AI Drafter 
TaxTMI 
TaxTMI 
2016 (3) TMI 1201
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....services and sales support services and not considering/ accepting the comparability analysis documented in the Transfer Pricing study report for benchmarking analysis. 2. Non applicability of transfer pricing provisions to software development unit of the Appellant which is enjoying tax holiday under section 10A of the Act Erred in applying transfer pricing provisions to software development unit (i.e. provision of software development services) of the Appellant which enjoys tax holiday under section 10A of the Act. 3. Use of contemporaneous data Erred in conducting arm's length analysis based on information of comparable companies available at the time of transfer pricing assessment but not available at the time of compliance with the transfer pricing regulations by the Appellant. 4. Use of multiple year data Erred in not considering multiple year data i.e. data for Financial Year (hereinafter referred to as 'FY') 2005-06 and two prior years, in respect of comparable companies for determining the arm's length price of international transactions pertaining to provision of software development services and sales support services.....
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....gin for comparison with the arithmetic mean of operating margin of comparable companies pertaining to international transaction of provision of software development services. 11. Non acceptance of Operating Profit Before Depreciation, Interest and Tax (hereinafter referred to as 'OPBDIT') as Profit Level Indicator (hereinafter referred to as 'PLI') for comparison purpose in connection with provision of software development services Without prejudice to the above grounds, the honourable DRP and consequently the learned AO have erred in not accepting the alternative argument that OPBDIT should be considered as PLI for the purpose of comparison of operating margins earned by the Appellant with the arithmetic mean of operating margins earned by the comparable companies in connection with international transaction pertaining to provision of software development services. 12. Adjustment for differences on account of functional and risk profile of comparable companies vis-a-vis the Appellant Erred in comparing full-fledged risk bearing entities with the Appellant's captive operations without making any risk adjustment for differences between ....
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.... deciding the issue at hand. 6. Briefly, in the facts of the present case, the assessee was wholly owned subsidiary of BMC Software, US. The unit of the assessee company is registered under the Software Technology Parks Scheme of the Government of India. For the year under consideration, the assessee had claimed deduction under section 10A of the Act and had declared taxable income of Rs. 6,87,913/-. The assessee had entered into international transactions with its associate enterprises and since the total international transactions were more than Rs. 15 crores, reference was made to the TPO under section 92CA(1) of the Act. The TPO noted that the assessee was engaged in providing software development services to the tune of Rs. 80,96,60,358/- to its associate enterprises and sales support services to BMC-USA of Rs. 69,89,833/-. Since the assessee was solely engaged in providing software development services and sales support services to BMC, USA in respect of software products of BMC, USA, the TPO observed that the assessee could be classified as a captive software development service provider and as sales support service provider. The assessee was providing these services at C....
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.... set of comparables was worked out to 24.25% as against the OP/TC of the assessee company at 9.39%. Consequently, addition of Rs. 8,79,554/- was proposed. The total addition made in the hands of assessee was to the tune of Rs. 12,39,84,018/-. The DRP upheld the directions of TPO. Thereafter, the Assessing Officer while passing order under section 143(3) r.w.s. 144C(13) of the Act had rejected the contentions of the assessee and made an addition to the extent of Rs. 12,39,84,018/-. 7. The assessee is in appeal against the order of Assessing Officer. 8. On the perusal of record, in order to adjudicate the issue raised in the present appeal, we would first refer to the facts relating to the adjustment on account of software development services. The assessee in its TP study report had selected 12 companies which are as under:- Sr. No. Name of the Company Operating profit on operating cost (%) Weighted average margins FY 2003-04 FY 2004-05 FY 2005-06 1 3i Infotech Limited (Segmental) 6.42% NC NC 6.42% 2 Bristlecone India Limited (Formerly known as....
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....tmental Representative for the Revenue was of the view that the issue needs to be gone into deeper to find out the nature of loss. He fairly accepted that only because of loss, it should not be rejected. However, the loss incurred by the said concern Orient Information Technologies Limited was to be looked into. Our attention was drawn to the Directors Report and the other attached documents placed at pages 65.5 to 65.24 of Paper Book by the assessee, wherein there is review by the Directors of the assessee company and they changed the depreciation policy from this year. As per th e learned Departmental Representative for the Revenue, the loss declared by the said concern for the year was automation loss and was not normal business loss because of this abnormality, the said company should be excluded. 12. The learned Authorized Representative for the assessee pointed out that the issue raised by the learned Departmental Representative for the Revenue was not raised by the TPO and hence, merits not to be applied. He further pointed out that the assessee ruled out the cost plus entity and hence, the chances of losses were Nil, but merely because the company was not doing well, cou....
