TaxTMI 
TaxTMI 
2015 (8) TMI 656
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....in short OSI Opto) were merged with Rapiscan India from 1.4.2008 and consequent to such merger, the name of the assessee was changed to OSI Systems (P) Ltd. It is also pertinent to mention here that as per the order of merger of the Hon'ble Andhra Pradesh High Court, the companies had maintained separate books of accounts for financial year 2008-09. As could be seen from the materials on record, Rapiscan Systems (P) Ltd is engaged in the business of software services to its AEs in the field of security and inspection. Spacelabs Healthcare Solutions (P) Ltd provides software development services to its AEs in the field of medical equipment and services, whereas OSI Opto is providing purely Information Technology enabled services (ITeS) to its AEs by maintaining a help desk. For the A.Y under consideration, assessee filed its return of income on 30.09.2009 declaring nil income under the normal provisions and book profit of Rs. 15,61,69,200 u/s 115JB. During the assessment proceedings, AO noticing that assessee has entered into international transactions with its overseas AE made a reference to the Transfer Pricing Officer (TPO) u/s 92CA1) of the Act for determining ALP of the interna....
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....ate method with operating profit to operating cost as the PLI. By conducting a search in the databases, assessee has ultimately shortlisted eight companies as comparable with average profit margin of 16.45% on cost. Since the margin earned by the assessee is at 12.26% of operating cost, the price charged was found to be within arm's length. Though, TPO accepted TNMM as most appropriate method with OP/OC as PLI, however, he did not accept TP documentation of the assessee on the ITES segment by pointing out various defects and deficiencies. After rejecting the TP documentation, AO undertook a search himself in the databases which yielded 12 comparable companies with average arithmetic mean of 27.42%. The details of the companies selected by the TPO are as under: S.No Company Name Total Operating Income (Rs.) PBIT/Cost (%) 1 Accentia Tech 78,73,29,230 49.40 2 Acropetal Technologies Ltd (Seg.) 33,13,47,129 25.01 3 Aditya Birla Minacs Worldwide Ltd 231,56,52,000 0.53 4 Cosmic Global Ltd 7,76,39,593 48.20 5 Crossd domain 33,76,05,000 29.38 6 Eclerx Services Ltd 187,98,40,000 53.34 7 Infosys BPO Ltd ....
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....rmined at Rs. 9,82,45,901. The resultant shortfall of Rs. 86,00,471 was treated as adjustment u/s 92CA of the Act. 10. As far as distribution segment is concerned, though assessee had undertaken TP analysis by following the re-sale price method(RPM), but AO rejecting the same proceeded to determine the ALP by applying the TNNM Method, as a result of which the arm's length operating revenue was determined by the TPO at Rs. 5,26,24,777 as against the actual operating cost of Rs. 7,07,71,770. The difference of Rs. 1,81,46,922 was treated as adjustment u/s 92CA. Thus the total TP adjustment made by TPO was to the tune of Rs. 2,85,89,750. In pursuance to the order passed by the TPO, AO proposed a draft assessment order incorporating the adjustments to the ALP recommended by the TPO. Being aggrieved of the draft assessment order, assessee raised objections before the DRP. The DRP rejected assessee's objections on TP adjustment while granting partial relief on the issue of 10A deductions and computation under MAT provisions. In pursuance to the directions of the DRP, the impugned assessment order has been passed by the AO. 11. Assessee has raised a number of grounds, totaling to 19,....
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.... of assessee. It was also contended that the Infosys BPO has done brand building exercise by incurring large amounts of brand building and advertisement expenditure and undertaking brand campaigning outside India. Further, it also has huge asset base and therefore, this company is not functionally comparable to assessee. Assessee relied on the decision of the Hon'ble Delhi High Court in the case of CIT V/s. Agnity India Technologies Pvt. Ltd. (2013) 219 Taxman 26 (Del), wherein it was held that huge turnover companies like Infosys and Wipro cannot be considered as comparable to smaller companies like assessee. 16.1 Even though we are not in agreement with the contentions of the comparability on turnover ratio of assessee with this company on the ground that assessee's turnover is about Rs. 129.8 crores, which as against turnover of Rs. 1016 crores of the Infosys, ( which is only about 5 times) we are of the view that other contentions with regard to the brand value and brand building exercise, having huge asset base, can be considered to arrive at the conclusion that Infosys is functionally not similar to that of assessee. Infosys BPO stands on its own as an exclusive BPO of the In....
