TaxTMI 
TaxTMI 
2016 (2) TMI 604
X X X X Extracts X X X X
X X X X Extracts X X X X
....reported four international transactions including "Provision of Software Development" with transacted value of Rs. 20,72,25,235/-, which is disputed in the instant appeal. There is no quarrel on the other three international transactions. The assessee applied the Transactional Net Margin Method (TNMM) as the most appropriate method for demonstrating that the international transaction of Provision of Software development was at Arm's Length Price (ALP). The assessee's profit margin from this transaction was shown at 22.63% as against the mean margin of five comparables chosen by the assessee at 17.91%. On a reference made by the Assessing Officer for determining the ALP of the international transactions, the Transfer Pricing Officer (TPO) observed that the overall Profit Level Indicator (PLI) of Operating Profit to Operating Cost (OP/OC) as per the assessee's Profit and loss account was (-) 15.34%, whereas it had shown profit margin from the international transaction at 22.63%. The Transfer Pricing Officer noticed from the Transfer pricing study report that the comparability adjustment was carried out to arrive at such PLI at 22.63%. On perusal of the details filed by the assessee,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er of the instant appeal. 5. The assessee has challenged the transfer pricing adjustment broadly on two counts, viz., calculation of its Profit level indicator (OP/OC) and inclusion of certain comparables. I. CALCULATION OF ASSESSEE'S PLI (OP/OC) 6.1. It has been noticed above that the assessee's Profit and loss account showed overall OP/OC at (-)15.43%, whereas the assessee computed its OP/OC from the international transaction of `Provision of the software development' at 22.63%. The TPO worked out such PLI at (-)12.65%. It is this calculation made by the Transfer Pricing Officer, which has been challenged before us on the sole issue of nongranting of capacity utilization adjustment. Apart from that, the ld. AR did not advance argument on any other aspect of the calculation of the assessee's PLI. 6.2. Before proceeding further, we want to clarify that the ld. AR has not disputed the above extracted calculation made by the TPO of the Profit level indicator at (-)12.65% from the international transaction of `Provision of software development', in so far as the adoption of figures is concerned. In other words, the learned Authorized Representative has accepted that the fi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....all be applied for the determination of ALP `in the manner as may be prescribed'. Calculation of ALP under the TNMM has been prescribed under Rule 10B(1)(e) of the Income-tax Rules, 1962, which states that for the purposes of section 92C(2), the ALP in relation to the international transaction shall be determined as under : `(e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base ; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base ; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e assessee from the international transaction. When we consider sub-clauses (ii) and (iii), it turns out that, firstly, the net operating margin actually realized from the comparable uncontrolled transaction is computed, which is determined in the same way as that of the assessee as per clause (i), that is, actual figures without making any adjustment. Then sub-clause (iii) talks of adjusting the actually realized margin of comparables to bring the same at par with the international transaction undertaken by the assessee, so as to iron out the effects of differences between the international transaction and comparable uncontrolled transactions. On going through all the sub-clauses of Rule 10B(1)(e), the natural corollary which follows is that the net profit margin realized by the assessee from its international transaction is taken as such and the adjustments, if any, due to differences between the international transaction and comparable uncontrolled transactions, are given effect to in the profit margin of comparables. The viewpoint canvassed by the learned Authorized Representative that adjustment due to difference between comparables and the assessee should be carried out in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed transactions qualifying for inclusion in the determination of the ALP under Rule 10B(1). Mechanism for determining ALP under the TNMM has been enshrined in Rule 10B(1)(e) alone which clearly provides for making adjustments on account of differences between uncontrolled transaction and international transaction in the profit margin of comparables. Sub-rule (3) is neither a machinery provision in itself nor a part of the machinery for calculating arm's length price of an international transaction, which falls exclusively and in the sole domain of sub-rule (1). If we accept the contention of the learned Authorized Representative that rule 10B(3)(ii) is to be construed as a provision for allowing adjustment on account of differences between uncontrolled transaction and international transactions from the profit margin of the assessee, then we will have to read sub-rule (3) as a part of machinery for calculating ALP under Rule 10B(1)(e), which has no statutory sanction. Thus, it follows from a conjoint reading of rule 10B(1)(e) with rule 10B(3), that whereas later rule is only meant for deciding the inclusion or otherwise of a probable comparable in the final list of comparables, the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ment of idle capacity with no revenue and allocate a larger chunk of costs to the same without adjusting it against AE or non-AE segments. We have noticed supra from the language of rule 10B(1)(e)(i) that it talks of finding out profit margin `realized', which can be computed by considering all the operating costs incurred. It does not permit ignoring any operating cost actually incurred. By doing so, the assessee has devised a unique method for converting its loss from the AE segment into profit, by artificially excluding huge operating costs actually incurred from the consideration zone, thereby projecting a rosy picture of profit from its international transactions so as to demonstrate that the same is at ALP. This course of action adopted by the assessee is legally unacceptable. 7.3. Further, the assessee has calculated capacity adjustment by considering full bench capacity for the entire year at 300 employees. On a specific query as to what this `full bench capacity' represents, the learned Authorized Representative submitted that these are the number of seats on which some work can be possibly done notwithstanding the actual number of employees working on them. When we con....
