TaxTMI 
TaxTMI 
2015 (12) TMI 517
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....Rs. 30,325,034 to the Officer-1 (2)value of the international transaction of provision of computer software development services by the Appellant to its Associates Enterprises ("AEs"). 2. On facts and in law, the Ld. AO erred in making a reference to the Learned Additional Commissioner of Income Tax, Transfer Pricing Officer-1 (2), New Delhi ("Ld. TPO"), inter alia, since he has not recorded an opinion that any of the conditions in section 92C(3) of the Income Tax Act, 1961 ("the Act"), were satisfied in the instant case. Accordingly, the order passed by the TPO is without jurisdiction. 3. On facts and in the circumstances of the case and in law, the Ld. TPO erred in not demonstrating that the motive of the Appellant was to shift profits outside India by manipulating the prices charged in its international transactions, which is a prerequisite condition to make any adjustment under the provisions of Chapter X of the Act. 4. On facts and in law, the Ld. TPO/Ld. AO erred in conducting and the Hon'ble DRP further erred in allowing a fresh benchmarking analysis using "non contemporaneous" data and substituting the Appellant's analysis with the fresh benchmark....
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....e Ld. AO and the Hon'ble DRP erred in contravening provisions of Rule 10B(1)(e)(i) by considering the unutilized rent and maintenance expenses as expenses incurred in relation to the international transaction of the provision of software development services. 15. On the facts and in law, the Ld. TPO/Ld. AO and the Hon'ble DRP grossly erred in not allowing the risk adjustment under Rule 10B(1)(e)(iii) and Rule 10B(3) to account for differences in the risk profile of the comparable companies vis-àvis the Appellant. 16. On the facts and in law, the Ld. AO/Ld. TPO and the Hon'ble DRP erred in not granting the benefit of reduction/variation of 5 percent from the arithmetic mean while determining the arm's length price to the Appellant as per the proviso to section 92C(2) of the Act. 17. On the facts and in circumstances of the case, the Ld. AO erred in levying tax at the rate of 40% on the assessed income visà- vis applicable tax rate of 30%, given the fact that the Appellant is a domestic company incorporated under the Companies Act, 1956. 18. On the facts and in the circumstances of the case, the Ld. AO erred in computing interest unde....
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....213 Operating cost 20,38,55,648 Operating profit 1,90,94,565 OP/OC 9.37% It is to be noted here that while calculating the operating cost of Rs. 20,38,55,648/-, a deduction of Rs. 82,18,899/- on account of adjustment of cost relating to rent and maintenance charges for under-utilization of capacity was claimed by the appellant. 6. Furthermore, the appellant had computed the PLI of the comparables by selecting a set of 6 comparables and the margin of these was shown to be 6.48% using the current year data as under: Sr. No. Name of the company Margin for FY 2009-10 1 CG- Vak Software & Exports Ltd. -12.48% 2 Quintegra Solutions Ltd. -9.42% 3 R S Software (India) Ltd. 9.29% 4 Tata Elxsi Ltd. 20.60% 5 Thinksoft Global services Ltd. 11.82% 6 Zylog Systems Limited 19.08% Average 6.48% 7. The TPO vide its order dated 22.01.2014, has observed that appellant has selected 6 companies as comparables on the basis of the search conducted in the public data base Prowess only. Further, TPO applied the following filters: i) Companies with RPT greater than 25% of re....
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....nder: Sr. No. Particulars Amount (Rs.) 1. Total Operating Cost 21,20,74,547* 2. Arm's Length Price at a margin of 23.99% 26,29,51,231 3. Transfer Price received by the taxpayer 21,82,68,570 4. Shortfall of Transfer Price from ALP 4,46,82,661 *by disallowing deduction of Rs. 82,18,889/- on account of adjustment of cost relating to rend and maintenance charges for under utilization of capacity. 11. DRP vide directions dated 14.11.2014 out of the set of 23 comparables adopted by the TPO directed for exclusion of one of the comparables, namely, Sonata Software Ltd. and also to grant working capital adjustment. After giving the effect of the aforesaid directions, margin of comparables was re-determined at 17.22% on a set of 22 comparables in the manner as under: Sr. No. Name of the company OP/OC with Forex 1 Accelya Kale Solutions Ltd. 7.18% 2 Akshay Software Technologies Ltd. -6.83% 3 Allgo Embedded 2.18% 4 CTIL Ltd. 7.47% 5 E-Infochips Bangalore Ltd. 61.40% 6 Evoke Tech 14.60% 7 E-Zest Solutions 12.75% 8 Infinite Data System Pvt. Ltd. 64.96% ....
