/-. 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 Ltd. 7.42 30.12% 12 KALS Information Systems Ltd. 2.00 30.55% 13 LGS Global Ltd. (Lanco Global Solutions Ltd.) 45.39 15.75% 14 Lucid Software Ltd. 1.70 19.37% 15 Media Soft Solutions Pvt. Ltd. 1.85 3.66% 16 Megasoft Ltd. 139.33 60.23% 17 Mindtree Ltd. 590.35 16.90% 18 Persistent Systems Ltd. 293.75 24.52% 19 Quintegra Solutions Ltd. 62.72 12.56% 20 R S Software (India) Ltd. 101.04 13.47% 21 R Systems International Ltd. (Segment) 112.....
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....s 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 Ltd. 343.57 7 Tata Elxsi Ltd. 262.58 8 Wipro Ltd. 9,616.09 Though the Appellant has not applied any turnover filter in its transfer pricing study, the TPO has conducted a fresh transfer pricing study selecting companies with a turnover of more than Rs. 1 crore, thus applying a lower turnover filter of Rs. 1 crore. Further, while the TPO has applied a lower turnover filter, the TPO has failed to apply an upper turnover filter as held in various Tribunal rulings. In this regard, the Appellant wishes to rely on the Chandigarh Tribunal ruling in the case of Quark Systems Pvt Ltd (2010-TIOL-31-ITAT-CHD-SB) wherein it has been held that -"In our considered view, it is improper to proceed on the ba....
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....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 Limited 178.63 36.63 2.40 Rejected on application of turnover filter of Rs. 1 to Rs. 200 Crores. Please refer page 15 and 16 of the order. 9 IGate Global Solutions Ltd. 747.27 Rejected on application of turnover filter of Rs 1 to Rs 200 Crores. Please refer page 15 and 16 of the order. 10 Infosys Technologies Ltd. 13,149.00 11 Ishir Infotech Ltd. 7.42 30.12 -0.06 12 KALS Information Systems Ltd. 2.00 30.55 7.39 13 LGS Global Ltd. 45.39 15.75 0.90 14 Lucid Software Ltd. 1.70 19.37 2.62 15 Media Soft Solutions Pvt. Ltd. 1.85 3.66 2.47 It has been held as a comparable company. The Tribunal further held that segmental margins should be considered instead of entity level margin. Please refer page 18 to 26 of the order. 16 Megasoft Limited 139.33 2....
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....tted that the appellant itself has not applied any turnover filter in its own TP Study. The T.P.O. has adopted a comparability analysis on the basis of certain well explained filters. The assessee in his present arguments has not agitated other filters applied by the T.P.O. except the adoption of the turnover criteria. (c) It may be submitted in this regard that, the turnover criteria in itself is not a major determining factor in arriving at profitability. It is only when relevant filters are adopted that, a suitable comparability analysis can be made. Reliance in this regard is placed on the T.P.O. Order . (d) The assessee has sought the exclusion of Celestial Labs Ltd and Avani Cimcon Technologies Ltd, case on the grounds of functional differences. In this regard, it has been elaborately explained in the T.P.O's Order as to the functional similarities of the above comparables with the assessee. In this regard, besides the T.P.O.'s/D.RP.'s order, kind reference is invited towards the written submissions submitted on 11.01.2013 at page 2 to 12, and at page....
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....rvices and contract testing services. In the case of Teva Pharma the assessee had argued as under:- "The activities undertaken Celestial Labs are in the nature of providing host of IT related services and some trading activity which is not comparable to the assessee. Hence, it is clear that it is not comparable to the functional profile of the Company and accordingly ought not to be considered a comparable." Relying upon the above arguments of the assessee Mumbai ITAT had held that Celestial Labs Limited is not a good comparable for a company which is engaged in the business of providing contract research, business development, pharma and technical services and contract testing services. This implies that Celestial Labs Limited is a good comparable for IT/ITES Company. (e) In respect of Megasoft Limited:- The assessee has submitted that findings of Ld ITAT, in the case of E-Triology - on application of segmental data, be applied to the case. In this regard reliance is placed by the undersigned upon the findings of T.P.O./DRP and written submissions dated 11.01.2013 at pages 15 to 23". 4.4 We have heard t....
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....followed by the earlier Benches of this Tribunal in the following cases: * M/s. Kodiak Networks (I) Pvt. Ltd v. ACIT -ITA No.1413/Bang/2010; * M/s Genesis Microchip (I) Pvt. Ltd. DCIT -ITA No.1254/Bang/2010; * Electronic for Imaging India (P.) Ltd. v. Dy. CIT [ITA No.1171/Bang./2010, dated 31-1-2012 & Trilogy E-Business Software India (P.) Ltd. (supra) . 4.4.2 In the case of Genisys Integrating Systems (India) (P.) Ltd. (supra), relying on Dun and Bradstreet', has observed as under: "9. .............we find that the TPO himself has rejected the companies which are making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these ....
