TaxTMI 
TaxTMI 
2016 (4) TMI 1211
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.... violation of the principles of natural justice. Without prejudice to the above, the order issued by the AO is bad in law insofar as the fact that the AO did not issue to Societe Generale Global Solution Centre Private Limited ('the Appellant or 'the Company'), a show cause notice, as per proviso to section 92C(3) of the Income-tax Act, 1961 ['the Act']. b) The AO has erred in law in making a reference to the Transfer Pricing Officer ['TPO'],inter alia, since he has not recorded an opinion that any of the conditions in section 92C(3) of the Act, were satisfied in the instant case. 2. Determination of arm's length price a) The AO/TPO erred in determining a transfer pricing adjustment to software development ('IT') amounting to Rs. 39,863,492 and IT enabled Services (ITeS') amounting to Rs. 18,646,103 by substituting the arm's length price as determined by the Appellant. b) The AO/TPO erred in rejecting the value of international transaction as recorded in the books of accounts, as the arm's length price. 3. The fresh comparable search undertaken by the TPO is bad in law a) The TPO erred on facts and in law in c....
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....ch 2007) and inconsistently applying such filter. h) The AO/TPO grossly erred on facts in arbitrarily rejecting companies having IT and ITeS service revenue less than 75% of total operating revenue and inconsistently applying such filter, without considering the specific segmental results. i) The AO/TPO erred on facts in arbitrarily rejecting companies earning less than 25% of revenue from exports. j) The AO/TPO also erred on facts in arbitrarily rejecting companies based on their financial results without considering the comparability. k) The AO/TPO erred on facts and in law in considering a set of 'secret data', i.e. data 1which was not available in public domain, in arriving at a fresh set of companies using his power under section 133(6), which is grossly unjustified. l) The AO/TPO also erred on facts and in law in excluding the foreign exchange gain or loss while calculating the net margins of the comparable companies. m) The AO/TPO erred on facts in arbitrarily rejecting companies whose employee cost is less than 25% of their total sales for IT services. n) The AO/TPO erred on facts in arbitrarily rejecting companies whose onsite revenue is greate....
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....and law in confirming the draft order of the AO/TPO. Relief: a) The appellant prays that directions be given to grant all such relief arising from the above grounds and also all relief consequential thereto. b) The appellant craves leave to add to or alter, by deletion, substitution or otherwise, the above grounds of appeal, at any time before or during the hearing of the appeal. c) The appellant further prays that the adjustment in relation to Transfer Pricing matters made by the learned AO/TPO and upheld by the Hon'ble DRP be deleted. 2. Briefly, facts of the case are that the assessee is a company incorporated under the provisions of the Companies Act, 1956. It is a wholly owned subsidiary of M/s.Genefinance, Paris, which is in turn a subsidiary of Societe Generale, Paris. The assessee-company is engaged in providing IT and ITES services only to its AEs. Being a captive service centre providing contact services to its AEs, SG India assumes less than normal risks and all the significant business and entrepreneurial risks are borne by the overseas affiliates. 3. Return of income for the assessment year 2007-08 was filed on 30/10/2007 declaring a total income of R....
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....t. The TPO proceeded to identify a different set of comparable entities for the purpose of determining the ALP. While doing so, the ld. TPO had applied the following filters in software segment: ** Use of current year data only; ** Turnover filter i.e. excluding companies having income from software development services less than INR 1 crore. ** Software development services income less than 75% of total operating revenues were excluded ** Related party transactions greater than 25% of operating revenue. ** Export sales less than 25% of operating revenues were excluded; ** Diminishing revenues/ persistent operating loss for last 3 years were excluded; ** Employee cost less than 25% of sales were excluded; ** Companies whose onsite income greater than 75% of their operating revenue were excluded 5. The TPO rejected 45 of the comparables in respect of software development services selected by the assessee-company in the TP study and introduced 16 new companies by undertaking fresh TP study and finally selected the following comparables: The TPO computed average profit margin of the comparables in respect of software development services at 25.14% and aft....
