TaxTMI 
TaxTMI 
2014 (10) TMI 358
X X X X Extracts X X X X
X X X X Extracts X X X X
....s the world. The main areas of operations of the Motorola Group are broadly structured around Wireless, Broadband and Automotive Solutions. Motorola is operationally structured in the following segments: a) Connected Home Solution; Motorola's Connected Home Solutions (CHS) business is focused around broadband solutions for the delivery of voice, video and data over HFC Networks. CHS core business revolves around the delivery of digital audio and video interactive applications, internet access and high speed data. b) Government & Enterprise Mobility Solutions; This segment is a provider of integrated radio communications and information solutions, with a focus on Government and enterprise customers worldwide. It also designs, manufactures and sells automotive and industrial electronics systems and telematics systems that enable automated roadside assistance, navigations and advance safety features for automobiles. c) Mobile Devices; This segment designs, manufactures, sells and services wireless subscription and server equipment for cellular systems and iDRN integrated digital and enhanced networks, advanced messaging devices, personal two way radios and a broad ra....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Adjustment Software Development Services 7,883,525,000 107,14,42,327 Advertising and market Promotion 179,31,42,647 179,31,42,647 Administrative Support Services 837,490,784 7,78,44,993 Total 294,24,29,967 4. The assessee filed objections before Dispute Resolution Panel, which, vide its order dated 20th September, 2011, gave various directions u/s 144C(5). The AO, in consequence to these directions, made a total adjustment to the declared prices of international transactions of Rs. 289,70,16,463/-, as under: Segment Adjustment u/s 92CA (Original) Adjustment u/s 92CA (Revised) AMP Segment 179,31,42,647 176,26,38,353 Software Development Services 1,071,442,327 105,57,45,127 Market Support Service Segment 7,78,44,993 7,86,32,983 Total 2,94,24,29,967 289,70,16,463 5. Being aggrieved with the order of AO, the assessee is in appeal before us and has taken various grounds of appeal: 1. "That on the facts and circumstances of the case, the assessment order passed by the ld. Assessing Officer is bad in law; 2. That on the fac....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mining the AMP expense as 'excessive' by comparing against the bright line limit arrived at using inappropriate comparables that : (i) are not operating on the same level of the business value chain as that of the appellant; and (ii) are wholly dissimilar to the appellant in respect of the brands promoted by them; 2.9 holding that the alleged 'excessive' AMP expense incurred by the appellant constitutes 'AMP service' provided to the overseas AEs and thereby adding a mark-up over and above the expense amount on arm's length basis; and 2.10 determining the arm's length price of the alleged 'AMP service' by applying a mark-up of 11.11% on the alleged 'excessive' AMP expense computed on the basis of inappropriate comparables which are operating in business functions different from that of the appellant; 3. That the ld. AO and ld. TPO, on the facts and circumstances of the case and in law have erred in not following the binding direction issued by the ld. DRP regarding the inclusion of M/s Spice Mobility Ltd. and M/s General Sales Ltd. as comparables of the appellant for the purpose of computing the arm's length price of the alleged international transaction of "excessive" AMP ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....king a low risk captive unit such as the assessee (disregarding judicial pronouncements on the issue), thus demonstrating an intention to arrive at a preformulated opinion without complete and adequate application on mind with the singleminded intention of making an addition to the returned income of the assessee; 5.5 including certain companies that are not comparable to the assessee in terms of functions performed, assets employed and risk assumed; 5.6 resorting to arbitrary rejection of low-profit/loss making companies based on erroneous and inconsistent reasons; 5.7 excluding certain companies on arbitrary/frivolous grounds even though they are comparable to the assessee in terms of the functions performed, assets employed and risk assumed; 5.8 ignoring the business/commercial reality since the assessee is remunerated on an arm's length basis, i.e. it is compensated for all its operating costs plus a pre-agreed mark-up based on a benchmarking analysis, the assessee undertakes minimal business risks as against comparable companies that are fully fledged risk taking entrepreneurs, and by not allowing a risk adjustment to the assessee on account of this fact; and 5.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ve, the ld. AO has erred in not increasing the deduction u/s 10A/10B by disallowance on account of computer software expenses; 10. The ld. AO while determining the tax payable erred in not allowing credit of advance tax of Rs. 15,19,97,800/- and TDS of Rs. 14,46,51,326/-; 11. That the ld. AO erred in facts and in law in levying interest u/s 234D and sec. 244A(3) amounting to Rs. 58,59,630/- and Rs. 17,03,000/-. 12. The ld. AO has erred on the facts and the circumstances of the case and in law in arbitrarily intiating a penalty proceedings u/s 271(1)(c) against the appellant for furnishing inaccurate particulars of income." 5.1 Ground No.1 is general and does not require any adjudication. Ground No.2 :- Issue Relating To AMP Expenses 6. Brief facts apropos ground no. 2 are that while examining the distribution segmental profitability chart submitted by the assessee, TPO noticed that the assessee had debited following expenses under the head "advertisement and market promotion activities" (in short AMP Expenses) to the Profit & Loss Account: 1) Advertisement and sales promotion 1469952312/- 2) Business meetings and conferences 182405029/- 3) Dea....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rred expense on account of advertisement and sale promotion activities with a sole intention of developing marketing in India for its product. The business model of the assessee is such that the assessee company is already getting credit notes for reimbursement in trading account, to sustain a constant profit margin. As per the Group's Global Transfer Policy, during FY 2006-07,theassessee received an amount of Rs. 1,506,756,362 from its AEs as a cost credit/purchase price adjustment." 6.2 The TPO disposed off the assessee's objections as under: 1) As regards the first objection raised by the assessee that TPO is to determine the ALP of the international transactions on reference being made by the AO to the TPO, the TPO pointed out that the AO had sent separate reference for AMP expenses vide his letter dated 19th October, 2010. 2) The TPO further pointed out that it was a matter of record that the AE of the assessee and its parent company Motorola Inc. had acknowledged an increase in its sale due to the marketing efforts of the assessee in India and, therefore, since the benefit had been received by the parent company from the effort of assessee, for w....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... or any other communication or any other supporting evidence to prove that the credits received by the assessee from its AE are the compensation for AMP expenses. In fact the assessee itself is stating that these are the credits for purchase price adjustments. Therefore, by no stretch of imagination the purchase price adjustment credits, can be taken as compensation for AMP activities undertaken by the assessee. Therefore, the contention of the assessee in this regard is without any basis and is therefore rejected." 6.3 The assessee's objections as regards comparables selected by TPO, in regard to AMP Expenses, were disposed of as under: a. "As regards Cyber Media Online, the objection of the assessee was that the company has high Related Party Transaction. The data on Prowess shows that the company has 100% of its revenue from Advertisement activities. The RPT in the case of this company is less than 25% hence this objection is also rejected. This company was itself taken by the assessee as comparables in its Transfer Pricing Report in class III category of transactions. There is no effect of shared expenses on the operating results of the assessee, as objected by the assess....
X X X X Extracts X X X X
X X X X Extracts X X X X
....se (v) of section 92F. 7.2 He further pointed out that no independent enterprise would incur expenditure for promoting the trade names owned by some third party unless duly compensated for such efforts. He proposed a mark up @ 13.04% on the AMP expenditure. 7.3 He, accordingly, determined the arm's length compensation for AMP services as under: Expenditure in excess of bright line (A) 158,63,90,382 Markup on above @ 13.04% (B) 20,68,52,265 Total of (A) & (B) above 179,31,42,647 7.4 The assessee filed objections before DRP after considering which, DRP directed the TPO to examine the assessee's objection in regard to exclusion of comparables by TPO, as under:- "As regards exclusion of Spice Mobility Ltd. by TPO on the grounds that it is promoting its own brands, we have considered the submissions of assessee. According to assessee, Spice brand is owned not by Spice Mobility (company proposed by assessee) but by Spiceorp Entertainment Ltd. Similarly, Lexus brand is not owned by General Sales Ltd. (Co. Proposed by assessee) but by Usha Sriram Entrprises. In view of the above explanation, Spice Mobility and General Sales Ltd. being functionally si....
X X X X Extracts X X X X
X X X X Extracts X X X X
....espect of credit notes. In the recent ruling [ITA 5140/Del/2011] of the Special Bench of Delhi Income-tax Appellate Tribunal (SB) in a group of cases involving several taxpayers, with lead case being that of Ms. L.G. Electronics India Private Limited vs. ACIT, the Special Bench has categorically mentioned "subsidy on purchases" as a factor to be taken into account while computing bright line. Following this new development, the Appellant wishes to reiterate its facts with additional evidence in the form of summary of credit notes received, sample copies of the credit notes and sample copies of the Foreign Inward Remittance Certificates. This additional evidence goes into the root of the matter and may by admitted in the interest of justice. 2. Additional Evidence The appellant would like to bring to your notice that Rs. 3,465,141,270. of credit notes were received by the appellant in AY 2008-09 in its trading operations. A summary of credit notes received in this regard are enclosed as Annexure 1. Sample copies of the credit notes are enclosed as Annexure 2. Sample copies of the Foreign Inward Remittance Certificates issued by the bank on receipt of the money are enclos....
X X X X Extracts X X X X
X X X X Extracts X X X X
....res that a range of Net Margins be generated for comparable, uncontrolled distributors. A range of comparable results is used because of the variety of price and profit outcomes that arise in arm's length transactions. Comparable, uncontrolled distributor results are obtained from published industry databases through a screening process that looks at the industry SIC codes and uses the subsidiary functional analyses to determine the comparable, uncontrolled distributors. From the comparable ranges which are generated,prices are established by the factory legal entity that aim to return to the Related Party distribution operations a net margin for the current year that falls at the midpoint of the Multi-Year Net Margin Range. However, if the Related Party distribution operation has an average net margin for the current year plus the two preceding years (the "3year average"), which is outside the Multi year Net Margin Range, then the current year's transfer price will be set to move the 3 year average closer to the Multi Year Net Margin Range, while still keeping the current year within the Net Margin Range." 9.2 Ld. Counsel submitted that this plea was taken before TPO also. In t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dent comparables then no further addition can be made on account of TP adjustment else it would lead to double addition. 9.4 In support of his contentions, ld. Counsel relied on the decision in the case of BMW India Pvt. Ltd. vs. Addl. CIT which was filed before us by way of additional submissions dated 27th August, 2013, after the hearing was over. In the petition the assessee stated as under: "The hearing in the above-captioned appeal was concluded on July 18, 2013 before Bench "I" comprising of Hon'ble Members Mrs. S.V. Mehrotra and Ms. Diva Singh and the order has been reserved in the case. The order is still awaited in this matter. In the meantime, "I" Bench has delivered its judgment in the case of BMW India Pvt. Ltd. vs. Addl. CIT (ITA No. 5354/Del/2012) which has a direct bearing on one of the main grounds of appeal in the above-captioned appeal. The Appellant, is accordingly, filing an application along with the copy of the BMW India judgment for the kind consideration of the Hon'ble Members who have heard our case. The application and copy of the said judgment are attached herewith. Your are requested to kindly place the application along with the judgment ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....herefore, vehemently opposed the admission of these additional evidences. 12.1 Ld. CIT(DR) further submitted that if assessee's contention is accepted then it would lead to an anomalous situation. In this regard ld. CIT(DR) has filed following working which is reproduced hereunder: Situation 1 "Working of Taxable Income relating to service of brand building by incurring excess AMP expenditure (over ALP or over Brightline) Let us say- Description Amt. (Rs.) A Sale 2000 B ALP or Bright line limit of AMP expenditure @ 3% of sales. 60 C Actual AMP Expenditure by Indian entity. 100 D Excess AMP Expenditure [Rs. 100 less Rs. 60] 40 E ALP mark up on Service of Brand Building @ 10% on excess AMP expenditure i.e. 10% of Rs. 40 4 F Total Recovery to be made by Indian entity [Rs. 40 + Rs. 4] 44 G Taxable Income on a/c service of Brand Building for foreign AE, by incurring excess AMP expenditure over Bright Line ALP 4 Situation 2 Excess AMP Spend [D] Rs. 40 Amount actually reimbursed on a/c of Subsidy Received [H] Rs. 30 Remai....