X X X X Extracts X X X X
X X X X Extracts X X X X
....al report of its comparable companies or from any other reliable data, to the effect that there existed differences in the utilization of capacity of such comparables vis-à-vis the assessee, that any adjustment can be allowed in the profit margin of the respective comparables. Contention of the ld. AR casting burden on the Revenue to show that in each comparable case capacity utilization was less than 100%, as a condition precedent for denying the claim of capacity adjustment, is akin to putting cart in front of horse, which is manifestly impermissible. In the present case, the assessee has taken a stand that capacity adjustment be allowed on the assumption of all the comparables operating at 100% capacity level, which is not evidenced from any material on record. On a pertinent query, the learned Authorized Representative candidly admitted that no such data was available to vouch such a claim. In the absence of any reliable data to support the difference between the capacity utilization levels of the assessee and the comparables, we are helpless in granting any such adjustment. 8. Summing up, we hold that neither there is any warrant for adjusting the assessee's profit m....
X X X X Extracts X X X X
X X X X Extracts X X X X
....clusive property of Buyer (i.e. its AE)'. Next para 12.2 of the Agreement provides that : `The software shall be deemed Buyer's proprietary information and shall not be disclosed to anyone outside of Buyer, or used by Service provider or others without the prior, written consent of Buyer'. These clauses of the Agreement adequately indicate that the assessee is simply engaged in software development and software support services including development of new applications and maintenance or up-gradation of such applications etc. for a particular sum and the work done by it in the shape of newly developed software or applications becomes exclusive property of its foreign AE, which the assessee cannot use, interfere with or sell to others. Its role is simply to develop and maintain the software and after doing the needful assign it to its AE for a defined consideration. No intellectual property rights in the work done by the assessee vest in it. The ld. AR contended that the assessee is mainly developing software and solutions to be used in banking business. However, he could not correlate such a contention with any material on record. With the above brief introduction of the assessee's....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l before the DRP. 11.2. We have heard the rival submissions and perused the relevant material on record. The only basis which has been challenged by the learned Authorized Representative seeking exclusion of this company is its functional dissimilarity. We have gone through the Annual report of this company which is available in the paper book. Its Profit and loss account specifies `Income from operations'. It is further borne out that it is providing end-to-end development, software project development services. As the assessee is also engaged in the customised software development, we find this company to be functionally similar. The same is, therefore, retained in the list of comparables. (iii) L&T Infotech Ltd. 12.1. The assessee argued against the inclusion of this company in the list of comparables before the Transfer Pricing Officer by contending that it was functionally different and there was insufficient segmental information. Apart from that, it was also argued that it was exceptional year of its operations and there were significant intangible assets possessed by it. The Transfer Pricing Officer did not accept this contention and included the same in the list o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....1534 of the paper book, that its income from 'Sale of software services and Products' is amounting to Rs. 6101.27 millions. The TPO has himself observed that this company does have some products, but, product revenue is only 7.2% and, hence, this company is predominantly a software service provider. This discussion is contained in para 21.67 of the TPO's order. Even Schedule-11 to the Profit & Loss Account also shows 'Sale of software services and Products.' This shows that this company is engaged in both rendering software development services as well as sale of software products. Albeit the percentage of software products in the total revenue is less, as has been noted by the TPO, yet, we are inclined to take it as non-comparable because there is no precise information about the contribution made by such small sale of software products to the total profit of the company. As no segmental information is available in respect of this company and the figures have been adopted by the TPO at entity level, we, therefore, order for the exclusion of this company from the list of comparables. vi) Sasken Communications Technologies Ltd. 15.1. The TPO included this company in the set of....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 2009." 16.3. It is observed from the above contention reproduced in the TPO's order that Wipro Technology Services Ltd., which was earlier Citi Technology Services Ltd., was held by Citi Corp. Banking Corporation, USA upto 20th January, 2009. Wipro Ltd., parent company of the assessee, executed an agreement with Citi Group Inc., for acquiring Citi Technology Services Ltd., now called Wipro Technology Services Ltd. On 21.1.2009, Wipro Ltd. signed a master agreement with Citi Group Inc., for the delivery of technology Infrastructure Services and application development and maintenance services for the period of six years, which also includes the year under consideration. This shows that income from software development support and maintenance services was earned by Wipro Technology Services Ltd., from Citi Group Inc., by means of master service agreement entered into between Wipro Ltd., its parent company and Citi Group Inc., a third person. 16.4. We have noticed above from the language of Rule 10B(1)(e)(ii) that it is the net profit margin realized from a comparable uncontrolled transaction, which is considered for the purposes of benchmarking. The epitome of `comparable unco....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... person. This unfolds that the transaction of earning revenue from software development support and maintenance services by Wipro Technology Services Ltd., is an international transaction because of the application of section 92B(2) i.e., there exists a prior agreement in relation to such transaction between Citigroup Inc. (third person) and Wipro Ltd. (associated enterprise). In the light of this structure of transaction, it ceases to be uncontrolled transaction and, hence, Wipro Technology Services Ltd., disqualifies to become a comparable uncontrolled transaction for the purposes of inclusion in the final list of comparables under Rule 10B(1)(e)(ii). We, therefore, direct removal of this company from the list of comparables. viii) Acropetal Technologies Ltd. (Seg.) 17.1. The TPO considered this company as comparable on segmental level. The assessee's contentions in this regard were rejected. 17.2. After considering the rival submissions and perusing the relevant material on record, we find from the Annual accounts of this company, a copy of which is available at page 892 of the paper book, that it has a separate segment of software development covering `Enterprise solut....