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....c mean of 30.21% and after giving working capital adjustment of 1.66% in respect of ITES segment, the adjusted arithmetical mean PLI was determined at 28.55% in respect of ITeS segment. On the above said basis, the TPO computed the transfer pricing adjustment in respect of ITes Segment as follows: Operating Cost (Rs. 13,62,77,652/- + Reimbursement of expenses received of Rs. 54,21,397/-) Rs. 14,16,99,049/- Arms Length Margin 28.55% of the Operating Cost Arms Length Price (ALP) @128.55% of operating cost Rs. 18,21,54,128/- Arms Length Price @128.55% of operating cost Rs. 18,21,54,128/- Price shown in the International transactions (Rs. 15,80,86,628/- + Reimbursement of expenses received of Rs. 54,21,397/-) Rs. 16,35,08,025/- Shortfall being adjustment u/s 92CA Rs. 1,86,46,103/- The total summary of transfer pricing adjustment made u/s 92CA of the Act is as under: Segment Arms' length price Price shown in the books Adjustment Software Development Services Rs. 63,61,04,883/- Rs. 59,62,41,391/- Rs. 3,98,63,492 IT Enabled Services Rs. 18.21,54,128/- Rs. 16,35,08,025/- Rs. 1,86,46,103/- ....
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....Mumbai bench of the Tribunal in the case of Capgemini India (P) Ltd. vs. Addl.CIT (12 taxman.com 51). However from the perusal of the financial results of the company, it is clear that it is engaged in the business of software development services as well as media solutions and services. It has two divisions - Technologies Division and Animation Division. The co-ordinate bench (Bangalore)of the Tribunal subsequently in two decisions viz (i) Autodesk India Pvt. Ltd. vs. DCIT (TS 62 ITAT 2013) and Yodlee Infotech Pvt. Ltd. vs. ITO (TS 63 ITAT 2013) had not followed the decision of the Mumbai Tribunal in the case of Capgemini India (P) Ltd.(supra) and remitted the issue back to the file of the AO for fresh adjudication with respect to functional dissimilarity. It is not clear from material on record whether the segmental information is available in respect of each divisions of the company. Accordingly, following the decision of the co-ordinate bench in the abovementioned cases, we remit the issue to the file of the AO for fresh evaluation of the company with respect to functional aspects. ii. Avani Cimcon Technologies Ltd: It is the contention of the assessee-company that thi....
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....vs. ACIT (TS 131 ITAT 2013(Bang) TP) • 3DPLM Software Solutions Ltd. vs. DCIT (TS 359 ITAT 2013(Bang) TP) iv. E-Zest Solutions Ltd.: This Company was held to be not comparable with the software development company as it is engaged in product development services, and high-end technical services which come under category of KPO services in the case of LSI Research (India) P. Ltd (supra). The co-ordinate bench of Tribunal had come to this conclusion following the decision of coordinate bench (Hyderabad) of the Tribunal in the case of Capital I-Q Information Systems (India) (P) Ltd. The ld.DR had not brought any evidence on record controverting the above submissions. Te Hon'ble High Court of Delhi in the case of Rampgreen Solutions Ltd. vs. CIT in ITA No.102/2015 dated10/8/2015 "31. In the present case, the Tribunal noted that Vishal and eClerx were both engaged in rendering ITeS. The Tribunal held that, "once a service falls under the category of ITeS, then there is no sub-classification of segment". Thus, according to the Tribunal, no differentiation could be made between the entities rendering ITeS. We find it difficult to accept this view as it is contrary to....
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....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 level and that the comparables so selected could be put to further test by comparing specific functions performed in the international transactions with uncontrolled transactions to attain relatively equal degree of comparability. 34. We have reservations as to the Tribunal's aforesaid view in Maersk Global Centers (India) Pvt. Ltd. (supra). As indicated above, the expression 'BPO' and 'KPO' are, plainly, understood in the sense that whereas, BPO does not necessarily involve advanced skills and knowledge; KPO, on the other hand, would involve employment of advanced skills and knowledgefor providing services. Thus, the expression 'KPO' in common parlance is used to indicate an ITeS provider providing a completely different nature of ser....
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....e 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 used, risks assumed. This is essential to ensure the efficacy of the exercise. There is sufficient flexibility available within the statutory framework to ensure a fair ALP. 37. Applying the aforesaid principles to the facts of the present case, it is once again clear that both Vishal and eClerx could not be taken as comparables for determining the ALP. Vishal and eClerx, both are into KPO Services. In Maersk Global Centers (India) Pvt. Ltd. (supra), the Special Bench of the Tribunal had noted that eClerx is engaged in data analytics, data processing services, pricing analytics, bundling optimization, content operation, sales and marketing support, product data management, revenue management. In addition, eClerx also offered financial services such as real-....
