TaxTMI 
TaxTMI 
2015 (10) TMI 945
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....e of Rs. 1,59,98,791. The return of income was processed under Section 143(1) of the Income Tax Act, 1961 (in short 'the Act') and the case was subsequently taken up for scrutiny. A reference under Section 92CA of the Act was made by the Assessing Officer to the Transfer Pricing Officer ('TPO') in respect of the following international transactions entered into by the assessee with its Associated Enterprises ('AEs') in the year under consideration :- Back-end Services (ITES) Rs. 1,24,40,30,865 Software Development Services Rs. 45,11,75,241 Reimbursement of expenses paid Rs. 29,09,92,785 Reimbursement of expenses received. Rs. 1,43,58,174 2.3 The TPO passed an order under Section 92CA of the Act dt.28.10.2009 wherein an aggregate T.P. Adjustment of Rs. 19,52,63,407 was proposed to arrive at the Arm's Length Price ('ALP') of the international transactions which included an adjustment of Rs. 4,16,14,767 to the software development services segment and an adjustment of Rs. 15,36,48,640 to the ITES segment. After receipt of the TPO's order under Section 92CA of the Act, the Assessing Officer passed the draft assessment order incorporating, in....
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.... was not available to the Appellant at the time of complying with the transfer pricing documentation requirements. 5. The Honourable DRP and the learned AO/TPO erred in fact and in law in determining the Arm's Length Price ("ALP") by adopting the financial data for a single year (i.e. the financial year 2005-06) of the comparables as against multiple year data considered by the Appellant. 6. The learned TPO and the Honourable DRP have erred in determining the arm's length margin at 19.96 percent for the software segment and 23.19 percent for the ITES segment based on companies which are not comparable to the Appellant due to various factors such as functional comparability, product led revenues, inadequate financial information, use of unreliable segment financials, extra ordinary events, low employee cost levels, failing of TPO's own filters, inconsistent approach of the TPO for different comparables etc. and rejecting certain companies comparable to the Appellant based on incorrect reasons. 7. The learned TPO erred in computing the operating margins of the comparable companies at higher levels and determining the operating margin of the Appellant to be lower than the mar....
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....penses should not be reduced from the total turnover for the purpose of computation of relief under section 10A of the Act even if these are reduced from the export turnover. 16. The learned AO has erred in facts and on law in computing the interest under section 234C of the Act at a higher amount without appreciating that the said interest is to be computed on the basis of the income returned by the appellant. 17. The Honourable DRP and the learned AO/TPO has erred in law and on facts in levying and wrongly computing interest under section 234B, 234C and 234D of the Act." 3.3 The Additional Grounds of appeal raised are as under :- "1. The learned DRP/A.O./TPO have erred in selecting companies (including Spanco Limited (formerly known as Spanco Telesystems & Solutions Ltd.) Allsec Technologies Ltd. (ITES), which are not comparable to the appellant. These companies cannot be retained as comparable, merely because these were initially selected by the appellant in its transfer pricing documentation. 2. The learned DRP/A.O./TPO have erred in not selecting companies (including Genesys International Corp. Ltd.) even though the aid companies qualified as a comparable to the....
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.... profit margin of these 49 comparables was computed at 12.80%. As the average mean of the comparables was within the 5% range, as compared to the assessee's margin at 10%, the assessee conducted that its international transactions of the software development service segment were at arm's length. 6.2 The TPO examined the assessee's T.P. Report and rejected the same for the various reasons enumerated in the T.P. order. The TPO then conducted his own search process adopting various criteria/filters and finally selected the following 20 companies as the final set of comparables. Sl. No. Company Name Sales (Rs. Crores) OP to Total Cost % 1. Aztec Software Ltd. 128.61 18.09 2. Geometric Software Ltd. (Seg.) 98.59 6.70 3. iGAte Global Solutions Ltd. (Seg) 527.91 15.61 4. Infosys Ltd. 9028.00 40.38 5. KALS Info Systems Ltd. 1.97 39.75 6. Mindtree Consulting Ltd. 448.79 14.67 7. Persistent Systems Ltd. 209.18 24.67 8. R Systems International Ltd. 79.42 22.20 9. Sasken Communication Ltd. (Seg) 240.03 13.90 10. Tata Elxsi Ltd. (Seg.) 188.81 27.65 11....
