TaxTMI 
TaxTMI 
2015 (2) TMI 944
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.... an addition to the Appellant's total income of Rs. 3,69,97,907/- based on the provisions of Chapter X of the Income-tax Act, 1961 ('the Act'). * The Hon'ble DRP erred on facts and in law in confirming the approach adopted by the learned AO/ TPO, who disregarded the various submissions made by the Appellant and also rejected the benchmarking analysis and comparable companies selected by the Appellant without appreciating the fact that such selection was based on the contemporaneous data and the transfer pricing study report prepared and maintained as per section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('the Rules'). Based on the following Grounds, the Appellant prays that the adjustment in relation to transfer pricing matters made by the learned AO/ TPO and upheld by the Hon'ble DRP be deleted. Ground No. 2: Erroneous addition/ rejection of certain comparables Hon'ble DRP/ Ld. AO erred in modifying the set of comparable companies identified by the Appellant in its Transfer Pricing Study Report for provision of software development services. In doing so, Hon'ble DRP/ Ld. AO specifically erred in: 2.1 considering and retai....
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....ith Rule l0C of the Income-tax Rules, 1962 ('the Rules). Ground No. 4: Not allowing the use of multiple year data Hon'ble DRP/ Ld. AO erred in not allowing the use of multiple year data as prescribed under Rule 10B(4) of the Rules and determining the arm's length price on the basis of financial information of the comparables for the previous year 2007-08 which was available in the public domain at the time of assessment proceedings but not at the time when the Appellant conducted its analysis to comply with the provisions of Rules 10B(4) and 10D(4) of the Rules. Ground No. 5: Not allowing the benefit of + / - 5% range Hon'ble DRP/ Ld. AO erred in not granting the benefit of +/- 5% range as per the proviso to Section 92C(2) of the Act. Ground No. 6: Ignoring the fact that the Appellant is entitled to tax holiday under Section l0A of the Act The Hon'ble DRP erred on facts and in law by not appreciating that there was no intention whatsoever on the part of the Appellant to shift profits outside India. The Hon'ble DRP/ Ld. AO erred in ignoring the fact that the Appellant is entitled to tax holiday under section l0A of the Act on its profits derived from the sof....
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....ational transactions relating to the Provision of software development services and Provision of sales and customer support services by applying the Transactional Net Margin (TNM) method as the most appropriate method; and, the transaction of payment of interest on External Commercial Borrowings (ECB) was benchmarked by applying the Comparable Uncontrolled Price (CUP) method. In terms of the Transfer Pricing Study undertaken by the assessee, all three categories of international transactions were found to be at an arm's length price, and therefore, even before the Transfer Pricing Officer (in short "the TPO") assessee contended that no adjustment was required to be made to the stated values in order to determine their arm's length price. 5. In the course of assessment proceedings, the Assessing Officer made a reference to the TPO u/s 92CA(1) of the Act, so as to determine the arm's length price of the international transactions for the purpose of computing income from such transactions in terms of section 92(1) of the Act. The TPO after allowing the assessee necessary opportunity of being heard, has passed an order u/s 92CA(3) of the Act dated 31.10.2011 in terms of wh....
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.... were prior to the period for which assessee's international transactions were being tested. The said approach of the assessee has not been accepted by the TPO, as according to him, it was more appropriate to adopt the financial data of the comparable cases for the contemporaneous period i.e. for the financial year ending on 31.03.2008 for the purposes of the Transfer Pricing analysis. In the course of the Transfer Pricing proceedings before the TPO, assessee was show-caused on this aspect and on the revised basis also assessee suggested certain inclusions and exclusions in the list of comparable cases. The TPO after considering the financial data of the comparable cases based on the current year data reexamined the comparables and finally selected the following comparables :- Sr. No. Name of the comparable OP/OC (%) 1 Bodhtree Consulting Ltd. 19.14 2 E-infochip Ltd. 30.32 3 eZest Solutions Ltd. 28.58 4 F C S Software Solution Ltd. 57.02 5 Goldstone Technologies Ltd. 27.06 6 Helios & Matheson Information Technology Ltd. 36.05 7 Kals Information Systems Ltd.(application software seg) 30.92 8 L G S Global Ltd. 26.33 9 Softsol India Ltd. 15.18 &....
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....pment and sale of software products and such activity is quite different from that of the assessee which relates to rendering of software development services for its customers. Before the TPO, assessee referred to an extract from the Annual Report of the said concern for the financial year 2007-08 to point out that the software development expenditure was reported by the said concern as an element of inventory, which according to the assessee demonstrated that the said concern was a product company and not a software services company. It was also pointed out on the basis of the website of the said concern that it was owning software products like Virtual Insure, Ia vision, CMSS, Docuflo (Document Management System) to support its plea that the said concern was into development and sale of software products. It was also pointed out before the TPO that the said concern was also engaged in rendering training services and although the TPO had used the segmental information of application software only but the segmental data published by the said concern was erroneous and accordingly it was unreliable. The TPO however did not find any weight in the arguments of the assessee and noted t....
