TaxTMI 
TaxTMI 
TaxTMI 
2016 (8) TMI 1195
X X X X Extracts X X X X
X X X X Extracts X X X X
....d in November, 2008 Alcatel Lucent Technologies India Private Limited (formerly Lucent Technologies India Private Limited), Lucent Technologies Hindustan Private Limited and Alcatel Development India Private Limited were marged with ALIL. The merger was effective with retrospective effect from April 1, 2007. The international transactions entered into, by the assessee are tabulated below. The table also provides the transfer pricing approach of the assessee followed by the assessee in benchmarking its international transactions. The table provides the values of the international transactions, the most appropriate method (MAM) adopted by the assessee, the profit level indicators (PLI) used by the assessee - S.No. Nature of Transaction Amount (In INR) 1. Purchase of telecom equipment/components 3,695,339.350 2. Purchase of capital goods 442,124,800 3. Receipt of Technical Services 493,803,543 4. Receipt of training services 28,581,092 5. Service Revenue 389,604,691 6. Provision of contract software development services 7,274,905,626 7. Payment for deputed employees 112,961,710 8. Reimbursement of expenses (Received) 44,455,170 9. Reimbursement of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rected to include Octant Industries Ltd. in the final set of comparables. However, the TPO failed to exclude Wipro Technologies Ltd. from the final set and made a revised Transfer Pricing Adjustment of Rs. 111,47,85,326/- in the final set of companies as per the following table: S.No. Company Name OP/TC 1. Octant Industries Limited 1.48% 2. Akshay Software Technologies Limited 0.16% 3. E-Infochips Limited 56.44% 4. Infosys Limited 43.53% 5. Larsen & Toubro Infotech Limited 18.40% 6. Mindtree Limited (Segment) 10.74% 7. Persistent Systems and Solutions Ltd. (Merged) 22.12% 8. Persistent Systems Ltd. 23.08% 9. R S Software (India) Ltd. 16.20% 10. Sankhya Infotech Limited (Segmental) 26.20% 11. Sasken Communication Technologies Ltd. 24.36% 12. Tata Elxsi Lgtd. (Segment) 13.00% 13. Wipro Technologies Limited 54.42% 14. Zylog Systems Ltd. 28.74% AVERAGE 24.20% 7. Now, the assessee is in appeal before us and has raised the following grounds of appeal: "That on the facts and in the circumstances of the case, and in law: 1. The order passed by the ld. AO is bad in law and void ab-initio. 2. The reference made by the ld. A....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the Appellant in its TP documentation/fresh search in its CSD services segment and TSS segment which were functionally comparable to the Appellant in terms of functions performed, assets employed and risks assumed by the Appellant in the aforementioned segments. 3.6 Incorrectly including certain companies that were primarily engaged in development of software products thereby owning significant intangibles or engaged in diversified business operations with no segmental information available in their annual reports and/or having highly volatile margins, in the final comparable set for determining the ALP for the Appellant's CSD services segment. 3.7 Incorrectly including certain companies that were primarily engaged in high end consultancy and engineering services, in the final comparable set for determining the ALP for the Appellant's TSS segment; 3.8 Arbitrarily including high-profit making companies in the final set of companies for benchmarking the international transactions of the Appellant in its CSD services segment and TSS segment without analyzing the contrasting difference in functions undertaken, assets employed and risks assumed by the said companies as compared t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d by the ld. TPO for giving effect to the directions of the Hon'ble DRP is incomplete for which, the Appellant has filed a rectification application u/s 154 of the Act before the ld. TPO as the ld. TPO while issuing the aforementioned order, has grossly erred in: 6.1 not completely following the directions of the Hon'ble DRP wherein it had issued specific directions to exclude M/s Wipro Technologies Limited (selected by the ld. TPO as a comparable for benchmarking the Appellant's CSD services segment) after verifying the Appellant's claim that the said company neither appears in the TP documentation Accept - Reject matrix submitted by the Appellant before the ld. TPO nor its financial data for the captioned AY was available in the public domain. However, the ld. TPO in his order issued for giving effect to the directions of the Hon'ble DRP, has not discussed anything about the said direction. 7. That on facts in the circumstances of the case and in law, the ld. AO has erred in initiating penalty proceedings u/s 271(1)(c ) of the Act mechanically and without recording any adequate satisfaction for its initiation. Corporate Tax Grounds 1. That based on the facts and circumsta....