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.... of the Act. In this Circular, Information Technology Enabled Products/Services have been divided into fifteen categories, starting with Bank Office operations, Call centres etc. and ending with Website services. From the very description of such services, it is palpable that even though these fall under the overall ITES category, but some of them are quite different from each other. To cite, service at Sl.No. (vi) of this Circular is 'Geographic Information System services and at Sl. No. (vii) is 'Human Resources Services.' No doubt, all these fifteen categories of products/services have been included under the major head of 'Information Technology Enabled Services' (ITES), but most of them are quite distinguishable from others. In our considered opinion, the fifteen broad categories set out in this Circular cannot per se be claimed as similar to each other. A cursory look at these products/services transpires that some of them are functionally quite different from each other. Further the level of investment required for providing such services is also not consistent. In our considered opinion, the mere fact that two services are placed under this category do not become automatica....
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.... a comparable. 18.1 The Learned Departmental Representative, however, submitted that having accepted Aditya Birla Minacs Worldwide Ltd., as a comparable company, this company should also be included, as otherwise, both the companies should be excluded. 18.2 We have considered the issue and examined the Annual Report and the objections of assessee. As seen from the Annual Report, the above company is involved in diverse nature of services and there was no segmental data for diversified service port folio. Moreover this company can be considered as KPO and we are of the opinion that this company is not comparable to assessee's services. We therefore, direct the Assessing Officer/TPO to exclude this company. (4) Cosmic Global Ltd. 19. The main objection of assessee with reference to the inclusion of this company is with reference to outsourcing of its main activity. Even though this company is in assessee's TP study, it has raised objection before the TPO that this company's employee cost is less than 21.30% and most of the cost is with reference to the outsourcing charges or translation charges, and as such this is not a comparable company. The TPO, though considered these s....
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....d with a giant case and thus excluded CG-VAK with turnover from Accounts BPO segment at Rs. 86.10 lacs. As the segmental revenue of BPO segment of Cosmic Global Limited at Rs. 27.76 lac is still on much lower side, the reasons given above would fully apply to hold Cosmic Global Limited as incomparable. This case is, therefore, directed to be excluded from the list of comparables." In view of the detailed analysis of the coordinate Bench of the Tribunal in the above referred case, in this case also we accept the contentions of assessee and direct the Assessing Officer/TPO to exclude this comparable for the same reasons. (5) Acropetal Technologies Ltd. (Seg.) 20. The objection of assessee with reference to this company is that the company is involved in engineering design services and high end services and has products in its inventory. It is also involved in R&D activity and developing sophisticated delivery system. It was further submitted that this company is not functionally comparable at segment level also, as engineering design services are high end services, as considered in other cases. It is further submitted that allocation of expenses between segments is not possi....
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....mpany cannot be selected as a comparable. Moreover, this is also not a comparable in the case of M/s. Mercer Consulting (India) P. Ltd. (supra), which indicates that the TPO therein has excluded it at the outset. In view of this, we direct the Assessing Officer/TPO to exclude this comparable, from the list of comparable selected". 15. As the aforesaid decision of the Coordinate Bench is for very same A.Y and facts are materially same, moreover, as the ld DR has not brought any contrary decision to our notice, therefore, respectfully following the aforesaid decision of Coordinate Bench, we exclude these comparables in ITES segment.. 16. In Ground No.11, assessee has objected to rejection of three comparables selected by it. However, at the time of hearing, ld AR restricted his submissions to only one of the comparable i.e. ALLSEC Technologies Ltd and submitted that rejection of other two companies are not pressed. In view of the aforesaid, we will consider assessee's objection with regard to rejection of Allsec Technologies as comparable. The ld AR submitted that the TPO has rejected this company by applying export revenue filter. The TPO observed that exports are only 19.57% ....
