TaxTMI 
TaxTMI 
2015 (5) TMI 303
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....nt of Rs. 93,951,619 to the income of the appellant by holding that the international transaction, 2 pertaining to provision of Information Technology ('IT or software services') and IT enabled back office support services ("ITES Services or back office support services') to the associated enterprise ('AE'), are not at arm's length under the Income-tax Act, 1961 ('the Act'). 2. On the facts and in the circumstances of the case, the Ld. DRP/AO erred in modifying the benchmarking analysis, as conducted by the appellant using Transactional Net Margin Method ('TNMM') for benchmarking its international transactions pertaining to provision of IT and ITES services to the AE, and thereby modifying the set of comparables. In doing so, the Ld. DRP/AO specifically erred in: a) Eliminating companies that would otherwise be comparables, but for the fact that they are loss making; b) Including the companies which are not functionally comparable to the IT and ITES services rendered by the appellant in final set of comparables on an adhoc basis, thereby resorting to cherry picking of comparables; c) Rejecting companies functionally similar to that of th....
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....income declaring total income of Rs. 2,33,171/-, which was subject to a scrutiny assessment. The international transactions entered by the assessee with its associated enterprises related to Provision of software services and Provision of back office support services amounting to Rs. 45,26,17,038/- and Rs. 18.82.13.428/- respectively. On a reference made by the Assessing Officer, the Transfer Pricing Officer (TPO) passed an order u/s 92CA(3) of the Act dated 28.01.2013 determining the arm's length price of the aforesaid international transactions at a figure higher than their stated values by a sum of Rs. 9,39,51,619/-. After the Assessing Officer passed a draft assessment order u/s 143(3) r.w.s. 144C(1) of the Act dated 26.03.2013 proposing the above addition to the returned income, assessee preferred to raise objections before the Dispute Resolution Panel (DRP) who vide its order dated 31.12.2013 primarily rejected the pleas of the assessee and upheld the determination of arm's length price of the international transactions as done by the TPO. As a consequence, the Assessing Officer has passed an assessment order u/s 143(3) r.w.s. 144C(13) of the Act dated 07.01.2014 wher....
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....tegorized as Provision of software services and for the year under consideration, assessee has been remunerated for such services at Rs. 45,26,17,038/-. The second stream of 'international transactions' entered with the associated enterprises relate to the administrative support services provided by the assessee for various service divisions of PFG e.g. investor services division, health services division and individual life insurance, underwriting operations division, etc.. Such services has been categorized as Provision of back office support services for which assessee has been remunerated during the year under consideration at Rs. 18,82,13,428/-. 7. Both the aforesaid category of international transactions entered by the assessee with its associated enterprises were subject-matter of determination of the arm's length price by the TPO in its order dated 28.01.2013 (supra). The TPO has differed with the assertions of the assessee that the stated value of the international transactions are an arm's length price. Instead, as per the TPO in both segments, adjustments are required to be made having regard to the arm's length price determined on an application of the Tran....
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....red the assessee's PLI of 15.66% in the segment of Provision of software services with the arithmetic mean PLI of the comparables at 32.79% and accordingly computed an adjustment of Rs. 6,70,55,721/- which was required to be made to the stated value in order to determine the arm's length price of the transactions relating to the Provision of software services to the associated enterprises. 12. On this aspect, the Ld. Representative for the assessee has made three-fold arguments. Firstly, it is contended that the following concerns, namely, (i) Compucom Software Ltd. (Software Segment); (ii) Transworld Infotech Ltd. (Sterling International Enterprises Ltd.); (iii) KALS Information Systems Ltd. (Application Software Segment); and, (iv) ICSA (India) Ltd. (ESS Segment) are liable to be excluded from the final set of comparables. Secondly, it is sought to be made out that the TPO has erred in adopting the margin of 27.60% in the case of Mindtree Consulting Ltd. inasmuch as according to the assessee, only the margin relating to the IT services segment of the said concern is to be adopted which comes to 5.27%. Thirdly, it is also sought to be pointed out that the TPO erred in not inc....