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rom the overseas, its function remains the same. The ld. AR further submitted that a company providing software services will charge the same rate from a client that is located in India or overseas. The ld. AR drew our attention to Rule 10B and submitted that since by applying this filter the profitability is being materially affected, the same should not be applied. 10.02 Helios and Matheson Information Technologies Ltd. - as per the TPO this comparable fails the different financial year ending filter. However, it is the assessee's contention that the company files quarterly financial statements with the stock exchange which were available in the public domain and the details for the year ending 31/03/2011 can be obtained by consolidating the quarterly statements. The ld. AR submitted that the TPO has rejected this comparable on the ground that it has a different year ending. However, this problem can be overcome by apportioning the data from preceding or subsequent period so as to make the data equivalent to the financial year available for comparison with the International Transaction. It was further submitted that listed companies file quarterly audited statements and hence, c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s and revenue from Software Developments and hence, one cannot be deduce revenue from Software Services and the impact of the revenue from the software products on overall profit from the common pool of income from both the streams of software products and software services. The ld. AR also submitted that during the relevant assessment year E-Infochips had a significant AMP/Sales Ratio of 15.74% whereas the assessee company did not undertake any AMP expenditure. The ld. AR also submitted that E-Infochips had an abnormal growth rate of 96% and also a volatile OP/TC margin trend which could be attributed to the fact that E-Infochips was pre-dominantly a consulting and engineering company with a strong focus on providing high and consulting services. The ld. AR also submitted that over the past three years including AY 2011-12, there has been an increased focus by EInfochips on rendering consulting services. The ld. AR relied on the decision rendered by the ITAT Delhi Bench in Saxo India Private Limited (ITA No. 6148/Del/2015), wherein the ITAT Delhi Bench has held that E-Infochips is to be rejected as a comparable on the ground that it earns income from software products and services....
X X X X Extracts X X X X
X X X X Extracts X X X X
....was further submitted that Infosys had significant R&D expenditure of Rs. 527 crores and advertising/sales promotion and brand building expenditure of Rs. 84 crores, whereas the assessee does not undertake any R&D and AMP expenditure. The Ld. AR also submitted that Infosys has been rejected as a comparable by the ITAT in the case of assessee's predecessor company Alcatel - Lucent Technologies India P. Ltd. for AY 2003- 04 and 2004-05. The Ld. AR also relied on the following decisions for the preposition that companies with high turnover have to be rejected - decision of the Hon'ble Delhi High Court in the case of M/s Agnity India Technologies P. Ltd. (ITA No. 1204/2011), Agnity India Technologies vs. Income-tax Officer- ITA No. 3856(Del)/2010, Telcordia (supra), Sonata Software Limited (ITA No. 3514/Mum/2010), Meritor LVS India (P) Limited, ITA No. 405 & 523/B/11 - ITAT Bangalore, Capital IQ Information Systems (India) Pvt. Limited ITA No. 1961/Hyd./2011. The Ld. CIT DR submitted that segmental data was available in the case of Infosys and it was also functionally similar to the assessee company and hence, it was an acceptable comparable. (iv) Larsen and Turbro Infotech Ltd. - Th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n diversified services such as software consultancy, software product development and system integration services unlike the assessee who is only involved in CSD activities. It was further submitted that this company is a part of Special Economic Zone and is entitled to various incentives provided by the Government. It was also submitted that segmental accounts in respect of various segments have not been disclosed in the accounts/annual report of this company, wherein the revenues and expenses have been presented in a consolidated form. The Ld. AR also referred to notes on accounts for revenue recognition and submitted that this company is engaged in (a) Software Development, (b) Licensing of Products, (c ) Sale of Software Products and (d) Maintenance Contracts. The Ld. AR also relied on the decision of the Hon'ble High Court of Andhra Pradesh in the case of CIT II Hyderabad vs. Intoto Software India P. Ltd. (ITA No. 233 of 2014), wherein it has been held that software product companies owning intangibles could not be compared with the software development services provider. The Ld. CIT DR submitted that in this case in the annual report/notes on accounts it has been mentioned