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....s clear that this company was held as comparable only because the Tribunal found the reason for exclusion of the company by applying the export revenue filter of 75% unacceptable. The Tribunal never considered the aspect of acquisition made by Allsec during the year. In the aforesaid view of the matter and considering the fact that the acquisition made by the company during the relevant FY might have had an impact on the financial results, we do not consider it expedient to interfere with the decisions of TPO/DRP. Accordingly, we uphold the rejection of the aforesaid comparable". 18. Considering the fact that this company was rejected because it has made acquisition during the relevant financial year, we do not consider it appropriate to accept this company as a comparable. This ground of the assessee is therefore, dismissed. 19. In Ground No.12, assessee has challenged the decision of the TPO in not aggregating the software services transactions of the assessee for determining the ALP. The ld AR submitted before us that after the merger of Spacelabs with the assessee company, assessee has considered the revenue earned from software development services as a whole while compu....
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....d entity specific a/c with segmental details and has also conducted analysis on this basis in its TP study, we do not find any reasons to disturb the order of the TPO and DRP on this issue. Accordingly, having not found any merit in the submissions of the ld AR, we dismiss this ground. 21. In Ground No.13, assessee has objected to selection of following six comparables: a) Bodhtree Consulting Ltd b) Comp-U-Learn Tech India Ltd c) iGate Global Solutions Ltd d) Infosys Technologies Ltd e) Kals Information Systems Ltd and f) Tata Elxsi Ltd. 22. The ld AR submitted before us that while Comp-U-Learn Tech India Ltd, iGate Global Solutions Ltd, Kals Information Systems Ltd and Tata Elxsi Ltd cannot be considered as comparable to the assessee, as they are functionally different, Infosys Ltd under no circumstances can be a comparable to the assessee not only because of its size and diversified activities, but also because of premium pricing, ownership over significant intangibles. The ld AR submitted that these companies have been rejected as comparables by different Benches of the Tribunal including the Hyderabad Benches, in a number of cases for the same A.Y, In su....
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....sulting Ltd. is in the business of software products and was engaged in providing open & end to end web solutions software consultancy and design & development of software using latest technology. The decision rendered by the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. (supra) is in relation to A.Y. 2008-09. It was affirmed by the learned counsel for the Assessee that the facts and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY 08-09 as far as this comparable company is concerned. Following the aforesaid decision of the Mumbai Bench of the Tribunal, we hold that Bodhtree Consulting Ltd. cannot be regarded as a comparable. In this regards, the fact that the assessee had itself proposed this company as comparable, in our opinion, should not be the basis on which the said company should be retained as a comparable, when factually it is shown that the said company is a software product company and not a software development services company. 26.2 Infosys Ltd.:- As far as this company is concerned, it is not in dispute before us that this company has been considered to be functionally different ....
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.... and filed for many patents in India and USA ; (iv) the company has substantial revenues from software products and the breakup of such revenues is not available ; (v) the company has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in 'AUTOLAY', a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded from the list of comparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 11.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee as brought on record sufficient evidenc....
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....re companies. The relevant extract are as follows: "16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds." Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. 47. We have given a careful consideration to the submission made on behalf of the Assessee. We find tha....
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.... "software products and services" segment revenues. Flextronics has a hybrid revenue model and hence should be rejected as functionally different. Based on the information provided under "Revenue recognition" in its annual report, it can be inferred that the software services revenues are earned on a hybrid revenue model, and the same is not similar to the regular models adopted by other software service providers. The learned representative pleaded that a regular software services provider could not be compared to a company having such a unique revenue model, wherein the revenues of the company from software/product development services depends on the success of the products sold by its clients in the marketplace. Hence, it would be inappropriate to compare the business operations of the assessee with that of a company following hybrid business model comprising of royalty income as well as regular software services income, for which revenue break-up is not available. He finally submitted that this was a good reason to exclude this company also from the list of comparables. 20. On the other hand, the learned DR supported the order of the lower authorities regarding the inclusion....
