TaxTMI 
TaxTMI 
2015 (9) TMI 1398
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....he assessee's marketing activities include providing information about Avaya Products, customer awareness, etc. 3. The assessee had conducted an economic analysis, as a part of its Transfer Pricing (TP) Documentation for FY 2006-07, to establish the arm's length nature of international transactions with its AEs. During the relevant FY, the assessee undertook the following international transactions with its AEs :- Particulars Transaction Value Rendering Software Services 79,63,36,195 Payment towards back office support services 2,52,31,537 Rendering Marketing Support Services 1,51,40,548 Purchase of assets 2,68,39,539 Reimbursement of expenses 3,07,02,640 However, it was pointed out by the ld AR, that TPO has accepted the transaction in respect to rendering market support services, purchase of assets and reimbursement of expenses. The dispute is only in regard to rendering software services and payment towards back office support services. 4. For the purpose of comparability analysis, the assessee has analyzed the Software services and Back Office Support services segments by using Transactional Net Margin Method (T....
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.... Systems Ltd. (Seg.) 30.55 13. LGS Global Ltd. (Lanco Global Solutions Ltd.) 15.75 14. Lucid Software Ltd. 19.37 15. Mediasoft Solutions Ltd. 3.66 16. Megasoft Ltd. (Seg.) 60.23 17. Mindtree Ltd. 16.9 18. Persistent Systems Ltd. 24.52 19. Quintegra Solutions Ltd. 12.56 20. R S Software (India) Ltd. 13.47 21. R Systems International Ltd (Seg) 15.07 22. Sasken Communication Technologies Ltd. (Seg.) 22.16 23. SIP Technologies & Exports Ltd. 13.9 24. Tata Elexi Ltd. (Seg.) 26.51 25. Thirdware Solutions Ltd. (Seg.) 25.12 26. Wipro Ltd. (Seg.) 33.65 ITES SEGMENT Sr.No. Comparable OP / TC 1. Accentia Technologies Ltd. (Seg) 30.61 2. Aditya Birla Minacs Worldwide Limited (earlier known as Transworks Information Services Ltd.) 11.98 3. Allsec Technologies Ltd. 27.31 4. Apex Knowledge Solutions Pvt. Ltd. 12.83 5. Appollo Healthstreet Ltd. -13.55 6. Asit C Mehta Financial Services Ltd. (earlier known as Nucleus Netsoft & GIS Ltd.) 24.21 7. Caliber Po....
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....the co-ordinate bench while repelling similar objections, held as under :- "17.1. The TPO found this company to be engaged in software development. Notice u/s 133(6) was issued to the company to get complete information. According to the TPO, this company qualified all the filters. The assessee argued before the TPO that this company was into software products and the segmental results were not available. The TPO rejected such contention by relying on the specific information collected from the company u/s 133(6) which divulged that this company was a purely software development company engaged in providing software development and consulting IT services to its clients. This company was concentrating on internet enabled business information systems in a wide range of industries. Resultantly, this company was included in the list of comparables. 17.2. After considering the rival submissions and perusing the relevant material on record, we find from the description of business activity of this company as reproduced on internal page 90 of the TPO's order, that it is a pure software development service provider. In the absence of any other specific objection against t....
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....irect the exclusion of this company from the list of comparables. So, the assessee's objection is upheld. (iv) Datamatics Ltd. The assessee has no objection to the inclusion of this company in the list of comparables. (v) E-Zest Solutions Ltd. Ld. AR contended that this company cannot be compared with the assessee company because it is functionally dissimilar and provides diversified services, such as, Design and Development, Feature Enhancement, Product Modernization, Offshore Software Development, Custom Software Development etc. and that segmental data are unavailable. However, the assessee was candid enough in stating that this comparable was confirmed in Toluna (supra). We find that in Toluna (supra), the co-ordinate bench while repelling similar objections, held as under :- "20.1. The annual report of this company was available, but, the functionality was not clear. Notice u/s 133(6) was issued by the TPO. On receipt of reply from the company, it was noticed that it was engaged in software development services and, hence, qualified all the filters applied by the TPO. After considering the objections of the assessee, the TPO held it to be includible in the....