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....stone Technologies Limited , which was picked up by the assessee as comparable, which in turn, was rejected by the TPO. 18. The basis for exclusion of Goldstone Technologies Limited is the observation of TPO at page 7 of its order, that the said concern for the year under consideration had earned foreign exchange to the extent of 25% of its total earning. However, the perusal of financial statements of the said concern at page 12.2 of the Paper Book for the year ending 31.03.2006 reflects that the total sales of the said concern were on account of export of software and services to the tune of Rs. 34,90,47,247/- i.e. the said concern had earned foreign exchange to the tune of 100% of its total sales. In this regard, we find no merit in the order of Assessing Officer / TPO in rejecting the said concern i.e. Goldstone Technologies Limited . Accordingly, we direct the Assessing Officer / TPO to include Goldstone Technologies Limited in the final set of comparables to work out the arithmetic mean of comparables selected for benchmarking the international transactions of the assessee. 19. The next concern which was selected by the assessee and rejected by the TPO was Quintegra Sol....
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.... The assessee is aggrieved by the exclusion of Quintegra Solution Limited from the final list of comparables. It has been pointed out by both the Authorized Representatives that admittedly, the said concern had a financial year comprising of 15 months as against the financial year of 12 months adopted by the assessee. The perusal of extract of Annual Report of Quintegra Solution Limited reflects that the financial period of 15 months does not correspond with the financial period of 12 months of the assessee concern. In view of the same, we hold that the said concern is to be excluded from the list of comparables and we dismiss the plea of assessee in this regard. We find support from the ratio laid down by Pune Bench of Tribunal in M/s. SunGard Solutions (India) Pvt. Ltd. Vs. DDIT (supra), wherein, similar proposition was laid down. Merely because DRP has accepted this concern as comparable in assessment year 2008-09 cannot be basis for its selection in this year because of different accounting period. 23. Another issue raised by the assessee was with regard to exclusion of Maars Software International Limited. The TPO held the said company not to be functionally similar as in t....
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....ly objected and pointed out that where the TPO / Assessing Officer had missed out something, then it is the duty of the Tribunal to come to a correct finding of facts, where no fresh ground of appeal is being raised by the Revenue. The Hon'ble Delhi High Court in CIT Vs. M/s. Jansampark Advertising And Marketing (P) Ltd. (supra) pointed out that the obligation to make proper enquiries and reach finding of facts does not end with the Assessing Officer, but the obligation moves upwards to CIT(A) and also ITAT, where it comes to their notice that there has been default in such respect on the part of Assessing Officer. In such an event, the Hon'ble Delhi High Court held that both the appellate authorities were bound to either themselves properly enquire or cause such enquiry to be completed. The relevant observations of the Hon'ble Delhi High Court are as under:- "35. Assessment proceedings under the Income Tax Act are not a game of hide and seek. The inquiry in the sake of a notice under Section 148 is not an empty formality. It must be effective and with a sense of purpose. There is an elaborate procedure set out which requires scrupulous adherence and followed up on. In the hiera....
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....ount declared was Rs. 498.624 Millions i.e. though in the Profit & Loss Account, it is reported that the assessee had earned income from software development, training and product, but while giving the segmental reporting on account of revenue, the assessee had declared the said revenue arising from on-site overseas at Rs. 498.624 Millions. Further, at page 61.28 of the Paper Book, earning and out go of the foreign exchange is also declared i.e. against total foreign exchange earnings of Rs. 39.10 crores, the foreign exchange used is Rs. 37.45 crores. The above results of the said concern reflect that it to be an onsite developer. On the other hand, the assessee before us is providing software development services to its associate enterprises and is off-site developer, which admittedly, is different from on-site developer. On the other hand, the concern Maars Software International Limited has total receipts from on-site overseas development i.e. on account of training and products and hence, the said concern is not functionally comparable to the assessee. We find similar issue of exclusion of Maars Software International Limited from the final set of comparables arose before the T....