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....g the decisions of the Coordinate Benches as referred to above, we exclude Bodhtree Consulting Ltd, Infosys Ltd, KALS Information Systems Ltd and Tata Elxsi Ltd from the list of comparables. As far as Comp-U-Learn India Ltd is concerned, it is seen that in case of M/s Kenexa Technologies Pvt. Ltd vs. DCIT (ITA No.243/Hyd/2014), the Coordinate Bench held as under: "39. The assessee submitted before the DRP that Comp-ULearn Tech India Ltd. was engaged in the development of new software (product development) (page 7 of the Annual Report) in ITES call centre and BPO services (page 11 of Annual Report). It was further submitted that schedule XIII of the Annual Report shows software development expenditure at only 25% of the total expenditure. The TPO extracted the 133(6) notice and held that the company has nil onsite revenue and satisfied all the filters applied by the TPO. We are of the opinion that some more analysis has to be done and we direct the TPO to look into the financial statement of the company and also provide an opportunity to the assessee to submit relevant details to substantiate its claim that Comp-U-Learn Tech India Ltd. is not a comparable company." 26. Therefo....
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.... (Seg.) by observing that the company does not satisfy the employee cost filter. The ld AR submitted, the observations made by the TPO is totally wrong as the annual report of the company would reveal that the employee cost of the company is 80.51% of its total revenue. The ld DR however, justified the reasoning of the TPO and the DRP. 30. We have considered the submissions of the parties and perused the materials on record. On a perusal of the discussions made by the TPO, it is seen that the TPO has rejected this company as comparable by alleging that complete information in respect of employee cost and other related costs are not available. If that is the case, then we do not understand how the TPO can state that the company fails the employee cost filter. In view of the aforesaid, we consider it appropriate to remit the comparability of the aforesaid company to the AO/TPO for considering afresh after due opportunity of being heard to the assessee. The TPO must consider all facts and materials brought on record by the assessee while deciding the issue. As far as Quintegra Solutions Ltd is concerned, the ld AR submitted that the TPO has rejected this company on the allegation t....
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.... 14/11/14 held as under: 41. We place reliance on the decision of ITAT Delhi Bench in the case of Sony India Pvt. Ltd. vs. DCIT, ITA No. 1189/Del/2005, 819/Del/2007 and 820/Del/2007. The relevant portion is extracted below: "106.2 Thus, creation of unpaid liability and its write back is a normal incident of a business operation which is carried everywhere in accounts to have true picture of profits of the relevant period. Having regard to statutory provisions, it cannot be said that provisions or writing back of liability is not part of operating profit or would not be taken into consideration for computing the same. We can therefore make a general observation that all business enterprises are making and writing back liabilities as a normal incident of operating business. Therefore on facts we do not see any justification for excluding provisions written back in the profit and loss account as not forming part of the operating profit of the taxpayer. Accordingly claim of the taxpayer is accepted. 107. The next item relates to balances written back. In our considered opinion, finding given in respect of provisions written back is equally applicable to balances written back m....
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....e, while bench marking ALP of the distribution segment has selected RPM as the most appropriate method. TPO however, did not accept the method selected by the assessee by observing that TNNM is the most appropriate method considering the nature of the services. Though assessee objected for adoption of TNNM as the most appropriate method but, the TPO was not convinced with the explanations of the assessee showing the following reasons: "6.2 The RPM method adopted by the taxpayer was rejected and the TNNM was selected as the most appropriate method and broadly the following reasons were given by the TPO: i) The equipments sold by the taxpayer were highend, branded and technologically advanced equipments whereas the comparable companies were functioning on a much lower technological platform. ii) The difference in marketing efforts among the comparables as well as with the tax payer distort the gross margins as these margins also include the marketing effort which was inbuilt in the sale price. iii) The levels of inventory and the cost involved in keeping the inventories had to be adjusted which may not be possible based on the information available in the public domain....