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....e have carefully considered the rival submissions. We find that the point made out by the assessee for exclusion of KALS Information Systems Ltd. (Application Software Segment) is on a sound footing inasmuch as the said concern is functionally distinct from the activities of Provision of software services rendered by the assessee. Ostensibly, for the very same assessment year in the case of PTC Software (India) Private Limited (supra), the Pune Bench of the Tribunal found that the said concern was functionally different from a concern which was undertaking pure software development services. The relevant discussion in the order of the Tribunal dated 31.10.2014 (supra) is as under :- "27. The assessee is aggrieved by the inclusion of item at Sr No.5 KALS Information Systems Ltd. (seg). It is the case of the assessee that the said company was included by the TPO in its study relating to assessment year 2007-08 and the Tribunal in assessee's own case in ITA No.1605/PN/2011 relating to assessment year 2007-08 vide order dated 30.04.2013 had held the said company to be not functionally comparable with the assessee. The relevant finding of the Tribunal vide para 19 is as under: "19. In....
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....S Information Systems Ltd. (Application Software Segment); and, therefore following the aforesaid precedents, the said concern is liable to excluded from the final set of comparables. Moreover, we have also perused the orders passed by the TPO u/s 92CA(3) for assessment year 2007-08 (supra) as also for assessment year 2010-11 (supra) wherein the plea of the assessee for exclusion of KALS Information Systems Ltd. (Application Software Segment) has been accepted. For all the aforesaid reasons, we uphold the plea of the assessee for exclusion of KALS Information Systems Ltd. (Application Software Segment) from the final set of comparables. We direct accordingly. 18. The second point made out by the assessee is for exclusion of Transworld Infotech Ltd. (earlier known as Sterling International Enterprises Ltd.) from the final set of comparables. The TPO vide his discussion in para 10(8) included the said concern in the final set of comparables and rejected assessee's plea for its exclusion. The short point made out by the assessee before us is to the effect that the said concern was not includible in the final set of comparables for the reason that the assessee's financial year under c....
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....ity of Provision of software services to its associated enterprises. 21. We have carefully considered the rival submissions. Firstly, we may refer to the decision of the Pune Bench of the Tribunal in the case of PTC Software (India) Pvt. Ltd. dated 30.04.2013 (supra) wherein the inclusion of ICSA (India) Ltd. (ESS Segment) in the final set of comparables was in dispute. In the case of PTC Software (India) Pvt. Ltd. (supra) assessee had made out a case that the Research and Development (R&D) expenditure incurred by the said concern was in excess of the quantitative filter of R&D expenses applied during the Transfer Pricing proceedings. This aspect of the matter was upheld by the Tribunal and therefore in-principle we find no reasons to disagree with assessee's plea to evaluate the exclusion or inclusion of the said concern based on the level of R&D expenses incurred. On this point, it is pointed out that in so far as the ICSA (India) Ltd. (ESS Segment) is concerned, it is carrying on significant R&D activities and the ratio of expenditure of R&D to sales is almost 3% (i.e. Rs. 1983.79 lacs / Rs. 66350.72 lacs). The aforesaid position was canvassed by the assessee before the lower a....
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....r 2010-11. In this background of the matter, in our view, we find merit in the assessee's plea for exclusion of the said concern from the final set of comparables in the present year too. We hold so. 22. The next point made out by the assessee is for exclusion of Compucom Software Ltd. (Software Segment) from the final set of comparables. In this context, the plea of the assessee is that the said concern is not only engaged in rendering software development services but also sale of software products, end-to-end mobile solutions, IT infrastructure services, etc. and in support a reference has been made to pages 162 to 213 of the Paper Book wherein is placed a copy of the Annual Report pertaining to financial period under consideration. Secondly, it is pointed out that assessee's plea for exclusion of the said concern, was accepted by the TPO in assessment year 2007-08 as well as in assessment year 2010-11 and in this regard, reference has been made to the orders passed by the TPO u/s 92CA(3) of the Act dated 28.01.2013 (supra) and 29.01.2014 (supra), copies of which have been placed in the Paper Book at pages 603 to 636 and 637 to 668 respectively. 23. On the other hand, the Ld. CI....