t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mental information cannot be selected as a comparable. He relied on the following decisions in support of his argument - Zavata India Private Limited, Hyderbad vs. DCIT (ITA No. 1781/Hyd./2011), Symphony Marketing Solutions India Pvt. Ltd. vs. ITO (ITA No. 1316/Bang/2012), NTT Data India Enterprise vs. ACIT (ITA No. 1612/Hyd./2010), Capital IQ Information Systems (India) Pvt. Ltd. vs. DCIT (ITA No. 1961/Hyd./2011), Petro Araldite Private Limited vs. DCIT (ITA No. 6217/Mum/2012). The Ld. CIT DR submitted that from the perusal of the annual report revenue from product is not evident and hence, the company should remain in the list of comparables. The Ld. CIT DR further submitted that in this case the IP is related to services only and simply on the basis of statement in the annual report a company should not be discarded as a comparable. (vii) Sankhya Infotech Limited(Service Segment) - The Ld. AR submitted that it is the TPO's observation that segmental data in the annual report duly provides results of operations from services. The Ld. AR submitted that this company is a leading simulation and training solutions provider which provides end to end simulation solutions. He further ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bmitted that in this case the segmental data was very much available in the annual report and the same should not be ignored and accordingly, this company cannot be rejected as a comparable. (viii) Sasken Communication Technologies Limited - The Ld. AR submitted that the TPO has contended that this company's income from sale of software products is only 9.4% of the total revenue. However, in absence of any segmental details pertaining to the corresponding costs, Sasken should not have been selected as a comparable. Ld. AR further submitted that this company is a provider of tele communication software services and solutions to network equipment manufacturers, mobile terminal vendors and semi-conductor companies. The company also delivers high end to end IT Solutions and provides full phone integration, IP led offerings in multi media and offerings for the android markets. This company also partners with semi conductor companies to provide turn key and end to end solutions ranging from chip design to other services. The Ld. AR drew our attention to the annual report and pointed out that the entity level figures of the company contain revenue from both software services as well as s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....at it includes product development costs amounting to 18.75 crores (at net book value) and hence, this goes on to prove the fact that this company is a software product development company. The Ld. AR further submitted that this company had a volatile OP/TC margin trend. The Ld. AR also submitted that Zylog has been considered as incomparable in Saxo India Private Limited (ITA No. 6148/Del/2015). The Ld. AR also relied on the decision of the Hon'ble High Court of Andhra Pradesh in the case of CIT II Hyderabad vs. Intoto Software India P. Ltd. (ITA No. 233 of 2014), wherein it has been held that software product companies owning intangibles could not be compared with the software development services provider. The Ld. AR also relied on the decision of the Hon'ble High Court of Andhra Pradesh in the case of CIT II Hyderabad vs. Intoto Software India P. Ltd. (ITA No. 233 of 2014), wherein it has been held that software product companies owning intangibles could not be compared with the software development services provider. The Ld. CIT DR submitted that in this case it is very much evident that there is no revenue from products and the entire revenue was from provision of services. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g had been demonstrated by the assessee to support its claim for the working capital adjustment. The Ld. CIT DR further submitted that the TPO had already given due consideration to this aspect and the issue needed no further adjustment. The Ld. CIT DR relied on the case of Ameriprise in ITA No. 2575/Del/2014 to support the contention that working capital adjustment need not be granted on the facts of this case. On the issue of risk adjustment, the Ld. CIT DR submitted that level of risk varies from company to company and the assessee could not substantiate the risk factor and hence, the claim was not tenable. The Ld. CIT DR relied on the case of Ion Trading P. Ltd. vs. ITO in ITA No. 1035/Del/2015 and Acts Global Services P. Ltd. vs. ITO in ITA No. 30/Del/2015 for the preposition that no risk adjustment ought to be given. 10.3 On the ground relating to the issue of Transfer Pricing adjustments made in respect of Technical Support Services(TSS) Segment, it was the submission of the Ld. AR that under this segment the assessee provided technical support service with respect to telecom equipment sold to customers in India. These services primarily include repairs and maintenance serv....