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.... and services' as a composite segment and therefore, no bifurcation is available between the two activities. He also submitted that this company has high turnover of approx Rs. 848 crores which is 10 times to the assessee's turnover. He submitted that this comparable was excluded in Toluna (supra). We find force in the said contentions of the AR. In Toluna (supra), the co-ordinate bench while accepting the contentions of the AR, held as under :- "21.1. This company was finding place in the accept/reject matrix of the assessee, but was rejected in the TP study report because it failed R&D spend filter. The TPO noticed that the "Products and service segment" of this company was comparable to that of the assessee. As the product revenue was Rs. 92.1 crore out of the total product and service segment revenue of Rs. 847.2 crore, the TPO held this company to be comparable. The assessee's objection that this company had incurred huge R & D expenses and, hence, should be ignored, did not find favour with the TPO. The DRP approved the view taken by the authorities below on the comparability of this case. 21.2. After considering the rival submissions and perusing the relevant mat....
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....s, Maritime Practice services, Enterprise Security & Privacy Practice services etc. He submitted that this company also fails on employee cost/sales filter applied by the TPO and it has high A&M ratio of 3.52%. He submitted that this comparable was excluded in Toluna (supra). We find force in the said contentions of the AR. In Toluna (supra), the co-ordinate bench while accepting the contentions of the AR, held as under :- "23.1. The TPO noticed from the annual accounts of this company that it was engaged in the software development services and also qualified employee cost filter. The assessee objected to its inclusion by, inter alia, contending that the PLI of this company was incorrectly worked out by the TPO. Correcting this mistake in calculation part, the TPO held this company to be comparable and determined its revised PLI at 36.63%. The DRP upheld the inclusion of this company in the list of comparables. 23.2. After considering the rival submissions and perusing the relevant material on record, we find from the annual accounts of his company that it is engaged in rendering ITES BPO services, Application management services, Offshore delivery, Project manag....
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....n which Infosys Ltd. has been held to be not comparable to a company that was engaged in the business of development of software for parent company. We, therefore, direct the exclusion of this case from the list of comparables. The assessee succeeds." In the light of the co-ordinate Bench finding, as afore-stated, we direct the exclusion of this company from the list of comparables. So, the assessee's objection is upheld. (xi) Ishir Infotech Ltd. Ld. AR contended that this company cannot be compared with the assessee company because the company has an A&M / sales ratio of approx. 10% which clearly indicates that it also enjoys a return on account of marketing intangibles and hence, is not comparable to the assessee. Ld. AR submitted that this comparable was excluded in Toluna (supra). We find force in the said contentions of the AR. In Toluna (supra), the co-ordinate bench while accepting the contentions of the AR, held as under :- "26.1. The AO included this company in the list of comparables by observing that it qualified 25% employee cost filter and all other filters on the basis of information received u/s 133(6). The assessee objected to the inclusion of this....
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....the list of comparables. So, the assessee's objection is upheld. (xii) KALS Information Systems Ltd. (Seg.) Ld. AR contended that this company cannot be compared with the assessee company because the company fails on software service revenue filter and has significant revenue from product. This company has no segmental details available. Ld. AR submitted that this comparable was excluded in Toluna (supra). We find force in the said contentions of the AR. In Toluna (supra), the co-ordinate bench while accepting the contentions of the AR, held as under :- "27.1. The TPO observed that this company was engaged in Software development and training. As the software products constituted only 3% of its revenue and training revenue constituted 8.56%, the TPO held that this segment of KALS Information Systems Limited was rightly includible. 27.2. After considering the rival submissions and perusing the relevant material on record, it is an admitted position that the TPO adopted Software development segment of this company by noticing that this segment also included revenues from software products and training. In view of the fact that the assessee is not engaged in im....
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.... page 192 of the paper book, being Notes to the balance sheet of Lucid Software Ltd., that this company developed software products in-house. The expenditure so incurred on product development has been duly capitalized by Lucid Software Ltd. These facts amply bring out that Lucid Software Ltd. cannot be considered as comparable. We, therefore, direct the exclusion of this case from the list of comparables. The assessee succeeds." In the light of the co-ordinate Bench finding, as afore-stated, we direct the exclusion of this company from the list of comparables. So, the assessee's objection is upheld. (xv) Mediasoft Solutions Ltd. The assessee has no objection to the inclusion of this company in the list of comparables. (xvi) Megasoft Ltd. (Seg.) Ld. AR contended that this company cannot be compared with the assessee company because the company has undergone significant restructuring during the relevant FY and owns intangibles. It also failed on different financial year end filter as applied by the TPO. He submitted that the JTPO should not have considered the company wide margin of assessee since that also factors into itself the return from the sale of software prod....