X X X X Extracts X X X X
X X X X Extracts X X X X
....her submitted that the concept of subsidy being brought in before TPO is primarily an after thought because once TPO held the brand building as international transaction then assessee came forward with plea that credit notes were towards brand building. 12.3 Ld. DR filed written submissions which are placed on record and submitted that the issue regarding AMP expenses has to be decided in view of LG's decision and the decision in the case of BMW's case has been rendered keeping in view the peculiar facts obtaining in that case. 12.4 Regarding ld. DR's submission that each international transaction has to be separately bench marked, ld. DR has filed written submissions which are reproduced hereunder: "This is for the reason that law mandates that each international transaction has to be separately bench marked. (Please refer to para 15.1 of the order in the case of M/s LG Electronics India P. Ltd. A.Y. 2007-08, ITA No. 5140/D/11). The whole para is relevant, and the first 5 lines are indicative of the discussion in this paragraph,- "15.1 At this stage, we feel it productive to have a macro view of the transfer pricing provisions. Section 92 provides that the income from ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... for the brand of the foreign AE and secondly, if at all it was there, the same stood compensated by the foreign AE in terms of sale of goods to the assessee at lower rates. The sale of goods at lower prices to the assessee by the foreign AE should be considered as a quid pro quo for the foreign brand building. For ascertaining as to whether or not the foreign enterprise sold goods to the assessee at a lower price, the ld. AR urged that the overall net profit rate of the assesee should be considered, which will naturally absorb the effect of incurring such brand building expenses. If the overall profit rate is higher, it will mean that the expenses incurred by the assessee on brand building were compensated by the foreign AE in terms of lower price of goods charged from the Indian AE, necessitating no separate further addition on the alleged presumption of the assessee having incurred any AMP expenses towards brand building. The ld. AR relied on the case of the Hon'ble Supreme Court in CIT vs. Calcutta Discount Co. Ltd. (1973) 91 ITR 8 (SC), to canvass the view that the assessee cannot be expected to earn maximum profit. It was submitted that the action of the Revenue in firstly ta....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g this exercise, the overall net profit was found to be better than other comparables, then the no addition was called for by subjecting the AMP expenses to the TP provisions. 21.4 There is a basic fallacy in the first sub-argument, which lies in not properly appreciating the modus operandi of applying the TNMM. This method provides for benchmarking of an international transaction by considering the operating profit from the concerned international transaction vis-à-vis certain basis as given in Rule 10B(1)(e), being total cost, sales, capital employed etc. Here it is significant to note the meaning of the term 'transaction' as given in rule 10A(d). It provides that: 'transaction includes a number of closely linked transactions'. Plural of transactions becomes singular when the transactions are closely linked to each other or are identical. These closely linked transactions can be processed as one transaction under any of the prescribed methods. If an Indian enterprise has made sale of similar goods to its foreign AE through several invoices and has also incurred some expenses or paid interest to it, it would mean that all the transactions of sales are closely linke....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is the case before us and the assessee or the TPO has applied the TNMM in a wrong manner or entity level for testing any of such transactions, then the remedy lies in correcting such mistake rather than drawing legally unsustainable conclusions by taking such mistake as a correct legal position. 21.6. Now we espouse the second sub-argument that when on applying the TNMM on entity level for the transaction of import of raw material the overall net profit is better than other comparables, then no addition is called for by subjecting the AMP expenses to the TP provisions. We have held in an earlier para that when there are different unrelated international transactions, the application of TNMM on entity level for examining one of such transactions, is itself an incorrect approach. Notwithstanding that, we deem it expedient to deal with the argument of the ld. AR that if rate of net profit of the assessee is better than other comparables, then no adjustment can be done under Chapter-X. 21.7. On a specific query from the Bench, it was admitted by the ld. AR that no addition was made by the TPO on account ofapplication of the TNMM on the imports made by the assessee from its foreig....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssee from the international transaction is more than the arm's length profit of Rs. 100/- and hence no further adjustment on account of AMP expenses should be made, then the assessee's income would stand reduced to Rs. 120/- as against the actual income of Rs. 140/-. We fail to appreciate as to how the judgment in the case of Calcutta Discount Co. Ltd. (supra) advances the case of the assessee. There cannot be any quarrel on the proposition that the assessee cannot be compelled to earn maximum profit. As it is the real profit which is to be taxed and the assessee cannot be expected to earn maximum profit, in the same way, the assessee cannot be allowed to reduce its real profit by including certain expenses which are for the benefit of the foreign AE. 21.9. It is pertinent to note that presently we are dealing with a case in which the majority of the assessee's sales is to Indian customers. Naturally the TP provisions cannot be applied in respect of sales to Indian customers because these are not international transactions. In such a case, there can be no benchmarking of the profits realized from such Indian customers so as to form a platform for contending that the TNMM has bee....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to directly prove the fact of cheap purchases de hors the overall higher net profit rate. This fact can be established by demonstrating that the foreign AE charged a specially low price from the assessee in comparison with that charged for the similar goods supplied to other independent entities dealing with it in India or in case there is no other independent entity in India, then the price charged for similar goods from other foreign parties. It can also be proved by showing that goods with identical features are available in the Indian market at a higher price. The fact that the assessee has a better net profit rate in comparison with other comparable entities is not decisive in itself of the assessee having purchased the goods at a concessional rate from its foreign AE as a compensation for its incurring AMP expenses towards the promotion of their brand. 21.11. At this stage, it is relevant to note sub-section (1) of section 92, which provides that : Rs.Any income arising from an international transaction shall be computed having regard to the arm's length price.' Similarly it is pertinent to take stock of sub-section (3) of section 92, which provides that : Rs.The provision....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n computing the total income, but the ALP of the second transaction shall be ignored. There is no provision which permits set off of negative adjustment with the positive adjustment to the income on account of different international transactions. The outcome of both the transactions has to be given effect distinctly. It, therefore, divulges that two or more international transactions are required to be separately processed under the TP provisions. The contention that if TNMM has been applied on one international transaction, then it would oust the jurisdiction of the TPO to process other international transactions under Chapter-X, really does not stand in the scheme of the provisions. Further, it this contention is taken to logical conclusion, then sub-section (3) of sec. 92 will become redundant to some extent. 21.13. There is one more way of fortifying our above conclusion. TNMM is one of the five recognized methods for determining the ALP of an international transaction. Such ALP can be determined inter alia by comparable uncontrolled price (CUP) method or Cost Plus method or even by the TNMM. All the five methods, as prescribed under section 92(1) and rule 10B, aim at deter....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ne international transaction under the TNMM." 13. Ld. Counsel for the assessee in his written submissions, in reply, has pointed out as under: "It is submitted that this contention is based on an erroneous understanding of the implications of the LG decision. The Special Bench in LG decision has not mandated that subsidy should be fully adjusted against the "excess" AMP expenditure. It has held that it needs to be seen whether the value of subsidy received by the assessee in any form (including in the form of subsidy against purchases from AE) is commensurate with the 'excess' AMP expenditure. Therefore, in cases where the value of subsidy exceeds the 'excess' AMP expenditure, the set-off would be limited to the value of 'excess' AMP expenditure so that the value of this transaction gets reduced to Nil. The balance subsidy remaining after the set-off would be available for set-off/adjustment against the other international transaction/s that have to be separately benchmarked. This is shown in the table below: S.No Nature of Transaction Book Price Arm's LengthPrice ALP) Subsidy adjusted Adjustment to the ALP 1 Import of TV tubes 1,00,000 60,000....
X X X X Extracts X X X X
X X X X Extracts X X X X
....iding the issue relating to advertising, marketing and promotion ("AMP") on behalf of the Appellant This is with respect to Motorola Solutions India Private Limited ("MSILP") appeal no. ITA 56371 Dell 2011 for Assessment Year ("AY") 2007-08. The hearings for the same were concluded on July 18, 2013 and the order was reserved on that date. The matter is now awaiting pronouncement of the decision by Your Honours. In the meantime the'!' Bench of the Hon'ble Income Tax Appellate Tribunal ("Tribunal"), New Delhi has pronounced its decision in the case of BMW India Pvt. Ltd. vs. Add!. CIT (I.T.A .No.- 5354/DeI/2012 for AY 2008-09) ("BMW India order"). The said order was passed on August 16,2013. Your Honours attention may kindly be drawn to the following: As mentioned in the BMW India order, BMW India acted as a distributor of motor vehicles and parts. During the year under consideration in the order, under the Transactional Net Margin method ("TNMM") applied by BMW India its operating profit margin was higher than the operating profit margin of the comparable companies. During the transfer pricing assessment proceedings, the Ld. Transfer pricing Officer ("TPO"), had al....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... here below(Para 6.25, 6.26 page 53, 55 of BMW India order): Quote We hold that in the facts of the present case the assessee has demonstrated that the compensation for the higher services was embedded in the pricing arrangement of the contract goods itself It is seen that the comparables identified by the assessee and accepted by the TPO as having similar intensity functions have earned profit at the gross and net levels far below the profits both at gross and net levels as achieved by the assessee. In the circumstances as evidenced from record, we are inclined to agree with the submissions advanced on behalf of the assessee that no further compensation was required to be made by the AE as the same has already been received. Thirdly, the Hon'ble Tribunal in BMW India order provided that BMW India was rewarded by price adjustments to earn profits which included the cost of AMP with mark up. It held that the tax department cannot insist that the mode of compensation received by BMW India from its AE necessarily had to be direct compensation and that pricing adjustment was not acceptable. The relevant text of the Hon'ble Tribunal ruling in case of BMW India is provid....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ased on the bright line analysis held that MSIPL should have been reimbursed by the AE for the excess AMP expenses incurred by it along with a mark-up. The Appellant filed an appeal before the Hon'ble Tribunal. The grounds related to AMP issue are covered in grounds nos. 2.1 to 2.10 and 3. (The details have been mentioned in para 4-43 of page 2-23 of the written submission filed with Your Honours on May 20, 2013 and again in para 8 of page 133-138 of the written submission filed with Your Honours on May 20, 2013.) In this regard we humbly submit that the decision in case of BMW India order also applies to MSIPL, as the facts of MSIPL are similar to that in the BMW India order. Hence, we humbly submit that the decision rendered in the BMW case has a direct bearing on the AMP issue. This has been summarized as under: 1.BMW India is a distributor of motor vehicles and related parts. MSIPL is also a distributor. Hence, what is relevant for consideration is the remuneration model of a distributor in both the cases. 2.BMW India's operating margin was higher than that of the comparables. Similarly, MSIPL also operated at a higher net operating margin than that of the comp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tual foreign collaboration agreement. Thereafter a Technical assistance and royalty agreement was entered into between these two entities on 1-7- 2001 by which LGI, in the capacity of a licensee, obtained a right to use the technical information, designs, drawings and industrial property rights for the manufacture, marketing, sale and services of the agreed products from the LGK i.e. the licensor." 16. In assessee's case the factual matrix has been reproduced earlier. Assessee is primarily engaged in the distribution of telecom equipment, mobile phones and provision of telecommunication service in India. The company also provides software development services to the group companies. Additionally the company also provides marketing and administrative support services to its group company. In the case of BMW the factual matrix was as under: 2.4 "A perusal of the same shows that the TPO took note of the facts that the BMW Group has global operations in 3 segments namely Automobiles, Motorcycles and Financial Services. The parent company of the group is BMW AG i.e. the associated enterprise (hereinafter referred to as the "AE") which is headquartered in Munich, Germany and is pri....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ial for the Contract Goods by applying its best efforts and adequate resources toward effective sales promotion and advertising for the Contract Goods including available optional equipment and accessories." 16.1 From the above factual matrix regarding business profile of the three entities under consideration, it is quite evident that business profile of none was identical. As far as BMW's case was concerned, Tribunal held that the same was predominantly a distributor of automobiles with insignificant or low value added assembly functions. Therefore, it was held that the decision in LG's case was not applicable being distinguishable on facts and accepted the assessee's contention that since the remuneration model of the assessee who was a distributor got rewarded by way of price adjustment to ensure profitability therefore, no further addition was required observing as under:- 6.27 "We on considerations of the contemporaneous international jurisprudence which supports the claim of the assessee are of the view that even if considering the arguments of the ld. CIT DR for a moment, the contemporaneous international jurisprudence is ignored even then the claim of the assessee ha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....with the facts and figures of the assessee in the year under consideration and the comparables as addressed in the orders and referred to by the parties before the Bench, we hold that in the facts of the present case there was no occasion for the AE to further compensate the assessee for the services rendered towards building the brand of the AE as the same already stood factored in the pricing adjustment of the contract goods. As such the occasion to consider the applicability of mark-up does not arise. We further find support from the decision of the Special Bench in L.G. Electronics case which considers a deviance from the view taken in the case of an assessee who incurred higher AMP vis-à-vis the comparables in the initial years. As discussed in the earlier part of this order, the DRP specifically notes that this is the first full year of assessee's functioning. The TP study referred to by us in the earlier part of this order addresses the prevalent competition in the market and the fact that the sector is highly competitive becomes more so far a new entrant where there is a declining trend seen in the automobile sale market coupled with nentrenched position of ear....