X X X X Extracts X X X X
X X X X Extracts X X X X
....itz India Pvt. Ltd. vs. DCIT (ITA No. 4704/Del/2012), MCI Com India Pvt. Ltd. (Now known as Verizon India P. Ltd.) (ITA No. 4187/Del/2010), Yum! Restaurants (India) Ltd. vs. ITO (ITA No. 6168/Del/2012), Actis Advisers P. Ltd. vs. ACIT (ITA No. 6390/Del/2012), Shell India Markets Pvt. Ltd. (ITA No. 193/Mum/2013). The Ld. AR further submitted that a Government company cannot be taken as a comparable to a company having a profit motive and he relied on the following decisions in support of his submission - M/s ThyssenKrupp Industries India P. Ltd. (ITA No. 6460/Mum/2012), M/s Avaya India P. Limited (ITA No. 5150/Del/2010). The Ld. AR also relied on the decision of Rampgreen Solutions P. Ltd. in ITA No. 102/2015, wherein the Hon'ble Delhi High Court has held that functionally different company cannot be considered as comparable company. (ii) Mahindra Consulting Engineers Limited The Ld. AR submitted that the TPO has held that under the application of TNMM as the most appropriate method, the difference in functional profile gets evened out and as such the company can be considered as a comparable. He further submitted that this company is engaged in the provision of technical consultan....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of an allow the claim of the tax payer in this regard in this year also. The Ld. AR submitted that the AO has not given effect to the directions of the Hon'ble DRP on this issue and prayed that suitable directions may be given in this regard. 10.5.1 The Ld. CIT DR submitted that whether the liquidated damages have crystallized or not need to be verified and hence, the issue should be restored to the file of the TPO for proper verification. 11. We have heard the rival submissions and perused the material on record. As far as the issue of excluding Allied Digital Services Ltd. from the list of comparables is concerned, it is seen that this has been excluded on the ground that the same fails the export filter. The assessee has objected that functional comparability is essential rather than geographical location. The TPO has held that geographical location plays an important part in determining the price and hence, comparability adjustments need to be made when prices that are being compared are from different geographical regions. The assessee has also objected to the quantum of turnover as taken by the TPO for applying the export filter. Similarly, as far as the TPO's rejection of....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... engaged in providing software consulting and products, application design, development, reengineering and maintenance, system integration, package evaluation and implementation and business process management etc. and hence is functionally dissimilar. The Ld. AR has also submitted that Infosys had a significant turnover of Rs. 25385 crores which was approximately 35 times the assessee's turnover of Rs. 728 crores. It was further submitted that Infosys developed/owns proprietary products like Finacle, Infosys Actice Desk, Infosys iProwe and Infosys mConnect and owns significant intangibles. It was further submitted that Infosys had significant R&D expenditure of Rs. 527 crores and advertising/sales promotion and brand building expenditure of Rs. 84 crores, whereas the assessee does not undertake any R&D and AMP expenditure. We find that Infosys has been rejected as a comparable by the ITAT in the case of assessee's predecessor company Alcatel - Lucent Technologies India P. Ltd. for AY 2003-04 and 2004-05 in ITA No. 2297/Del/2008 and 2298/Del/2008. The Hon'ble Delhi High Court in the case of M/s Agnity India Technologies P. Ltd. (ITA No. 1204/2011) has held that companies with high ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ntangibles of around 50 crores. since the company is engaged both in rendering software development services as well as sale of software products, in absence of segmental details, this company could not be selected as a comparable. It is seen that this company has been rejected on the ground that it earns income from software products and services and that no segmental data is available in the following cases - Saxo India Private Limited (ITA No. 6148/Del/2015), Ciena India Pvt. Ltd. (ITA No. 3324/Del/2013), Planet Online Pvt. Ltd. (ITA No. 464 and 608/Hyd./2014), 3D PLM Software Solutions Ltd. (ITA No. 1303/Bang/2012). The Hon'ble High Court of Andhra Pradesh in the case of CIT II Hyderabad vs. Intoto Software India P. Ltd. (ITA No. 233 of 2014), has held that software product companies owning intangibles could not be compared with the software development services provider. Further, companies facing an extra ordinary event, having volatile margins and having no segmental information cannot be selected as a comparable as has been held in - Zavata India Private Limited, Hyderbad vs. DCIT (ITA No. 1781/Hyd./2011), Symphony Marketing Solutions India Pvt. Ltd. vs. ITO (ITA No. 1316/Ba....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rminal vendors and semi-conductor companies. The company also delivers high end to end IT Solutions and provides full phone integration, IP led offerings in multi-media and offerings for the android markets. This company also partners with semi conductor companies to provide turn-key and end to end solutions ranging from chip design to other services. Hence the company is functionally dissimilar. It is seen that Sasken has been rejected on the ground that it owned IPRs and has branded products in the following cases - Freescale Semiconductor India Private Limited (ITA No. 5865/Del/2012), Motorola Solutions India Private Limited (ITA No. 5637/Del/2011). The Ld. CIT DR has submitted that in this case also the segmental data was very much available and the TPO has erred in taking the data at entity level. Hence, on an overall consideration of the facts, we restore the issue of the inclusion of this company to the file of TPO for fresh adjudication after thoroughly examining all the aspects in this regard. (ix) Zylog Systems Limited - This company derives revenue from consultancy services, project and e Governance projects with a focus on software development, solutions and mobile tec....