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....mmunication Technologies Ltd. (vi) M/s Thirdware Solutions Limited and (vii) M/s Wipro Technologies Services Limited. in the final set of comparables. Apart from the above, it was also prayed that AO/TPO/DRP erred in contravening provision of rule 10B(1)(e)(i) by considering the unutilized rent and maintenance expenses as expenses incurred in relation to the international transaction of the provision of software development services. It was also submitted that the authorities below have grossly erred in not allowing the risk adjustment under Rule 10B(1)(e)(iii) and Rule 10B(3) to account for differences in the risk profile of the comparable companies vis-a-vis the appellant. The learned DR has supported the orders of DRP/TPO/AO and contended that adjustment made should be sustained and, no interference is warranted. 14. We have considered the rival submissions and perused the material placed on record. The first and foremost substantive contention raised by the learned counsel vis-a-vis Ground 6 of Grounds of Appeal is that DRP violated the provisions of Rule 10B(2) of the Rules by rejecting CG-VAK Software Exports Limited, a comparable company selected by the appellant in the T....
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....,03,470 Total income as per Annual Report (B) 6,19,81,460 RPT as a % of sales (A/B) 13.72%" 17. However the DRP upheld the exclusion on the following basis: "Having considered the above and the material placed on record, we are of the opinion that the said company does not satisfy the filter applied by the TPO of employee cost less than 75% of turnover and therefore the same cannot be taken as comparable. In view of the above, action of the TPO is upheld." 18. Before us it was submitted that DRP incorrectly applied employee cost filter which was never proposed by the TPO. It was submitted in the profit and loss account, CG-VAK has reported certain "Cost of Services", however, the breakup of the same is not known (to ascertain whether the same includes any employee cost or not). It was further submitted that from the annual report for financial year 2010-11 and financial year 2011-12, it is can be seen that the employee cost was disclosed as cost of services. The relevant extracts from the annual report is given below: PROFIT & LOSS STATEMENT FOR THE YEAR ENDED 31ST MARCH 2012 Note No. 31.3.2012 (Rs.) 31.3.20....
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....les. Therefore, we are inclined to uphold the orders of the authorities below in rejecting this company as a comparable. We direct accordingly. 22. Now taking up Grounds No.7 to 13 of Grounds of Appeal, the learned counsel made his submission for exclusion of comparables selected by TPO. We will now consider the merits of the arguments of the parties with regard to selection of the these companies as comparables by TPO. 23. E-Infochips Bangalore Limited 24. The learned AR contended that DRP/TPO have erred both in law and on facts by considering E-Infochips Bangalore Limited as a comparable to the appellant. The learned counsel for the assessee contended that the DRP, however has ignored the submissions made by the assessee and upheld the action of the Assessing Officer/TPO to include M/s. E-Infochips Bangalore Ltd. in the list of final comparables. The appellant has objected to the inclusion of the comparable on the ground of functionally not comparable and, abnormal deviation in profit margin. The appellant submitted that the functional profile of M/s. E-Infochips Bangalore Ltd. is different from that of the assessee company. In this regard, he pointed out that the said c....
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....services like software, FPGA, ASIC, QA & Testing require software engineers only. Hence, the services and personnel required are not entirely different. The reference made by the taxpayer is in respect of website of E-Infochips Ltd. and not that of E-Infochips Bangalore Ltd. After having gone through the website www.einfochip.com., we however find that the same is in respect of the entire group of E-Infochips, of which M/s. E-Infochips Bangalore Ltd. is only a part. The functional profile given on the said website thus is that of the entire group and not just of the M/s. E-Infochips Bangalore Ltd. The content of the said website in our opinion, therefore, cannot be relied upon to ascertain the functional profile of M/s. E-Infochips Bangalore Ltd., especially when the nature of functions/services given there are materially different from the functions/services stated to be rendered by M/s. E-Infochips Bangalore Ltd. in its annual report. Even the details of services stated to be rendered by M/s. E-Infochips Bangalore Ltd. at different places in its Annual Report are very sketchy and it is very difficult to ascertain from the same, exact nature of services rendered by the said entity....
