TaxTMI 
TaxTMI 
2016 (1) TMI 115
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....k-office support services in the nature of remote monitoring and maintenance of the Equant's global network platforms and services, coordination and remote configuration and implementation of quality customer networking solutions to its Group Company in Ireland, Equant Network Services International Ltd. (ii) Contract software development services (hereinafter referred to as 'CSD') for developing software applications for use within Equant Group/ Associated Enterprises (hereinafter referred to as 'AEs'). For rendering these services, the assessee was remunerated on an arm's length cost plus basis i.e. it was compensated for all its operating costs, plus a pre-agreed mark-up of 15% thereon. 3. During the relevant FY, the assessee undertook the following international transactions with its AEs which were duly reported in the Accountant's Report (Form No 3CEB) filed along with the return:- Particulars (International Transactions) Adjustment Outcome of TP Order after DRP Directions Provision of ITES and CSD services 97,11,94,161 Adjustment of Rs. 13.044,743 on CSD services and Rs. 75,513,180 on ITES se....
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....osys Technologies Ltd 40.30% 37.96% 11. Ishir Infotech Ltd. 30.12% 29.46% 12. KALS Information Systems Ltd. (Seg.) 30.55% 22.54% 13. LGS Global Ltd. (Lanco Global Solutions Ltd.) 15.75% 14.33% 14. Lucid Software Ltd. 19.37% 16.21% 15. Mediasoft Solutions Ltd. 3.66% 0.87% 16. Megasoft Ltd. (Seg) 60.23% 50.21% 17. Mindtree Ltd. 16.90% 14.54% 18. Persistent Systems Ltd. 24.18% 22.21% 19. Quintegra Solutions Ltd. 12.56% 8.46% 20. RS Software (India) Ltd. 13.47% 12.33% 21. R Systems International Ltd. (Seg.) 15.07% 12.43% 22. Sasken Communication Technologies Ltd. 22.17% 20.21% 23. SIP Technologies & Exports 13.90% 9.91% 24. Tata Elxsi Ltd. (Seg.) 26.51% 25.26% 25. Thirware Solutions Ltd. (Seg.) 25.12% 20.65% 26. Wipro Ltd. (Seg.) 33.43% 33.27% Mean OP / TC 25% 22.13% ITES - TP ORDER COMPARABLES S.No. Name of the company 1. Accentia Technologies Ltd 30.61% 25.52% 2. Aditya Birla Minacs Worldwide Ltd. 11.98% 10.5....
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....following case laws have been relied upon by the ld. AR :- * Motorola Solutions India Put Ltd (ITA No. 5637/Del/2011)(AY 2007-08), * DE Shaw India Software Pvt Ltd (ITA No. 2071/Hyd/2011)(AY 2007-08), * Logica Priuate Ltd (ITA No.1129/Bang/2011)(AY 2007-08), * LGS Global Ltd (formerly known as Lanco Global Systems Ltd.) (ITA No.1885/Hyd/2011) (AY 2007-08) 8.3 According to ld. AR, segmental details excluding revenue from product sale is not available in audited financials. In this regard, he relied on the following case laws :- * Intoto Software India Put. Ltd. (ITA.No.1196/Hyd/2010)(AY 2005-06), * ITA No.1197/Hyd/2010 (AY 2005-06), * ITA.No.2102/Hyd/2011 (AY 2007-08) (ii) Celestial Labs Limited ('Celestial') 8.4 Ld. AR contended that this comparable owns products and took our attention to Exhibit 2. According ot ld. AR, the Celestial company is primarily into development of software tools as products for application in the field of bio technology, pharmaceutical and health care industry. Eg: Celsuite tool is used for developing new molecule in drug development area, Celtox tool is used for predicting to....
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....1197/Hyd/2010(A.Y 2005-06). * ITA.No.2102/Hyd/2011)(AY 2007-08). * 3DPLM Software Solutions Ltd. (Successor to Delmia Solutions Pvt Ltd) (IT(TP) A.NO.1303/Bang/2012 (AY 2008-09) (v) E-Zest Solutions Limited ('E-Zest') - 8.12 According to ld. AR, this company has diversified business and took our attention to Exhibit 5. According to ld. AR, based on the company website, it undertakes diversified activities. It provides services such as custom software development, CRM ERP, Open Source ERP, Knowledge management consulting, health care manufacturing, manufacturing solutions, legal solutions etc. Ld. AR also contended that as per the Annual report of E-Zest, no segmental details are provided. 8.13 Ld. AR relied on the following case laws :- * 3DPLM Software Solutions Ltd. (Successor to Delmia Solutions Pvt Ltd) (IT(TP) A NO.1303/Bang/2012) (AY 2008-09), * Symphony Services Pune Pvt Ltd (ITA No. 257/PN/2013) (AY 2008-09). Ld. AR pointed out that this comparable fails TPO filter. (vi) Helios & Matheson Information Technology Limited ('Helios') 8.14 Ld. AR contended that this comparable fails employee cost filter and to....
