TaxTMI 
TaxTMI 
2016 (6) TMI 1180
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....AO referred the assessee's case to the ld. TPO, for determination of the arms length price (ALP) in respect of international transactions entered into by assessee with its AE during the financial year 2009-10. On the reference being made to the ld.TPO, notice under section 92CA was issued to the assessee. In response to the same the assessee filed documentations prescribed under rule 10 D of the rules. 2.1 During the year under consideration the ld. TPO observed that Sun Life group is a diversified financial service organization, providing retirement and pension products and life and health insurance in Canada, US, UK and Asia. It also operates mutual fund and investment management business. Sun Life India (assessee) was incorporated on 28 separate 2006 as a wholly owned subsidiary of Sun Life financial (Mauritius) Inc.,(Sun Life Mauritius). The assessee was set up to provide software development and maintenance support service and back office support service to its Sun Life information services Ireland Ltd (AE) for assistance in their projects. The international transactions entered into by the assessee company with its associated enterprises during the year are as below: Ty....
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....s Ltd. NA 10.54 5.73 8.51 Ancent Software International Ltd. NA -8.13 -18.29 -13/61 Aziecsoft Ltd. NA 3.43 2.40 2.98 CG Vak Software & Exports Ltd. -13.90 3.74 -7.92 -5.58 Gold stone technologies Ltd. NA -10.30 19.35 8.06 Helios & Matheson Information Technologies Ltd 12.61 NA 29.16 18.90 Indium Software (I) Ltd. NA -12.96 -3.45 -7.64 Infosys Tech. Ltd. 43.24 38.69 35.53 39.45 KPIT Cummins Info systems Ltd. NC 9.27 8.94 9.12 Larsen & Tubro Infotech Ltd. 16.23 13/49 14.04 14.56 LGS Global Ltd. NA 13.75 22.36 17.29 Mindtree Ltd. 16.34 1.36 12.49 9.25 Persistent Systems Pvt. Ltd. 27.16 13.39 24.61 21.13 Quintegra Solutions Ltd. NA -8.32 13.55 2.40 RS Software (India) Ltd 7.64 8.82 5.46 7.52 Sasken Communication Technologies Ltd. 25.47 13.29 13.64 17.11 SIP Technologies & Exports Ltd. NA -33.28 -38.98 -36.84 Softsol India Ltd. NA NC 10.50 10.50 Thinks of Global Services Ld. 8.59 15.86 15.51 12.77 TVS Infot....
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....Data Systems Pvt. Ltd. (Merged) 88.25 6 Infosys Ltd. 45.08 7 Larsen & Toubro Infotech Ltd. 20.48 8 LGS Global Ltd. 12/79 9 Mindtree Ltd. 16/62 10 Persistent Systems Pvt. Ltd. 30.50 11 RS Software (I) Ltd. 10.29 12 Sasken Communication Tech. Ltd. 17.54 13 Tata Elxsi Ltd. 19.82 14 Thinksoft Global Services Ltd. 17.35 15 Thirdware Solutions 41.63 Average 28.65% Back-office support and F&A support service segments S. No. Company Name OP/OC WC Adj. OP/OC (%) 1 Accentia Technologies Ltd. 43.07 37.30 2 Cosmic Global Ltd. 18.28 17.40 3 e4e Healthcare 31.03 28.66 4 Fortune Infotech Ltd. 22.80 18.49 5 I-gate Global Ltd 24.54 21.20 6 Infosys BPO Ltd. 31.46 27.27 7 Jindal Intellicom Ltd. 13.62 12.05 8 Microland Ltd. ... -5.18 9 Omega Healhcare ... 11.84 10 TCSE-Serve International Ltd. 13.80 52.53 11 TCSE-Serve Ltd. 63.38 62.38 Average 28.56% 25.81% 2.6 This led to the proposal for a transfer pricing adjustment in respec....
