TaxTMI 
TaxTMI 
2017 (1) TMI 1215
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....CA(3) of the Act and subsequently confirmed by the Hon'ble Dispute Resolution Panel ("DRP"). Each of the ground is referred to separately, which may kindly be considered independent of each other. That, on the facts and circumstances of the case and in law, 1. the AO/TPO has erred in making an addition of INR 49,981,078 to the total income of the Appellant by rejecting the transfer pricing ("TP") analysis undertaken by the Appellant and making an adjustment under section 92CA (3) of the Act without returning a finding about existence of any of the circumstances specified in clauses (a) to (d) of sub-section (3) of section 92C of the Act. 2. the AO/TPO has erred by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act' read with the Income-tax Rules, 1962 ("the Rules"), and modifying the same for the determination of the Arm's Length Price ("ALP") of the Appellant's international transactions to hold that the same are not at arm's length. 3. The AO/ TPO has erred in: a) Using data for a single year instead of multiple year data; and (b) Determining the arm's length margins / prices using data pertaining only....
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....se. 2. The briefly stated facts of the case are that the assessee, a company incorporated under the Companies Act, 1956, is a wholly4 owned subsidiary of 'Comverse Network System Inc., USA'. During the relevant assessment year, the assessee was engaged in the provision of sales and post sales support services, software development services, professional and maintenance services to its Associated Enterprises (AEs) in the field of telecommunication network including voicemail systems, Billings and other related hardware etc. The assessee filed its return of income electronically on 30/09/2008 declaring loss of Rs. 6,44,33,875/-, which was further revised to loss of Rs. 7,28,17,072/- on 31/03/2010. The case of the assessee was selected for scrutiny under 'Computerized Assisted Selection of Scrutiny' (CASS) and notice under section 143(2) of the Act was issued and complied with. The Assessing Officer made a reference to the Transfer Pricing Officer (TPO) under section 92CA(1) of the Act for determining the Arm's Length Price (ALP) under section 92CA(3) of the Act in respect of the International Transactions entered into by the assessee. According to the transfer pricing study, repor....
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....2, 74, 97, 397/- 2. sales and post sales support service Rs. 2, 24, 83, 680/- total Rs. 4, 99, 81, 078/- 2.4 After taking into account the adjustment to ALP, as directed by the DRP, the Assessing Officer passed the impugned order under section 144C read with section 143(3) of the Act on 23/10/2012. Aggrieved with the adjustment to the ALP sustained by the DRP, the assessee is in appeal before the Tribunal raising the grounds as reproduced above. 2.5 Before us, the Ld. counsel of the assessee argued only issue of exclusion/inclusion of comparables in respect of both segments and issue of claim for working capital adjustment in software development segment. The grounds No. 4 to 9 are in respect of exclusion/inclusion of comparables and ground No. 11 is in respect of claim of working capital adjustment. As other grounds were not pressed before us, same are dismissed as infructuous. 3. First we take up the ground No. 11, wherein the assessee has challenged the finding of the AO/TPO in not allowing the working capital adjustment. The facts in respect of issue in dispute are that the assessee argued before the TPO that suitable adjustment on ac....
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....used the relevant material on record. The TPO in para-16.2 held that during the proceedings the figures given by the taxpayer like sundry debtor, sundry creditors, did not match with the financials, hence working capital adjustment was not given to the assessee. As far as finding of the TPO on the issue in dispute is concerned, we are agreed with the Ld. counsel of the assessee that if the TPO was agreed in principle for allowing the working capital adjustment, then he should not have denied the same merely on the ground of non-matching of working capital adjustment with financials. He could have allowed an opportunity to the assessee and get the financial corrected. Further, the DRP observed that the issue of working capital would be relevant when there is a situation of inventory remaining tied up or receivable is being held up. The DRP held that though situation might not be so relevant to the service industry. It was observed that the assessee as also the comparables used would launch into project only when they have been awarded a contract and it is not as if those parties manufactures goods that awaits buyers. The DRP further observed that the working capital adjustment would....