X X X X Extracts X X X X
X X X X Extracts X X X X
....transaction. 17.3 In view of above discussion, we are of the considered opinion that the decision in the case of BMW has no application to the present case. 18. Ld. Counsel elaborating his arguments submitted that since assessee was earning 5% profit margin as against 1% earned by comparables. Therefore, credit notes received by assessee in pursuance to global transfer pricing policy covers the excess AMP expenses also his contention is that if any further addition is made then it will amount to double addition. We find that Spl. Bench in LG's case has considered this specific plea and has rejected the same vide para 21.1 to 21.13 of its order noted earlier. We find that while enumerating the 9th factor to be taken into consideration for determination of cost/value of international transaction with reference to AMP expenses, Spl. Bench itself has taken note of the fact that if the compensation has been received for excess AMP expenses regarding brand building then the same is a relevant consideration and this will ensure no double addition as pleaded by ld. Counsel for the assessee. However, the assessee has to establish that in its global transfer pricing policy the AMP expe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ich is only of the Indian AE or is it a joint logo of both the Indian entity and its foreign counterpart ? 5. Whether Indian AE, a manufacturer, is paying any royalty or any similar amount by whatever name called to its foreign AE as a consideration for the use of the brand/logo of its foreign AE? 6. Whether the payment made as royalty to the foreign AE is comparable with what other domestic entities pay to independent foreign parties in a similar situation. 7. Where the Indian AE has got a manufacturing licence from the foreign AE, is it also using any technology or technical input or technical knowhow acquired from its foreign AE for the purposes of manufacturing such goods ? 8. Where the Indian AE is using technical know-how received from the foreign AE and is paying any amount to the foreign AE, whether the payment is only towards fees for technical services or includes royalty part for the use of brand name or brand logo also ? 9. Whether the foreign AE is compensating the Indian entity for the promotion of its brand in any form, such as subsidy on the goods sold to the Indian AE ? 10 . Where such subsidy is allowed by the foreign AE , whether the amount of s....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... Counsel's contention that merely because operating margin to sales is better than the other comparables, it has to be inferred that assessee had duly been compensated towards AMP expenses. In this regard ld. DR's contentions are well founded that each international transaction has to be separately bench marked and overall profitability cannot be a determinative factor as held in LG's case also. Further, in factor no. 10 Spl. Bench has specifically qualified such subsidy for the purposes of adequacy or sufficiency of quantification and this also supports the contention of revenue that the subsidy has to be specifically received for promotion of brand. When specific guidelines have been laid down in Spl. Bench it cannot be held that unless this nexus, though not necessarily one to one, is established, the credit notes can be considered towards excess AMP expenses for brand promotion. However, we agree with ld. Counsel that while determining the Cost/value of the AMP transaction on a stand-alone basis, the direction of Special Bench with regard to the 14 economic and business facts has to be followed. It is mandatory for the TPO to consider all facts and evidence, as may be submitte....
X X X X Extracts X X X X
X X X X Extracts X X X X
....see for substantiating its plea that credit notes were issued by foreign AE towards compensation for promotion of brand. 19. In the result the additional ground raised by assessee is allowed for statistical purposes. Now we will consider the various other grounds taken be assessee with reference to AMP Expenses. 20. Ld. Counsel in the written submissions has first given a brief note on the decision rendered by Spl. Bench in the case of M/s LG Electronics India Pvt. Ltd. vs. ACIT. After considering the same ld. Counsel has fairly conceded that ground nos. 2.1, 2.2, 2.3, 2.6, and 2.9 are covered against the assessee by LG's decision and may be decided accordingly as the assessee reserves the right to prefer an appeal before the Hon'ble Delhi High Court. 20.1 We will, therefore, first in brief refer to the findings of Spl. Bench apropos these grounds. 21. Apropos ground nos. 2.1 & 2.2, as noted earlier, TPO has disposed off this objection by pointing out that reference had separately been made by AO for determination of arm's length compensation for AMP expenses. . Therefore, these grounds are dismissed. 22. Apropos ground no. 2.3, we find that in para 21.3 to 21.8 in L....
X X X X Extracts X X X X
X X X X Extracts X X X X
....xpenses for the purposes of determining the ALP. It was submitted that selling expenses cannot constitute part of AMP expenses. Our attention was drawn towards the erstwhile sections 37(3A) and 37(3B), in which disallowance u/s 37(3A) was prescribed in respect of expenses referred to in sub-sec. (3A), which, inter alia, included advertisement, publicity and sales promotion. It was submitted that various courts have held that the selling expenses cannot be included within the scope of sec. 37(3B). 18.2. The learned Departmental Representative opposed this contention by stating that there is no logic in the contention of the learned AR that the expenses causing sales should be taken out of the total AMP expenses for consideration. All the AMP expenses including the expenses in connection with the sales should be considered as one basket of expenses, out of which the AMP expenses for the creation or promotion of marketing intangibles on behalf of the foreign enterprise are to be segregated. It was contended that since by their very nature most of the AMP expenses are common having been incurred for own business and brand building for the foreign AE, the reduction of expenses in con....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... considering the term Rs.advertisement marketing and promotion expenses', which is analogous to, if not lesser in scope than the term Rs.advertisement, publicity and sales promotion' as employed in the erstwhile sub-sec. (3B) of sec. 37, all the judgments rendered in the context of sub-sec. (3A) & (3B) of sec. 37 will squarely apply to the interpretation of the scope of AMP expenses. We, therefore, hold that the expenses in connection with the sales which do not lead to brand promotion cannot be brought within the ambit of advertisement, marketing and promotion expenses for determining the cost/value of the international transaction. 19. In the facts and circumstances of the present case, it is found that the TPO restricted the comparable cases to only two without discussing as to how other cases cited by the assessee were not comparable. Further it can be seen that the TPO has not considered the effect of any of the relevant factors as discussed above. A bald comparison with the ratio of AMP expenses to sales of the comparable cases without giving effect to the relevant factors as discussed above, cannot produce correct result. It can be illustrated by a simple example. If ther....
X X X X Extracts X X X X
X X X X Extracts X X X X
....& Marketing (India) Ltd. Rockman Advertising & Marketing (I) Ltd. is engaged in provision of complete communication solutions. It is also engaged in carrying out activities related to film and documentary production, fabrication of hoardings, etc. 2 Goldmine Advertising Ltd. Goldmine Advertising Ltd. is engaged in provision of fullfledged communication solutions, delivering solutions ranging from press to electronic and outdoor media. 3 Marketing Consultants & Agencies Ltd. Marketing Consultants & Agencies Ltd. is engaged in rendering advertising and other related services. 4 Needwise Advertising Pvt. Ltd. Needwise Advertising P. Ltd. is engaged in Provision of advertising services. 5 Adbur Pvt. Ltd. Adbur Pvt. Ltd. is engaged in provision of Advertising and marketing services. 28.1 He, therefore, submitted that the comparables selected are not in conformity with the decision of LG's case. He further submitted that as far as Rockman advertisement and marketing is concerned the same is engaged in the same business....
X X X X Extracts X X X X
X X X X Extracts X X X X
....challenged this addition on various counts as per ground nos. 4.1 to 4.11. 32.1 As per transfer pricing study submitted by assessee, in the software development segment, assessee performs activities relating to software development/coding relating to party control and documentation, testing, implementation and maintenance. This work was carried out by assessee in accordance with the guidelines provided by the AEs. As per the functional analysis documented in the transfer pricing documentation, assessee characterized itself as a captive service provider claiming that it assumed less than normal risk associated with carrying out such business. Assessee bench marked its SDS segment by applying TNMM as the most appropriate method with operating profit/total cost as the profit level indicator. The assessee had used following quantitative filters in its transfer pricing documentation as contained at page 1019 to 1020 of paper book: Criteria and reason for usage No. of Companies Passing the criterion Total universe of companies available in Prowess as of February 15, 2007. 9,801 Companies with positive sales and ratio of other operating income to sales more than ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Cambridge Technology Enterprises Ltd. C 21% 14 ICRA Techno Analytics Ltd. C 15% 15 Mindtree Consulting Ltd. C 11% 16 Computech International Ltd. Seg- P 7% 17 Karuturi Networks Ltd. Seg- P 4% Mean 10% 33. The assessee earned an operating profit/total cost margin of 7% for its software development services activities. This was computed as under: Operating Income 6812082673/- Less Total Cost 6350000000/- Operating Profit 462082673/- Operating profit/total cost 7%. 33.1 The assessee pointed out that as per Indian Tax Regulations, it can choose a price which does not very from the price of comparables by more than 5% (proviso to section 92(2) of the Act). Since the price of comparables was within this range, assessee claimed that the transactions undertaken by it were at arm's length. 34. As against the aforesaid approach of assessee, the TPO adopted the following approach: a. The TPO rejected the TP Study prepared by the assessee stating that quantitative filters were incorrect; selection/rejection of comparable companies was based on qualitative filte....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... export revenues from onsite software development services) rendering services at the site of client or through their branches located outside India whereas the taxpayer is mainly an offshore company delivering all the services through its centers in India. 5.The tax payer has considered companies as comparables even though they are not functionally similar to the tax payer. Some additional filters are applied by the TPO like export earnings filter (companies with export earnings less than 25% of the revenues are rejected as comparables), salary filter (companies in which salary expenses are less than 25% of operating revenues are rejected as comparables), service income filter (companies in which software services income is more than 75% of the revenues were considered as comparable) etc so as to make the comparables functionally similar and also economic circumstances also similar to that of the taxpayer. These filters are discussed in detail under their respective heads in the order. 6.The tax payer has taken companies as comparable even if they do not work in same economic circumstances as that of the tax payer. The comparability study is correct or reliable only if the e....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he segment qualified this filter. d. Companies who had more than 25% related party transactions (income as well as expenditure combined) of the operating revenues were excluded; e. Companies which had less than 25% of the operating revenues as export sales were excluded; f. Companies which had diminishing revenues/persistent losses for the period under consideration were excluded; g. Companies having different financial year ending (i.e. not March 31, 2007) or data of the company which did not fall within 12 months period i.e. 01/04/2006 to 31/03/2007, were rejected; h. Companies whose employee cost to operating revenues was less than 25% of the revenue were excluded; i. Companies whose on-site revenue was more than 75% of the export revenue's were excluded; j. Companies that were functionally different from that of the tax payer were excluded. Applying the aforesaid filters, the TPO identified 26 comparable companies which were as under: 1) Accel Transmatic Ltd. (Seg.) 2) Avani Cimcon Technologies Ltd. 3) Celestial Labs Ltd. 4) Datamatics Ltd. 5) E-Zest Solutions Ltd. 6) Flextronics Software Systems Ltd. (Seg.) 7) Geometric Ltd. (Seg.) ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....isprudence on the issue. Support is found from Hon'ble Delhi High Court in the case of M/s CIT vs. Mentor Graphics (Noida) P. Ltd., ITa No. 1114/2008, dtd. 04/04/2013, para 25 thereof. 4. In case of ITES (and logically IT) situation, even 40% margin is compared as normal. (M/s Nextlink India P. Ltd., ITA No. 454/Bang/2011, dtd. 19/10/2012, para 40. 5. There cannot be a situation of loss, in a cost plus situation, like the assessee which is getting remunerated at Cost + 7% para 85 of M/s SAP Labs, 418/Bang/2008. 6. Some of the assessee's comparables have been found to be comparables in other case laws. For eg: - the assessee has pleaded that M/s Celestial Labs Ltd. is not acceptable as per his case law M/s Tevapharma P. Ltd. 6623/M/2011, dtd. 23/12/2011, para 5 on pages 29 and 30. But in another case law relied upon by him for another proposition (M/s Telecordia Technologies ITA No. 7821/M/2011), para 6.3, page 9, Celestial Labs Ltd., has been found to be comparable. 