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.... the Arm's Length Price (,ALP') of the impugned transactions to hold that the same are not at arm's length. Ground No.3 : The learned AO / TPO / DRP has erred, in law and on facts and circumstances of the case, by aggregating the transactions pertaining to 'provision of finance and accounting ("F&A") support services' with transaction pertaining to 'provision of back office support services'. Ground No.4 : (a) Not accepting the use of multiple year data, as adopted by the assessee in TP documentation; and (b) Determining the arm's length margins / prices using data pertaining only to financial Year ('FY') 2009-10 which was not available to the assessee at the time of complying with the Indian TP documentation requirements. Ground No.5 : The learned TPO / AO / DRP has erred, in law and on facts and circumstances of the case, in rejecting certain comparable companies selected by the Appellant by applying inappropriate comparability criteria such as: a) Turnover less than INR 5 crore; b) Different accounting year; c) Diminishing revenues; d) Employee cost less than 25 percent of total cost; and e) Export turno....
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....e corresponding adjustment from 'total turnover' for the purpose of computing deduction under section 10A of the Act. Thus, not maintaining parity in the numerator and denominator i.e. to say, export turnover and total turnover respectively. * Erred in law and in facts in not considering the order passed by the Hon'ble ITAT for AY 2007-08 wherein the disallowance on similar ground has been deleted thereby violating the Doctrine of Binding Precedents. Ground No. 13: The learned AO has erred in levying consequential interest under section 234B of the Act. Ground No. 14: The learned AO has erred in initiating penalty proceedings under section 271 (1)( c) of the Act. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time or at the time of hearing the appeal. The' Appellant prays for appropriate relief based on the said grounds of appeal and the facts and circumstances of the case." 4. We have heard the rival contentions of both the sides, perused the orders passed by the authorities below, the paper books filed by the assessee and the case laws relied upon by both the sides. 5. Grou....
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....precisely consider the functional profile of the assessee. Functional analysis of the assessee from the TP study: 9. From the TP study it is seen that assessee was providing software development and maintenance support service, back-office support services, financing and accounting services and advisory services to its AE since it's incorporation. Tendered the aforesaid services under the directions issued by Sun Life Ireland. Further it stopped rendering F and A support service and advisory services to its group entities during financial year 2009- 10. 9.1 From the TP study it is seen in respect of software support service segment, the assessee undertakes development of modules as well as parts of modules for software, being used by overseas group entities which included bug fixing, carrying out maintenance support services on software used by overseas entities. In back-office support segment the assessee updated the financial and personal data (such as name, address and other personal details) of the clients, both individual and group) of overseas group entities. Based on the information provided by the overseas group entities assessee generated insurance contracts for t....
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....see objected to the same. The assessee had objected that the company is functionally different and is having two different segments that there is IT and ITeS and that it has earned supernormal profits due to this similar nature of services. It was further contended that this company is engaged in hard designing, product re-engineering, product life cycle management enterprise IT consulting and IT enabled services. Ld.TPO did not accept the contentions of the assessee and retained this company as a comparable. It was further submitted that this company was not selected by TPO either in earlier year or in later years. The ld.AR submitted that segmental information was not available in respect of this comparable. The counsel has relied on the order passed by the TPO for assessment year 2009-10 10.2. Ld.DR, however, refer to the extracts made by the ld.TPO in the order to submit that E-Infochips Bangalore Ltd is a comparable company with that of assessee. 10.3. After considering the rival contentions and pursuing the annual reports placed on record, we are of the opinion that this company cannot be selected as comparable for TP analysis, because it is engaged in both software dev....
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....rect the AO/TPO to exclude this company from the final list of comparables. Thirdware Solutions Ltd 10.10. This company was selected by ld.TPO (page 43- 44 of TPO order) even though assessee objected to the same. The assessee had objected that the company is functionally different as during the said year the company was engaged in providing software product development implementation and consulting based on ERP and business intelligences. 10.11. Ld.DR, however, refer to the extracts made by the ld.TPO in the order to submit that Thirdware Solutions Ltd is a comparable company with that of assessee. 10.12. After considering the rival contentions and pursuing the annual reports placed on record, we are of the opinion that this company cannot be selected as comparable for TP analysis. Here it is pertinent to mention that this company was considered by the ld.TPO as a comparable in the immediately preceding year in ITA No. 1489/del/2014 for assessment year 2009-10 as well. The Tribunal by aforenoted order has held it to be incomparable. Since no distinguishing features of the functional profile of this company and the assessee for the current year vis-a-vis the preceding ye....