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....s :- i) Accel Transmatics Ltd. (Seg.) ii) Infosys Technologies Ltd. iii) KALS Info Systems Ltd. iv) Megasoft Ltd. v) Tata Elxsi Ltd. In support of the assessee's contentions for exclusion of the above comparables, the learned Authorised Representative for the assessee placed reliance on the following decisions :- (i) Ariba Technologies India (P) Ltd - IT(TP)A No.1179/Bang/2010. (ii) CES Pvt. Ltd. - ITA No.1445/Hyd/2010. (iii) NTT Data FA Insurance Systems - IT(TP)A No.1311/Bang/2010. (iv) Yahoo Software Development India Pvt. Ltd. - ITA1129/Bang/2010. (v) Agnity India Technologies Ltd. - ITA No.1204/2011 (Delhi) 8.1 Accel Transmatics Ltd. The assessee contends that this company is not a pure software development service company but rather it is a product development company and has a different functional profile from the assessee who is providing only software development to its AEs. It is submitted that this company is engaged in business application products in the healthcare and education segments which operate the products 'Healthspace' and 'Prodigy' respectively for which it received and would continue to receive royalty. It is also s....
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....ng were the relevant observations of the Tribunal on the aforesaid comparable companies in the case of Triology E-Business Software India Pvt.Ltd.(supra): "(d) KALS Information Systems Ltd. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual report, the salary cost debited under the software development expenditure was Q 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal's decision of the ITAT in the case of Bindview India Private Limited Vs. DCI, ITA No. ITA No 1386/PN/1O wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software 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 t....
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....ion kiosks Queue management system, ticket vending system (ii) Ushus Technologies - offshore development centre for embedded software, net work system, imaging technologies, outsourced product development (iii) Accel IT Academy (the net stop for engineers)- training services in hardware and networking, enterprise system management, embedded system, VLSI designs, CAD/CAM/BPO (iv) Accel Animation Studies software services for 2D/3D animation, special effect, erection, game asset development. 4.3 On careful perusal of the business activities of Accel Transmatic Ltd. DRP agreed with the assessee that the company was functionally different from the assessee company as it was engaged in the services in the form of ACCEL IT and ACCEL animation services for 2D and 3D animation and therefore assessee's claim that this company was functionally different was accepted. DRP therefore directed the Assessing Officer to exclude ACCEL Transmatic Ltd. from the final list of comparables for the purpose of determining TNMM margin." Besides the above, it was pointed out that this company has related party transactions which is more than the permitted level and therefore should not be tak....
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....ra) for Assessment Year 2006-07. 9.2 Per contra, the learned Departmental Representative supported the orders of the TPO in including this company in the list of comparables to the assessee. 9.3.1 We have heard both parties and perused and carefully considered the material on record; including the judicial pronouncements cited. We find that the Hyderabad Bench of the ITAT in the case of CES Pvt. Ltd. (supra) for Assessment Year 2006-07 has excluded this company i.e. Infosys Technologies Ltd., from the list of comparables to companies who are merely providers of software development services and at para 16(1) & 17 thereof has held as under :- "16. W ith ref erence to sof tware se gment, Assessee objections are as under: 1 . Infosys L t d . The learned counsel for the assessee submission is to exclude the said company from the list of comparables on the ground that this company is a giant company and is e ngaged in the de ve lopment of niche products. He relied on the decis ion of Hyderabad I T AT in the case of In toto Soft ware Pvt. Ltd. in IT A No. 1196/Hyd/2010 (32 T axmann.com 21)." 17. we have considered various objection in the light of material placed before....
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.... 16(6) and 17 of its order, the co-ordinate bench of the ITAT, Hyderabad has held as under :- "16...... (6 ) M e g a s of t L t d . The learned counsel for the assessee submission is to exclude the said company from the list of comparables on the ground that this company is a su per profit making company and diff erence in f unctionality and b usiness model. Fu rther, T PO pla ced a f ilter of simila r year financial endin g i.e., March year endin g. Ho we ver, Megasof t Ltd has a diff erent f inancial year endin g compared to Assessee company i.e., December Year ending and ought n ot to have considered it as a c omparable. He relied on the follo win g c ase law: 1. Hyderabad ITAT order in the case of Capital IQ Information Systems (India) Ltd. vide para 15 - 32 T axmann.com 21. 2. Mumbai ITAT order in Teva India Pvt. Ltd. Vs. DCIT Mum bai. 3. Dy. CIT Vs. America l E xpres s (India )(P ) Ltd. [2012] 135 IT D 211 (Delhi)(T rib)" " 17. we have considered various objection in the light of material placed before us. Various co-ordin ate benches have already considered the above object ions on similarly pla ced sof tware development companies. Accord ingly, these ob....
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....ibunal in the case of Logica Pvt.Ltd. IT (TP) 1129/Bang/2011 AY 07-08) wherein on the comparability of the aforesaid company, the Tribunal held as follows:- "14. As far as comparable at Sl.No.6 & 24 are concerned, the comparability of the aforesaid two companies with that of the software service provider was considered by the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India Private Ltd. (supra) wherein on the aforesaid two companies, the Tribunal held as follows:- "7.7.Tata Elxsi Limited.: From the facts and material on record and submissions made by the learned AR, it is seen that the Tata Elxsi is engaged in development of niche product and development services, which is entirely different from the assessee company. We agree with the contention of the learned AR that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratiofrom product and services. Thus, on these facts, we are unable to treat this company fit for....