7. The ITAT order of M/s Philips Software Centre P. Ltd. ITA No. 218/Bang/08, has been stayed by Hon'ble Karnataka High Court. Hence, reliance on this ITAT order, by the assessee is misplaced. 8. The a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....own self determined Arm's Length Margin of cost +10%. 16. Every proposition sought to be laid down by the assessee needed to be correlated by empirical data. The assessee failed to do so." 36. At the time of hearing, ld. Counsel for the assessee, did not press ground nos. 4.1, 4.4, 4.5.1 & 4.5.2, 4.5.7, and 4.5.8. Therefore, these grounds are dismissed as not pressed. 37. Apropos ground no. 4.2, the reason for rejecting the use of multiple year data has been noted in the defects highlighted by TPO. The assessee's contention is that TPO has utilized the data for earlier years also while examining the trend of companies incurring losses. Therefore, the multiple year data should have been used for computing the average margin also. 37.1 Having heard both the parties, we do not find much substance in the argument of ld. Counsel for the assessee because as per Rule 10B(4),the data to be utilized and for analyzing the comparability of uncontrolled transaction with an international transaction is to be the data relating to the financial year in which the international transaction has been entered into. As per proviso to Rule 10D, earlier year data can be used, in addition to t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....this regard Ld. CIT (DR) has submitted as under. 1. Data upto the date of assessment is allowed to be used by the TPO, and the TPO is allowed to carry out a fresh search. The following case laws are being relied upon: i. M/s Mentor graphics - Hon'ble Delhi High Court in ITA No. 1114/2008 dated 04/04/2013, for the proposition that a TPO, can carry out a fresh search. ii. M/s Aztec Software & Technology Services Ltd. (2007) 294 ITR (AT) 32, page 130 thereof. iii. M/s Symentec Mumbai, ITA No. 7894/M/2010, A.Y. 2006-07, para iv. M/s ST Micro Delhi [15 ITR (Trib)410 Del], para 28 till 32 of this order. [ITA 1806/1807/Del/2008, order dtd. 03/06/2011]. v. M/s Deloitte Consulting Hyderabad ITA No. 1082/1084 of 2010 (paragraph 30 thereof). vi. M/s Customer Services (I) (P) Ltd. (2009) (30 SOT 486 - Delhi). Fresh search has been approved by TPO in the aforesaid cases. 42. Ld. counsel for the assessee did not seriously disputed the submissions of ld. DR. This ground is dismissed. 43. Vide ground no. 4.5.3 the assessee has assailed the TPO's action in excluding companies with diminishing revenues/persistent losses for last three years upto and including F.Y. 2006-07.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....xclude loss making companies. He excluded only persistent loss making companies. The comparability exercise cannot be relaxed just to get a loss making company as a comparable. * The taxpayer's argument that the retention of loss making companies alongside profitable companies tends to even out the risk profile of comparable companies is also far fetching. If the risk of a comparable company is very high, the same is not comparable as the taxpayer and other comparable companies are not assuming that extreme risk resulting in persistent losses. As mentioned above, just because mean takes care of diffences in risk, every loss making software development company cannot be considered as a comparable if it has persistent loss arising due to the peculiar economic circumstances with its greater assets than the tested party. Therefore, persistent losses observed in the proposed comparables understate those that would be expected in the tested party. * The tax payer argued that the TPO has used the multiple year data for his comparability study, whereas, the tax payer has been denied using the multiple year data while computing the mean ALP. In this order, multiple year data has been ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as been approved in the judicial pronouncements in the case of Quark Systems Pvt. Ltd. 2010-TIOL-31-ITAT-CHD-SB and Sony India Ltd. 114 ITD 488 (Del) wherein the rejection of comparables having persistent losses, diminishing revenue, restructuring, etc. was upheld. In fact in the recent decision of the Hon'ble ITAT Bangalore in the case of SAP Labs Ltd., the ITAT has removed all comparables that had a loss in the relevant financial year. The TPO has only removed comparables that are persistent loss makers." 45. The assessee filed objections before DRP. Ld. DRP after considering the assessee's objections, confirmed the TPO's action. Ld. DRP also referred to revised OECD Guidelines, 2010 which also supports this instance. They referred to para 6.63 which state that where one or more of the comparables have extreme results, further examination would be needed to understand the reason for such extreme result. Further in para 3.64 it is stated that an independent enterprise would not continue loss generating activities unless it had reasonable expectation of future profit. In para 3.65 it is stated that a loss making uncontrolled transaction should trigger further investigation in or....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... that grow much faster than the average, companies which grow much lower than the average and companies that grow close or around the average. The rational of taking the arithmetic mean or the average as the arm's length rate is based on this principle. Exclusion of low or loss making companies makes the average margin artificially screwed to the project of the assessee because while the comparables at the lower end of the range are excluded those at the higher end were left untouched. Ld. counsel pointed out that auditors certify a company as sick in the audit report if the losses are very high, therefore, the annual report of such companies should be analyzed before rejecting them. Margin cannot be starting point of determination of arm's length margin but it is the end result of a careful process of functional and economic analysis provided under law. The assessee relied on following case laws: S.No. Name of the case Relevant extract form the case law 1. Trilogy E business India Software P. Ltd., ITA No. 1054/Bang/2011 Para 35 It has been held that profit/loss should not determine the functional comparability and the specific reasons ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....(P) Ltd. Delhi - 5227/Del/2011, (Paragraph 22) ii. M/s Brigade Global - 1494/Hyd./2012, A.Y. 2004-05 (Para 26 last 4 lines) iii. Filter of rejection of persistent losses okayed in M/s CRM Services (I) (P) Ltd. 4068/4796/Del/2010, dtd. 30/06/2011 (paras 13, 13.1 and 13.2) iv. These filters have also been okayed in M/s Quark Systems 4 ITR (Trib.) 606. v. M/s Sony India P. Ltd. vs. DCIT - 114 ITD 448 (Internal page 54 of TPO's order) vi. Navisite India Pvt. Ltd., ITA No. 5329/Del/2012 dated 31st May,2013." The assessee has tried to sidetrack the issue by bringing in issue of volatility of margins and extreme results. This is not the case here. 48. Ld. Counsel in the rejoinder submitted that the decisions relied upon by ld.CIT(DR) are distinguishable and made following submissions: "48. The decision of Sony India v. DCIT (114 ITO 448) supports the case of the appellant. In this case the Hon'ble ITAT held that a persistent loss making company like Godrej has to be excluded from the list of comparables not because it was making losses but there were numerous factors demonstrating extraordinary economic circumstances (like labour issues, financial restructur....
X X X X Extracts X X X X
X X X X Extracts X X X X
....normal economic factors which impact all industry players. It is just that some companies are better able to respond to these factors than others which leads to a situation where some companies makes profits while few others make losses. Only diminishing revenue or consistent losses cannot be termed as abnormality in any industry. For the purpose of choosing comparables, one has to look at the factors of comparability provided in Rule 108(2) - which are characteristics of goods and services; functions, assets and risks; contractual arrangements; and characteristics of the market etc .. Declining revenues and persistent losses are not factors of comparability but merely manifestations of a company's ability to respond to the market conditions. 54.Further final comparable companies selected by the TPO, in his TP order, do not show a uniform trend. It has been highlighted by the Appellant that many of the companies selected by Id. TPO have witnessed a decline in revenue in the future years while they have retained healthy profit and are functionally comparable. If the filter of diminishing revenue was to be accepted then it would lead to an anomaly that a company may be compara....
X X X X Extracts X X X X
X X X X Extracts X X X X
....st arising from retrenchment of excess work-force. So in these cases when there is a decline in sales the corresponding costs also come down, and as contended by Ld. ClT DR it is not necessary that declining sales would always have an adverse effect on profitability. In this regard, the Appellant places reliance on the ITAT ruling of Capgemini India Pvt. Ltd. ITA no. 7861/Mum/2011. 60.In order to substantiate our point we wish to highlight some of the companies rejected by the Id. TPO on declining sales filter which have actually witnessed an increasing trend in profit during these years Company Name OP/OC Margins Sales in crores 2004-05 2005-06 2006-07 2004-05 2005-06 2006-07 Mascon Global Ltd. NA 12.21% 33.82% NA 181.75 140.71 Pent asoft Technologies Ltd. [Me rged] 6.96% 7.51% 8.25% 55.94 16.17 9.45 Thus, there is no correlation between decline or increase in sales and the margins." 48.1 We have considered the rival submissions and have perused the record of the case. The TPO had excluded the companies with diminishing revenue because in an environment where software sector is grow....
X X X X Extracts X X X X
X X X X Extracts X X X X
....that TPO has mentioned the distinction between the loss making company and a persistent losses/diminishing revenue making company. Ld. DRP has observed that TPO has examined the reasons for persistent losses. This filter was applied on the ground that such companies have some peculiar problems because of which the revenue was declining and not in line with the growth of software industry. Considering the statistical data noted earlier, it can safely be observed that declining turnover and persistent loss is not a normal phenomenon of this sector under the Indian economic conditions. Diminishing revenue/persistent loss are not in conformity with the normal operational results in this line of activity. Therefore the reasons for persistent losses incurred by a company needs to be identified. 50. Ld. Counsel has pointed out various aspects in regard to decisions relied upon by ld. CIT(DR) which are noted in his submissions earlier. In our opinion merely because one comparable has been accepted or rejected in a particular case cannot be a basis for accepting or rejecting the same in every transfer pricing analysis. Each case has to be considered on its own facts and only broad ....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... 4.5.4, the assessee has assailed the TPO's action in applying the filter of excluding the companies which have related party transactions of more than 25%. The TPO noticed that assessee did not mention anything regarding related party transaction filter. He, therefore, issued show cause notice stating therein that this filter is appropriate to eliminate the companies which have controlled transactions and, thereby, have its significant influence on the margin earned. The TPO, after dealing with the objections of the assessee and after taking into consideration the definition of the associated enterprises u/s 92A(2)(a), 40A(20)(b), OECD Guidelines and the mandate of Rule 10B(1)(e)(iii) that net profit margin is required to be adjusted to take into account differences which could materially affect the amount of net profit margin in the open market and also Rule 10B(3)(i) mandating such adjustment, concluded that related party filter of 25% is an adequate filter because on the one hand it will help in excluding the companies with significant controlled transactions and at the same time it also helps in obtaining an adequately large sample size. 53. Ld. DRP, after considering the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....easonable for which guidance has been taken from the provisions of section 92A(2)(a) which provides a limit of 26% for treating an enterprise as associated enterprise. His submissions are reproduced hereunder:- Exclusion of companies with related party transactions up to 25% of their sales; Counter: This is the filter of Related Party Transactions up to 25% of Sales. (Pl. See Pages 36 till 38, being para 8.1 of TPO) The following case laws support Revenue, wherein this limit has been approved. i. M/s Actis Advisers (I) (P) Ltd. - 5227/Del/2011 (paras 28 and 29) ii. M/s Deloiette Hyderabad, ITA No. 1082/Hyd./2010, dtd. 22/07/2011 (para 35 of this order) iii. M/s ST Micro Electronics (I) (P) Ltd. (15 ITR (Trib.) 410 Del) - paras 40 and 41 iv. M/s Global Logic (I) (P) Ltd. 2011-T11-35-ITAT-Delhi-TP. Dtd. 25/03/2011, paras 4 and 5, till para 5-17 (ITA Nos. 6082/Del/2010, A.Y. 05-06) v. M/s Hapag Loyd, ITA No. 8499/Mum./2010, dtd. 28/02/2013, para 6-2, wherein they have relied on the case of M/s Thysen Krupp, Mumbai, ITA No. 6460/Mum./2012. 55.2 We have considered the rival submissions and have perused the record of the case. 56. We are in agreement w....