TaxTMI 
TaxTMI 
TaxTMI 
2013 (11) TMI 422
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....cessed u/s 143(1) of the Act. Subsequently, however, the assessee's case was selected for scrutiny and in course of scrutiny assessment proceeding, the Assessing Officer noticing that the assessee has entered into international transactions with its Associates Enterprises (AE), a reference was made by him to the Addl. Commissioner of Income-tax (Transfer Pricing), (hereinafter called TPO),Hyderabad for determining arm's length price of the international transaction with its AE. The assessee during the year reported the following receipts earned from international transaction with its AE: (i) Provision of software development services 186,96,89,012 (ii) Reimbursement of expenses to AE 62,71,942 (iii) Reimbursement of expenses by AE 4,42,63,545 3. In course of the proceeding before the TPO, the assessee submitted TP study conducted by M/s Ernst & Young, CAs., after undertaking a detailed analysis for determining the functions, assets and risks utilized by the assessee and its AE in respect of international transactions between them. As per the functional analysis in the TP study the assessee was categorise....
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.... filters and in this process selected 26 companies as comparables, with average arithmetic mean PLI of 25.14% and after making working capital adjustment of 0.82% arrived at adjusted arithmetic mean PLI of 24.32% by applying the aforesaid arithmetic mean PLI of 24.32% to the operating cost of Rs. 166,29,22,973/- determined arm's length price at Rs. 206,73,45,840/-. The price charged by the assessee for its international transactions being shown at Rs. 193,29,17,969/- (including the reimbursement of expenses by AE), the shortfall of Rs. 13,44,27,871/- was treated as TP study adjustment u/s 92CA of the Act. In pursuance to the order passed by the TPO proposing the aforesaid TP adjustment, the AP passed a draft assessment order incorporating TP adjustment of Rs. 13,44,27,871/-. Apart from adding TP adjustment, the Assessing Officer also reduced the communication charges from the export turnover while computing deduction u/s 10 of the Act and also made some other disallowances. 5. Being aggrieved of the draft assessment order, the assessee raised the objections before the DRP. 6. The DRP, however, rejected the objections raised by the assessee with regard to selection of comparables ....
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....011. 4. Bearing Point Business, ITA No.1124/Bang/2011. 5. LG Soft India Pvt. Ltd., ITA No. 1121/Bang/2011 6. Transwitch India Pvt. Ltd., ITA No.948/Bang/2011. 7. Mercedes Benz Research & Development India (P.) Ltd. v. Dy. CIT [IT Appeal No. 1222 (Bang) of 2011, dated 22-2-2013]. 8. CSR India Pvt. Ltd., ITA No. 1119/Bang/2011. 9. First Advantage offshore Services (P.) Ltd. v. Dy. CIT [IT Appeal No. 1086 (Bang.) of 2011, dated 7-9-2012] 10. HCL EAI Services Ltd., ITA No.1348/Bag/2011. 1.2 The learned DR, on the other hand, submitted that both the TPO and DRP having accepted the aforesaid company as a comparable after objectively considering contentions raised by the assessee, there is no reason to exclude it. 1.3 We have heard the submissions of the parties and perused the material on record with regard to the aforesaid company being treated as comparable. The fact that this company is earning revenue from product development also has not been controverted by the learned DR. The ITAT, Mumbai Bench in ca....
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....ged in diversified activities including products, consultancy and solutions. It was submitted that due to scale of operations, Infosys enjoys economies of scale, which results in lower cost of infrastructural facilities and overheads. Therefore, the comparability of assessee, which is only captive services provider to such a company cannot be made. It was submitted that various benches of the Tribunal have declared Infosys as not comparable on various parameters to a captive services provider and have directed for exclusion of the said company. The AR relied on the following cases: 1. Intoto Software India (P.) Ltd. (supra). 2. Trilogy E-Business Software India (P.) Ltd. (supra). 3. Telcordia Technologies India (P.) Ltd. (supra). 4. Patni Telecom Solutions (P.) Ltd. v. Asstt. CIT [IT Appeal No. 1846 of 2012, dated 25-4-2013]. 5. Adaptec (India) (P.) Ltd. v. Dy. CIT [2013] 154 TTJ 129 (Hyd.) 6. Cordys Software India (P.) Ltd. v. ACIT [IT Appeal No. 1972 (H) of 2011]. 7. Trinity Advanced Software Labs Pvt....