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....owers the interest cost and accelerates profits. To have a level playing field, it is sine qua non that the working capital adjustment should be carried out to bring two other side comparables cases at par with each other. We are unable to comprehend any reason or rhyme to restrict the grant of working capital adjustment only in the case of manufacturers or traders. What is true for these categories of businesses is fully true for a service provider as well. It is a different matter that in the case of service provider, no working capital adjustment would be required towards higher or lower inventory, but the same may be warranted in respect of higher or lower trade receivables/payables. Since the authorities below have rejected the assessee's contention for grant of working capital adjustment at the threshold, which in our considered opinion is not correct, we set aside the impugned order and remit the matter to the file of the TPO/AO for examining the assessee's claim for grant of working capital adjustment on merits and thereafter, allow the same, if it is available. Needless to say, the assessee will be allowed an adequate opportunity of hearing." 3.2.3 Thus in case of servi....
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.... by the TPO : 1. Lanco Global Ltd. 2. Quintegra Solutions Ltd. 3. RS Software ( India) Ltd. 4. Sasken Communication Technologies Ltd. 4.1.1 The TPO included 15 comparables to the above list of four comparables chosen by the assessee. The final list of comparables considered by the TPO is as under: 4.1.2 The grievance of the assessee is against the inclusion of following five companies in the final list of comparables selected by the TPO: (i) Awani Cimcon Technologies Ltd (ii) celestial labs Ltd (iii) Infosys Ltd (iv) KALS Information Systems Ltd(segmental) and (v) Wipro Ltd. 4.2 Before proceeding further on the issue of accepting/rejecting of the above comparables, we would like to consider submission of both parties in respect of the profile and nature of services provided by the assessee. The learned counsel submitted as under: "In its TP documentation, the appellant had reported four services, viz. sales and postsale support service, software development service, professional service and maintenance service. For the purpose of transfer pricing assessment, the TPO has aggregated the three segments (pertaining to software development services....
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.... into software development and consulting with major focus on the travel and insurance industry. Before the TPO, The assessee objected to its inclusion on account of functional dissimilarity and use of information obtained under section 133 (6) of the Act by the TPO, but the same were rejected by the TPO. The DRP also rejected the claim of the assessee by upholding the action of the TPO. 4.3.2 Before us, the learned counsel of the assessee referred to pages 419 to 422 of the Annual Report compilation and submitted that said company is not comparable with the assessee due to following reasons: (i) that 'AvaniCimcon' is functionally dissimilar to the assessee, as it was engaged in a wide array of services including development of software products and back-office support services and no separate segmental information is available. (ii) that from the profit and loss account of the said comparable, it is seen that it was engaged in sale of products and also in the rendering of the services. (iii) that in the decision of Sun Life India service centre private limited (ITA No. 5799/Del/2012 for assessment year 2008-09, the the Tribunal Delhi bench held that AvaniCimcon, a soft....
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....st is Tribunal order in Agnity India Technologies Pvt. Ltd. Vs. DCIT (ITA No.6485/Del/2012). Vide its order dated 20.9.2013, the tribunal considered the functional profile of this company by noticing it to be a Product company owning software products like Dxchange, Travel Solutions, Insurance Solutions, Customer Appreciation, etc. Similar view has been taken by the Mumbai Bench of the Tribunal in the case of Net Hawk Networks India Pvt. Ltd. Vs. ITO (ITA No.7633/N/2012). Vide its order dated 6 11.2013, the Tribunal for the assessment year 2008-09 has noticed AvaniCimcon Ltd., to be a Product based company and not providing software development services. No contrary material has been placed before us by the Id. DR to show the functional profile of this company matching with the assessee. When contrasted with the assessee company, which is engaged in providing software development and maintenance services to its group concerns, we fail to see as to how a software product company like AvaniCimcon having intellectual property rights over some of the products developed by it, can be compared with the assessee on an entity level. IT A No.5799/Del/2012. We, therefore, order for the elimi....
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....are Solutions (ITA No. 1303/BAN/2012 ) * NXP Semiconductors Indian Private Ltd. (ITA No. 1174/BAN/2011) 4.3.7 On the other hand, the Ld. CIT(DR) submitted that this company was considered as one of the comparables in preceding year, thus the arguments of the learned counsel of the assessee need to be revisited by the TPO/AO and, therefore, matter needs to be restored back to the TPO/AO. 4.3.8 We have considered the rival submission of the parties and perused the relevant material on record. On perusal of the Annual Report of the company available on page 423 to page 464 of the Annual Report compilation of the assessee, we find that the company was engaged in the field of IT/bio informatics, biotechnology and consultancy work and offered enterprise resource planning solutions, Data warehousing, business intelligence solutions and bio services like clinical data management, gene sequence analysis, molecular modeling, design and development of drug molecules dedicated to health sector to government, institution Pharma and Biotech companies, hospitals and medical centres. On page 431 of the Annual Report compilation, the intellectual property rights of the company in var....