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....orting by the said concern would not alter the bigger picture that it was deriving income mainly from software development service. Accordingly, inclusion of the said concern in the final set of comparables is sought to be defended. 13. We have carefully considered the rival submissions. The pertinent point raised by the assessee is that the said concern is functionally not comparable to the activities undertaken by the assessee on account Provision of software development services. The services rendered by the assessee to its associated enterprise under the heading 'Provision of software development services' include development of software in accordance with the designs, production orders, plans, process specifications, and production schedules, etc. supplied by the associated enterprise. Assessee is remunerated on a cost plus markup (15%) basis for the services provided to the associated enterprise. Notably, the ownership of the product developed lies with the associated enterprise. The ownership of any documentation or know-how and any other proprietary information received from the associated enterprise for the purpose of rendering of services to the associated enterprise are....
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...., namely, the Annual Report, and the website extract of the said concern, which have been pertinently referred to by the assessee. 16. For the aforesaid reasons, we uphold the plea of the assessee for exclusion of M/s Kals Information System Ltd. (applications software segment) from the final set of comparables for the purposes of comparability analysis. 17. The next plea of the assessee is for excluding M/s. FCS Software Solutions Limited from the final set of comparables. On this point, assessee submitted before the TPO that the said concern was earning income from diversified segments and the income from software development services was less than 75% of the total operating income. The claim of the assessee was that the said concern did not qualify the filter applied by the TPO himself, namely, to exclude concerns whose income from software development services was less than 75% of the total income. Before the TPO, assessee submitted that, apart from other activities, the said concern was engaged in rendering application support services and Infrastructure management services which constitute 11% and 15% respectively of the total revenue of the said concern. The aforesaid acti....
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....he said concern's income from software development services was less than 75% of the total income and therefore, it cannot be included as a comparable. In this context, it is pointed out that the proportion of income in various segments is as under:- IT consulting - 44%; Application support - 11%; Infrastructure Management Services - 15%; and, E-learning and Digital Consulting - 30%. 21. At the time of hearing, our attention was invited to pages 1010 and 1011 of the Paper Book, wherein it is placed relevant pages of the Annual Report of the said concern to justify the aforesaid segmental data. It has also been pointed out that even in the written submissions made to the TPO, which have been reproduced in the impugned order, the aforesaid segmental data has been referred to and that there is no dispute on the same. On the basis of the aforesaid, it is sought to be pointed out that the activities on account of application software services and infrastructure management services, which constitute 11% and 15% respectively of the total revenue, are obviously IT enabled services and are not linked to the software development services. It has also been submitted that E-learning and Digit....
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....linked to the software development services. 24. Moreover, the assessee had referred to the following extract from the Annual Report of the said concern in relation to the E-learning and Digital Consulting before the TPO to say that it is in the nature of IT enabled services:- "E-learning and Digital Consulting Services: US corporations look at E-learning of web / CD based training programs as one of the ways to achieve organizational growth and improved business performance. E-learning helps employees, vendors, and dealers of a company to better their performance and deal with fast-changing environments. E-learning makes training highly efficient, by making it available anytime, anywhere and reduces total cost of training. E-learning is used to train employees, customers and service technicians on product knowledge, concepts, strategies, risk and finance, compliance and technology." 25. Ostensibly, the aforesaid services involve setting up of support centres and remote maintenance, which have been duly categorized as ITES by the CBDT's Circular dated 26.09.2000 itself, which has been reproduced by the TPO in the impugned order. Therefore, even the said segment is not to be incl....
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....t plus mark-up basis, could not been found comparable to a loss making concern, the same approach ought to have been adopted by the TPO even with regard to the concerns earning super normal profits. 28. On this aspect, the learned CIT-DR reiterated the stand of the TPO to the effect that the assessee being an entity which operates on a cost plus business model, the incurrence of loss is not possible. Therefore, such a concern could not be benchmarked with a concern which has incurred a loss from its operations. 29. We have carefully considered the rival submissions. In our considered opinion, the point sought to be made out by the TPO is quite mis-placed having regard to the purpose and import of the comparability analysis of the international transaction being undertaken for determining its arm's length price. Ostensibly, the whole objective of the transfer pricing proceeding is that the contours of an un-controlled transaction shall reflect a measure of arm's length price of the tested international transaction. The un-controlled transaction, if it reflects a loss, would not normally be excludible unless any peculiarity in such un-controlled transaction is brought out. ....
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.... the written submissions made to the lower authorities in particular to the DRP, to point out that the activities of verification and validation of software being undertaken by the said concern are a part of software development services. In this context, it has been submitted that as per the functions explained in the Transfer Pricing study, a copy of which is placed in Paper Book, assessee has also performed such activities. It was pointed out that assessee was predominantly performing software coding and testing activities in the course of its software development services and therefore, the said concern was indeed a good comparable to assessee. In this context, the learned representative referred to pages 946 to 983 of the Paper Book to point out that a detailed functional analysis document was placed before the DRP, which supplemented the functional analysis carried out in the Transfer Pricing study in order to demonstrate various activities of software development process, like coding and testing, etc., which are carried out by the assessee, as against the whole software development process. It was therefore, contended that the lower authorities have wrongly rejected assessee....