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....td.) 5.68 34.52 8. Goldstone Infratech Ltd. (Seg) (Earlier known as Goldstone Teleservices Ltd.) 5.03 29.01 9. Spanco Ltd. (Seg.) (Ea4.97rlier known as Spanco Telesystems & Solutions Ltd.) 82.32 20.86 10. Ace Software Exports Ltd. 4.97 7.72 11. Apex Knowledge Solutions Pvt. Ltd. 4.92 20.48 12. R Systems International Ltd. (Seg.) 9.17 15.11 13. Flextronics Software Systems Ltd. (Seg.) 21.41 14.54 Average Mean Margin 24.00 12.3 The TPO thereafter proceeded to determine the ALP of the international transactions in the ITES segment by applying the arithmetic mean of the final list of comparable companies chosen by him. After allowing working capital adjustment of 0.81% to the assessee, the TPO computed the ALP as under :- Particulars Amount (Rs.) Arm's Length Mean Margin on cost 24.00 % Less : Working capital adjustment 0.81% Adjusted Margin 23.19% Operating cost 114,31,24,876 ALP 123.91% of operating cost 140,82,15,534 Price received 125,45,66,894 Shortfall being the adjustment u/s.92CA 15,36,48,640 Based on t....
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....to be excluded from the list of comparables to the assessee as it fails the RPT filter as it has RPT of 49% of its income. 13.2.3 in the case of Vishal Information Technologies Ltd., it was submitted that this company is functionally different from the assessee in the case on hand, as it was engaged in e-publishing services. It was also submitted that this company has a different business model as it has outsourced its ITES and therefore cannot be comparable to the assessee. 13.2.4 In the case of Asit C Mehta Financial Services Ltd., it was submitted that this company has a different business model from the assessee in the case on hand, as it has a very low employee cost of 23.4% as against 46.95% of the assessee. It was also submitted that there were extra-ordinary events in the form of merger of Nucleus Netsoft and GIS with the assessee company in the year under consideration and therefore its margin of 90%, which have significantly diminished in subsequent years, would render it not comparable to the assessee. It was submitted that in view of the above, this company cannot be treated as comparable to the assessee. 13.2.5 In the case of Goldstone Infratech Ltd., it was s....
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....) Vishal Information Technologies Ltd. (b) Goldstone Infratech Ltd. (c) Datamatic Financial Services Ltd.(seg) (d) Maple e-Solutions Ltd. (e) Nucleus Netsoft & GIS(India) Ltd. (now known as (Asit C. Mehta Financial Services Ltd.) Vishal Information Technologies Ltd. 9. The assessee's objection with reference to inclusion of this comparable is on the reason that the company is functionally different, also does not satisfy the filters such as employee cost and on-site revenue filter. It was submitted that employee cost forms a major portion of the total cost of BPO services and in the assessee's case employee cost is 62% of the total cost, whereas in the selected company the employee cost is less than 2%, which indicates that most of the work was outsourced and the out-sourcing cost was at 88.64% of the operating cost. It was further submitted that the ITAT Bangalore in the case of First Advantage Off-shore Services (ITA No.1252/Bang/2010) has directed to use employee turnover filter in a consistent manner for selection of comparables and in the case of Maersk Global Services Centre (India) Pvt. Ltd. (14 ITR(Trib) 541) the Mumbai Bench of the Tribunal has analysed a....
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.... of the total turnover. Therefore, it fails the filter provided by the Assessing Officer, on the basis of the foreign exchange earnings. Further, the Revenue from BPO is failing over a period of three years. This issue was considered by the coordinate Bench (Mumbai Bench) of the Tribunal in the case of Stream International Services Ltd.(supra) wherein it was considered as under- "14. The inclusion of second case objected to by the Id. AR is that of Goldstone Infratech Limited (Seg) (earlier known as Goldstone Teleservices Limited). Here it is relevant to note that the TPO, inter alia, applied filter of 'Companies withexport revenues more than 25% of the revenues'. Annual accounts of Goldstone Teleservices Limited indicate total revenue of the company at Rs. 30.89 crore from three segments, viz., Telecommunication at Rs. 13.63 crore, BPO at Rs. 5.02 crore and Insulator at Rs. 12.23 crore. The break up of such revenue of Goldstone Teleservices Limited has been provided at page 236 of the paper book. Schedule forming part of the annual accounts of Goldstone Teleservices Limited divulges earnings in foreign currency at Rs. 4.24 lakh. Such detail is available at page 239 of the paper....