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....ld AR referring to Rule 10B of the I.T. Rules submitted that when there is transaction involving purchase of a product and resale, the most appropriate method to be adopted is the resale price method. In support of his contention, ld AR relied upon the following decisions of the ITAT: i) L'Oreal India P. Ltd (ITA No.1046/2012 - Bombay High Court ii) L'Oreal India Pvt. Ltd. ITA No.5423/Mum/2009 iii) Kodak Polychrome Graphics (I) Pvt Ltd. ITA No. 1557/Mum/2009 iv) Danisco (India) Pvt.Ltd- ITA No.5291/Del/2010 v) Frigoglass India Pvt Ltd. ITA No.463/Del/2013 vi) Luxottica India Eyewear Pvt Ltd ITA No.1115 & 617/Del/2014 vii) Mattel Toys (I) Pvt. Ltd ITA No.2476/Mum/2008 viii) Nokia India Pvt. Ltd. ITA Nos. 242 & 178 and CO No.77/Del/2010 ix) Star Diamond Group NV vs. DCIT ITA No.3923/Mum/2008 x) Tektronix India Pvt Ltd . ITA No.1334/Bang/2010 xi) Tupperware India Pvt Ltd ITA No.2140 & 1323/Del/2012 42. The ld DR on the other hand submitted before us that assessee having accepted the rejection of resale price method in A.Y 2008-09, it cannot again press for acceptance of RPM as most appropriate method. In rejoinder, the ld AR submitted that in A.Y 20....
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....dopted TNMM as the MAM for its transfer pricing study and hence it cannot turn around and argue for adoption of RSPM as the MAM, we find that the Mumbai Bench of the Tribunal in the case of Mattel Toys(I) Pvt.Ltd. in ITA no.2476/Mum/2008 held as follows. "41. Now coming to the argument of the Ld.DR that once the assessee itself has chosen TNMM as the MAM in TPR, then it cannot resort to change its method at an assessment or appellate stage. In our opinion, such a contention cannot be upheld because if it is found on the facts of the case that a particular method will not result into proper determination of the ALP, the TPO or the appellate authorities can very well hold that why a particular method can be applied for getting proper determination of ALP or the assessee can demonstrate a particular method to justify its ALP. Thus, even if the assessee had adopted TNMM as the MAM in the TP report, then also it is not precluded from raising the contentions/objections before the TPO or the appellate Courts that such a method was not an appropriate method and is not resulting into proper determination of ALP and some other method should be resorted. The ultimate aim of the TP is to ex....
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....hereinabove. On the other hand, ld.AR justified the RP< method adopted by it and also referred to order of TPO in the preceding AY as well as succeeding AY to the AY under consideration to substantiate that RPM is the most appropriate method to determine ALP. He submitted that the assessee made adjustment for marketing and selling expenses to the profits to make it comparable to the comparable companies'profits. We agree with the Ld.CIT(A) that there is no order of priority of methods to determine ALP. RPM is one of the standard method and OECD guidelines also states that in case of distribution and marketing activities when the goods are purchased from AEs which are sold to unrelated parties, RPM is the most appropriate method. In the case before us, there is no dispute to the fact that the assessee buys products from its AEs and sells to unrelated parties without any further processing." (iii) In the case of Danisco (India) Pvt.Ltd. vs. ACIT, Circle 10(1), New Delhi (ITA no.5291/Del/2010), it is held as follows: "22. Considering the above submissions we find that the assessee established in 1998 as a 100% subsidiary of Danisco A/S Denmark. Danisco India is engaged in the bu....
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....hods by TPO as adopted by assessee is bereft of any cogency and objectivity. The same is a work of guessing and conjectured. Similarly the TNMM method applied by the TPO suffers from the same inherent aberrations as mentioned above. In these circumstances we are of the view that Assessee's methods of CPM and RPM respectively worked by applying appropriate comparables is to be upheld. Thus the ALP working returned by the assessee is upheld. The Assessee's TP grounds are allowed." (v) Textronic India Pvt.Ltd. vs. DCIT (ITA no. 1334/Bang/2010), it is held as follows: "We have considered the rival submissions. The dispute is with regard to the ALP in respect of international transactions whereby the assessee imports equipment from its AE and resells them without any value addition to the Indian customers. In similar circumstances, Mumbia Bench of the Tribunal in the case of L'Oreal India Pvt.Ltd. (supra) has taken the view that the RPM would be the most appropriate method for determining the ALP. The Mumbai Bench of Tribunal in this regard, has referred to the OECD guidelines wherein a view has been expressed that RPM would be the best method when a resale takes place without any....