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.... Systems Ltd. Ld. AR contended that this company cannot be compared with the assessee company because the company has undergone significant restructuring during the relevant FY and the company also derives its income from the sale of software services as well as products. Ld. AR submitted that this comparable was excluded in Toluna (supra). We find force in the said contentions of the AR. In Toluna (supra), the coordinate bench while accepting the contentions of the AR, held as under :- "33. After considering the rival submissions and perusing the relevant material on record, we hold that this company also cannot be considered as comparable because of merger of another company into it, which fact is evident from page 196 of the paper book. It can be seen that a subsidiary company was merged into this company pursuant to judgment of Hon'ble Bombay High Court w.e.f. 1.4.06. Because of the merger of subsidiary into this company, we hold that the financial position of this company cannot be construed as normal capable of a good comparison. Following the Mumbai Bench decision in Petro Araldite (P) Ltd. (supra), we direct the exclusion of this company from the list of compara....
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....ny also fails R&D filter. Ld. AR submitted that this comparable was excluded in Toluna (supra). We find force in the said contentions of the AR. In Toluna (supra), the co-ordinate bench while accepting the contentions of the AR, held as under :- "39.1. The TPO included this company in the list of comparables by noticing that its 'Software development and services segment' matched with the assessee. On being called upon to explain as to why this company be not included in the list of comparables, the assessee stated that the nature of activity done by this company was different inasmuch as it was engaged in R&D activities also which resulted in creation of intellectual property. Not convinced with the assessee's submissions, the TPO included this segment of the company in the list of comparables. 39.2. After considering the rival submissions and perusing the material on record, we find from page No.206 of the paper book, which is Annexure to the Director's report of this company, that the nature of its activity is quite distinct from that of the assessee. It can be seen that this company is into development of hardware and software for embedded products such as mul....
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.... 84,24,37,99,640. He submitted that this company fails on R&D filter and substantial turnover and also there is no standalone financial data for FY 2006-07. Ld. AR submitted that this comparable was excluded in Toluna (supra). We find force in the said contentions of the AR. In Toluna (supra), the co-ordinate bench while accepting the contentions of the AR, held as under :- "41. After considering the rival submissions and perusing the relevant material on record, we have absolutely no doubt in our mind that this company cannot be considered as comparable to the assessee inasmuch as it is a giant company in terms of parameters discussed above while dealing with the case of Infosys Ltd. The Hon'ble Delhi High Court in the case of Agnity India Technologies Pvt. Ltd. (supra) has upheld the exclusion of this company also from the list of comparables on the basis of certain parameters, which are fully applicable to the instant assessee as well. It is, therefore, directed to exclude this company from the list of comparables. The assessee succeeds." In the light of the co-ordinate Bench finding, as afore-stated, we direct the exclusion of this company from the list of comparabl....
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....correct in view of the Hon'ble jurisdictional High Court decision in Rampgreen Solutions Pvt. Ltd. vs. CIT (ITA 102/2015 order dated 10.08.2015) wherein the Hon'ble High Court has held as under : "33. The Special Bench of the Tribunal in Maersk Global Centers (India) Pvt. Ltd. (supra) struck a different cord. The Special Bench of the Tribunal held that even though there appears to be a difference between BPO and KPO Services, the line of difference is very thin. The Tribunal was of the view that there could be a significant overlap in their activities and it may be difficult to classify services strictly as falling under the category of either a BPO or a KPO. The Tribunal also observed that one of the key success factors of the BPO Industry is its ability to move up the value chain through KPO service offering. For the aforesaid reasons, the Special Bench of the Tribunal held that ITeS Services could not be bifurcated as BPO and KPO Services for the purpose of comparability analysis in the first instance. The Tribunal proceeded to hold that a relatively equal degree of comparability can be achieved by selecting potential comparables on a broad functional analysis at ITeS l....
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....may be functionally comparable to a KPO while other services may not. In such cases a classification of BPO and KPO may not be feasible. Clearly, no straitjacket formula can be applied. In cases where the categorization of services rendered cannot be defined with certainty, it would be apposite to employ the broad functionality test and then exclude uncontrolled entities, which are found to be materially dissimilar in aspects and features that have a bearing on the profitability of those entities. However, where the controlled transactions are clearly in the nature of lower-end ITeS such as Call Centers etc. for rendering data processing not involving domain knowledge, inclusion of any KPO service provider as a comparable would not be warranted and the transfer pricing study must take that into account at the threshold. 36. As pointed out earlier, the transfer pricing analysis must serve the broad object of benchmarking an international transaction for determining an ALP. The methodology necessitates that the comparables must be similar in material aspects. The comparability must be judged on factors such as product/service characteristics, functions undertaken, assets use....