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....cting to the aforesaid company being treated as comparable, submitted before us that the aforesaid company fails the employee cost filter applied by the TPO as the employee cost of the company is less than 25%, which is the bench mark adopted by the TPO. It was further submitted that while employee cost as a percentage of operating revenue of Ishir Infotec Pvt. Ltd. Is only 3.96% where as the assessee's employee cost is 61.23%, In support of such contention, the learned AR relied on the following decisions: 1. Intoto Software India (P.) Ltd. (supra). 2. LG Soft India (P.) Ltd. (supra). 3. Transwitch India (P.) Ltd. (supra). 4. Mercedes Benz Research & Development India (P.) Ltd. (supra). 5. CSR India (P.) Ltd. (supra). 6. First Advantage offshore Services (P.) Ltd. (supra). 7. HCL EAI Services Ltd. (supra). 3.2 The learned DR, on the other hand, supported the orders of the DRP & TPO. 3.3 We have considered the submissions of the parties and perused the material on record. As it can be seen, the ITAT H....
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..... Therefore, respectfully following the decision of the Coordinate Benches (supra), we direct the Assessing Officer/TPO to exclude these two companies also from the list of comparables." 4.4 Respectfully following the aforesaid decision of the coordinate bench in case of Intoto Software India (P.) Ltd. (supra), we direct the AO/TPO to exclude the aforesaid company from the list of comparables while determining the ALP. 5. Megasoft Ltd. 5.1 While objecting to the aforesaid company being treated as comparable, the learned AR submitted before us that the said company does not satisfy certain filters applied by the TPO himself. It was submitted that the onsite revenue of the company is Rs. 75.26 crores whereas the revenue of the services division (Blueally division) is Rs. 63.71 crores. Onsite revenues are significantly attributable to services division of the company, hence, services segment fails 75% onsite revenue filter applied by the TPO. It was further submitted that as otherwise Mega Soft ltd is also functionally different as Megasoft XIUS division is a product division and revenue of XIUS division includes sale of hardware embedded with customized software, sale of license, ....
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.... response to the notice issued u/s 133(6) of the Act, the aforesaid company has clearly stated that it cannot be considered as comparable to any other software company due to complex nature of its business. However, while the TPO selected the aforesaid company by holding that the services provided are akin to software development services, the DRP, did not comment on the comparability of this company. The learned AR submitted that comparability of the aforesaid company was considered and analysed by different benches of the ITAT and the aforesaid company was rejected as comparable to the software services provider. For such contention, the learned AR relied upon the following decisions: 1. Telcordia Technologies India (P.) Ltd. (supra). 2. Trilogy E-Business Software India (P.) Ltd. (supra). 6.2 The learned DR, on the other hand, supported the orders of the AO/TPO and DRP in this regard and referred to the observations made by the TPO in his order. 6.3 We have heard the submissions of both the parties and perused the material on record. In case of Telcordia Technologies India (P.) Ltd. (supra), the ITAT Mumbai Bench while consid....
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....ra). 7.2 The learned DR on the other hand supported the orders of the DRP as well as TPO so far as the selection of the aforesaid company as comparable while determining ALP. 7.3 We have heard the submissions of the parties and perused the material on record. The ITAT Mumbai Bench in case of Telcordia Technologies India (P.) Ltd. (supra), while considering the objection of the assessee for treating the aforesaid company as comparable held as follows: "7.5 This company is also a global IT Company having varieties of service and products and looking to the magnitude of its operations, sales and expenses, the same cannot be taken into consideration for comparability analysis. Moreover, 67% of its sales relates to its product which are sold on premium resulting into higher profitability, therefore, cannot be compared with the assessee company at all. There are several judgments of ITAT which have been referred in para 6.5 above, that Wipro cannot be taken as comparable case for comparable case with the company like assessee. In view of these facts and the reasoning given in the case of Infosys, we hold that Wipro also cannot be considered as a comparability ....