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....014, wherein Hon'ble Delhi High Court has held that: "the mere fact that an entity makes high / extremely high profits / losses does not ipso facto, lead to its exclusion from the list of comparables for the purpose of determination of ALP. In such circumstances enquiry under Rule 10B(3) ought to be carried out, to determine as to whether the material differences between the assessee and the said entity can be eliminated. Unless such differences cannot be eliminated, the entity should be included as a comparable." 10.18. After considering the rival submissions and pursuing the relevant material on record, we find that functionally, this company is into development of software products for healthcare. It is submitted by the ld.AR that Accentia Technologies Ltd is engaged into diversified activities such as Knowledge Process outsourcing(KPO), Legal process outsourcing(LPO), Data process Outsourcing(DTO), high end software services. It is submitted by the ld.AR that segmental information in respect of this company is not available. We find that the Ld. TPO had adopted this company as a comparable for assessment year 2009-10. Coordinate bench of this Tribunal has considered the comp....
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....ew that the case of aforesaid Infosys and the assessee are not comparable at all as seen from the financial data etc. of the two companies mentioned earlier in this order. Therefore, we are of the view that this case is required to be excluded." 10.23 Since there is no similarity in the functional profile of this company and assessee respectfully following the ratio laid down in Agnity India Technologies (supra), we direct the TPO/AO for removal of this company from the list of comparables. I Gate global solutions Ltd 10.24. The TPO included this company in the list of comparables despite the objections raised by the assessee. The assessee contended that this company offers both IT and ITES services and it has amalgamated with I Gate Global Solutions Sdn.Bhd., during the year under consideration. 10.25. Ld.DR, however, referred to the extracts made by the ld.TPO in the order to submit that Infosys BPO Ltd. is a comparable company with that of assessee. The ld. DR relied upon the extract of the decision of Hon'ble Delhi High Court in the case of Chris Capital Investment vs. DCIT (supra), which has been reproduced hereinabove. 10.26. After considering the rival submiss....
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....idering the rival submissions and pursuing the relevant material on record, we find that the financial results of this company shows that this company is into business of providing IT enabled services/BPO services primarily to Citigroup entity globally. The operations of this company broadly comprises of transaction processing and technical services. Transaction processing includes the broad spectrum of activities involving processing, collections, customer care and payment in relation to services offered by Citigroup to its corporate and retail clients. The technical services offered by this company are in the nature of servicing and maintenance of software testing, verification and validation of software, which are akin to software maintenance services falling within the overall category of software development services and has created a lot of applications which are in the nature of intellectual property in terms of reconciliation software, fund transfers, etc. The company also undertakes software testing and validation activities. Possession of intellectual property rights has to be factored if such a company is to be taken as comparable. Further, from the TP study we observe t....
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....unctionality and financial data. Hence following the rule of consistency, we are of the opinion that this company cannot be considered as comparable for the year under consideration. We therefore direct to exclude this comparable. Cosmic Global Ltd: 10.33. The ld.TPO had included this company as a comparable despite objections by the assessee. The assessee objected the inclusion of this company as the main revenue generation of this comparable is from medical transcription and consultancy services. Thus the ld.AR contended that this comparable is a high ended KPO. 10.34. Ld.DR, however, referred to the extracts made by the ld.TPO in the order to submit that Cosmic Global Ltd., is a comparable company with that of assessee. 10.35. After hearing the rival submission and pursuing the relevant material on record we find that this company was subject matter of consideration before this Tribunal in assessee's own case for assessment year 2009-10. After making a detailed analysis this Tribunal had approved the view taken by the TPO in considering this company as a fit comparable. As there is no difference in the functional profile and financial results o the assessee for the y....