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....he comparables due to following reasons: (i) that the company is engaged in wide range of services from package evaluation and infrastructure management to development of software products. (ii) that the company does not have adequate segmentation of revenue between services and products, in addition to the fact that such services are widely varied and dissimilar to those rendered by the assessee. The only segmental information is on the basis of geographical/industry segment. (iii) that the company is an industry leader and is significantly large scale of operations (turnover of Rs. 15, 648 crores as against the appellant's turnover of Rs. 22 crores) . (iv) that the company has significant brand value and intangible assets as against the assessee which is a captive service provider. (v) that in the case of Sun Life India Service Centre India Private Limited for AY 2008-09( ITA No. 5799/Del/2012) , the company was rejected as a comparable to a captive service provider. (vi) that the finding of the Tribunal was also followed in following rulings: (a) Toluna India Private Ltd. (ITA No. 5645/DEL/2011) (b) 3DPLM Software Solutions (ITA No. 1303/BAN/2....
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.... providing software development services without having any IP rights in the work done by it. After making comparison of various factors as enumerated above, the Hon'ble Delhi High 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 all the above factors in a holistic manner, there remains absolutely no doubt in our mind that Infosys Technologies Ltd. Is incomparable to 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 held as comparable." 4.3.14 In view of our discussion above, we are of the opinion that the company is functionally dissimilar to the assessee, and accordingly, we direct the AO/Transfer Pricing Officer to exclude the above company from the list of comparables. (4.) KALS Information Systems Ltd (segment) 4.3.15 The TPO selected the company at seg....
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....pletion of milestones in contracts, under the percentage of completion method. Income from training is recognized on time proportion basis." 4.3.18 Further we find that in the case of Sun Life India service centre private limited (supra) also the revenue under application software segment of comparable company has been held to be consisted of from development of software as well as from sale of software products. The relevant part of the finding of the Tribunal is reproduced as under: "We have gone through the Annual report of this company which is available at pages 24 onwards of the paper book. Schedule no. 16 comprising Notes to the Financial Statements gives background of this company to be 'engaged in development of software and software products since its inception. ' This company consists of STPI unit engaged in development of software and software products Page of the paper book contains segmental information of this company which has been divided into two parts, namely, 'Application software segment' and 'Training segment'. It is the 'Application software segment' of this company, which has been adopted by the TPO. The development of software and all soft....
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.... the Annual Report of the comparable company which is placed on page 516 to 612 of the Annual Report compilation, that the revenue consist of sales and services and no separate segmental results for software development services are available. On perusal of the page 560 of the Annual Report compilation, we find that the company was engaged in research and development and activities having focus to strengthen the portfolio of Centre of Excellence (COE) and innovation projects and part of this focus, over 600 people were engaged. On perusal of page 561 of the Annual Report compilation, we find that the company has been granted 40 registered patent and 62 pending applications. As against the intellectual property rights owned by the company and R&D activities, the assessee was only a captive service provider to its AE. In the case of 3-D PLM software solutions(supra) , the Tribunal has observed as under: "We have heard both parties and carefully perused and considered the materials on record. We find merit in the contentions of the assessee for exclusion of this company form the set of comparables. It is seen that this company is engaged both in software development and product dev....
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.... under: "37. As per TP documentation maintained by the appellant, it is stated as: "Sales support services includes services related to promotion and marketing of Comverse group's products and identifying potential customers in India. Post-sale support services include installation and test runs, integrating the equipment with existing network, post commissioning maintenance including warranty, extended warranty and post warranty services on products sold directly by Comverse's AEs to customers in India." 38. The appellant is remunerated on a cost-plus basis by its AE for such services and it carries out limited and routine functions and mitigated from all risks. Any intangible/technical know-how of its own and relies solely upon training and know-how of its AE for provision of such services." 5.2 The Ld. CIT(DR), on the other hand, referred to page -26 of the transfer pricing study and submitted that the sales and post sales support segment of the assessee was more of a technical in nature, which consisted software error analysis and bug fixing and therefore the work which was carried out by the assessee was in the nature of technical services/engineering service....