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... as per prowess data base, the average employee cost works out to about 35% of sales in the case of companies having turnover more than 1 crore for the F.Y. 2006-07. He pointed out that extremely low expenditure on salary/employee cost is a definite indication that the company is either into further outsourcing of the work or is a software product developer or a software trading company. He, therefore, applied filter of 25% of minimum salary expenditure to sales while searching for comparables. The TPO, after dealing with various objections of assessee, concluded that application of this filter was fully justified. He further pointed out that no comparable had been accepted/rejected merely on this count and this filter was applied just to consider functionality of such companies in detail. He pointed out that detailed analysis of companies with employee cost less than 25% was done. Ld. DRP confirmed the TPO's action, inter-alia, observing that since this is the main cost component in the sector, use of the filter cannot be considered as inappropriate. It further pointed out that, in any case, the TPO did not reject any company only on the basis of employee cost. Where a company had....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ly cryptic reference, as opposed to detailed discussion in cases relied by revenue. 60. In the rejoinder, ld. Counsel submitted that in the case of Asia India Pvt. Ltd., considering the fact that employee cost to sales was 46%, the range of employee cost to sales was fixed at 30% to 60%. He, therefore, submitted that in the case of assessee since the employee cost to sales ratio is 64%, the threshold of 25% would be inappropriate. Ld. Counsel, therefore, submitted that if, at all this filter is to be applied, then, the appropriate range would be 50% to 80%. 60.1 We have considered the rival submissions and have perused the record of the case. 61. As far as ld. Counsel's objections of data being not available in public domain is concerned, for which TPO resorted to obtain information u/s 133(6), we find that this objection of ld. Counsel is not sustainable particularly because ground no. 4.4 dealing with this issue has not been pressed by him. Even otherwise, we find that TPO has been vested with specific powers u/s 92CA(7) to obtain information u/s 133(6) if he so considers for the purposes of determining the arm's length price. The whole exercise of transfer pricing analy....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pplying the range of employee cost to sales of 50% to 80%. We direct accordingly. 62. In the result, this ground is partly allowed. 63. Vide ground no. 4.5.6 the assessee has assailed the TPO's action of applying on-site revenue filter. By applying this filter, the company's whose onsite revenues exceeded the 75% of total export revenues, were rejected as comparable. 64. Ld. TPO summarized the assessee's objections to this filter as under: (a) "The Indian software sector provides both on-site and offshore services. (b) The Indian vendors have succeeded in raising the share of offshore revenue from 44% in 2000-01 to 64% in 2003-04, 71 % in 2004-05 and to 74% in 2005-06. Though the data is not available for the FY 2006-07, the annual report of big software companies shows that this ratio is increased further during the FY 2006-07. Most of the uncontrolled enterprises follows hybrid model with revenue mix both from onsite and offshore. The taxpayer is mainly offshore service provider and it is difficult to get independent companies which generate revenues only form offshore software development service providers. (c) The pricing is different in onsite when compared t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....holds operating margins in the low of 20%. The TPO referred to various sources to buttresses his contention. He, therefore, concluded that the tax payer, whose business is entirely offshore, cannot be compared with a company which has substantial revenues generated from its on-site operations. As regards the assessee's objections that nature of activity regarding software development services do not change between on-site and offshore software development services, the TPO observed that merely because a company is into software development does not automatically become comparable because the economic circumstances should also be comparable between the tax payer and the comparable. The TPO further pointed out that there is no dispute that Indian Software Companies do follow hybrid model. He pointed out that as per NASSCOM, during the financial year 2005-06, 74% of the revenues was from offshore software development. That is the main reason why all the independent comparable companies do have some part of their revenues generated from their on-site operations. He further pointed out that from the analysis of various annual reports of software development companies, it is evident that....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ues from on-site operations were rejected as comparables. 67. Ld. DRP concurred with the findings of TPO. 68. Ld. Counsel has advanced following submissions in this regard: * If this filter is to be applied then whole process of determination of arm's length price will get delayed till TPO examines the issue because the annual report does not contain information in regard to onsite and offshore revenue separately. This information has been obtained by TPO u/s 133(6). * Such a filter is contrary to the statutory scheme provided in the Act & Rules; * A company is judged to be a comparable or otherwise based on parameters relating to functions risks and assets; * Software development activity comprises both offshore and on-site development. These services are provided in bundled manner. So even if a profit margin may be low in on-site work, it should not be viewed in isolation but in conjunction of offshore work because both the activities are performed as a compliment to each other and not as independent activities. Also lower margins can be compensated by higher volumes; * Profitability cannot be considered as a comparability factor under Rule 10B(2). There is n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es entail altogether different cost structure and cannot be compared with each other. He submitted that margins of profit from on-site revenue is much less than the profit margins earned from off site revenues. Ld. DR further submitted that if on-site revenues earned from export were more than 75% then the said company had to be excluded since assessee was mainly earning offshore revenues from export. He submitted that this is in line with Rule 10B(2) particularly clauses (b) & (d) which require that comparability of an international transaction with an uncontrolled transaction is to be judged with reference, inter-alia, to the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties and also the conditions prevailing in the market in which the respective parties to the transaction operate, including the geographical location and size of the market, the laws and government orders in force, cost of labour and capital in the markets, overall economic development and level of competition, etc. Ld. DR further pointed out that the AE is located in USA where minimum wages payable to an employee are much more than Indian w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....se, admittedly, the profitability in case of on-site project is much less than offshore projects. Therefore, TPO was quite fair when it applied the on-site revenue's filter considering the companies generating more than 75% of their export revenues from on-site operations. This resulted into accepting those comparables where companies were generating less than 75% of their export revenues from on-site operations. This resulted in excluding only those comparables which were predominantly earning from on-site operations. This took care of the assessee's submissions also that Indian Software Companies follow hybrid model with a mix of on-site and offshore operations. 72.1 In view of above discussion, the ground raised by assessee stands rejected. 73. Brief facts apropos ground no. 4.5.9 are that TPO noticed that assessee had excluded the companies which incur expenses on R&D more than 3% of revenues. The assessee justified its search process on following grounds: 1. It eliminates companies owning intellectual property rights; 2. It eliminates companies that entail different level of risks and are functionally different. Incurring R&D expenditure at a material level makes t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....osys had spent an amount of Rs. 167 crores as R&D out of which Rs. 48 crores was spent on its banking software product, Finacle. The remaining amount of Rs. 119 crores was spent on other activities. Therefore, the main intention of R&D Infosys was either to develop its software product, Finacle or to enhance quality productivity and customer satisfaction through continuous innovation of designs framework processes and methodology of the services delivered by it. Therefore, it can be inferred that R&D Software Industry is always not to create only IPR's but also to create tools/processes to improve the quality of services being rendered. As regards assessee's contention that it being a captive service provider does not invest in R&D but its parent company invest in R&D, TPO observed that risk of R&D is borne by a parent company. TPO further pointed out that the comparable companies are also mainly involved in the development of software similar to the tax payer. He pointed out that this filter is not relevant as the expenditure on R&D is also towards improving the processes as well. With reference to the reliance placed on OECD Guidelines regarding high risk of failure of investment....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ticularly in the case of Software Service Provider. 75. In contrast, ld. TPO pointed out that he had applied a filter, wherein all those companies whose revenues from software development services was less than 75% of the overall revenues/segmental revenues were rejected. This filter eliminates companies which were software product company as well. Ld. TPO further demonstrated that R&D filter applied by the assessee had on the one hand failed to eliminate the product companies and on the other hand resulted in elimination of following non-product companies which were actually companies engaged in software development services:- S.No. Name of the company Remarks of the TPO 1. Quintegra Solutions Ltd. The company is into software development Services and it does not have any revenues From sale of software products. 2. Sasken Communications Technologies Ltd. The company has software services segment. This segment does not contain any revenue by Way of sale of products. Sasken Communication Technologies Ltd. clearly stated in its reply That it has not incurred any R&D expenses In the software developmen....
X X X X Extracts X X X X
X X X X Extracts X X X X
....material impact in the case of assessee. Ld. DRP, inter-alia, pointed out that spending on R&D does not necessarily result in creation of IPR. The R&D activity in a software company may be with respect to improving process of delivery of services (software development services) rather than creation of intangible. Ld. DRP relied on analysis of statistical data of various companies as demonstrated by ld. TPO, noted above. 79. Ld. Counsel for the assessee relied on the written submissions filed by it as noted earlier. 80. Ld.CIT(DR) submitted that there is no basis for adopting 3% limit of R&D expenses to sales. He pointed out that assessee has not demonstrated as to how profitability got affected by incurring expenditure more than 3% on R&D to sales. Ld. DR further submitted that since expenditure had already been debited to the profit and loss account, therefore, the profits were lower and hence had no impact on operating profitability of comparable. He submitted that the assessee had not demonstrated that R&D activity changes the functionality of a software development. The submissions of ld. CIT(DR) are reproduced as under:- Rejecting assessee's filter of accepting companies....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt to note that Deloite Consulting India P. Ltd. and the comparable in question were not software development companies, but companies providing information technology enabled services which are in the nature of business process outsourcing. In this case, the R&D Investment does not matter much as the services are in the nature of back office support. Ld. Counsel further pointed out that as per Rule 10B(2) functional comparability is the most important determining factor in selecting comparables. However, research is an additional function which the assessee does not undertake and hence incurred zero expenditure on any research activity. Therefore, the assessee had excluded the companies engaged in any kind of research activity. As regards ld. CIT(DR's) submission that a correlation has to be established between research and development activity and profitability to determine whether this filter should at all be applied or not, ld. counsel submitted that R&D expenditure is an investment i.e. made with the hope of reaping benefit there from. If substantial expenditure is incurred on R&D the company exposes itself to additional risk not borne by companies that do not incur any R&D ex....
X X X X Extracts X X X X
X X X X Extracts X X X X
....h are performing similar functions as assessee with almost similar asset base and similar risks. These comparables are to be considered for finding out the arm's length price. If by applying a particular filter many, otherwise comparables, gets excluded then such a filter should be applied after making necessary adjustments for material factors. Thus, if a comparable has developed its own intellectual property right resulting into development of a patented product by incurring huge expenditure on R&D then even if it is performing software development functions, it has to be excluded. However, if a company is incurring huge expenditure on R&D only for improving the processes in delivering the software development services then the said comparable cannot be rejected merely because it is incurring R&D expenditure more than 3% of its total sales revenue because sufficient number of comparables are to be found for determining ALP. An objective decision has to be taken in each case. Ld. TPO has clearly demonstrated that by applying this filter even functionally similar companies gets excluded. This will result in limiting the number of comparables to a very small number. Thus, this....
