TaxTMI 
TaxTMI 
TaxTMI 
2016 (6) TMI 1180
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....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: Type international transaction Method selected ....
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....nologies 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 Infotech Ltd. NA -15.59 NC 15.59 Zylog Systems Ltd. NA 9 11.80 10.21 Average 6.21% Back-office support segment S.No. Name of company OP/OC (%) 1 CG-VAK Software & Export Ltd. (Seg) 0.53 2 Cosmic Global Ltd 16.59 3 Datamatics Financial Services Ltd. -3.73 4 Fortune Infotech Ltd. 19.62 5 Informed Technologies India Ltd. 24.96 6 JIndal Intellicom Pvt. Ltd. 18.79 7 Micropgenetics Systems Ltd. 6.49 8 Microland Ltd. ....
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....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 respect of software development service and Back-office support and F&A support service amounting to Rs. 4,49,58,039/-. S.No. Segment Adjustment in INR 1 Software Development Service 31,879,747 2 Back-office supports and F&A support services 13,088,292 Average 44,968,039 2.7 Thereafter the assessee carried the matter before the dispute resolution panel (DRP)-III, New Delhi. The DRP under section 144C (5) of the IT act, 1961 gave directions on 24/11/20153, determining the total income at Rs. 4,49,58,039/., confirming the addition made by the Ld.TPO to the arms length price. Apart from the adjustment made to the ELP, the DRP confirmed the addition made by the Ld.TPO in respect of foreign exchange fluctuation while computing the operating margins of the comparable companies as well as the assessee. On receipt of the directions passed by the DRP, the Ld....
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....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 turnover less than 75 percent of operating revenues. Ground No.6 : The learned TPO/ AO/ DRP have erred in selecting certain companies (which are earning supernormal profits) as comparable to the Appellant to benchmark the said transactions. Ground No.7: The learned TPO/ AO/ DRP have erred in wrongly rejecting certain companies from and adding certain companies to the final set of com parables for the said transactions on an ad-hoc basis, thereby resorting to cherry picking of comparable for benchmarking the impugned transactions. Ground No.8 : The learned TPO/ AO/ DRP have erred in not considering gains/ losses arising out of foreign exchange fluctuations while computing the operating margins of the comparable companies as well as the Appellant. Ground No.9 The learned AO has erred in not considering the directions passed by the learned DRP and passing an order under section 143(3) read with section....
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.... 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. Grounds 1 and 2 are general in nature. 6. Ground No. 3 6.1 It is noted that the assessee has agitated the clubbing of back-office support services with F& A support service segment by the ld.TPO for the purpose of benchmarking. The assessee's grievance against the computation of ALP under this merge segment is only confined to selection of comparables made by the ld.TPO. Apart from these the assessee satisfied on all other aspects of the computation of ALP of this merged set of transactions by the ld.TPO. We therefore dismiss this ground is unanswered. 7. Ground No. 4 This ground has been raised by the assessee as the Ld.TPO/DRP has rejected the usage of multiple year data. We agree with the findings of the ld.TPO, unless the assessee is able to make out where certain factors relevant to those years that have affected the transfer price of the year under consideration. It is observed that comparables that are in dispute relates to the same year vis-....
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.... 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 the customers of overseas group entities and sends them to the respective overseas group entities. 9.2 In F&A segment, the assessee provided finance and accounting support services to its group entities. In advisory segment the assessee provided advisory services to its AE. However these segments were discontinued during the financial year 2009-10. 9.3 It has been mentioned in the TP study that the assessee is responsible for day to day management activities, human resources, financial management and routine administration activity. It has its own finance, recruitment, administration and training departments which supports the overall services being rendered to its AE's. Thus the assessee performs the following functions in relation to software development and maintenance support segment to its AE's: * identification of problem (Limited) * software specifications/requirement analysis (Limited) * coding and documentation * project management (Limited) * testing and integration 9.4 In respect of b....
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.... comparable for TP analysis, because it is engaged in both software development as well as ITeS. Assessee being characterised as a routine service provider, the above company cannot be considered as comparable on functional basis. 10.4. As this company is functionally different from assessee and in absence of segmental information we direct the AO/TPO to exclude this company from the final list of comparables. Infinite Data Systems private limited 10.6. This company was selected by ld.TPO (page 36-38 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 has earned supernormal profits and the profitability of the company has increased by 1496% as compared to financial year 2008-09. Ld.AR further contended that this company is engaged in technical consulting, systems integration, infrastructure management services. He also submitted that this company is exposed to significant customer address due to sole customer being Fujitsu services Ltd. Ld.TPO did not accept the contentions of the assessee and retained this company as a comparable. It was further submitted that this com....
