TaxTMI 
TaxTMI 
2015 (10) TMI 2431
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....ssee provided software development and maintenance support services, advisory and also back office support services to its associated enterprises (AEs) for assistance in their projects. The assessee, inter alia, reported four international transactions in Form no. 3CEB consisting of 'Provision of software development and maintenance support services' with the transacted value of Rs. 39.45 crore-; 'Provision of back office support services' with the transacted value of Rs. 6.52 Crore; 'Provision of F&A support services' with the transacted value of Rs. 1.51 Crore and 'Provision of advisory services' with the transacted value of Rs. 1.75 crore. In order to demonstrate that its international transactions were at arm's length price (ALP), the assessee applied the transactional net margin method (TNMM) with the Profit level indicator (PLI) of Operating Profit to Total Cost (OP/TC). On a reference made by the AO, the Transfer Pricing Officer (TPO) noticed that the segment of 'Provision of back office support services' was no different from the segment of 'Provision of financial and accounts support services'. He, therefore, merged these two segments into one for conducting the benchmarki....
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.... software used by its overseas group entities. The assessee entered into Services Agreement dated 1.4.2006 with Sun Life Ireland, under which it undertook to provide software development and maintenance services to its overseas group entities. These services have been provided under the directions of Sun Life Ireland. The assessee has been compensated with cost plus mark up by Sun Life Ireland. The assessee provided software development and maintenance services during the year under consideration in pursuance of the same agreement dated 1.4.2006 under which services were provided in the preceding year as well. 7. Now, we proceed to examine the comparability of the companies included by the TPO in the final set of comparables, as under:- i) CAT Technologies Ltd. 8.1. The TPO considered this company as comparable. The assessee's objections against the incomparable functional profile of this company were rejected. The TPO noticed that this company launched a job portal viz., Logtalent.com, which was quite successful with job aspirants. The assessee's objection about the incomparability of this function adopted by CAT Technologies Ltd., was held by the TPO to be irrelevant in view o....
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....ts of Rs. 83.74 lac and Training income of Rs. 2.44 lac, both of which have been combined with the income from Software development and consulting services. One cannot ascertain with precision the contribution made by the income from Medical transcription and Training to the overall profitability of CAT Technologies Ltd., so that the other income may be segregated. As such, we fail to comprehend as to how the entity level comparison of this company with the assessee's 'Software development and maintenance services' segment can be construed as valid. This company is, therefore, directed to be excluded from the list of comparables. ii) Infosys Technologies Ltd. 9.1. The TPO noticed that this company was finding place in the accept/reject matrix. He found it to be engaged into software development services qualifying all the filters applied by him. The assessee raised certain objections before the DRP against the inclusion of this company, but without any success. The TPO computed operating profit margin of this company at 40.74% and considered it accordingly. The assessee is aggrieved against the inclusion of this company in the eventual set of comparables. 9.2. We are disinclined....
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....Court held Infosys Ltd. to be incomparable with Agnity India Technologies Pvt. Ltd. The facts of the instant case are more or less similar inasmuch as the extant assessee is also a captive service provider with a limited number of employees at its disposal and also not owning any branded products with no expenditure on R&D etc. When we consider the above factors in a holistic manner, there remains absolutely no doubt in our minds that Infosys Technologies Ltd. is incomparable with the assessee company. Respectfully following the judgment of the Hon'ble jurisdictional High Court in Agnity India (supra), we hold that Infosys Technologies Ltd., cannot be treated as comparable with the assessee company. Here it is pertinent to mention that the Tribunal in the assesse's own case for immediately preceding assessment year in ITA No.5799/Del/2012 vide its order dated 27.5.2015, has also removed this company from the final set of comparables. This company is, therefore, directed to be excluded from the list of comparables. iii) Tata Elxsi. 10.1. The TPO included this company in the tally of comparables. The assessee objected to the proposed inclusion of this company by arguing that it was....
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.... company is also engaged in sale of software products/solutions and has its own intangibles. The revenues under 'Systems integration and support' segment of this company stand at Rs. 4008.75 crore, out of its total revenue of Rs. 41851.60. For comparison, the TPO has taken the figures of this company at entity level, starting with a revenue at Rs. 41851.60 crore. Since the overall profit of this company includes the effect of profit from sale/licensing of software products/solutions and there is no measure to isolate such profit from the overall profit of software development segment, we hold that this company at an entity level cannot be considered as comparable with the assessee's 'Software development and maintenance' segment. This company is, therefore, directed to be excluded. iv) TCS Ltd. 11.1. This company was chosen by the TPO as comparable. The assessee's objections about this company's incomparability were turned down. 11.2. Having heard the rival submissions and perused the relevant material on record, we find from the Annual report of this company that its total income comprises of revenues from 'IT and Consultancy services' at Rs. 21535.75 crore and 'Sale of equipme....
