TaxTMI 
TaxTMI 
2015 (10) TMI 1005
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.... the learned AO erred in assessing the total income of the Appellant at Rs. 16,65,79,490 as against returned income of Rs. 12,61,73,755 computed by the Appellant. 3. The learned AO / Transfer Pricing Officer ("TPO") erred in making an addition of Rs. 2,14,03,620 and Rs. 1,90,02,115 to the total income of the Appellant on account of adjustment in the arm's length price with respect to the IT enabled services and software development services transaction respectively entered into by the Appellant with its associated enterprise. 4. The learned TPO and the learned AO have erred, in law and in facts, by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Rules, and conducting a fresh economic analysis for the determination of the ALP in connection with the impugned international transaction and holding that the Appellant's international transaction is not at arm's length. 5. The learned TPO and the learned AO have erred, in law and in facts, by determining the arm's length margin/ price using only FY 2009-10 data which was not entirely available to the Appellant at the time of complying with ....
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....ld. TPO for determining the arm's length nature of the international transactions of the assessee. The ld. TPO requested for certain information/documents which were duly furnished by the assessee. Subsequently, the ld. TPO passed an order dated 16.01.2014 making certain adjustment to the ALP of the international transactions of the assessee. 6.1 The assessee operates in two segments i.e. software development segment and ITES segment. During the FY 2009-10, the assessee had following international transactions with Associated Enterprises (AEs) which were picked-up for scrutiny by the TPO :- S. No. Particulars Method Adopted PLI Total Value (Rs.) 1. Provision of software development services TNMM (Segmental) OP/TC 33,51,548/- 2. Provision of IT enabled services 40,02,92,121/- 6.2 In respect of the Assessee's impugned international transaction of provision of IT services and ITES, the transfer pricing analysis was undertaken in the following manner :- 6.3 The Assessee had undertaken analysis selecting the Transactional Net Margin Method ("TNMM") as the most appropriate method. In order to identify compa....
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....td. 24.09 6. Infosys B P O Ltd. 30.17 7. Jindal Intellicom Ltd. 14.95 8. Omega Healthcare 13.11 9. T C S E-Serve International Ltd. 55.43 10. T C S E-Serve Ltd. 10. 65.27 Average 31.81 7. Accordingly, the arm's length price of the international transaction related to proviso of ITES is calculated as below :- Operating Cost (A) 32,03,40,125 Arm's Length Margin (%) 31.81% Margin (B) 10,19,00,194 Arm's Length Price (A+B) = C 42,22,40,319 Price charged by the assessee (D) 40,02,92,121 Proposed Adjustment 2,19,48,198 8. The comparables that shall be used in the Software Development Services are as under :- S.No. Company Name OP/OC (%) Adjusted OP/OC (%) 1. Akshay Software Technologies Ltd. -1.04 -0.42 2. Cat Technologies Ltd. 11.48 4.49 3. E-Infochips Bangalore Ltd. 72.69 65.99 4. Evoke Technologies Pvt. Ltd. 19.02 19.67 5. E-Zest Solutions Ltd. 18.66 16.36 6. Infinite Data SYstems Pvt. Ltd. 84.65 84.65 7. Infosys Ltd. 45.08 46.41 8. KulizaTech 18.85 17.66 ....
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....is evident from the annual report of the company and the relevant extracts are reproduced for your goodself's ease of reference: Infosys owns patents and has also filed numerous patent applications which are pending approvals. These have been filed by Software Engineering and Technology Labs (SETLabs) which is the center for applied technology research in software engineering and enterprise technology created by Infosys. The relevant extract contained in Page 15 of the annual report is produced below : During the, year SET Labs' IP Cell filed 31 patent applications in the United States Patent and Trademark Office (USPTO) and Indian PATENT Office. We now have an aggregate of 224 patent applications pending in India and the U.S. and the USPTO has granted nine patents. Page 27 of the annual report suggests that Infosys earns revenue from software products. 1.b Software products The revenue from software products grew 9.1% compared to 42% in the previous year. Of the software products revenue, 82.1% came from exports compared to 75.7% in the previous year. The company has incurred huge research and development expenditure and the same is evident from the pag....
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....n 50% of the income is from onsite services Most of the revenue composition is offshore Expenditure on advertising sales promotion Has incurred selling and marketing expenditure to the tune of 974 crore. Has 65 marketing offices in total. Does not undertake any expenditure on advertising/ sales promotion as entire services revenue is from AEs. Expenditure on research and development Rs.440 crore Does not undertake product development, merely provides software development services to AEs. He has referred to following decision: a) Aginity Technologies ITA No. 3856/D/2010 b) CIT v. Aginity Technologies 262 CTR 291 (Del) c) Atrenta (India) Pvt. Ltd. d) Toluna India Pvt. Ltd. vs. ACIT (formerly Greenfield Online (P) Ltd. 166 TTJ 128 (Del) e) Cordys R&D (India) Pvt. Ltd. ITA N. 1092/Hyd/2010 dated 3.1.2014 wherein the ITAT excluded Infosys Technologies as it is not functionally different but is a giant company in the field of software development services having considerable brand value and assumed all risks related to business. Further, appeal of Revenue against this order has been dismissed by the Hon'ble Andhra Pradesh High Court vid....