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.... so far as, other companies are concerned, which were selected as comparables by the assessee, we find that the DRP ha not objectively considered the contentions of the assessee in this regard. We, therefore, restore the matter back to the file of the AO/TPO to consider the comparability of the aforesaid companies after giving due opportunity of hearing to the assessee and considering all aspects of the matter. 15. In Ground No. 12, the assessee challenged the action of the TPO in adding the amount of Rs. 4,42,63,545/- being reimbursement received from the AE with operating cost for determining ALP. The TPO while determining the ALP of the assessee has also included the amount of Rs. 4,42,63,545/-claimed to be the reimbursement received by the assessee from its AE. The TPO observed that since the expenditure was incurred on behalf of the parent company and assessee received money back, hence, the expenditure is connected to the business services and should form part of the turnover. He, therefore, was of the view that the amount should be treated as part of export turnover and total turnover. The DRP while upholding the finding of the TPO to the extent that reimbursement should fo....
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....d it was found that Chennai unit is formed by transfer of existing business at Hyderabad. The AO further noted that losses suffered by Chennai Unit up to 2005-06 was not ascertainable, hence, there was a difficulty in computation of 10A benefit. It was further held that as the Chennai Unit was formed on reconstruction/splitting up of business already in existence, benefit u/s 10A cannot be granted. The DRP while dealing with the issue of diversion of business and splitting of business at Hyderabad unit for forming another unit at Chennai, considered the order of CIT(A) for the AY 2006-07 on identical issue holding that new unit at Chennai cannot be treated as separate and independent unit because the same business is carried out. Though the DRP agreed that Chennai unit is not formed by reconstruction of Hyderabad Unit, however, it held that the units at Chennai and Hyderabad are not two distinct and independent units. The DRP however directed that 10A benefit to be given on the combined profits of Chennai and Hyderabad Units. 23. The learned AR has submitted before us that Chennai and Hyderabad units should be considered as two distinct and separate units for benefit u/s 10A. It w....
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....nd separable. Therefore, from the infrastructure point of view which involves land and building, plant and machinery and employees, etc., as well as from the business processes/activities point of view, both the units are separate and distinct with different objects and challenges of the clients. Thus, commonness of the projects/services should not be the basis of rejection of claim of exemption in principle. As such, the services of both the units are different, for different purposes and thus, the conclusions of the assessing officer and CIT(A) are not as per the law in force. Relevant decisions are discussed in the preceding paragraphs. In our opinion, the Revenue has stepped into wrong decision making area, while denying exemption under S.10A of the Act in respect of the projects of Chennai Unit. Further, we also examined the available judicial pronouncement on the subject. It is a settled issue that existence of some old employees in the new undertaking is not a disqualification for granting exemption benefit to the assessee under S.10A of the Act as long as larger chunck of HR Department has not moved to the new unit from the old one. So long as both the units are existing an....
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....imately held that Chennai Unit and Hyderabad Unit are not two distinct and independent units. However, on perusal of the aforesaid order of the coordinate bench, we find that the issue in dispute has been set at rest and decided in favour of the assessee. Therefore, following the decision of the coordinate bench, we allow the ground of the assessee and direct the AO to allow benefit u/s 10A of the Act to the Chennai Unit. 26. The next issue raised in ground Nos. 16 & 17 is with regard to rejection of reimbursement of expenses to Virtusa Corporation, USA of an amount of Rs. 62,71,942/- from the export turnover while computing deduction u/s 10A of the Act. 27. We have considered the submissions of the parties on this issue and perused the materials on record. The issue stands squarely covered by the decision of the Hon'ble Mumbai High Court in case of CIT v. Gem Plus Jewellery (India) Ltd. 330 ITR 175 and the special bench decision of ITAT, Chennai in case of ITO v. Sak Soft Ltd. [2009] 30 SOT 55 wherein it has been held that if communication charges, insurance charges and reimbursement of expenses attributable to the delivery of computer software outside India, are to be reduced f....