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....essee's software development and maintenance segment on this count as well. The same is directed to be excluded. v) Thirdware Solutions Ltd. 12.1. This company was directly chosen by the TPO as comparable. The DRP refused to intervene in the TPO's selection. The assessee is now assailing the inclusion of this company in the final set of comparables. 12.2. We have heard both the sides and perused the relevant material on record. It is observed from the Annual report of this company that apart from revenue from 'Software services', this company has also earned revenue from 'Sales.' The TPO has considered entity level figures of this company for comparison. In view of the joining of the revenue from sales with the revenue from software services, this company ceases to be comparable with the assessee's 'Software development and maintenance services' segment. Here, it is pertinent to mention that this company was considered by the TPO as comparable in the immediately preceding year as well. The Tribunal vide its aforenoted order, has held it to be incomparable. Since no distinguishing features of the functional profile of this company and the assessee for the current year vis-à....
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....vision of F&A support services'. Separate OP/TC was computed and it was claimed that these international transactions were at arm's length price (ALP). The TPO merged these international transactions for benchmarking. The assessee had chosen certain companies as comparables. The TPO made alterations in comparables. Finally, ten companies were chosen as comparable of this merged segment, which have been listed on page 88 of the TPO's order. Average OP/TC of these companies was computed at 37.15%. By applying this profit rate as benchmark, the TPO recommended transfer pricing adjustment to the tune of Rs. 1.89 crore. The DRP allowed some relief by reducing the adjustment to Rs. 1.48 crore. The assessee is aggrieved against the sustenance of balance addition under this merged segment. 17. The ld. AR did not seriously raise any dispute against the merger of the two segments by the TPO. As such, we are proceeding to determine the ALP of these merged segments into one. 18. Back office support service provided by the assessee include Policy administration and maintenance and also Contract generation. Generating insurance contracts for the customers of overseas group entities and sending....
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.... assessment year as well. After making a detailed analysis, the Tribunal has approved the view taken by the TPO in considering this company as a fit comparable. Following such a view taken in the immediately preceding assessment year, we uphold the TPO's order rejecting the assessee's contention for exclusion. iii. Coral Hub (Vishal Information Technology Ltd.) 22.1. The assessee chose this company as comparable. As such, no objection was taken before the TPO against its inclusion. However, the assessee argued before the DRP that this company was wrongly included. The DRP refused to accept the assessee's contention. That is how the assessee is aggrieved before us. 22.2. In view of discussion made supra, we are not inclined to accept the preliminary objection raised by the ld. DR against the inclusion of this company on the premise that the assessee had itself chosen it as comparable. 22.3. Coming to the functional comparability of this company, we observe from its Annual report that it is outsourcing its major activities. Such outsourcing charges constitute around 90.57% of the total operating cost. As against this, the assessee is engaged in providing the services under this s....
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....pping, Navigation maps, Image processing, Cadastral mapping, etc. When we consider the nature of services provided by this company and then compare them with the combined back office, financial and accounting support services rendered by the assessee under consideration, it turns out that both are poles apart from each other. This company is totally incomparable with this segment of the assessee. At this stage, it is further pertinent to mention that the TPO has himself excluded this company from the list of comparables for the immediately succeeding year by noticing it to be a functionally different company. As such, we are not inclined to accept the comparability of this company with the assessee's merged 'Back office support and F&A support services' segment. This company is directed to be taken away from the tally of comparables under this segment. C. ADVISORY SERVICES SEGMENT 25. The TPO recommended a transfer pricing adjustment under this segment for a sum of Rs. 17,08,751. The assessee assailed the draft order on this issue before the DRP. Pursuant to the directions given by the DRP, the AO made an addition of Rs. 16,04,147 in his final order. This addition is in challenge....
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....ely longer period to pay their dues, which will result into higher interest cost and the resultant low net profit. Similarly, by carrying high trade payables, a company benefits from a relatively longer period available to it for paying back the dues to its suppliers, which reduces the interest cost and increases profits. In order to neutralize the differences on account of carrying high or low inventory, trade payables and trade receivables, it becomes eminent to allow working capital adjustment so as to bring the case of the assessee at par with the other functionally comparable entities. We, therefore, agree in principle with the grant of working capital adjustment. 29. The view taken by the Dispute Resolution Panel (DRP) for computing such adjustment on the basis of daily average of working capital deployed by the tested party and also each of the comparables, is not tenable because of the order passed by the Delhi Bench of the Tribunal in the case of Navisite India Pvt. Ltd. Vs. ITO (ITA No.5329/Del/2012). Vide its order dated 31.5.2013, the Tribunal has held that the components of the working capital deployed should be considered on annual basis with the average of opening a....
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....for the immediately preceding assessment year, a copy of which order has been placed on record. Once it is held that such an adjustment is allowable, then it should be carried out whether it favours or disfavors the assessee. It goes without saying that the assessee will be allowed an opportunity of hearing in such fresh determination of the working capital adjustment, if any. E. FOREIGN EXCHANGE GAIN/LOSS. 31. The next issue raised in this appeal is against the treatment of foreign exchange (FOREX) gain/loss as an item of non-operating nature. On a pertinent query, it was admitted by the ld. AR that the FOREX gain/loss in the hands of the assessee relates to its revenue transactions alone. The ld. DR relied on the orders passed by the authorities below. 32. We find merit in the contention raised on behalf of the assessee about the treatment of foreign exchange gain/loss as an item of operating nature. As regards the nature of such foreign exchange gain earned by the assessee, the ld. AR put forth that the same is in relation to the trading items emanating from the international transactions. No contrary material has been placed on record by the ld. DR. If the foreign exchange g....