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....ons, distortion free 24 sensors and deploys the latest seismic data analysis with advanced interactive workstations. - It had a huge asset base of INR 705 crore (majority of which is seismic equipment), with substantial expenses on survey and drilling. - The Hon'ble ITAT excluded in the case of Syngenta Biosciences Private Limited (ITA No 1083/MUM/2015) by holding that it is engaged in seismic research activity including 3D data seismic data acquisition Mahindra Consulting Engineers Limited Mahindra Consulting Engineers Limited: - It is engaged in infrastructure consultancy services and provides services in multidisciplinary projects (such as special economic zones, water supply and sewerage, solid waste management, urban infrastructure, agriculture and horticulture infrastructure, social infrastructure, ports; harbor and offshore terminal, industrial infrastructure etc). - Owns technical knowhow and operated in a single business segment - The Hon'ble ITAT excluded in the case of Rolls Royce India Private Limited (ITA No. 6636/DEL/2015) and Emersons Process Management Power & Water Solutions India Private Limited (ITA No. 5343/DEL/201....
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....d was engaged in providing 2D and 3D seismic services for design and preplanning of 2-D and 3-D surveys, seismic data acquisition, seismic data processing/reprocessing/special processing, seismic data interpretation, generation ,evolution and ranking of prospectus, Rservoir data acquisition, Reservoir analysis etc. This company has also been held as engaged in seismic research activity by the Tribunal in the case of Syngenta Bioscience private limited (supra). On perusal of page 119 of the compilation of the annual reports, we find that M/s Mahindra consulting Engineers Ltd is engaged in infrastructure sector by providing consultancy services in the areas of special economic zone, water supply and sewerage, solid waste management, urban infrastructure, Agri and Horti infrastructure, social infrastructure, ports and harbours and offshore terminals, industrial infrastructure etc. On perusal of page 97 of the compilation of the Annual Report, we find that M/s Kirloskar consultants Ltd was engaged in the area of engineering consultancy, project management services, architectural consultancy. The major assignment executed by the company are mentioned on page 98 of the compilation of the....
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.... assessee challenged the action of the TPO in respect of company M/s Himachal Futuristic Communication Ltd. The company was selected as a comparable by the assessee but was rejected by the TPO on functional dissimilarity. 5.10 Before us, the Ld. counsel submitted that the company was engaged in activities similar to the assessee. He further submitted that in the immediately preceding year i.e. A Y 2007-08 the company was chosen as comparable by the TPO and there was no change in the functional profile of either the assessee or the company and thus there was no rationale behind TPO's exclusion of this company from the list of comparables. 5.11 Before us, Ld. CIT(DR) submitted that the TPO rejected the company as it was engaged in providing telecom solutions and producing mobile communication equipment and digital microwave communication equipments and providing turnkey project, hence the company was functionally not comparable to the assessee. Ld. CIT(DR) submitted that no segment report was available in the Annual Report of the company. He also referred to page 186 of the compilation of the Annual Report and submitted that revenue of the company was decreasing and it was incu....
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....e segment are not comparable with the sales and post sale support services in respect of software products. Normally, the turnkey contracts include executing of all component of contract contracts, i.e., from start to the end including civil, electrical, transportation etc. kind of work. In the Annual Report of the company, no information in respect of turnkey contract executed by the company, is available. In our opinion, the segment of the company inclusive of turnkey contract, cannot be compared functionally with the sales and post sale support segment of the assessee. Further, the argument of the learned counsel that it was considered as comparable in preceding year also cannot be accepted because the functional comparability has to be made in the current year only and preceding year results cannot be precedent in Transfer Pricing comparison. Further, since the company has not been found functionally comparable at segment level, we are not adjudicated on the other arguments argued by the Ld. CIT(DR) on the issue of persistent loss-making company etc . Accordingly, we direct exclusion of the company from the set of comparables. 5. Exclusion of the other two companies i.e. ORG....