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....is found by the Hon'ble Tribunal that it was also engaged in developing software products and not purely software development provider. It is also found that no segmental details were available and similar observations have been made in the following cases: • Bearing Point Business Consulting P.Ltd. vs. DCIT [TS 758 ITAT 2012(Bang) TP(AY 2007-08] • CSR Pvt. Ltd. vs. ITO [TS 68 ITAT 2013(Bang) TP(AY 2007-08] • Logica Pvt. Ltd. vs. ACIT [TS 131 ITAT 2013 (Bang) TP)(AY 2007-08)] • LG Soft India Pvt. Ltd. vs. DCIT [TS 64 ITAT 2013(Bang) TP(AY 2007-08] • Tranwitch India Pvt Ltd. Vs. DCIT (TS 105 ITAT 2013 (Bang) TP)(AY 2007-08)] • Mercedes Benz R&D India Pvt.Ltd. vs. DCIT[TS 108 ITAT 2013(Bang) TP])AY 2007-08); Following the decisions cited supra, we hold that this company cannot be considered as comparable company which is engaged in providing software development services. Therefore, we direct the TPO/AO to exclude this company from the list of comparable. vii) Infosys Technologies Ltd.: This company was excluded from list of comparables by this Hon'ble Tribunal in the case of LSI Research (India) P. L....
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....td. vs DCIT in IT(TP)A No.1222/Bang/2011 [TS-108- ITAT-2013-Bang-TP] had restored the issue to the file of the TPO to examine the above aspects of this comparable. In the absence of any financial data on record in support of the proposition that it had outsourced its work and had related party transactions of more than 15%, we also restore this issue to the file of the TPO/AO to examine the issue afresh on the above lines. ix) Lucid Software Ltd.: This company was excluded from the list of comparables by this Tribunal in the case of LSI Research (India) P. Ltd (supra) on the ground of functional dissimilarities. The co-ordinate bench (Mumbai) in the case of Telecordia Technologies India Pvt. Ltd. vs. ACIT [TS 325 ITAT 2012(Mum)] observed that this company was predominantly engaged in the product development rather than service provider. Thus it was considered to be functionally dissimilar to a pure software service provider company. Similar observation has been made in the following decisions: • CSR Pvt. Ltd. vs. ITO [TS 68 ITAT 2013(Bang) TP(AY 2007-08] • LG Soft India Pvt. Ltd. vs. DCIT [TS 64 ITAT 2013(Bang) TP(AY 2007-08] • Transwitch I....
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..... Ltd. was for the assessment year 2008-09. It is not clear whether similar facts were existing for the assessment year 2007-08 as no information was filed before us in support of the above propositions. In the circumstances, we remit the issue back to the file of TPO/AO for fresh evaluation of the comparable on the above lines. xii) Thirdware Solution Ltd., This company was excluded from the list of comparables by this Tribunal in the case of LSI Research (India) P. Ltd (supra) following the decision of Pune Bench of Tribunal in the case of Egain Communication P.Ltd. vs. ITO [TS 7 ITAT 2008(Pun)] on the ground of functional dissimilarities. The Pune Bench of the Tribunal observed that this company had income from other sources like interest and deposits which jacked up the profit margin of the company. It was also observed that it was into the purchase & sale of software licenses. Thus, ITAT held that it cannot be a comparable to a company which is engaged in software development. This decision was in relation to assessment year 2004-05, whereas, in the present case, we are concerned with assessment year 2007- 08. It is not clear from material on record whether similar circumst....
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....149 4 Mindtree Ltd. 590.39 5 Persistent Systems Ltd. 293.74 6 Sasken Communication Technologies Ltd 343.57 7 Tata Elxsi Ltd. 262.58 8 Wipro Ltd. 961.09 The submissions of the learned AR of the assessee-company have been considered at length. Though there are decisions to the effect that the companies with the turnover filter of Rs. 1 to Rs. 200 crores should alone be considered as comparables, this proposition was diluted by the Mumbai bench of the Tribunal in the case of Willis Processing Services (I) P.Ltd. vs. DCIT [TS-49- ITAT-2013(Mum)-TP] wherein it was held that the turnover band of Rs. 1 to Rs. 200 crores is bereft of any rationality as the application of this rule does not enable comparison of a company with Rs. 200 crores with another company having a turnover of Rs. 201 crores. It was further observed by the Hon'ble Tribunal that the turnover was also not a criteria prescribed under rule 10B for selection of comparables. We are also of the considered opinion that the turnover cannot be relevant criteria in a service sector where fixed overheads are nominal and the cost of service is in direct proportion to the ser....