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....fact, in the paragraph containing overview of the operations, the aforesaid statement is the only assertion which elucidates the activities being undertaken by the said concern. No doubt, in the financial statement namely Profit & Loss Account, the income / revenue has been classified as "income from software development, training and product" so however, evidently no detailed bifurcation thereof is available. The entire set of financial statements which are in public domain, and placed in the Paper Book at pages 1188 to 1229, contain only a singular observation about the nature of activities, which is in the Directors report, which throws light on the major area of revenue generation. Even if one goes by the nomenclature stated in the Profit & Loss Account i.e. software development, training and product and product, and infer that the concern is in the software development also, yet there is no segmental detail relating to software development services, leave alone the details showing the actual activities of software development. Therefore, in our view, the TPO justifiably excluded the said concern because it is only the information available in public domain, which can be the ba....
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....Matheson Information technology Ltd. are to be excluded. Another concern to which the objection was raised by the learned Authorized Representative for the assessee was Aztecsoft Ltd. The issue raised by the assessee before us is the exclusion of ICSA (India) Ltd. The objection of the assessee to its inclusion is that the said concern was engaged in conceptualizing, developing and manufacturing of embedded software, where the value addition was completely different. Further, the said concern was spending 4.5% of its revenue on R & D, whereas, the assessee had not incurred any R & D expenditure. The learned Authorized Representative for the assessee also pointed out that there was substantial job work undertaken by the said concern and hence not comparable to the functions of assessee before us. Another objection of the learned Authorized Representative for the assessee was that it was an exceptional year, considering its growth i.e. the rate of growth in respect of PBT was 302.70% for the year. The TPO however, noted that the said concern was in the business of software and embedded system development activity in the power and power related sectors. Since the embedded solution cons....
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....ned Departmental Representative for the Revenue is incorrect that the software is software i.e. embedded or not. Our attention was drawn to the segmental at page 62.39 of the Paper Book, where as against the revenue of Rs. 76.63 crores, the purchases were to the tune of Rs. 56.01 crores and there was stock of software declared by the assessee at page 62.41 of the Paper Book. 34. After considering various arguments raised by both the Authorized Representatives vis-a-vis the concern ICSA (India) Ltd., the first objection is that it is not functionally comparable and the second objection is that its R&D expenditure is 4.5% of revenue. The TPO rejected the plea of the assessee of not including the said concern in the final set of comparables on the said basis of R&D expenditure being more than 3% of revenue. However, we find that the Tribunal in Bindview India Pvt. Ltd. Vs. DCIT (supra) and thereafter, in PTC Software (India) Pvt. Ltd Vs. ACIT (supra), have laid down the proposition that where the R&D filter is more than 3% as against the assessee who has not incurred any R&D expenditure, then the said concern is not to be taken in the final list of comparables. The relevant finding....
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....e R&D expenses pertain only to this segment. In this connection a reference has been made to page 297 of the Paper book which gives the break-up of the sales in different segments and after considering the R&D expenses of Rs. 6,71,86,184/- vis-à-vis the sales in software services/embedded services segment, the percentage comes to 3.84%. The Ld. Counsel pointed out that the percentage of 2.04% of R&D expenditure computed by the TPO was after considering the total turnover of the said concern including that of the product and projects related to power sector segment. It is submitted that the aforesaid action of the TPO is wrong, firstly the R&D expenditure has been incurred only for the software services/embedded services segment, and secondly, it is wrongly compared with total turnover which included the turnover of products and projects related to power sector segment whereas the TPO has only adopted the software services/embedded services segment for the purposes of comparability analysis. Factually speaking, we find no reasons to disagree with the plea set up by the assessee. Evidently, the TPO has not disputed the adoption of quantitative filter of 3% of R&D expenses. How....
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....d was excluded by the TPO because of its high turnover and in case the same is to be excluded, then even Helios and Matheson Information technology Ltd. is to be excluded or on the other hand, both the concerns are to be included. Another issue raised by the learned Authorized Representative for the assessee with regard to the said concern was that it was engaged in significant on-site development and our attention was drawn to the financials of the said concern, wherein at page 63.62 of the Paper Book, it is reported that it has strong US presence and was engaged in on-site and off-shore activities. Further, if foreign earnings and foreign outgo were taken, then similar basis is to be applied as for exclusion of Maars Software International Limited. 38. The learned Departmental Representative for the Revenue pointed out that the said concern was engaged in on-site development. 39. We have already considered the issues in the paras hereinabove while directing the TPO to exclude Maars Software International Limited. Since the concern Helios and Matheson Information Technology Ltd. was also engaged in on-site development and its foreign exchange earnings were to the extent of R....