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.... ignored the submissions made by the assessee and upheld the action of the Assessing Officer/TPO to include Infinite Data System Private Limited in the list of final comparables. The appellant objected to the inclusion of the comparable before TPO on the following grounds: i) Functionally not comparable ii) Abnormal/Supernormal profits iii) Significant intangibles iv) Accepted as a non comparable in previous year by TPO 30. The DRP upheld the order of TPO as under: "The TPO has dealt the issue in para 8,4, of the order and held that the company is providing software development services which is parimaterial with the functions carried on by the assessee. Having considered the material placed on record we find that the company is mainly involved in software services. Therefore we hold that TPO is right in including the same for the purpose of comparability analysis." 31. Before us the learned AR of the appellant has contended as under: "Substantially Related Party Transactions - Company's operations relates to providing services to its sole customer-Fujitsu Services Ltd." (substantially related) which can be substa....
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....ept infrastructure management services have also been refereed as 'technical support services' in Revenue Recognition portion and as 'software technical consultancy services' in Segment Reporting portion of the annual report. All these services are in the nature of software development services. .......It can be seen that all the services have been referred primarily as IT services. The objection of the assessee is mainly on verticals of the company. Under TNMM the standards of comparability are relatively relaxed and only broad similarity of functions is required. It is further stated that TNMM can be used with data for companies that are broadly comparable to the taxpayer, as functional differences are likely to be reflected in the level of operating expenses incurred by each company. These expenses are deducted in the calculation of operating profit and are accordingly taken account of in the comparability analysis. It is further seen that this company has been chosen as it is engaged in providing software development, which is broadly similar to the services being provided by the assessee. Since, the assessee is also providing similar services, so this company can be u....
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....h is even more than 968 times of that of the assessee. The Ld. Counsel for the appellant has placed reliance upon the various decisions, in which Infosys Limited has been rejected as a comparable considering the same not only as a giant company but is also engaged in development of various niche products, which are as follows: i) 35 taxmann.com 421 (Hyd) Intoto Software India Pvt. Ltd. vs. Asst. CIT ii) 40 taxmann.com 173 (Hyd) NTT Data India Enterprise Application Services (P.) Ltd. vs. Asst. CIT iii) 38 taxmann.com 306 (Del) Agnity India Technologies (P.) Ltd. vs. DCIT iv) 38 taxmann.com 166 (Hyd) Virtusa (India) (P.) Ltd. vs. DCIT 38. The TPO has observed as under: "The brand name may have helped Infosys in increasing its number of clients & retention of existing clients and this an increase in its market share, but it has not necessarily resulted in better profit margins. Brand may bring more revenues but not necessarily higher margins....a brand may generate revenue but with a cost compensating any extra benefit, if any derived from such efforts." "Assessee had objected on the high turnover of this comparable company whi....
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.... 16. We note that all the above facts highlight that Infosys Technologies Ltd. is a product owner, undertakes substantial advertising/sales promotion and brand-building activities and is engaged in significant R&D activities, and is very huge in size/volume as compared to the assessee. Hence, it cannot be said to be comparable with the assessee. The said proposition has also been confirmed by Delhi Tribunal in Agnity India Technologies v. ITO [IT Appeal No.3856 (Delhi) of 2010] wherein the Coordinate Bench held as follows : "Various arguments, as stated earlier, were taken before the DRP which inter-alia included rejection of comparable cases; application of arbitrary filter of wage to sales ratio; ignoring that the assessee is a limited risk company; inclusion of Infosys Technologies Ltd.; and inclusion of Sat yam Computers Services Ltd. in spite of the fact that its data is not reliable as publicly known. On the basis of these arguments, the DRP excluded the case of Sat yam Computers Services Ltd., thereby reducing the arm's length margin to 25.6%. It is argued that the case of the assessee is not comparable with Infosys Technologies Ltd., the reason being that th....