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....d objection in the filter used by the TPO of 25% related party transactions. According to him, the ideal situation is that there should be zero related party transactions, however, the related party transactions should be taken the least when there are reasonable comparables available before the TPO. In order to buttress his arguments, he cited the order of the coordinate Bench in the case of Motorola Solutions India Private Limited (supra) wherein the Tribunal had accepted the said contention of the assessee and held as under :- "56. We are in agreement with TPO in principle that this filter is appropriate to eliminate the companies which have controlled transactions and thereby have a significant influence on the margins earned. The TPO in his order has observed that in principle the tax payer has no objection for applying this filter. However, its two main contentions are-one-availability of RPT information and second the threshold limit of 15% in place of 25%. At the same time we also find considerable force in the submission of ld. Counsel for the assessee that ideally if sufficient number of 100% uncontrolled comparables are found, then no comparable having related p....
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....re of account reconciliation, trade order management services and has been rated as a leading KPO by Nelso Hall. It was contended that similarly Vishal was engaged in the services of data analytics and providing data processing solutions to some of the largest brands in the world. Vishal too had been rated as a leading KPO by Nelso Hall. In addition, it was pointed out that whilst the employee costs incurred by Vishal was relatively low and constituted only 2.30% of its total cost during the relevant year, the hire charges, vendor payments constituted almost 87% of the total costs. According to the AR, this evidenced that Vishal's business model was different and Vishal had outsourced significant part of its operations. We have heard both the sides and perused the material available on record. The Hon'ble jurisdictional High Court in the case of Rampgreen Solutions Pvt. Ltd. (supra) has held as under :- "36. As pointed out earlier, the transfer pricing analysis must serve the broad object of benchmarking an international transaction for determining an ALP. The methodology necessitates that the comparables must be similar in material aspects. The comparability must be ju....
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....of its work was outsourced to other vendors/service providers. The DRP and the Tribunal erred in brushing aside this vital difference by observing that outsourcing was common in ITeS industry and the same would not have a bearing on profitability. Plainly, a business model where services are rendered by employing own employees and using one's own infrastructure would have a different cost structure as compared to a business model where services are outsourced. There was no material for the Tribunal to conclude that the outsourcing of services by Vishal would have no bearing on the profitability of the said entity." In the light of the aforesaid decision of the Honorable jurisdictional High Court in the case of Rampgreen (Supra) wherein the it was held that both these companies cannot be compared with the low end service provider like the appellant in this case. (ix) Infosys BPO Ltd. The DRP repelled the objections of the assessee and concurred with the findings of the TPO and observed that the BPO segment of Infosys has been considered which passes all the applied filters. The ld. AR contended that Infosys is functionally dissimilar as it provides high-end integrated se....
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....ilarity with that of the assessee in this case. So, we uphold the action of the TPO to include this company as a comparable. The assessee fails. (x) Maple eSolutions Ltd. (xi) Triton Corp Ltd. Maple eSolutions & Triton Corporation, it is mentioned in the report of the TPO that the first named company is carrying on the business of rendering data process services and BPO services. Objection has been raised that the directors of the company were involved in a fraud. This company is a wholly owned subsidiary of Haryana Fibres Ltd., whose promoters were involved in fraud as per newspaper report and the CBI report. The TPO mentioned that according to CBI bulletin of December, 2008, it was reported that the Rastogi family cheated Government of India to the tune of Rs. 54.00 crore in late 1980s and mid 1990s. Rastogi brothers had floated 14 firms for the purpose of export of bicycle parts to Russia and Hong Kong. They were arrested by the FBI and U.K. authorities and sentenced to imprisonment for more than 9 years. However, the report nowhere contains the name of this company. According to the data available at Prowess Data Base, it is engaged in the business of call centre activ....