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....value- Inventory (F= D+ D*E) 4,550,861 Percentage revenue from trading (F/B) 23% Percentage revenue from training (C/A) 4% 8.19 Ld. AR relied upon the following case laws :- * Motorola Solutions India Pvt Ltd (ITA No. 5637/Del/2011)(AY 2007-08) * DE Shaw India Software Pvt Ltd (ITA No. 2071/Hyd/2011)(AY 2007-08) * Logica Private Ltd (IT (TP)A.No.1129/Bang/2011) (AY 2007-08) * Axsys Healthtech Ltd. (ITA.No.2076/Hyd/2011) (AY 2007-08) * Conexant Systems India Put. Limited (ITA No.1429/Hyd/2010), * ITA No.1978/Hyd/2011 (AY 2007-08). * DPDJ Softuiare Solutions Ltd (IT (TP) A.No.1303/Bang/2012)(AY 2008-09) * Bearing Propertu Services P.Ltd (ITA NO.1124/Bang/2011) * Pyramid IT consulting Pvt. Ltd (ITA No. 5401/DEL2012)(AY 2008-09) (ix) Megasoft Limited ('Megasoft') 8.20 Ld. AR submitted that amalgamation took place in this year and took our attention to Exhibit 9. He submitted that the company has undergone business restructuring activities during the year where in the business performance of Visual Soft Technologies Limited, w.e.f. October 1, 2006 has been amalgamat....
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....ubmitted that this comparable company is a giant Company and took our attention to Exhibit 12. He submitted that Infosys has substantially high turnover of Rs. 13,149 crores (approx 700 times the turnover of assessee of Rs. 17 crores from the CSD services), therefore, should be rejected based on established judicial precedents by the Hon'ble Delhi High Court in the case of Agnity India Technologies Ltd. (ITA 1204/2011) which rejected Infosys on various factors, which includes factors such as turnover, capital, advertising, sales promotion and brand building expenses, and expenditure on R&D. 8.31 Ld. AR further submitted that Infosys has substantial intangible assets valued by the Company at Rs. 89,069 crores comprising brand value itself at Rs. 31,617 crores (as on March 31, 2007) as provided in the relevant extracts of the annual report for 2007. 8.32 Ld. AR relied upon the following case laws :- * Motorola Solutions India Pvt. Ltd (ITA No.5637/Del/2011)(AY 2007-08), * DE Shaw India Software Pvt Ltd (ITA No. 2071/Hyd/2011)(AY 2007-08) * Logica Private Ltd (ITA No.1129/Bang/2011)(AY 2007-08) * LGS Global Ltd (formerly known as Lanco Glo....
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....ity of the company. 8.38 Ld. AR relied on the following case laws :- * Tata McGraw (ITA No.857/Del/2011) * Witness Systems Software India Pvt Ltd. (IT(TP)A.No.1366/Bang/2011) * Actis Advisers Pvt Ltd (ITA No.5277/Del/2011) (AY: 2007-08) * ITA No. 958/Del/2012 (AY 2006-07) * Capital IQ Information Systems (India) Pvt. Ltd. (ITA No.961 Hyd/2011)(AY 2008-09) ITES SERVICES 9. Ld. AR submitted that the business restructuring / amalgamations / mergers / demergers / extra ordinary circumstances occurred during the year. (xiv) Accentia Technologies Limited ('Accentia') 9.1 Ld. AR submitted that amalgamation took place in this year and took our attention to Exhibit 14. Ld. AR submitted that during FY 2006-07, an amalgamation occurred wherein Accentia took over Iridium Technologies and Geosoft technologies. 9.2 Ld. AR relied on the following case laws:- * Capital 10 Information Systems (India) Pvt. Ltd (ITA No.1961/Hyd/2011)(AY 2007-08) * Zavata India Private Limited (ITA No.1781/Hyd/2011)(AY 2007- 08) * Avineon India Pvt Ltd (ITA No.1989/Hyd/2011)(AY 2007-08) * Stream International Ser....
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.... Cummins Turbo Technologies Ltd. UK - India Branch (ITA No. 161 & 269/PN/2013. (TS-W4- ITAT-2014/PN2/2013) TP. ITAT Pune) (AY 2007-08). 9.12 Ld. AR submitted that the following comparables are functionally different :- (xviii) Bodhtree Consulting Limited (Segmental) ('Bodhtree') 9.13 Ld. AR submitted that this comparable company is engaged in the business of software development and took our attention to Exhibit 18. He submitted that Bodhtree is a software development and product company which cannot be considered similar to ITES services provided by the assessee. Further, he submitted that the TPO himself has considered Bodhtree as a comparable to the assessee's CSD segment in AY 2009-10. 9.14 Ld. AR submitted that from the annual report of Bodhtree, it is observed that the extra ordinary profit of the company was due to the hiring of e-paper business and web based assessment services by the company to a separate company and the company formed another company by name of Learnsmart (India) Pvt. Ltd. (xix) Eclerx Services Limited ('Eclerx') 9.15 Ld. AR submitted that this comparable company is engaged in the business of High End KPO Services. He....