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....ces to its associated enterprises as per the specifications provided. It has also been pointed out by the assessee that the software services segment of Compucom Software Ltd. is, inter-alia, engaged in development of software products also which is qualitative different from what is being undertaken by the assessee. Therefore, in the absence of any credible discussion emerging from the order of the lower authorities as to in what manner the functional profile of the said concern in the software segment is similar to assessee's tested activity, we are inclined to uphold assessee's plea that the software segment of Compucom Software Ltd. is not comparable to assessee's segment of Provision of software services to its associated enterprises. We accordingly direct the lower authorities to exclude the said concern from the final set of comparables. 26. With respect to the dispute in the software services segment, another point made out by the assessee was that the margin of Mindtree Consulting Ltd. considered by the TPO at 27.60% was wrong. In this context, the Ld. Representative for the assessee pointed out that before the TPO, assessee had asserted that only the IT services segment ....
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....the lower authorities to exclude the margins relatable to the R&D services segment of the said concern and consider only the margin relatable to the IT services segment alone to benchmark assessee's activity of Provision of software services to its associated enterprises. Thus, on this aspect also assessee succeeds. 29. Apart from the aforesaid, there is no other plea raised by the assessee with regard to the determination of arm's length price of international transactions relating to Provision of software services to the associated enterprises. Therefore, we direct the Assessing Officer to re-compute the arm's length price of international transaction of Provision of software services in the light of our aforesaid discussion. 30. Now, we may take-up the dispute relating to the determination of arm's length price with regard to the international transactions of Provision of back office support services rendered by the assessee to its associated enterprises for stated value of Rs. 18,82,13,428/-. On this aspect also, the TPO disagreed with assessee's assertion that the stated value of the international transactions are at an arm's length price. The TPO selected th....
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.... Pvt. Ltd.. Whereas Infosys Technologies Ltd. was spending substantial sums on advertisement, sales, promotions, brand, building and R&D activity, and Agnity India Technologies Pvt. Ltd.'s spending on such activities was NIL. Agnity India Technologies Pvt. Ltd. was a captive service provider for its associated enterprises, which was not the case of Infosys Technologies Ltd.. Under these circumstances, the Hon'ble Delhi High Court approved the decision of the Tribunal which held that Infosys Technologies Ltd. could not be compared with M/s Agnity India Technologies Pvt. Ltd. having regard to the financial data, etc. of the two concerns. Considering the aforesaid parity of reasoning, it has to be appreciated in the present case that the activities undertaken by Infosys BPO Ltd. cannot be qualitatively compared with the activities being carried out by the assessee in its back office support services segment. Undoubtedly, Infosys BPO Ltd. owns significant intangibles and eminent brand value whereas in the case of the assessee before us there is no such situation. The turnover achieved by Infosys BPO Ltd. is many times higher in comparison to the assessee; the said concern is a giant in....
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....he similar effect. Therefore, in our considered opinion, having regard to the difference in the business model brought out by the assessee, M/s Cosmic Global Services Ltd. is liable to the excluded from the final set of comparables. We hold so. 38. With regard to rendering of back office support services segment, assessee has also submitted that (i) Omega Healthcare Management Services Pvt. Ltd.; (ii) In House Productions Ltd.; and, (iii) Galaxy Commercial Ltd. (BPO Segment) have been wrongly excluded by the TPO from the final set of comparables. 39. With respect to the M/s Omega Healthcare Management Services Pvt. Ltd., we find that the TPO excluded the said concern on the ground that the information with regard to the said concern was not available in public domain. For the said reason, the financial data with regard to the said concern was not considered by the TPO in the comparability analysis. 40. The Ld. Representative for the assessee asserted at the time of hearing that the TPO was wrong in stating that the Annual Report of the said concern was not available in the public domain whereas assessee had duly furnished a copy of the Annual Report of the said concern pertainin....
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....tand has been reiterated by the Ld. CIT-DR before us in order to justify the exclusion of the said concern from the final set of comparables. 43. On the other hand, the Ld. Representative for the assessee vehemently pointed out that the Auditor's Report of the said concern does not reveal any adverse finding or qualification with regard to the unreliability of the financial data. It was therefore contended that the TPO has misdirected himself in questioning the integrity of the financial data reflected in the Annual Report of the said concern. 44. We have carefully considered the rival submissions. Having regard to the discussion in the order of the TPO, we find that the only reason advanced by the TPO to reject the said concern was his perception that the financial data of the said concern was not reliable. The perception of the TPO is based on the fact that a fire destroyed major portion of the account books of the concern. The point made out by the assessee is that the audited financial statements have not been adversely commented by the statutory auditors of the said concern with regard to the reliability of the data. The said stand of the assessee cannot be brushed aside lig....