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....expenses does not include any profit element, the Id. DR urged that the same be excluded. He stated that once this transaction is excluded, the other transaction of Rs. 14.31 lakh are less than 25% of the total transaction with related parties. 13. We do not find any force in the contention advanced by the learned Departmental Representative for the exclusion of transactions with Datamatics Limited towards 'Reimbursement of expenses' from the overall transactions entered into by Datamatics Financial Services Ltd. with its AEs. Section 92F(v) defines 'transaction' in the context of transfer pricing provisions to include an arrangement, understanding or action in concert whether or not it is formal or in writing or whether or not it is intended to be enforceable by legal proceeding. There is no reference to any transaction having necessarily including profit element or mark-up so as tofall within the definition of 'transaction' under Chapter X of the Income-tax Act. Since the TPO applied filter of having companies with less than 25% related party transactions, it is not open to argue that the transactions of reimbursement of expenses duly reported by Datamatics Financial Services ....
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.... by the learned Departmental Representative. It is apparent from two orders passed - one by the Delhi Bench and the other by the Hyderabad Bench of the Tribunal - that the case of Maple eSolutions Limited has been directed to be excluded from the list of comparables. As the assessment year under consideration is 2006-2007 and the Delhi Bench of the Tribunal has also considered the same assessment year while directing the exclusion of the case of Maple e Solutions Limited from the list of comparables, we are unable to accept the contention of the Id. DR in this regard. It is more so because no contrary view has been brought by the Ld. DR to our notice. Respectfully following the precedents, we direct the exclusion of this case from the final list of comparables." Since the DRP in assessee's own case for assessment year 2007-08 also considered and excluded this company, we uphold the assessee's objection in this regard and direct the Assessing Officer to exclude this company from the comparables adopted. Nucleus Netsoft & GIS(India) Ltd. 13. The last objection was with reference to the above company, which is on similar facts as that of Vishal Information Technologies, discu....
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.... assessee submitted that this company being engaged in electronic publishing services and GIS including data conversion, data entry imaging, etc. is functionally different from an ITES provider, as is the assessee in the case on hand, and therefore prayed that this company be excluded from the list of comparables. In support of this proposition, the learned Authorised Representative of the assessee placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of Ariba Technologies India Pvt. Ltd. (supra). 14.2 Per contra, the learned Departmental Representative supported the orders of the authorities below in including the company in the list of comparables to the assessee in the case on hand. 14.3.1 We have heard both parties and perused and carefully considered the material on record; including the judicial decision cited and relied upon by the assessee. We find that the co-ordinate bench of this Tribunal in the case of Ariba Technologies India Pvt. Ltd. (supra) has considered the comparability of this company, namely, Apex Knowledge Solution Pvt. Ltd. in the ITES Segment and held that it is not functionally comparable to ITES provider as it provides....
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....bles by the assessee itself. It was submitted by the learned Authorised Representative of the assessee that at the time of the T.P. Study, based on the details available in the public domain, the assessee had selected these two companies as comparables. However, it subsequently came to light that various Tribunals have held that these two companies are not comparables for companies in the ITES sector and therefore had raised additional grounds in this regard. In support of the assessee's contention that these two companies are to be excluded from being adopted as comparables to companies in the ITES sector in the year under consideration, the learned Authorised Representative placed reliance on the decision of the ITAT, Hyderabad Bench in the case of CES Pvt. Ltd. (supra) for Assessment Year 2006-07 wherein 'Spanco' was excluded from the list of comparables on the ground that it had acquired Intelenet BPO Services Ltd. in Nov., 2005 and was also a super profit making company, and Allsec Technologies Ltd. was excluded on grounds of having super normal profits and for entering into new areas of business. 16.2 Per contra, the learned Departmental Representative supported the TP....
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....ounds raised by Assessee on this issue are allowed." 16.3.2 Following the aforesaid decision of the ITAT, Hyderabad Bench in the case of CES Pvt. Ltd. for Assessment Year 2006-07 (supra), for the factual reasons cited therein and also brought before us, we hold and direct that these two companies namely, Spanco and Allsec Technologies Ltd. are to be excluded from the set of comparable companies for the ITES segment of the assessee. 17. Ground No.2 : Genisys International Corp. Ltd. 17.1 In the Ground at S.no.2 of the additional grounds of appeal, the assessee has submitted that this company; namely, Genisys International Corp. Ltd., should be included as a comparable. From the details before us, we find that the assessee has failed to adduce any evidence to support its claim. Evidently, this company was neither selected as a comparable company in the set of 49 comparables chosen by the assessee nor those chosen by the TPO. Therefore, this company did not come to be selected in the search process of either the TPO or the assessee. That being the case, we find that the assessee has not brought on record any factual evidence to establish its claim that this company satisfies all....