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....nal Limited and Quintegra Solution Limited being not functionally similar, have to excluded and despite the fact that it falls within the range, but because its functions were dissimilar, the said concerns are not to be included in the final set of comparables. Further, we also held that Helios and Matheson Information Technology Ltd . being engaged in on-site development services as Maars Software International Limited, is not to be included in the final set of comparables. The two concerns which are left in the list are Aztecsoft Ltd. and Orient Information Technologies Ltd. The learned Authorized Representative for the assessee on the last date of hearing fairly conceded that Aztecsoft Ltd. may be included as comparable and in case Aztecsoft Ltd. is so included, then the concern picked up by the assessee in its TP study report i.e. Orient Information Technologies Ltd. is also to be included in the final set of comparables. In view thereof, applying the said turnover filter range of Rs. 25 crores to Rs. 150 crores, we direct the Assessing Officer / TPO to include both the concerns i.e. Aztecsoft Ltd. and Orient Information Technologies Ltd. in the final set of comparables. It may....
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....ed. The learned Authorized Representative for the assessee in this regard has placed on record the methodology prescribed by Bangalore Bench of Tribunal in Philips Software Centre India Pvt. Ltd. Vs. ACIT (2008) 119 TTJ (Bang) 721. Further, the assessee has also submitted the risk adjustment to be made as per the methodology prescribed by Delhi Bench of Tribunal in M/s. Sony India (P) Ltd. Vs. DCIT (2008) 114 ITD 448. In view of the provisions of section 10B of the Act, we restore this issue back to the file of Assessing Officer / TPO to compute risk adjustment after affording reasonable opportunity to the assessee to work out and justify to the satisfaction of Assessing Officer, the risk adjustment it would be entitled to. We hold so. The issue raised is thus, allowed for statistical purposes. 45. The next contention of the assessee with regard to the working of profit before depreciation and the allowability of its adjustment. 46. The learned Authorized Representative for the assessee further pointed out to the next proposition of computation of PLI. The plea of the assessee before us was that the profits should be taken before depreciation and similarly, the profits of com....
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.... that final adjustments, if any, would fall within + / - 5% range and no adjustment is to be made to international transaction entered into by the assessee. Accordingly, we do not address the issue of exclusion of depreciation from operating cost while benchmarking international transaction of the assessee at present. 50. Another proposition raised by the learned Authorized Representative for the assessee was that where the companies are entitled to deduction under section 10A of the Act, no adjustment on account of transfer pricing is to be made. Reliance in this regard was placed upon the ratio laid down by Mumbai Bench of Tribunal in DCIT Vs. M/s. Tata Consultancy Services Ltd. in ITA No.7513/Mum/2010 and CO No.216/Mum/2010, relating to assessment year 2005-06, order dated 04.11.2015. 51. The learned Departmental Representative for the Revenue on the other hand, pointed out that if there is no question of any TP adjustment, then why the section 10A of the Act itself provides that no such deduction is to be allowed on TP adjustment. The learned Departmental Representative for the Revenue pointed out that the Special Bench in Aztec Software and Technology Services Ltd. Vs. A....
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....7 companies whose arithmetic mean was 41.50%. Thereafter, certain directions were given by the DRP and arm's length margin of the comparables was worked out at 23.15%. The TPO while benchmarking first international transaction of provision of software services, has rejected loss making companies. However, the case of assessee before us was that the approach of TPO was not consistent and while benchmarking international transaction of provision of sales support services, the companies which had incurred losses have been taken as comparable. But we find that loss making companies have been excluded by TPO. The final set of comparables picked up by the TPO were as under:- Sr. No. Name of the company Operating profits on operating costs (%) 1 Crisil Limited 17.39% 2 Epic Energy Limited 53.96% 3 ICC International Agencies Ltd. 49.39% 4 IDC (India) Limited 14.59% 5 Priya International Ltd. 28.55% 6 Ratan Glitter Industries Ltd. 115.30% 7 T S R Darashaw Ltd. 11.33% Arithmetic mean 41.50% 56. The learned Authorized Representative for the assessee pointed out that first company Crisil Limited was a cr....