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....sp; 100 per cent offshore (from India) 11.6 On the basis of the above chart, the Hon'ble High Court affirmed the conclusion that a captive unit of acomparable 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 therefore, do not warrant any different conclusion. The assessee is also captive service provider to its AE and as such, M/s. Infosys Ltd. is not a valid comparable with the assessee 17. Accordingly, Ld. CIT(A) proposed to exclude this company from comparable set of companies. Therefore, the ld. CIT (A) has rightly ordered exclusion of the Infosys Technologies Ltd. from the comparable and this impugned order is upheld." 41. Having regard to the above regard to the above judicial pronouncement, we hold that Infosys Limited cannot be considered as comparable for the purpose of benchmarking international transaction of the assessee. 42. Persistent Systems Limited 43. The assessee has sought exclusion of the aforesaid company on the ground that this company is a technolog....
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....parables i.e. Larsen and Tourbo Infotech Ltd., Persistent Systems Ltd. and Mindtree Ltd., it is noted that before the CIT(A) the assessee contended that during the financial year 2008-09, it has a turnover of approx. Rs. 14.45 crores which cannot be compared with certain companies having turnover of more than 200 crores. Support was drawn from the following decisions : (a) Decision of ITAT in the case of appellant for A.Y. 2006-07 ITA No. 3856/D/2010 A.Y. 2006-07; (b) Genisys Integrating Systems (India) (P.) Ltd. v. Dy. CIT [2012] 20 taxmann.com 715/53 SOT 159 (Bang.) (c) Centillium India (P.) Ltd. v. Dy. CIT [2012] 23 taxmann.com 34/53 SOT 145 (Bang.) (d) Kodiak Networks (India) (P.) Ltd. v. Asstt. CIT [2012] 18 taxmann.com 32/51 SOT 191 (Bang.) (e) Actis Advisers (P.) Ltd. v. Dy. CIT [IT Appeal No. 5277 (Delhi) of 2011] 13. Having considered the rival submissions and perused the material on record. We find this issue is no longer res-integra. The Hon'ble High Court upholding the decision of Tribunal in the case of the appellant for A.Y. 2006-07 has held in an order dated 10.7.2013 in ITA No. 1204/2011 in [CIT v. Agnity Ind....
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....stems Ltd. is functionally different from the assessee as the company is into software development services as well as software products unlike the assessee who is a captive service provider. Moreover, no segmental details are available in the annual report. It can be thus derived that the prices may have been influenced. The rationale of applying a related party filter is defended. 12.3 The Bangalore Bench of the Tribunal in the case of CSR India (P.) Ltd . v. ITO [2013] 31 taxmann.com 265 , has held as under: '(i) Turnover Filter 3.3 We have heard the rival submissions and perused the materials on record. The TPO had, while selecting the above 26 comparables, applied a lower turnover filter of Rs. 1 crore but preferred not to apply any upper turnover limit. The size of the comparable is an important factor in comparability. The ICAI TP guidance note has observed that the transaction entered into by a Rs. 1000 crores company cannot be compared with the transaction entered into by a Rs. 10 crores company and the two most obvious reasons are the size of the two companies and related economies of scale under which they operate. The TPO's range had r....
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....res only should be taken into consideration for the purpose of making TP Study." 3.3.2 The above view has been followed in the recent order of the Tribunal in the case of Trilogy E -Business (supra ). The relevant findings of the Tribunal are extracted as under: 20. In this regard we find that the provisions of law pointed out by the ld. counsel for the assessee as well as the decisions referred to by the ld. counsel for the assessee clearly lay down the principle that the turnover filter is an important criteria in choosing the comparables. The assessee's turnover is Rs. 47,46,66,638. It would therefore fall within the category of companies in the range of turnover between 1 crore and 200 crores (as laid down in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010) . Thus, companies having turnover of more than 200 crores have to be eliminated from the list of comparables as laid down in several decisions referred to by the ld. counsel for the assessee. Applying those tests, the following companies will have to be excluded from the list of 26 comparables drawn by the TPO viz. Turnover Rs. (1) Flextronics Software Systems Lt....