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....In service industry, turnover does not play any significant role as far as the margins are concerned.... This reinforces the view that turnover does not play a significant role in service industry and there is no link between turnover and margins.... The turnover is not a relevant factor for choice of comparables has been confirmed in many decision, as listed below." 10.37 Further, the Ld. A.R. had submitted that the TPO had applied turnover filter of less than 1 crore for back office support segment as a criterion. It is observed that the Ld. TPO has not provided nay rational or logic for changing the said limits. Such an approach adopted by the TPO is not in accordance with law and against the principles of application of TP regulations. There ought to be a uniformity in treatment and consistency when the facts and circumstances are identical particularly in the case of same assessee. We accordingly direct the ld. TPO/AO to include this company to the list of comparables. R Systems International Ltd 10.38. The ld.TPO has rejected the company on account of different financial year ending vis-a-vis the assessee. The ld.AR submitted that companies whose financial data was a....
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.... using such a filter would be very limited and therefore, in such a case the net margin earned by the comparable companies would be different from the one that would be computed without using this filter. This view is supported by the coordinate bench of this Tribunal in the case of DCIT vs. McKinsey knowledge Centre India private limited in ITA No. 2195/del/2011 wherein it has been held that if a company is functionally comparable, it cannot be rejected merely on the ground that data for the entire financial year was unavailable, if the data can be reasonably extrapolated. Hon'ble tribunal further observed that rule 10 B (4) cannot be interpreted in such a rigid manner so as to defeat the basic objective of the rule. The relevant extract of the ruling are reproduced below: " 23. ..... However, in our considered opinion, if a comparable is functionally same as that of the tested party then the same cannot be rejected merely on the ground that data for entire financial year is not available. If from the available data on record the results were financial year can be reasonably extrapolated, then the comparable cannot be excluded solely on this ground. The learn ADR as referred to....
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....ider these companies in the final list of comparables. 11. It is worthwhile to note at this juncture that the ld.TPO has cherry picked the comparable without considering the functional /similarity differences as well as insufficient data/information available on the public domain. It is also noted that the ld.TPO has to take reasonable approach while selecting/rejecting any of the comparables. The ld.TPO should not select any comparable on the basis of hypothetical approach. Merely because the accounting year ending is not similar, should not be a reason for rejecting a particular comparable without having any functional dissimilarity between the comparable with that of an assessee. The ld.TPO must consider a particular comparable company bit different any financial year ending if the data can be reasonably extrapolated. The ld.TPO must demonstrate with documentary evidence/research materials placed on record to the contrary to suggest otherwise. In the event the contemporary comparative analysis undertaken ease in accordance with the rule 10 B (2) and also in line with globally accepted practices, the use of different accounting year is appropriate, as long as the international....
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....rt of operating profit of the company and should be included in the operating revenue. Similar view has been taken in Trilogy E Business Software India (P) Ltd. Vs DCIT (20ll) 47 SOT 45 (URO) (Bangalore). The Mumbai Bench of the Tribunal in S. Narendra Vs Addl.CIT (2013) 32 taxman. com 196 has also laid down to this extent. In view of the foregoing discussion, we are of the considered opinion that the amount of foreign exchange gain/loss arising out of revenue transactions is required to be considered as an item of operating revenue/cost. However, it is made clear that it should be dealt with identically both in the calculation of the PLI of the assessee as well as the comparable under all the three segments." 12.2 The ld.AR submits that the facts are identical in the year under consideration vis-à-vis that of assessment year 2009-10. Respectfully following the same we hold that the foreign exchange gain/loss arising out of revenue transaction is required to be considered as an item of operating revenue/cost. 13. Ground No. 9 12.1 This ground has been raised by the assessee as the Ld.AO has not followed the directions of the DRP for rectifying the arithmetical error....