X X X X Extracts X X X X
X X X X Extracts X X X X
....in better profitability. He pointed out that in the case of Infosys 95% of its revenue for F.Y. 2006-07 was derived from repeat businesses which implies that marketing expenditure had little impact on the profitability of assessee company. Ld. TPO has given the operating profit to sales ratio of various companies along with the marketing expenditure incurred by the said companies to demonstrate that expenditure on marketing has no correlation to the margin earned. Even in case of companies that have a marketing expense more than 3% of sales they are also software development companies. 83. Ld. DRP confirmed the TPO's action, inter-alia, observing that marketing expenditure in the case of service industry may lead to increased revenue but it has not been demonstrated with figures that such expenditure in the case of software service firms has lead to increased profitability. Ld. DRP also referred to the decision of ITAT Hyderabad in M/s Deloite Consulting India Pvt. Ltd. in ITA No. 1082 & 1084/2010. 84. Ld. Counsel for the assessee submitted that assessee does not take any marketing or advertising activity as the associated enterprise are contractually obliged to obtain the se....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t is true that by incurring heavy expenditure on advertisement marketing and distribution the companies carrying on manufacturing activities do create marketing intangibles and in these cases a broad correlation between two viz. marketing intangible and sales would be reflected. However, as pointed out by ld. TPO, in case of Infosys though heavy expenditure was incurred on advertisement, marketing, etc. but 95% were the repeat customer. But, this factor on stand alone basis cannot be a deciding factor. We agree with Ld. CIT(DR) that assessee need to correlate the expenditure on advertising, marketing and distribution costs with profits or with FAR analysis with empirical evidence. Therefore, both, the outright rejection as well as acceptance of this filter as such, cannot be accepted. Therefore, for the reasons given in regard to ground no. 4.5.9 this ground is partly allowed. 85. Vide ground nos. 4.6 to 4.9, the assessee has challenged selection of various comparables by Ld. TPO on various grounds which we shall now discuss each comparable wise. However, before that we may reproduce the submissions of ld. CIT(DR) Ground No. 4.6 and 4.9 Including certain companies that are....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... make any difference i. M/s Deloiette Consulting (I) P. Ltd. ITA No. 1082/Hyd./2010, para 36. ii. M/s Actis Advisors P. Ltd. ITA No. 5277/Del/2011, para 25. iii. M/s Wills Processing Service (I) Pvt. Ltd. ITA No. 4547- 4429/Mum./2012, para 45.1 and 45.2 dated 01.03.2013. Ground 4.8 Resorting to arbitrary rejection of low profit/loss making companies based on erroneous and inconsistent reasons; Counter: It is pointed out that there has been no arbitrary rejection of loss makers or low profit makers, and no arbitrary inclusion of high profit makers. The rejection has been on basis of FAR analysis and on account of abnormal circumstances. Support is found from the following decisions: i. M/s Wills Processing Services (I) P. Ltd. ITA No. 4547- 4429/Mum./2012, dtd. 01/03/2013, paras 34.4, 34.5, 35.6. In this case they have relied upon, M/s Exxon Mobile (para 34.6), a case also relied upon by the assessee. ii. M/s Symantec, Mumbai, ITA No. 7894/M/2010, paras 15 and 15.1. iii. M/s B.P. India Services P. ltd. ITA No. 4425/Mum/2010, dtd. 23/09/2011, para 12. iv. M/s Capgemini India P. Ltd., ITA No. 7861/Mum./2011, dtd. 28/02/2013, para 5.3-4. v. M/s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o be excluded. 88.1 We have considered the rival submissions and have perused the record of the case. 89. Ld. TPO has reproduced at page 99 of his order the segmental details from the annual report which separately contains the details of software services. In the cases relied upon by assessee these details were not considered and, therefore, on the basis of those decisions this comparable cannot be excluded. However, we find that in Trilogy E-Business Software India Pvt. Ltd. (supra), as considered in HCL EAI Services (supra), it was, inter-alia, observed in para 49 that this company has related party transactions which are more than permitted level. Ld. TPO has not recorded any finding to this effect. Therefore, as held by us earlier that if RPT is more than 15% than the said company cannot be considered as uncontrolled comparable. We, therefore, restore this issue to the file of Ld. TPO to consider the inclusion/exclusion of this comparable depending upon the findings on RPT. This issue is allowed for statistical purposes. B. Avani Cimcom Technologies Ltd. Ld. Counsel for the assessee submitted that this is software product company and hence functionally different. He s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s also stated that the company is involved in provision of software development and IT services. Ld. counsel's contention that it is a product company is primarily based on the details given on web site that it owns product like Dxchange travel solutions, insurance solutions, customer appreciation and relationship management application, content management systems. These products appear to have been developed by this company for being utilized for business solutions of its clients. Therefore, it is primarily in a software development service sector. The revenues have been derived mainly from software exports. In the case of Trilogy (supra) this company was excluded on the ground of having high operating revenues and details of percentage of exports of products or services were not available. There is no gainsaying that it is not only the functional profile of a company which is relevant but also the assets utilized by it and risk undertaken. In our opinion, this company being owning certain softwares developed by it, therefore, it was in a better position to cater to the needs of travel sector. This particular asset brought this company in an advantageous position over other softwa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s in the field of biotechnology. Thus, in sum and substance, the assessee submitted that the company was functionally dissimilar to the assessee as the company was engaged in the biopharma & biotech manufacturing with customized IT Solutions, manufacture of drugs, clinical trials and contract research activities. The assessee relied on same decisions as for Accel Transmatic, noted earlier and also on following decisions in support of its contention that Celestial Lab has been rejected as a comparable: Trilogy E business India Software Private Limited, ITA No. 1054/Bang/2011 para 35, Exxon Mobil Company India Private Limited, ITA No. 8311/Mum./2010 para 33 (xi), Quark Systems Private Limited, 32 TTJ 1 (SB) (Chd.), para 25. 91. The assessee further pointed out in the Synopsis that this comparable had been rejected by DRP in the subsequent year i.e. A.Y. 2008-09 from the list of comparable, stating "the company does not meet the employee cost filter and it has been receiving loans from the department of Science & Industrial Research". Ld. Counsel submitted that the same facts hold goods in the current year as well. 92. Ld.CIT(DR) submitted that ld. TPO had issued detailed not....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... As regards the submission of ld. Counsel that in AY 2008-09 this comparable was not taken into consideration as it did not meet the employee cost, Ld. DR pointed out that the TPO also studied the prospectus filed by the company before SEBI and based on its examination issued notice u/s 133(6) which has been reproduced at pages 105 to 110 of his order and in response to the same, the company pointed out that it was mainly providing the services in the field of software development. 93.1 We have considered the submissions of both the parties and have perused the record of the case. 93.2 There is no gainsaying that it is impossible to find exact replicas of an entity. In a TNMM situation only broad comparability is to be considered. This is the precise reason due to which benefit of (+/-) 5% safe harbor limit has been provided in the Act itself. The minor differences, if any, gets ironed out when mean is calculated. From the submissions noted above, it is evident that Celestial Labs is mainly Into Software Development Services inasmuch as the R&D facilities have been used by it in relation to development of a software for discovery of new drugs. Admittedly, this company was eng....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ted, 32 TTJ 1 (SB) (Chd.), para 25 94. Ld.CIT(DR) referred to page 127 of ld. TPO's order (page 395 of appeal set) and pointed out that in the TP document this company was rejected by observing "Business Review". However, no reasons were given. Ld. DR pointed out that as per the information submitted by the company in response to notice under section 133(6) that it is into two segments viz. software development services and training. The segmental details were also submitted. He pointed out that the conclusion drawn by the TPO that its SWD segment has pre-dominant revenues from software development services only is based on the categorical information furnished by the company. In the information furnished it was pointed out that the use of readymade object libraries were only to the tune of about (0.33 to 3)% in the year of 2005-06 and 2006-07. Further it was pointed out that very small amount of revenues was from domestic training activities contributing between 7% to 8.56% in the year 05-06 to 06-07. Thus, the revenues from software development services constituted more than 88% of the total operating revenues. Ld. DR further pointed out that ld. TPO has only taken the segment....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oticed that this company was finding place in the accept/reject matrix of the tax payer and was rejected in the TP document saying that it failed R&D filter. He observed that based on the information submitted by the company, it qualified all the filters applied by the TPO. From the details of the product revenue submitted by company, it was evident that the same were only 10.8% of the total revenue. He, therefore, proposed to include this company as a comparable to the tax payer. The assessee in its reply pointed out that information obtained u/s 133(6) is in contradiction to the information contained in the annual report. The assessee pointed out that Flextronics claimed that the investment in R&D was only for the purpose of improving the process and did not result in any IPR's whereas from the annual report it was clear that R&D activities resulted in creation of IPR's. Further it was pointed out that the Flextronics had disclosed data from products and services as a composite segment and, therefore, no bifurcation was available between two activities of the company. Ld. TPO referring to the reply received from Flextronics pointed out that company had not created any uniqu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ail over the information contained in the annual report. He submitted that the product revenue is around 10% of the total revenue as per the information obtained u/s 133(6). 97.1 We have considered the submission of both the parties and have perused the record of the case. 97.2 For a company to be included in the list of comparables, it is necessary that credible information is available about the company. Unless this basic requirement is fulfilled, the company cannot be taken as a comparable. It is true that ld. TPO is entitled to obtain information us/ 133(6), the object of which is primarily only to supplement the information already available on record, but not, as rightly submitted by ld. Counsel for the assessee, to replace the information. If there is a complete contradiction between the information obtained u/s 133(6) and annual report then the said information cannot be substituted for the information contained in annual report. We, therefore, are in agreement with ld. counsel for the assessee that this company cannot be included as a comparable in the set of comparables selected by ld. TPO on account of clear contradiction between contents of annual report and infor....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he margins earned by Infosys or any other company in the software industry were affected by the so called brand value. He submitted that the ultimate profits earned by any company including Infosys dependent upon the over all market conditions and the services rendered. He demonstrated with reference to final comparable selected by him that brand value had nothing to do with the margin. The said table is reproduced hereunder: 97.4 With reference to the above table he pointed out that lesser known companies like Avni Simcom Ltd., Celestial Labs Ltd. & Mega Soft were having almost the same or better margins than Infosys which implies that brand per se does not affect the margins. Similarly he pointed out that Mind Tree Consulted Ltd. and Eye Global Solution Ltd. which have brand value had very thin margins. Thus, he pointed out that brand value has no correlation with the margins earned by a company. He pointed out that assessee did not give any evidence except the margins of Infosys to say that it charges premium over market for its services. Further he pointed out that brand comes with a cost i.e. huge expenses were required to be incurred to build brand value. Thus, a brand may....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hat risk bearing activities that compete in the market place need to incur AMP Expenditure to establish and maintain their brand. 99. Ld. CIT(DR) relied on following decisions in support of his contention that brand/intangible does not per se make any difference: 1. M/s Deloite Consulting India Pvt. Ltd., 108/Hyd./2010 (para 36); 2. M/s Actis Advisors Pvt. Ltd., ITA No. 5277/D/2011 (para 25); 3. M/s Wills Processing India Pvt. Ltd., ITA No. 4429 to 4547/Mum./2012 (para 45.1 & 45.2) dated 01/03/2013; 4. M/s Navisite India Pvt. Ltd., ITA No. 5329/D/2012 (para 53 & 54); 5. M/s Cab Gemini, ITA No. 7861/Mum./2011 to contend that economies of scale is relevant for manufacturing sector and not importance for service industry. 100. Ld. Counsel, in the rejoinder, submitted that in the case of Deloite Consulting (supra), ITAT was examining the suitability of one particular comparable viz. Vishal Information Technology Ltd. viz-a-viz the assessee which was engaged in IT Enabled Services. In this case the assessee itself had chosen VITL as a comparable in its TP Report and letter on sought to exclude on the ground that it had intangible and low employee cost to sales ratio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....selecting a comparable for determining the arm's length price of an international transaction, the pre dominant aspect which has to be taken into consideration is the functional profile of the comparable. If a comparable is performing the same functions as the assessee then a further exercise is to be taken regarding assets utilized and risk assumed in carrying out those functions. If the asset base pre-dominantly differs or the risk assumed by a comparable are predominantly different then the said entity has to be excluded from the list of comparables selected for determining arm's length price. Ld. Counsel has relied on the decision in the case of CIT vs. Agnity India Technologies Pvt. Ltd. ITA No. 1204/2011 dated 10/07/2013, wherein the Hon'ble Delhi High Court has confirmed the decision of Tribunal in excluding Infosys Technologies after taking into consideration following differences: 101.1 Thus, one of the consideration is ownership of branded/proprietary products . Respectfully following the decision of Hon'ble Delhi High Court, we direct Ld.TPO to exclude this company from the list of comparables taken by TPO. 8. Asian Infotech Ltd.: 102. Ld. TPO noticed that this ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lication management services, business and technology consultant ITES & BPO services, Maritime practice, etc. Ld. Counsel referred to page 388 of paper book and pointed out following objections were raised by assessee in this regard: 1. This company failed the employee cost/sales filter of more than 25% applied by ld. TPO. However, the company was selected on the basis of information obtained u/s 133(6); 2. The notice u/s 133(6) was not sent to Helois and Mathison and the information obtained was not shared with the assessee; 3. The company's advertising and marketing expenditure to sales ratio was 3.52% and, thus, the company enjoyed a return on account of marketing intangible. 104. Ld. Counsel pointed out that ld. TPO has not dealt with the objections raised by assessee. 104.1 We have considered the submissions of both the parties and have perused the record of the case. 105. As far as assessee's challenge to information u/s 133(6) being in contradiction to the information available in the annual report in regard to employee cost is concerned, we do not find much substance in the same because in the information obtained u/s 133(6) the company must have segreg....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n record in regard to this company between A.Y. 2007-08 and 2008-09. 107.2 Accordingly, we direct Ld. TPO to exclude this comparable from the list of comparables. 11. Third Ware Solutions Ltd.: 108. At the time of hearing, ld. Counsel for the assessee did not press exclusion for this comparable from the list of comparables. 12. Siskin Communication Technologies Ltd.: 109. Ld TPO noticed that the company was rejected in the TP document on the ground that the company fails its filter of business review and R&D to sales was more than 3%. However, no reasons were given for the business review. 