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....he items of expenses and income are merging. So, true and correct picture of profitability cannot be ascertained. Therefore, due to extra ordinary events taking place in the instant financial year of this company, we are of the opinion that this company should be excluded from the list of comparables. In view of the above, both the aforesaid companies are directed to be excluded. (xii) Mold - Tex Technologies Ltd. The DRP repelled the objections of the assessee and observed that the company has two divisions viz plastic and IT (KPO division) and held that the IT segment is performing the same functions as that of the Appellant i.e. ITES. It was observed that the companies were performing broadly similar functions as that of the assessee. The ld. AR contended that Moldtek is engaged in the business of rendering engineering services in the nature of producing design, drawings, detailed structural engineering drawings using 3D and 2D software. These services are high - end in nature and cannot be compared with the low-end services provided by the assessee such as accounting services, transaction processing, customer contact services etc. Our attention was drawn to the Annu....
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....mplement our service offerings, provide access to niche skill sets and expand our presence in select geographies. We have a dedicated team of professionals who identify businesses which meet our strategic requirements and are cultural fit to Wipro. The following businesses have joined the Wipro family during the year : 1. US based Quantech Global Services LLC and the India based Quantech Global Services Ltd. for a cash consideration, which includes upfront payment of approximately USD 2 million. 2. CMango - Transactions consummated in April 2006 - US based CMango Inc and India based CMango India Private Limited for cash consideration which includes upfront payment of USD 20 Mn. 3. Europe based Retail Solutions Provider, Enabler. The consideration included upfront cash payment of approximately Euros 41 million. 4. Finland based Saraware Oy. For a cash consideration of approximately Euro 25 million. 5. Middle East and SAARC operations of 3D Networks and Planet PSG for a cash consideration of approximately USD 23 million. 6. In our Consumer Care and Lighting business we acquired North-West Switches business from North-West Switchge....
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.... Hydrauto Group AB (Hydrauto) Nov 06 Engaged in production, marketing and development of customised hydraulic cylinders solution for mobile applications. In the light of the aforesaid facts regarding acquisition made by this company, we find where there is amalgamation, then the accounts do not portray the correct picture in the profits due to the merging of accounts. So the financial results cannot be relied upon for the computation of PLI of this comparable. Since the terms of amalgamation is decided on the scheme of amalgamation, which is approved by the High Court, so not necessarily all the items of expenses and income are merging. So, true and correct picture of profitability cannot be ascertained. Therefore, due to this extra ordinary events taking place in the instant financial year of this company, we are of the opinion that this company should be excluded from the list of comparables. It is ordered accordingly. (xiv) Aditya Birla Minacs Worldwide Limited (earlier known as Transworks Information Services Ltd.) (xv) Apex Knowledge Solutions Pvt. Ltd. (xvi) Appollo Healthstreet Ltd. (xvii) Cosmic Global Ltd. (xviii) Datamatics Financial Ser....
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....k adjustment is case specific, function specific and also depends on the nature of functions (including risks) carried out by the comparable companies. 2. The tax payer had not given any evidence or argument regarding how the assumptions of CAPM model are true in the case of the AE when it is doing business with the taxpayer. 3. The CAPM model has some weakness, the main being that the model does not recognize the presence of human capital, which is the main driving source for revenues in the software service industry. 4. The taxpayer considered only listed companies. But, there is a method of computation of similar nature in the index. There is a manner in which unlisted companies beta would be calculated. 5. Wherever market data was not available, the beta is computed based on guideline companies from the small cap and madcap indices of BSE and NSE. But, the risk adjustment should always be based on the comparables selected by the taxpayer or the TPO and not on the other companies, which are not examined and otherwise, not comparable functionally. Thus, the beta of unlisted companies or companies where data was not available should be the avera....
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....les would not change after risk adjustment. But, after giving effect to risk adjustment, the financial statements of the comparables should look like that of the tax payer i.e., stripping the risk component. So, the expenses pertaining to the risk like sales and marketing expenses, bad debts etc. should be removed from operating expenses and corresponding risk premium adjusted amount has to be reduced from the operating revenues. Hence, as per the above detailed discussion, the computation of risk adjustment by the taxpayer is not acceptable. There is no scientific basis for working out the taxpayer company's beta or beta of the unlisted comparable companies. The taxpayer altogether forgotten that the risk adjustment, if at all to be computed, is to be computed based on the difference between the actual weighted cost of capital of the comparables and weighted cost of capital of the comparable companies assuming same level of equity in the total finances and risk level as evidenced by beta of the taxpayer. This differential is altogether is ignored making the entire exercise redundant. ................ 118.1 We have considered the submissions of both the p....