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....diture on Research and Development Rs. 236 crores Rs. Nil Other 100 per cent offshore (from India) 16. On the basis of the above chart, the Hon'ble High Court affirmed the conclusion that a captive unit of a comparable company which assumed only a limited risk cannot be compared with a giant company in the area of development of software who assumes all types of risks leading to higher profits. The facts of the appellant are akin and the comparative chart of assessee vis -a-vis M/s Infosys clearly depicts the same and therefore, do not warrant any different conclusion. The appellant is also captive service provider to its AE and as such, M/s. Infosys Ltd. is not a valid comparable with the appellant and we direct it's exclusion from the comparables. M/S. WIPRO TECHNOLOGY SERVICES LIMTIED 17. As regards this comparable, the assessee had the following objections taken before the lower authorities :- " In this regard, the Assessee wishes to submit that Wipro should be rejected on the ground that there is insufficient financial information in the annual report to conclude on its comparability. As per the profit and loss account of FY 2009-10,....
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....isitions or such other factors which affect the operations of the company substantially should not be used as comparables as they will not prove to be good benchmarks. The relevant extract as on Page 5 has been provided below for your easy reference: 8. Select companies based on an analysis of the nature of operations undertaken by each of the companies. The rationale for excluding companies that are affected by factors like persistent losses, declining sales, extraordinary income or expense, mergers and acquisitions or other such factors which affect the operations of the company substantially should not be used as comparables as they will not prove to be good benchmarks, is discussed subsequently. An analysis of companies in the accept/reject matrix has also been done by this office with respect to the nature of function/operations. And the extract regarding the same point has also been stated on Page 7 of the show cause notice issued by your goodself : viii Companies that are affected by some peculiar economic circumstances: Companies that are affected by factors like persistent losses, declining sales, extraordinary Income or expense, mergers and acq....
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....inary in the sense that this is going to affect the profit margin of the comparable company. So called extraordinary event is that this company acquired 100% holding of City Technology Services Ltd. This is typically a share holder activity using the resources of reserves or surplus. Therefore, this cannot be taken as affecting the functions performed by the assessee resulting into affecting its profitability. Therefore, DRP rejects the arguments of the assessee and justifies the action of the TPO." We concur with the finding of DRP while repelling the objection regarding extra-ordinary event taking place for this comparable, but for a different reason, i.e. the relevant extra ordinary event took place in the preceding Financial Year i.e. FY 2008-09. However, we concur with the submissions advanced by Ld AR that the Director's Report and Notes to Account for this comparable are not available in public domain. Ld. DR has not been able to controvert this fact. Since sufficient information for this comparable is not available, we direct exclusion of this company as a comparable. CALIBER POINT BUSINESS SOLUTIONS LTD. & R SYSTEMS INTERNATIONAL LTD. 20. We find that the lower au....
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....f the erstwhile Asscent Infoserve Private Limited (as at 1st Apr 2008) have been incorporated in the books of accounts of the company as per "pooling of interest" method as prescribed by AS14 notified under Companies auditing standards 2006. The resultant Goodwill as specified in the scheme of amalgamation has been incorporated in the books of the accounts of the company and same will be amortized over the period of 10 years . * The financial results of the company for the year ended 31st March, 2010 are inclusive of the figures of the amalgamating company. * 11,88,313 equity shares (8.84% of the Company's increased share capital) have been issued to the shareholders of the Asscent Infoserve Private Limited in the ratio of one equity share in Accentia Technologies Ltd for every 1.6 equity shares held in Asscent Infoserve Private Limited. Pending completion of the relevant formalities of transfer of certain assets and liabilities acquired pursuant to the scheme, such assets and liabilities remain in the name of the erstwhile amalgamating companies. In view of the above amalgamation being effective the figures for the year ended 31st Mar, 2010 are inclusive of the fig....
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....liance placed on Carlyle India Advisors Pvt. Ltd. vs. DCIT (ITA No.7367/Mum/2012) (AY 2008-09) - Para 12, pg. 9 and Telechordia Technologies India P. Ltd. vs. ACIT (ITA No.7821/Mum/2011) (AY 2007-08) - Pg.17. 3. TCS E-Serve Limited ('TCS Limited')" Why TCS Limited should be rejected? * Exceptional year of Operation - First full-year of operation since its acquisition by TCS [Pg. 13 of Annual Report], a company with a huge brand name; more than two- fold increase in PBT vis-avis preceding year [Pg. 92 of Annual Report]. * Earning Super-normal profits due to exceptional year of operation - reliance placed on Maersk Global Service Centres (India) Private Limited vs. ACIT (ITA No.7466/Mum/2012) (SB) (AY 2008- 09) - para 99 * Insufficient Segmental Information: Broad range of ITES services comprising of processing, collections, customer care and payments in relation to the services offered by Citigroup to its corporate and retail clients; and IT services comprise of software testing, verification and validation of software at the time of implementation and data centre management activities. [Pg. 106 of Annual Report] No break-up of segmental details available in A....