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....alore Tribunal cited supra, the following 8 companies will have to be eliminated from the list of comparables selected by the TPO, namely: * Flextronics Software Systems Limited; * iGate Global Solutions Limited; * Mindtree Limited; * Persistent Systems Limited; * Sasken Communication Technologies Limited; * Tata Elxsi Limited; * Wipro Limited; & * Infosys Technologies Limited. 4.4.5 It is ordered accordingly. (ii) Functional Dissimilarity: 4.5 We shall now deal with the improper selection of comparables by the TPO for the reasons that they were functionally different. (a) Avani Cimcom Technologies Ltd.: The selection of this company as comparable by the TPO was rejected by the earlier Bench of the Tribunal in Trilogy E-Business Software India (P.) Ltd. (supra) for the reasons that- "41. We have given a careful consideration to the submissions made on behalf of the Assessee and are of the view that the same deserves to be accepted. The reasons given by the Assessee for excluding this company as comparable are found to be acceptable. The decision of ITAT (Mumbai) in the case of Telcordia Technologies Pvt. Ltd. v. ACIT (supra) also suppo....
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....ould be rejected as comparable. However, the Tribunal accepted the alternative submission of the assessee that the segmental profit margin is to be reckoned with instead of entity level margin and held that the profit margin of 23.11% which is the margin of the software service segment be taken for comparability. The discussion and the findings of the Bench with regard to the acceptance of the alternative submission of the assessee to adopt the segmental margin of 23.11% are reproduced below: "37. The next plea of the Assessee is that if at all this company is considered as a comparable then the segmental margin of 23.11% (which is the margin for software service segment) alone should be considered for comparability. On the above submission, we find that the TPO considered the segmental margin (Software service segment) in the case of Geometric, Kals Info systems, R Systems, Sasken Communication and Tata Elxsi. Before DRP the Assessee pointed out that the segmental margin of 23.11% alone should be taken for comparability. The DRP has not given any specific finding on the above plea of the Assessee. Perusal of the order of the TPO shows that the TPO relied ....
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....n the Assessee and Megasoft and the profit arising to the Megasoft as a result of the existence of the software product segment and no finding has been given that reasonably accurate adjustments can be made to eliminate the material effects of such differences. For this reason, we are inclined to hold that the profit margin of 23.11% which is the margin of the software service segment be taken for comparability...........". 4.6.1 In conformity with the findings of the earlier Bench (supra), we are of the considered view that the TPO was justified in selecting M/s. Megasoft Ltd as comparable. However, the AO/TPO is directed to take segmental margins of 23.11% for comparability. It is ordered accordingly. 4.7 It is the claim of the learned AR, after exclusion of the companies on account of turnover filter and functional dissimilarity and modifying the margin of Megasoft as mentioned above, the comparable margin after working out the working capital adjustment would be 16.54% whereas that of the assessee-company is 14.4% which would be within the permissible limit and, hence, the price that is charged to its AE is within the arms' length price. 4.8 In conclusion, we direct the AO t....
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....ed by the Assessing Officer in his draft assessment order and the same was affirmed by the DRP u/s.144C of the IT Act and, hence, the assessee being aggrieved is in appeal before us. 5.3 The learned counsel for the assessee had filed a written submission, the gist of the same read as follows : 2.4.1 Services rendered are not in the nature of commission agency services With respect to the pre-sales support and marketing segment, the TPO in determining the ALP for the above segment has categorised the services rendered by NDS Pay-TV as being in the nature of commission agency services rather than sales and marketing support services. The Appellant wishes to draw your Honour's attention to the scope of the services as enumerated in the agreement entered between NDS India and NDS UK for rendering pre-sales support and marketing services. "The services envisaged include; * Liaising and meeting with potential and existing clients of NDS UK and for the dissemination of information both to and from the customers. * Advising NDS UK of developments in the Indian sub-continent (includi....
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....Y 2006-07, ICC International had an operating cost of Rs 1.77 Crores and an operating profit of Rs 2.25 Crores in its commission and servicing segment. However, the TPO while computing the operating profit to operating cost margin have considered the operating cost to be Rs 2.25 Crores and the operating profit to be Rs 1.77 Crores. Functional difference ICC International is into trading in textile machinery, embroidery machinery - which are typically high investment, high margin and low quantity business and not comparable to the marketing support services rendered by the Appellant in the realm of sale of software/services (See Page 49 of the Directors' report forming part of the annual report - enclosed in submission dated February 6, 2012 at page 1296). Further, from the financial statements of ICC International, it appears that the company is engaged in trading activities as well and that the commission income earned may be on account of such trading activities carried on by ICC International which is different from the functional profile of the Appellant. 2.4.3 No Transfer Pr....
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....n on Pre-Sale and Marketing Support Services: Relianc in this respect is placed on the order of T.P.O./DRP and written submission dated 11.01.2013 at pages 24 to 28. (iv) Status in A.Y. 2008-09:- The AR in his arguments has submitted that no similar T.P. adjustments were made in subsequent A.Y. 2008-09. In this respect it s submitted that, the exact facts and circumstances obtaining in the next year, are not available, so as to reach an inference in favour of the assessee. The doctrine of the ResJudicata does not apply to the Income Tax Proceedings and therefore, this plea of the assessee is not acceptable." 5.4 We have heard the rival submissions and perused the materials on record. The TPO in determining the ALP for this segment had categorized the services rendered by the assessee to its associated enterprise as being in the nature of commission agency services. In the agreement entered into between the assessee [NDS India] and its associated enterprise (NDS UK) for rendering pre sales and marketing services, the following services are envisaged : * Liaising and meeting with potential and existing clients of NDS UK and for the dissemination of infor....