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....essee for the current year vis-a-vis the preceding year have been brought out to our notice, following the preceding, we direct the TPO/AO for removal of this company from the list of comparables. Tata Elxsi Ltd 10.13. This company was selected by ld.TPO (page 41- 42 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 sale of equipment and software licenses along with providing IT enabled and software product services. 10.14. Ld.DR, however, refer to the extracts made by the ld.TPO in the order to submit that Tata Elxsi Ltd. is a comparable company with that of assessee. 10.15. After considering the rival submissions and pursuing the relevant material on record, says we find that the total revenue of this company for the year under consideration stands at rupees for 1866.05 Lacs, consisting of revenue of sale and services amounting to Rs. 41,851.60 Lacs and other income amounting to Rs. 14.45 Lacs is. Segmental reporting done by this company indicates the split of total revenue of 41,866.05 Lacs into 2 segments. Here it is pertinent to mention t....
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....this Tribunal has considered the comparibility of the assessee and has directed this company to be excluded from the final list of comparables. Applying the same ratio we direct the learner TPO/AO to reject this company from the final list of comparables Infosys BPO Ltd 10.19. The TPO included this company despite assessee's objections. Assessee had objected for inclusion of this company as it provides high-end integrated services in the nature of business platforms, customer service outsourcing, finance and accounting LPO, HR outsourcing, sourcing and procurement outsourcing etc. The company also has a high brand value of goodwill and has acquired a company or by the name McCsmish Systems LLC to provide end-to-end solutions. 10.20. Ld.DR, however, refer 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. 10.21. After considering the rival submissions and pursuing the relevant material on record, we find that for the year under con....
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.... the rival submissions and pursuing the relevant material on record, we find that the financial results of this company due to restructuring activities during the relevant year. 10.26 A perusal of the Annual repro of I-Gate for F.Y. 2009-10, makes it clear that during the yea this company had acquired I Gate Global Solution Sdn.Bnd. Further, this company is engaged in providing variety of services in nature of I T Services and I T enabled Services for which there is no segmental information available. Coordinate Bench of this Tribunal in case of Capital I Q Information Systems (I) Pvt. Ltd. VS DCIT in I.T.A.No. 1961/Hyd/2011 has held as under: "11. On careful consideration of the matter, we also agree with the aforesaid view of the DRP that extraordinary event like merger and de-merger will have an effect on the profitability of the company in the financial year in which such even takes place. It is the contention of the assessee that in case of the aforesaid company, there is amalgamation in December, 2006, which has impacted the financial result. This fact has to be verified by the TPO. If it is found upon such verification that the amalgamation in fact has taken place, then th....
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....bserve that, this company is a wholly owned subsidiary of Tata Consultancy Services. During the year under consideration, this company has made payments towards use of Tata brand. Consequentially use of the TCS brand has substantially increased the operating profits post acquisition. In such factual background, the ratio relied upon by Ld. D.R. in case of Chrys Capital Vs DCIT (supra) cannot be applied. Instead the ratio laid down by Hon'ble High Court in the case of Rampgreen Solutions Pvt. Ltd. (supra) would be applicable. Hence we are of the opinion that this company cannot be taken as a comparable. We therefore direct to exclude this comparable. TCS E-Serve Ltd 10.31. The ld.TPO had included this company as a comparable despite objections by the assessee. The assessee objected the inclusion of this company as it provided financial information processing and customer contact services with high-level of foreign expenditure and abnormal profits. 10.31. Ld.DR, however, refer to the extracts made by the ld.TPO in the order to submit that TCS E serve Ltd. is a comparable company with that of assessee. The ld.DR relied upon the extract of the decision of Hon'ble Delhi High Cou....