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....where not only the level of knowledge, skill required would be high, but the technical knowledge as well would be high. According to him, back office transaction process services may he as remarkable and as complicated as insurance/market transaction processing services. He, therefore, rejected the contention of the assessee and treated the 131'O as equivalent to KPO services. 40. We have to now consider whether a BP0 and a KPO are functionally similar and are comparable to each, other. BPO is a subset if, outscoring arid involves the contracting of the operations and responsibilities of specific business functions or process to a third party services provider. Often business processes outsourcing are information technology based and referred to as ITES-BPO. KPO is one of the sub-segment of the BPO industry. It involves outsourcing of core information related business activities which are competitively important or form an integral part of a company's value chain. It thus requires advanced analytical and technical skills as well as a high degree of specialist expertise. The KPO services include all kinds of research and information gathering. Thus it can be seen that even th....
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....h Court in the case of Tata Elxsi (supra) wherein the Hon'ble High Court held as follows: "From the aforesaid judgments, what emerges is that, there should be uniformity in the ingredients of both the numerator and the denominator of the formula, since otherwise it would produce anomalies or absurd results. Section 10-A is a beneficial section. It is intended to provide incentives to promote section. It is intended to provide incentives to promote exports. The incentive is to exempt profits relatable to exports. In the case of combined business of an assessee, having export business and domestic business, the legislature intended to have a formula to ascertain the profits from export business by apportioning the total profits of the business on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. In the case of Section 80HHC, the export profit is to be derived from the total business income of the assessee, whereas in Section 10-A, the export profit is to be derived from the total business of the undertaking. Even in the case of business of an undertaking, it may include export business and domestic bus....
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....r (Export turnover + domestic turnover) Total turnover In that view of the matter, we do not see any error committed by the Tribunal in following the judgments rendered in the context of Section 80HHC in interpreting Section 10-A when the principle underlying both these provisions is one and the same. Therefore, we do not see any merit in these appeals. The substantial question of law framed is answered in favour of the assessee and against the revenue." Respectfully following the decision of the jurisdictional High Court, we direct the AO to reduce telecommunication expenses of Rs. 8,95,46,490/- from the export turnover as well as total turnover and allow the deduction u/s 10A accordingly. 17. In the result, the appeal filed by the assessee-company is partly allowed. Order pronounced in the open court on this 22nd day of April, 2016 ============= Document 1 Sl. Company Name Sales OP to Prod RPT(R % of Export No. (Rs.cr.) Total uct s.cr.) RPT (Rs. Cr.) exports Cost% sales over over (Rs./ Sales Sales % of Onsite R&D %of Revenues (Rs.cr.) r&d Mktg. %of (Rs.cr.) mktg. % of ....
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....t Systems Ltd 293.75 24.52% 2.16 28.55 0.73% 0.60% 9.72% 553.44 93.75% 282.06 96.02% 36.18% 0 0.00% 4.83% 2.71 0.92% 2.75 0.47% 2.35 0.80% 55.27% P 54.95% P 19 Quintegra Solutions Ltd 62.72 12.56% • 0.00% 20 RS Software (India) Ltd 101.04 13.47% 0.85 21 R Systems International Ltd 112.01 15.07% 2.68 12.77 0.84% 11.40% 59.91 95.52% 97.17 96.17% 105.36 94.06% 48.52% 0.39 0.62% 68.77% 8.55% 0.63 0 0.00% 0.56% 2.02 3.22% 1.83 1.81% 0.93 0.83% 66.68% P 64.62% P 56.32% P (Seg.) 2.39% 22 Sasken Communication 343.57 22.16% 3.94 1.15% 262.66 76.45% 21.43% 0 0.00% 22.26 6.48% 57.03% P Technologies Ltd (Seg) 23 SIP Technologies & Experts 3.80 13.90% 0 ° 0.00% 3.8 100% 30.96% 0 0.00% 0.04 1.05% 39.92% P Ltd 24 Tata Elxsi Ltd (Seg.) 262.58 26.51% 0 3.34 1.27% 252.57 96.19% 22.90% 10.91 4.15% 2.63 1.00% 54.35% P 25 Thirdware Solutions Ltd 36.08 25.12% 3.60 9.90% 26 Wipro Ltd (Seg.) 9616.09 33.65....