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.... its associated enterprise, then the captioned activities being undertaken by Thinksoft Global Services Limited, which ostensibly also are a part of the whole process of software development, would definitely be considered as comparable. The argument being set up by the lower authorities that the 'Verification' and 'Validation' are steps to test the efficiency of the software, but not a part of software development, in our view is a hairsplitting argument, which is not justified in the context of the present comparability analysis. Ostensibly, 'Verification' and 'Validation' are broadly speaking, a part and parcel of the process of software development. Therefore, on this aspect, we are unable to uphold the action of lower authorities in excluding the said concern from the final set of comparables. We direct, accordingly. 34. The next plea of the assessee was that the lower authorities have unjustly excluded M/s. Maars Software International Limited from the final set of comparables. In this context, the TPO has assigned reasons for excluding the said concern in para 15.3 of his order. Firstly, as per the TPO, the said concern was engaged in on-site work of software development an....
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....oftware development. Therefore, in our view, the TPO justifiably excluded the said concern because it is only the information available in public domain, which can be the basis to effectuate comparable analysis. The assertions in the Directors report, which do not find any contradiction in the other financial statements accompanying such Directors report, have to be relied upon. Thus, on this point itself, we find no merit in the plea of the assessee for including the said concern in the final set of comparables. Without going into the other grounds taken by the TPO to reject the said concern, on the aforesaid aspect itself, we affirm the stand of the TPO to exclude M/s. Maars Software International Limited from the final set of comparables. Thus, on this aspect, assessee has to fail. 37. The next plea of the assessee is against the action of TPO in excluding Akshy Software Technologies Limited from the final set of comparables. The TPO has discussed the aspect of exclusion of Akshy Software Technologies Limited from the final set of comparables in para 15.1 of his order. As per the TPO, Akshy Software Technologies Limited is predominantly an on-site service provider whereby....
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....the site of the clients. The TPO in terms of his discussion in the order has attempted to deduce that the margins from on-site consultancy are lower when compared with margins from off-shore development work. He has also referred to an extract from McKinsey's research on Indian software industry competitiveness to say that because of the differences in costs between a developed country and India, it acts as motivator for the companies located in developed countries to increase its offshore sourcing of services. In our considered opinion, whether on-site business model provides higher or lower margins in comparison with off-shore development work, is not the issue of consideration. The important point is that the business models are quite different. Ostensibly, the logistics and other aspects of the two business models cannot be treated on par and certainly it would impact the relative margins of the two business models. Therefore, in our considered opinion, the business model of the assessee i.e. provision of off-shore services to its associated enterprise stands on a different footing than the on-site services being rendered by Akshy Software Technologies Limited. The assertions o....
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....etic mean of 11 comparables selected by him and determine the ALP after computing the adjusted average PLI. As result, grounds Nos.1,2 and 3 are dismissed." [underlined for emphasis by us] 42. The aforesaid decision was relied for the proposition that on-site income filter could not be applied to reject certain companies from being considered as comparables. In this context, a perusal of decision of the Hyderabad Bench of the Tribunal dated 15.01.2013 (supra) reveals that the application of such filter was set-aside by the CIT(A) on the ground that the relative data / information was not available in respect of the comparables in question. The aforesaid decision of the CIT(A) was affirmed by the Tribunal and it is quite clear that there is no discussion as to whether or not such a filter is a relevant criteria to undertake comparability analysis. In the present case before us, it is not the case of the assessee that the application of on-site income criteria applied by the TPO can be defeated on the ground that the relevant information is not available. Therefore, in the present case, we have decided the issue on its own merits and the decision of the Hyderabad Bench of the Tribun....
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....over filter was applied by the assessee. It has been submitted that application of an upper Turnover filter was neither confronted and nor show-caused to the assessee in the course of transfer pricing proceedings before the TPO; and, that such action of the TPO is inconsistent with his own action for assessment year 2010-11 wherein such upper Turnover filter has not been applied. It was pointed out by the Ld. Representative that assessee has been consistently applying only the lower filter to exclude concerns with turnover of less than one crore, and no upper filter has being applied either in this year or subsequently. By referring to the order of the TPO u/s 92CA(3) of the Act dated 20.01.2014 for assessment year 2010-11 it is sought to be pointed out that the TPO has accepted the aforesaid four concerns as comparables, even where their turnover exceeded Rs. 200 crores. It has been submitted that no opportunity was allowed to the assessee before the TPO excluded the said concerns from the list of comparables. 45. In so far as the aforesaid factual matrix brought out by the appellant is concerned, the learned CIT-DR has not controverted the same. However, he has referred to the p....