109.1 Ld. TPO pointed out that R&D to sales being more than 3% is not acceptable for which detailed discussion has already been made earlier. He further noticed that the company has software services segment and segmental results are available for software services. He further pointed out that on the basis of information obtained u/s 133(6), the company qualifies onsite revenue filter (onsite revenues were to the extent 27.27% of its export revenues). After considering the assessee's reply, ld. TPO included this company in the list of comparables. Ld. counsel pointed out that th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he company has termed the services provided by it as unique and non-repetitive in nature involving development of embedded software for use by the customer, whereas in the case of assessee the software development service provided were of routine nature and involved low level coding, testing and documentation services. The assessee further pointed out that in the information obtained u/s 133(6), the company itself has urged not to use the financial of the company for making comparison with the tested party due to the specialized nature of activities performed. The ld. TPO, however, did not accept the assessee's contention and included this company in the list of comparables. Ld. Counsel submitted that in response to notice u/s 133(6), company itself admitted its complex functional profile. He pointed out that the company is into "hardware design". Further, the company employ wide variety of personnel such as hardware engineers, styling and mechanical designers, graphic designers, and special effect artists. This is ample testimony to the fact that company is not engaged in pure software development activity unlike the assessee. He further submitted that NASSCOM, which is the premiu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....omparable." 113.1 The submission of ld. Counsel for the assessee that NASSCOM, which is the premium body of IT/ITES Companies in India, has classified hardware and software designing activity as functionally different to software development activities cannot be ignored. However, since segmental details were available, the objection raised by ld. Counsel cannot be accepted. As far as asseessee's objection with regard to IPR is concerned, we find that the software developed by assessee were used as tool in development of new softwares. This definitely contributed towards higher profits. We have elaborately considered this aspect in earlier part of our order. We, therefore, direct for exclusion of this company from the list of comparables. 14. Wipro Ltd.: 114. Without going in detailed discussion on this issue, we find that in view of the decision of Hon'ble Delhi High Court in the case of Agnity India Technologies Ltd., this cannot be included in the list of comparables. 115. Ground no. 4.10 is with regard to denial of economic adjustment for difference in risk profile. 116. Ld. TPO noticed that in the TP report various risks like market risk, product and technology r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ment regarding how the assumptions of CAPM model are true in the case of the AE when it is doing business with the taxpayer. 3. The CAPM model has some weakness, the main being that the model does not recognize the presence of human capital, which is the main driving source for revenues in the software service industry. 4. The taxpayer considered only listed companies. But, there is a method of computationof similar nature in the index. There is a manner in which unlisted companies beta would be calculated. 5. Wherever market data was not available, the beta is computed based on guideline companies from the small cap and madcap indices of BSE and NSE. But, the risk adjustment should always be based on the comparables selected by the taxpayer or the TPO and not on the other companies, which are not examined and otherwise, not comparable functionally. Thus, the beta of unlisted companies or companies where data was not available should be the average of the beta of the remaining comparable companies. 6. The taxpayer ignored negative risk adjustment in some of the comparable companies. This looks absurd as any risk undertaking enterprise may get a negative return for the r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....expenses, bad debts etc. should be removed from operating expenses and corresponding risk premium adjusted amount has to be reduced from the operating revenues. Hence, as per the above detailed discussion, the computation of risk adjustment by the taxpayer is not acceptable. There is no scientific basis for working out the taxpayer company's beta or beta of the unlisted comparable companies. The taxpayer altogether forgotten that the risk adjustment, if at all to be computed, is to be computed based on the difference between the actual weighted cost of capital of the comparables and weighted cost of capital of the comparable companies assuming same level of equity in the total finances and risk level as evidenced by beta of the taxpayer. This differential is altogether is ignored making the entire exercise redundant." 117. Ld. Counsel submitted that assessee is risk mitigated/insulated/ low risk company and, therefore, in view of the provisions contained under Rule 10B(1)(e) read with Rule 10B(2) and 10B(3)(ii), adjustment was required to be made to the profit margins of the comparables but the same was denied by TPO. Ld. Counsel submitted that assessee had assured orders and, t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....omputation as per CAPM Model duly supported by expert opinion and TPO could rebut the same with an expert opinion. 118. Ld. CIT(DR) submitted as under:- Ground 4.7 and 4.10 Including certain companies that had extraordinarily high profit margins and hence were not comparable to a low risk captive unit such as the appellant: Ignoring the business/commercial reality since the assessee is remunerated on an arm's length basis, i.e. it is compensated for all its operating costs plus a pre-agreed mark-up based on a benchmarking analysis, the assessee undertakes minimal business risks as against comaparable companies that are full fledged risk taking entrepreneurs, and by not allowing a risk adjustment to the assessee on account of this fact; and Counter: It has been established that a captive service provider has all the normal risks and even more, because its entire existence is based on its parent group. The following case laws are being relied upon: i. M/s Deloiette Consulting (I) P. ltd. ITa No. 1082/Hyd/2010, para 15, 21 and 40. ii. M/s Interra Information Technologies (I) P. Ltd. ITA No. 5568/Del/2010, para 76 and 79. iii. M/s Symantec, Mumbai ITA No. 7894/M....
X X X X Extracts X X X X
X X X X Extracts X X X X
....unt of market risk by applying CAPM Model. In this regard ld. TPO has observed that the services rendered by the assessee forms a component within the products developed by the assessee. Thus, the associated enterprise incurs marketing for its products and not on the services rendered by the assessee as they are considered in the product sold by the associated enterprise. The relationship between the tax payer and its parent company is exactly the same as that of the independent company and its client in the case of software design and development services. Ld. TPO has observed that it is a fact that the independent enterprises have to bear the vagaries of market conditions. But since the software sector is growing at more than 30% CAGR (Compounded Annual Growth Rate) for the last 10 years, it is not showing or affected by any adverse market conditions. In the absence of adverse market conditions, the assessee has not shown how these market risks borne by the independent enterprises had an effect on the price and, thus, on the profits during the F.Y. 2005-06. From these findings of ld. TPO, it is evident that he himself is agreeable that market conditions do influence the independe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....yer is totally dependent on the AE for business. Thus, the taxpayer takes the risks associated with heavy dependence on a single customer. In common business parlance it is known as 'single customer risk'. * The cost plus agreement with the AE does not guarantee sufficient volume of business nor period as the agreement is for a period of one year and renewed one year at a time unless terminated otherwise. The agreement can be terminated by any party at any time after giving a stipulated period notice. Thus, the taxpayer is not free from the risk of losing business entirely or losing volume of business. * The taxpayer is not compensated any amount for termination of agreement even if it is terminated without any cause. No independent enterprise would like to agree for a termination clause without compensation if it is terminated without any cause. * The AE is exposed to the market risk and any fluctuation in the business conditions of the AE affect the contractual terms between the AE and the taxpayer. Thus even if independent comparables undertake some risk, the taxpayer also had to undertake risks like single customer risk, political risk, etc. which are not incurred by t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ctions of ld. DRP. 125. In the result, this ground is allowed for statistical purposes. 126. Now, we will take up grounds relating to Administrative and Marketing Support Services segment of the assessee. 127. The brief description on functions of the company in this segment as under: "The corporate segment ('CS') is the administrative arm of MIPL. It comprises various teams rendering services that are essentially administrative in nature. Apart from rendering these services to other segment/business units of MIPL the various teams within CS also provide/receive administrative services to/from various overseas Motorola Group Companies. The administrative support services rendered with CSC, global vendor of Motorola group companies during the FY 2006-07 are briefly described below: * Coordination/liasioning with CSC, global vendor of Motorola Group for IT support services and IT systems. The Corporate Segment is required to supervise the personnel provided by CSC for IT system maintenance. * CS is also involved in identification of potential domestic vendors which can provide IT support services to Motorola Group. This role is limited to identifying the vendor a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....velopment service segment and, therefore, for the reasons stated therein this ground is dismissed. 134. As far as ground no. 5.3.7 is concerned the same relates to advertisement marketing and distribution cost more than 3% filter which was applied by the assessee. This ground has been considered while deciding ground no. 4.5.10 of software development segment and, therefore, for the reasons stated therein this ground is dismissed. 135. As far as ground no. 5.4 is concerned, the same relates to challenge by assessee to TPO's action in including high profit making companies in the final set of comparables for bench marking low risk captive unit such as the assessee. In this regard we may observe that mere high profit margin cannot be a basis for excluding a particular comparable unless it is demonstrated that the profit margin was influenced by certain extraordinary factors or the comparable was not meeting the FAR analysis. As far as the assessee's plea that the profit margins of the company were influenced on account of its being captive unit, we have restored the issue for risk adjustment in the software development segment to the file of TPO after detailed discussion. There....
X X X X Extracts X X X X
X X X X Extracts X X X X
....opment segment. We, therefore, proceed to consider each comparable separately: 1) Genins India TPA Ltd.: 138.3 Ld. Counsel submitted that this company is a third party administrator in health insurance and, therefore, cannot be considered to be in the provision of market support services. 139. Ld. TPO has not established the functional similarity. 139.1 Having heard both the parties, we find that ld. TPO has pointed out from the details provided by the assessee that this company handles customer related queries, pocesses of claims, cashless authorization etc. Therefore, we agree with ld. counsel for the assessee that this company was providing specific services and not market related information. We, therefore direct ld.TPO to exclude this company from the list of comparables. High temp-tech-mat Pvt. Ltd.: 140. The main challenge to the inclusion of this company as comparable is on the ground that the proportion of raw material expenses to total expenses was 31.20% and, therefore, it was not a pure service provider. 141. Ld. TPO pointed out that as per the assessee's reply, it is evident that the business of the company is to provide business consulting service....
X X X X Extracts X X X X
X X X X Extracts X X X X
....el for the assessee that the fact of demerger being an extraordinary event had impact on profitability but this aspect had not been considered by ld. TPO. Ld. Counsel has also challenged the inclusion of this comparable on the ground of expenditure on R&D. In this regard ld. Counsel referred to extracts from annual report to demonstrate that company continuously invests in creating new products and services. Most of the product/service offerings of company involve innovation and original thinking. Further, company also takes steps to register its right over the intellectual property. Therefore, in the the light of the decision of Hon'ble Delhi High Court in the case of Agnity India Technologies Pvt. Ltd. (supra) also this company cannot be taken as comparable. We, therefore, direct Ld. TPO to exclude this company from list of comparables. IDC(India) Ltd.: 146. Ld. Counsel submitted that the company is in providing consulting services in Asia Pacific Region. It provides the most rigorous and exhaustive primary research. Further, it also provides services like CMO Advisory Research, Investment Research Serviced, IT Advisory Tools etc. Thus, the company is providing services whi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....does not need to spend on advertising and marketing. Ld. TPO, however, has not accepted the assessee's contentions for the following reasons: 1) the assessee is also imparting consultancy service like the comparable selected by him; 2) expenditure on advertisement and marketing does not make the company functionally dissimilar; 3) assessee has not pointed out any fact that would lead one to believe that there is some factor in the accounts of the company that makes the profit margin of 38.46% as extraordinary. 148.1 Ld. Counsel pointed out that in the case of M/s Mcicom India Pvt. Limited and M/s Varison India Pvt. Ltd. (ITA Nos. 4187/Del/2010, 2766/Del/2010 & CO 218/D/2010), this company has been rejected on the ground of functional profile being different. 149. Ld. CIT(DR) submitted that the industry verticals must not be looked into for comparability purposes and the assessee has rejected the comparable on the ground of high profitability only. 149.1 Having heard both the parties, we do not find any reason to exclude this comparable from the list of comparables selected by ld. TPO only because of high profit margin earned by the company. Admittedly, the company....
X X X X Extracts X X X X
X X X X Extracts X X X X
....arent company, which is in the nature of support service and hence not functionally comparable. She rightly concluded that the risk profile is vastly different and hence on this count also they are not comparable." We are in agreement with ld. CIT(DR) that merely because of shares being held by the Government of India, the company cannot be excluded, unless it is established that the company is not functionally comparable. However, we find that assessee was imparting only marketing support services but Rites Ltd. admittedly was primarily imparting turnkey engineering services. Therefore, in view of the observations in the case of M/s MCI com India P. ltd. and others (supra), we direct the ld. TPO to exclude this company from the list of comparables. 8) Technicom-Chemie (India) Limited: 152. Ld. Counsel submitted that this company deals in high-tech machinery and has an excellent set up of company trained service engineers along with suitable spare parts inventory for providing technical support during and after the sales. The areas of operation are as under: * Solar Energy, pharmaceuticals and health care chemicals infrastructure development. 152.1 Thus, business profile o....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... obligation by Government Company at best results in reduction of profit and not in increasing the profits. As far as, the decision relied upon by ld. Counsel is concerned, the same has been rendered having regard to related party transactions but no data has been provided in the present case. We, therefore, uphold the ld. TPO's contention in this regard. 10) Consulting Engineering Services (India) Pvt. Ltd.: 156. Ld. Counsel submitted that this company is engaged in the business of rendering services in diversified areas such as agricultural and rural development, architecture, bridges and structure, roads and highways etc. He pointed out that ld. TPO has not controverted the contention of the assessee. 157. Ld. DR submitted that this company is imparting consultancy services and, therefore, functionally comparable to assessee. 157.1 Having heard both the parties, we do not find any reason to exclude this company from the list of comparables merely on the ground of the company imparting consultancy services in diversified field. Under TNMM method broad comparability is to be considered and if a comparable is horizontally comparable then the same cannot be excluded beca....