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....by the assessee. 9.19 Ld. AR relied on the following case laws :- * Stream International Services Pvt Ltd [TS-312-ITAT-2014(Mum -TP] AY (2007-08) * Zavata India Private Limited [TS-156-ITAT-2013CHYD)-TP] (AY 2007-08) * Maersk Global Service Centre (ITA No.7466/MUM/2012)(SB)(AY 2009-10) Further, he submitted that during the year, the company acquired Cross Road Detailing Inc., an engineering services company KPO and due to this during the year 2006-07, Mold- Tek experienced supernormal growth of more than 200% in relation to KPO division. 9.20 The case laws relied upon by the ld. AR are as under :- * Knoah Solutions Pvt Ltd (ITA NO.140..../Hyd/2013) * Capital IQ Information Systems (India) Pvt. Ltd. (ITA No.1961/Hyd/2011)(AY 2007-08). 9.21 Ld. AR submitted that the company has a relatively low employee cost/ sales ratio (approx 8%) as against the employee cost/ sales ratio for the assessee as under :- Particulars Amount (in INR) Income from operations (A) 881,188 Employees Remuneration & Benefits (B) 66,881 Employee cost / sales (B) / (A) 7.59% 9.22 Ld. AR relied on the decision of Avineon ....
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....) and (1864/Hyd/2012)(AY 2008) * HSBC Electronic Data Processing India Ltd. [ITA No.1624/Hyd/2010) (AY 2006-07). 9.31 Ld. AR further submitted that Maple has extremely volatile margins. Maple has shown 100% loss in financial year 2002-03 but all of a sudden it has shown profit of 37.38% in financial year 2004- 05. In financial year 2008-09, it again suffered losses with a negative margin of -65.23%. 9.32 Ld. AR relied on the decision of Actis Advisers Pvt Ltd - ITA No.5277/Del/2011 (AY: 2007-08) and ITA No. 958/Del/2012 (AY 2006-07) . 9.33 Ld. AR submitted that the following comparable has abnormal margins :- (xxv) IServices India Private Limited ('iServices') 9.34 Ld. AR submitted that this comparable company has abnormal margins. He submitted that the company has an abnormally high margin of 34.12% which renders it unfit to be taken as a comparable for benchmarking a low isk captive unit such as the assessee as under:- Particulars FY 06-07 FY 07-08 FY 08-09 FY 09-10 FY20-11 FY 11-12 FY 12-13 OP/TC 46.58% NA NA 47.41% -6.85% 6.58% -3.63% 9.35 Ld. AR relied on the following case laws ....
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....ion to pages 17 & 18 of the DRP order wherein the objection of the assessee and DRP observation are given as under :- "3.7 Without prejudice to assessee's other contentions, failing to apply the wages/ sales ratio filter to the ITES comparables (as applied vis-a-vis the CSD comparables) and thereby adopting an inconsistent stand between the ITES and CSD comparables and applying this filter selectively only to the CSD comparables, more so when the said filter was applied to the ITES segment in the previous assessment year i.e. AY 2006-07; DRP's Observation: 3.7.1 Filters have been applied as relevant facts and circumstances of the sector. So there is no inconsistency in the approach of TPO. 3.8 Including high-profit making companies in the final comparables set for Benchmarking a low risk captive unit such as the Assessee (disregarding judicial pronouncements on the issue), thus demonstrating an intention to arrive at a pre-formulated opinion without complete and adequate application of mind with the singleminded intention of making an addition to the returned income of the Assessee; 3.9 Including certain companies that are not compar....
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....round No. 3.13 committing a number of factual errors in acceptreject of comparables and/ pr or in the computation of the operating profit margins of the comparables; DRP/s Observation: The TPO is directed to verify and re-compute if necessary operating profit margins of the comparables and re-compute ALP accordingly, if required. Ground No. 3.14 disregarding judicial pronouncements in India in undertaking the TP adjustment. DRP/s Observation: The assessee has objected to disregarding judicial pronouncement in India in undertaking TP adjustments. 3.14.1 The assessee itself has contended that this is a general ground. On examination DRP finds that the persuasive value of various ITAT decisions has been acknowledged by the TPO and distinction on facts and law made based facts of the case. In the circumstances, this being a general ground, the contentions are duly considered and no specific directions are being issued." 11. From a perusal of the above order of the DRP, it is clear that the assessee's objections / contentions against the inclusion/exclusion of the comparables has not been dealt by the DRP while exercising the appe....