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....der consideration vis-à-vis Assessment Year 2009-10, respectfully following the view taken by this tribunal in the immediately preceding assessment year, we uphold the TPO's order, rejecting the assessee's contention for exclusion of this comparable. Now we shall take up the comparables that were selected by the assessee and rejected by the TPO. Software Development Segment CG-VAK Software and Exports Ltd (Seg.) 10.36. The ld.TPO excluded this company from the list of comparables by holding that this company does not satisfy the employee cost filter. 10.37 We find that the Ld. TPO has accepted the submissions of assessee which is as under: "38.2 In its reply, the assessee has stated that the employee cost to total cost of the company is 68.22%, and it satisfies all the filters applied by the TPO and being functionally comparable to the assessee, this company should be accepted as a comparable" 10.38 However, the Ld. TPO rejected this comparable as it did not satisfy the turnover filter. The Ld. A.O. has not brought on record any material / documents contrary to the above submissions of the assessee. The Ld. TPO has also not been able to bring out any instance of functi....
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....t period, were considered in view of rule 10 D (4), which provides that information to be used must be contemporaneous. The ld. AR further submitted that though the Company has different financial year ending, were operating during the same period of time as the assessee, and were also facing similar business cycles, market and economic conditions as faced by assessee having financial year from April to March. He thus submitted that in absence of evidence available to the contrary that there has been a significant impact on the margins due to change in different reporting/accounting period, it is incorrect to disregard the comparable using this filter. Ld.DR, however, referred to the extracts made by the ld.TPO in his order to submit that R Systems International Ltd., should not be considered comparable with assessee. 10.39. After considering the rival submissions and pursuing the relevant material on record we find that the ld. TPO has not pointed out exact difference, the change of accounting year has made to the financial results of the comparable. The ld.TPO has further not pointed out whether it would not be possible to restate those financial results for a different accounti....
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....ndates that the data which is to be utilised for analysing the comparability of uncontrolled transactions with an international transaction, has to be financial year only in which the international transaction has been entered into. This rule is based on matching principle but this role cannot be interpreted in such a rigid manner so as to defeat the basic object of rule viz., selection of the comparable for determination of arms length price of an international transaction" (emphasis supplied) 10.40. In any case the ld.TPO has not cited any instances of functional dissimilarity of this comparable company with that of assessee. We therefore direct the ld. AO/TPO to consider this company in the final list of comparable. Calibra Point, Business Solutions Ltd, Helios & Matheson Information Technology Ltd 10.41. These comparables have been rejected by the ld.TPO applying the same filter of having different financial year. The ld.TPO has not cited any instance of functional dissimilarity of these comparable companies with that of assessee. The submissions advanced by both the sides are identical with that as raised while dealing with R Systems International Ltd. As we have this f....
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....year. 11.1 Ground No. 1, 2, 5 to 7 stands disposed off accordingly. 12. Ground No. 8 12.1 This issue raised is against the treatment of foreign exchange gain/loss as an item of non-operating nature. At the outset the ld.AR submitted that the issue stands covered in favour of assessee by an order of this tribunal in assessee's own case for assessment year 2009- 10 in ITA No. 1489/del/2014. The Tribunal has held as under: "32. We find merit in the contention raised on behalf of the assessee about the treatment of foreign exchange gain/loss as an item of operating nature. As regards the nature of such foreign exchange gain earned by the assessee, the ld. AR put forth that the same is in relation to the trading items emanating from the international transactions. No contrary material has been placed on record by the ld. DR. If the foreign exchange gain/loss resulted from the trading items only, we fail to appreciate as to how it can be treated as non-operating. 33. The Special Bench of the Tribunal in ACIT Vs Prakash I. Shah (2008) 115 ITD 167 (Mum)(SB) has held that the gain due to fluctuations in the foreign exchange rate emanating from export proceeds simply on the ground tha....
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....direct the ld.AO to follow the directions of the DRP and ratify the computational errors. 14. Ground No. 10 This ground has been raised by the assessee against disallowability of operating and non-operating items with respect to foreign exchange gain/loss, while computing the margins of the assessee and comparable companies. As we have dealt with this issue at length in grounds 8 & 9, referring to and relying upon the discussion made above, we dispose of this ground accordingly. 15. Ground No. 11 This ground has been raised by the assessee for not allowing suitable adjustments on account of differences in the risk profile of the comparable vis-a-vis that of the assessee. 15.1 As observed from the transfer pricing study the assessee functions in a low-risk or almost risk mitigated environment viz-a-viz enterprise a real risk borne by the comparables. The assessee is thus operating under economic circumstances that warrant adjustments to the margins made by the comparables so as to make the comparison between the margins earned by the comparable companies and the assessee appropriate we therefore are of the considered opinion that the entitlement of the assessee in respect of ....