TaxTMI 
TaxTMI 
2015 (5) TMI 349
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....ee reported four international transactions. The Assessing Officer (AO) referred the international transactions to the Transfer Pricing Officer (TPO) for determination of their arm's length price (ALP). Two of such transactions were accepted by the TPO as at arm's length price. The other two international transactions in dispute are 'Provision of software development services' with transacted value of Rs. 98,42,37,491/-; and `Provision of marketing support services' with transacted value of Rs. 4,21,25,941/-. The TPO examined the assessee's segmental results. As regards the segment of `Software development services', the assessee applied the Transactional Net Margin Method (TNMM) as the most appropriate method with the Profit level indicator (PLI) of Operating Profit/Total Cost (OP/TC). Profit margin in the software development service segment was declared by the assessee at 19.16%. In order to demonstrate that these services were provided at arm's length price, the assessee chose 20 companies as comparable. The TPO rejected the assessee's computation of arm's length price worked out on the basis of multiple year data of the comparables and proceeded to determine the ALP of such tr....
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....s' segment. Even though the ld. CIT(A) has ordered for the deletion of addition on account of TP adjustment in respect of this international transaction, the assessee is still aggrieved against the inclusion of the following three companies in the list of comparables :- i) Infosys Technologies Ltd.; ii) Persistent Systems Ltd.; and iii) Wipro Ltd. 7. But for the inclusion of the above three companies in the final list of comparables, the assessee is satisfied with all the findings given by the TPO, as endorsed in the first appeal, in respect of other issues connected with the determination of ALP of the international transaction of `Provision of software development services'. We will take up the above three companies, one by one, for the purposes of ascertaining as to whether they are comparable or not. Before embarking upon the exercise of making comparison of these three companies with the assessee, it is sine qua non to consider the functional profile of the assessee under this segment. It can be seen from the TPO's order that he has simply stated that the assessee is engaged in the provision of software development services, but, has not spelt out the further detai....
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.... the work done by it. This clause further provides that the intellectual property rights in the format, presentation, procedures, process, computer software and other material of whatever nature created, developed or enhanced by Ciena India in the course of providing the services to Ciena, USA 'shall be and remain the sole property of Ciena, USA absolutely.' From the above clauses of the Agreement, it is manifest that the assessee is simply a captive unit providing software development services to its AEs without acquiring or retaining any intellectual property rights in the work done by it for and on behalf of its foreign AE, for which it is compensated with actual costs incurred plus 19% mark up. Total operating revenue of the assessee from this segment stands at Rs. 98.42 crore with the operating costs at Rs. 86.95 crore, giving profit before interest and tax at Rs. 11.46 crore and the resultant profit ratio of 13.19%. With the above understanding of the nature of services provided by the assessee to its AEs under this segment, we will espouse the disputed companies for consideration as to their comparability or otherwise. Infosys Technologies Ltd. 8.1. The TPO noticed tha....
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....cluded from the list of comparables. Persistent Systems Ltd. 9.1. The TPO observed this company to be engaged in software development services with predominant revenues from software development services. He called for some information u/s 133(6) of the Act from this company regarding break up of software products and software development services. On consideration of such information, he observed that around 95.1% of the total revenue of this company was from software development services and the remaining amount was from software products. After considering the assessee's objections, the TPO included it in the list of comparables. The assessee is aggrieved against the consideration of this company as comparable. 9.2. We have heard the rival submissions and perused the relevant material on record. It can be seen from the information supplied by this company u/s 133(6) of the Act, a part of which has been reproduced in the TPO's order, that this company 'has developed a few of its own products in the area of identity management connectors.' Revenue from product licences stands at Rs. 288.93 million as against the revenue from software development services at Rs. 4829.57 milli....
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....nover, which was also taken by the assessee against the inclusion of Infosys Technologies Ltd. The ld. CIT(A) upheld the finding of the AO/TPO in treating it as a correct comparable. The assessee is aggrieved. 10.2. We have heard the rival submissions the perused the relevant material on record. It can be observed from the TPO's order itself that the facts and circumstances of Wipro Ltd., are somewhat similar to Infosys Technologies Ltd., inasmuch as he has proceeded to reject the assessee's objections by relying on the reasoning given by him for the inclusion of Infosys Ltd. It is further observed that Wipro Limited (Seg.) was considered as comparable by the TPO in the case of Toluna India (supra) and Lear Automotive (supra). The Tribunal, in both the cases, has held Wipro Ltd. (Seg.) as not comparable. This company is also operating as a full-fledged risk taking entity; engaged in providing technology infrastructure services, testing services, package implementation having more than 82,000 employees. It has its own R&D centre. It incurred around 11% of net sales as expenditure on research and development. None of the above factors match with the assessee company. Respectfully ....
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....d chose 10 new companies as comparable. The average operating profit margin of these companies was computed at 22.5% and, accordingly, transfer pricing adjustment of Rs. 33,13,077/- was proposed by the TPO, which was eventually made by the AO. The ld. CIT(A) excluded Apitco Ltd., Rites Ltd., and Vapi Waste and Affluent Management Company Ltd. from the final list of comparables drawn by the TPO. This resulted into the deletion of addition on account of transfer pricing adjustment under this segment. Both the sides are in appeal against the impugned order to the extent it is prejudicial to them. Whereas the assessee has challenged the inclusion of Choksi Laboratories Ltd., and WAPCOS Ltd. (Seg.) in the list of comparables, the Revenue is aggrieved only against the exclusion of Apitco Ltd. 13. We have heard the rival submissions and perused the relevant material on record. Before examining the comparability or otherwise of the companies challenged before us, it is of utmost importance to consider the nature of activity carried out by the assessee in the provision of marketing support services. There is no elaboration of the nature of services in the Agreement between the assessee a....
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....ts' - provides that this company is a commercial testing house engaged in testing of various products and also offers services in the field of pollution control as allied activity. Para 2 of the Annexure to the auditor's report also clarifies that this is a company engaged in rendering services 'for testing purposes.' From the above description of the nature of services carried on by this company, it is evident that it is basically engaged in providing testing services for various products and also offers services in the field of pollution control. As against this, the services provided by the assessee are purely in the nature of identifying customers for its AEs and providing technical support services to their customers. We fail to appreciate as to how marketing support services can be equated with testing services. When we peruse Schedule of fixed assets of this company, it can be seen that the major asset is 'Instruments.' It is with the help of these instruments that the company is providing services in the nature of testing of various products. By no standard, this company can be considered as comparable with the assessee company. We, therefore, direct the exclusion of this c....
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....nt Management, Energy related Services, Cluster Development, Technology Facilitation, Asset Reconstruction & Management Services, Emerging Areas. It can be seen from the nature of operations carried out by this company that the same is towards Micro enterprises development, Skill development and Project related services, etc., also including Infrastructure planning and development along with Energy related service and Cluster development. A part of its activities has got some resemblance with the nature of service provided by the assessee under this segment. The ld. CIT(A) has recorded that 'only 12% of total income of this company is from research studies which is akin to the nature of services provided by the assessee company.' This contention has not been controverted by the ld. DR with any clinching evidence. When we consider the operations of this company as enumerated above and the fact that this company has maintained accounts on entity level and there is no bifurcation available in respect of the services similar to those provided by the assessee under this segment, this company on entity level cannot be considered as comparable. We, therefore, hold that the ld. CIT(A) was ....