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....rison to employee cost of Rs. 213.46 cr." "All software companies have software in their fixed assets. It is only when it is significant and developed by them and is being amortized on sale of software products exceeding 25% of total income, it can be said to be resulting in different income which changes the profile from pure software developer to a company also selling products. It is further seen that this company has been chosen as it is engaged in providing software development, which is broadly similar to the service being provided by the assessee. Since, the assessee is also providing similar services, so this company can be used as a comparable." 51. The DRP supported the action of the TPO in including this company in the final list of comparables by holding as under: "The TPO has dealt the issue in para 8.8 of the order and held that the company is providing software development services which is parimateria with the functions carried on by the assessee. Having considered the material placed on record we find that the company is mainly involved in software services. Therefore, we hold that TPO is right in including the same for the purpose of comparabi....
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....is mainly involved in software services. Therefore, we hold that TPO is right in including the same for the purpose of comparability analysis." 56. We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that the functions of Thirdware are in contrast with the assessee which only provides software development in the finance domain as per the instruction of its AE. Also, Thirdware has incurred expenses towards import of software services, evidencing outsourcing of software services unlike the assessee. Since it is also engaged in outsourcing its activities as it has incurred expenses towards imports of software services, evidencing outsourcing of software services unlike the appellant company. Hence, it is functionally not comparable and cannot be treated as a comparable to assessee. We order accordingly. 57 Wipro Technology Services Limited (Wipro) 58. As far as this company is concerned, the arguments of the assessee were not only on account of functional dissimilarity but the assessee also raised the other objection that there was an extraordinary event during the year. Wipro provides program ....
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....e material on record. In our view, 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. Further, 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. 60. Now taking up Ground No. 14, which relates to adjustment of unutilized rent and maintenance expenses as expenses incurred in relation to the international transaction of the provision of Software development services. The assessee contended that as per the rule 10B(1)(e)(i) of Income Tax Ru....
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....f its work during the year, it would have reaped the benefits of advance planning and foresight. This would have resulted in greater profits and better margins owing to its smart moves. However, when the volume of work did not grow as anticipated, it is seeking an adjustment due to the same smart business move. It cannot cut both ways. e) Moreover, the method of computing the adjustment is also not correct. Any comparability adjustment in transfer pricing analysis has to be carried out in respect of the comparable companies. In the instant case, the taxpayer has reduced its own employee costs to achieve the desired goal. 62. We have considered the rival submissions, perused the material on record. We uphold the order of Hon'ble DRP, as it has rightly held that as there is no objective basis led by the assessee to support its claim; mere submission that there was underutilization does not discharge the burden upon the assessee. Moreover, the assessee has not given any cogent basis to satisfy the reasons for underutilization. Once the assessee is a software service provider to its AE then there can be no claim on account of under utilization of capacity as it was....
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.... of any adjustments performed, the reasons for the adjustments being considered appropriate, how they were calculated, how they changed the results for each comparable and how the adjustment improves comparability. Issues regarding documentation of comparability adjustments are discussed in Chapter V." From the above guidelines it can be seen that unless it is shown that how the risk adjustment would change the result of each comparable and how the same would improve the comparability and unless adequate reasons are given for such adjustment, no adjustment can be allowed to the taxpayer. In the present case, except giving proportion of various risks borne, the taxpayer has not shown with evidence as to whether each of the risk was actually undertaken or not by the comparables and if so, how these risks affected each of them and whether such adjustment would improve the comparability. Mechanical adjustment cannot be made to the margins of the comparables without knowing which risk was taken by the entity concerned and how its profitability was affected. Probability of risk and certainty of risk are two different aspects and cannot be equated for the purpose of adjustment. In my view....
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....lly undertaken or not by the comparables and if so, how these risks affected each of them and whether such adjustment would improve the comparability. 13.11 Mechanical adjustment cannot be made to the margins of the comparables without knowing which risks were taken by the entity concerned and how its profitability was affected. Probability of risk and certainty of risk are two different aspects and cannot be equated for the purpose of adjustments. The significant of risk depends on its economic significance, likelihood of its realization and predictability. All these requires robust and reliable data, both for the assessee and the comparables in the absence of which tax adjustments cannot be considered for enhancing comparability. Thus the objection is rejected. 13.12 In the various judicial pronouncements the risk adjustment has not been allowed by the ITATs. Some of these decisions are discussed below: (a) Vedaris Technology 2010-TII-10-ITAT-Del-TPL: No risk adjustment to be allowed even on ad hoc basis particularly when the same has not been quantified; (b) Marubeni India Private Ltd. (2010-TII-36-ITAT-Del-TP) in which it was held that as the....