X X X X Extracts X X X X
X X X X Extracts X X X X
....arables should be directed to be followed by ld. TPO. 162.1 Having heard both the parties, we find that while considering ground no. 4.9 relating to working capital adjustment, ld. DRP has directed AO/TPO to grant working capital adjustment based on the OECD formula and by taking 10.25% as the PLR. We, therefore, direct the ld. TPO/AO to carry out the directions given by ld. DRP. 163. In the result, this ground is allowed for statistical purposes. Corporate Issues: 164. Vide ground no.7, the assessee has assailed the order of ld. AO as per the directions of ld. DRP in disallowing provision for liquidity damages amounting to Rs. 201537175/- on the ground that the claim for liquidated damages is a liability of future and not present liability. Further, AO erred in not following the directions of ld. DRP in allowing the reversal of Rs. 306779345/- of the provision for liquidated damages. 165. Brief facts apropos this issue are that AO noticed that assessee had debited provision for liquidated damages amounting to Rs. 201537175/- in its profit and loss account. The AO observed that assessee was engaged, interITA No. 5637/D/2011 alia, in the business of installation and c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ome". 167.2 Ld. Counsel submitted that the assessee is engaged, inter-alia, in the business of installation and commissioning of telecommunication and equipment network and provides technical support services in relation to the same for various telecom operators in India. All the projects executed by the assessee company are done under contracts which contain the clause for liquidated damages in accordance with the normal industry practice. In this regard, ld. Counsel referred to a sample agreement for supply of services between Tata Teleservices (Maharashtra) Ltd. & Motorola India Pvt. Ltd. dated 10/10/2003 contained from pages 798 to 838 of paper book and specifically referred to page 818, wherein the clause relating to delays and liquidated damages is contained. The same reads as under: 13.2 "The Contractor specifically acknowledges and agrees that time is of essence in the performance of all the Contractor's obligations including, without limitation, the provision of all the Services set forth in this Agreement; 13.3 In the event that Provisional Acceptance of an Equipment, or Element or provision of Equipment is delayed beyond the time schedule specified in the Order,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....account of the reversal. Ld. Counsel relied on following case laws in support of his contention that provision for liquidated damages is an allowable deduction: 1. Bharat Earth Movers vs. CIT, 245 ITR 428; 2. Delhi High Court in the case of Ericson Communication, 318 ITR 340; 3. KCP Limited, 34 ITD 50 (Hyd.) ITAT Spl. Bench; 4. Madras ITAT in the case of Kaveri Engineering Services, 43 ITD 527; 5. FFE Minerals India Pvt. Ltd. vs. JCIT, 84 TTJ 907 (Chen.) ITAT; 6. Pune ITAT in Thermax Babcock and Willcox Ltd. vs. Addl. CIT, 304 ITR 130; 7. Delhi ITAT in Addl. CIT vs. Ericson India Pvt. Ltd., ITA No. 516/Del/2005. 168. Ld. DR submitted that provision for liquidated damages is actually provision for unliquidated damages because liability has not crystallized. He submitted that unless the damages are crystallized, the same cannot be allowed. He submitted that the deduction for unliquidated damages can be allowed only when the same gets crystallized. The estimation of expenditure and crystallization of expenditure are two separate things. In support of his contention ld. DR relied on following decisions: 1. NSUNDARE SWARAN vs. CIT, 226 ITR 142 (Ker.); 2. Na....
X X X X Extracts X X X X
X X X X Extracts X X X X
....al which was dismissed as the assessee failed to establish its claim. The Hon'ble High Court, inter-alia, observed that the details regarding the period of contracts, the manner of their performance, quantification of damages etc. were not specifically brought to their notice. Only the fact regarding arbitration proceedings was brought to the Hon'ble Court's notice. Under these facts, it was held that the damages had not crystallized particularly because there was no stipulation in contract and assessee had denied its liability. In the present, case, however, as noticed earlier, the provision had been made on the basis of specific terms of contract in regard to liquidated damages. Therefore, this decision is of no assistance to the revenue. 171. The next decision relied upon by ld. DR is in the case of Navjeevan Rollar and Floor Ltd. In this case, the assessee company was engaged in the business of manufacturing of dal, besan, suji, etc. On 23/07/1986, the assessee had entered into a contract with a foreign company for the import of yellow gram. Under the contract letter of credit were to be opened latest by 14/08/1986. The assessee, failed to open letter of credit. Protracted l....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the case. 172. On the other hand, we find that the case laws relied upon by ld. Counsel for the assessee clearly support the assessee's case particularly because terms and conditions of agreement with customers contained delayed delivery clause whereunder specified penalty was to be paid by assessee for delay in delivery. We find that Hyderabad ITAT Spl. Bench in the case of KCP Limited, 34 ITD 50 in para 8, inter-alia, observed as under: 8. "As we have noted above, it is not in dispute that in terms of the agreements of the assessee for the supply of goods, time was the essence of the contract and any delay in the delivery of the goods would result in the liability to pay damages. That the parties mean it seriously is proved by the fact of provision for bank guarantee up to the maximum value of liquidated damages. It is also now settled that even contingent liabilities, if properly valued on scientific basis, can be taken into account as trading expenses if they are sufficiently certain and capable of valuation and profits cannot be properly estimated without taking them into account Metal Box Co. of India Ltd. vs. Their Worken [1969] 73 ITR 53 at 64 (SC)]. But, thi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....agreement itself depending on the period of delay which is intended to act as a deterrent against delays in deliveries and this is to avoid future litigation as to the quantum of damages. Under section 74 of the Indian Contract Act, even if there is a stipulation by way of penalty, the party complaining is entitled to receive only reasonable compensation not exceeding the amount named. Section 74 reads as follows: "When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for." This shows that the claim for damages arises at the point of breach but the quantification of damages is subject to negotiation, though the ceiling of the amount is stipulated in the contract. As far as the assessee is concerned, the liability to pay damages arose at the point of time when the breac....
X X X X Extracts X X X X
X X X X Extracts X X X X
....k, is a part of the contract agreement entered into by both the parties for executing and completing the work. In other words, the condition for payment of liquidated damages for delay in work is in-built in the contract agreement itself. Therefore, there exists an undertaking given by the parties to execute the work within the specified time, the defaulter has agreed to pay damages on account thereof. This undertaking is not found to be conditional. Thus, this undertaking imported a definite liability on the assessee which accrued as soon as the delay in executing the works had first occurred and continued till the work was fully completed, though that liability was to be quantified precisely and discharged at a future date. On this aspect, we may again usefully6 refer to a decision of the Hon'ble Supreme Court in the case of Calcutta Co. Ltd. [1959] 37 ITR 1 where the assessee's liability towards undertaking to carry out development work within six months from the date of the deeds of sale was held to have been accrued on the dates of the deeds of sale, though that liability was to be discharged at a future date. In this case the Hon'ble Supreme Court further held that it was an ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y into conditional one as has been held by the Hon'ble Supreme Court in the case of Calcutta Co. Ltd. vs. CIT [1959] 37 ITR 1 (SC), Metal Box Company of India Ltd. vs. Their Workmen [1969] 37 ITR 53 (SC) and Bharat Earth Movers vs. CIT [2000] 245 ITR 428 (SC). In this view of the matter, we may, therefore, say that the reasons given by the AO as well as by the CIT(Appeals) for rejecting the assessee's claim is not in consonance with the principle laid down by the Hon'ble Supreme Court in the case of Calcutta Co. Ltd. vs. CIT [1959] 37 ITR 1 and Bharat Earth Movers vs. CIT [2000] 245 ITR 428 (SC). The very principles laid down by the Hon'ble SC in the case of Calcutta Co. Ltd. vs. CIT [1959] 37 ITR 1 were also followed by the Kerala High Court in the case of CIT vs. Indian Transformers Ltd. [2004] 270 ITR 259 and the Hon'ble Delhi High Court in CIT vs. Vinitec Corporation P. Ltd. [2005] 278 ITR 337 while deciding the assessee's claim for liability towards warranty clause provided in the sale agreement itself. In this case, it was held that the taxpayer was in the year of sale under an accrued legal obligation to make payments under warranty claims, even further held therein that in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....may be made at a future date, the assessee payer was, in obligation to pay liquidated damages for the delay in work did accrue on the date when the delay was first occurred and continued upto the date of completion of the work, and thus, in computing the profit and gains derived by the taxpayer from such contract works in the present year, the assessee tax payer is entitled to deduct from the profits from the aforesaid contract works a provision, for the cost of the anticipated liquidated damages in so far as the same is related to the period of delay falling within the year under consideration." 174.1 It has also allowed the assessee's claim of liquidated damages following the decision of Hon'ble Supreme Court in the case of Calcutta Company Ltd. vs. CIT (1959) 37 ITR 1 and Bharat Earth Movers vs. CIT,245 ITR 428 (SC). 175. In view of above discussion, this ground is allowed for statistical purposes. 176. Apropos ground no. 7.2 ld. counsel submitted that the same has become infructuous because relief has been given to assessee. 177. Ground no. 8 is in regard to disallowance of computer software expenses aggregating to Rs. 1crore 10 lakhs on the ground that these are ca....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d our deep appreciation for the unrelenting assistance extended by Shri Piyush Jain Ld. CIT(DR) on behalf of Department and the team led by Shri Himanshu Sinha on behalf of the representatives of both the parties, due to which we have been able to assess the legal position as emanating from the innumerable number of cases cited by both the parties. 187. In the result, the assessee's appeal is partly allowed for statistical purposes. Order pronounced in the open court on 14/08/2014. ============= Document 1 Motorola Inc. Motorola International Winphoria Inc. Force (MNC) Credit Corp. (WINC) Comp Inc. (FINC) USA 30% 65% 3% 1% Motorola India Pvt. Ltd. (MIPL) Document 2 Name Company of the Working Capital adjusted OP/TC As Working Capital adjusted per Original OP/TC After directions the Transfer of Hon'ble Pricing Order DRP-1 Accel Transmatic 21.07% 21.07% Ltd. (Seg.) Avani Cimcon 49.91% 49.91% Technologies Ltd. Celestial Labs Ltd. 55.26% 55.26% Datamatics Ltd. 0.62% 0.62% E-Zest Solutions Ltd. 36.63....
X X X X Extracts X X X X
X X X X Extracts X X X X
.....) 14. Lucid 1.70 19.37 0.00% Software % Ltd. 15. Mediasoft 1.85 3.66% 0.00% Solutions Ltd. 16. Megasoft 139.33 60.23 0.00% Ltd. % 17. Mindtree 590.35 16.90 0.00% Ltd. % 18. Persistent 293.75 24.18 0.92% Systems % Ltd. 19. Quintegra Solutions 62.72 12.56 0.62% % Ltd. 20. R S 101.04 13.47 0.00% Software % (India) Ltd. 21. R Systems Internatio 112.01 15.07 0.56% % nal Ltd. (Seg.) Sasken 343.57 Communi 22.16 % 0.00% 22. cation Technolog ies Ltd. (Seg.) 23. SIP 3.80 13.90 0.00% Document 6 Technolog ies & % Exports Ltd. 24. 25. 26. Ltd. (Seg.) Thirdware Solutions Ltd. Wipro Ltd. (Seg.) Tata Elxsi 262.58 26.51 4.15% % 36.08 25.12 0.00% % 9616.0 33.48 8.50% 9 % Document 7 S.No. Company Sales OP to Name (Rs. Total Cr.) Cost % 1. Accel 9.68 20.90% Transmatic Ltd. (Seg.) 2. Avani 3.55 50.29% Cimconn Technolo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rowe, Infosys mConnect, Also, the company derives Substantial portion of its Proprietary products (including its Document 10 Onsite Vs. Offshore flagship Banking product suite 'Finacle') As much as half of the Software development Services rendered by The appellant provides Only offshore services Expenditure Advertising/ Infosys onsite are (i.e. services performed At the customer's location (i.e. remotely from India). on Overseas). And offshore (50.20%) (Refer page 117 of The paper book) than half of Its service, income from Onsite services. Rs. 61 crores on Rs. 102 crores Rs. Nil (as the 100% Services are provided to AEs) Rs. Nil Sales promotion and Brand building Expenditure Research & Development Other 100% offshore (from India) Document 11 S.No. Case Law Hellosoft India 1. Ltd. ITA 9 2. 3. P. No. 645/Hyd/0 M/s Cordys R&D (India) Pvt. Ltd., Hyderabad (ITA No. 212/Hyd/0 6) Sony India P. Ltd....