TaxTMI 
TaxTMI 
2016 (5) TMI 1364
X X X X Extracts X X X X
X X X X Extracts X X X X
....India are held by FID holdings (Mauritius) Ltd., Mauritius. FIL India provides services to FIL Group of companies and is engaged in providing IT and IT enabled services related to Fidelity Group's business activities and was compensated on a cost plus mark up basis. 3. The assessee company had filed return of income declaring total income of Rs. 9,94,50,836/-. The AO noted that assessee had entered into following international transactions during the year: S. No. International Transaction Amount (In Rs.) 1 Revenue from Software Development Services 1,415,633,844 2 Revenue from IT enabled services 997,425,829 3 Recharge to Group Companies 15,586,679 4 Recharge from Group companies 155,891,869 4. He, therefore, made a reference u/s 92CA to TPO for determination of ALP for these transactions. 5. Ld TPO, after detailed analysis, directed for making following adjustments: (i) Software development services 209,228,000 (ii) IT enabled service 138,463,000 6. Thus, ld. TPO accepted the arm's length price ("ALP") as declared by assessee in regard to recharge to group companies ( Rs. 15,586,679/....
X X X X Extracts X X X X
X X X X Extracts X X X X
....h; 4.2. disregarding multiple year / prior years' data as used by the Appellant in the TP documentation and holding that current year (i.e. Financial Year 2009-10) data for comparable companies should be used despite the fact that the same was not necessarily available to the Appellant at the time of preparing its TP documentation; and 4.3. rejecting the economic and comparability analysis undertaken by the Assessee in its TP documentation/ fresh search and applying certain erroneous/ modified filters in determining the ALP; and 4-4. including high-profit making companies in the final comparables set for benchmarking a low risk captive unit such as the Appellant (disregarding judicial pronouncements on the issue) ; and 4.5. erroneously including certain functionally dissimilar companies that are not comparable to the Assessee in terms of functions performed, assets employed and risks assumed and excluding certain comparable companies on arbitrary/ frivolous grounds; and 4.6. arbitrarily including companies having high margin/ volatile operating profit margins in the final com parables' set for benchmarking a low risk captive unit such as the Assessee; and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... for soft development services, ld. TPO noticed that the assessee had used TNMM as the most appropriate method in determining its international transactions and OP/TC was taken as the profit level indicator in the TNMM analysis. 10. Ld. TPO noticed that in the TP study the assessee had arrived at a set of 16 companies with an average margin of 10% by using multiple year data. He noticed that assessee's own margin of this segment was worked out at 12.98%. Thus, the assessee had concluded that its international transaction in regard to software development services were at arm's length. 11. As regards software development service segment, ld. counsel pointed out that in the TP study there were 16 comparables. However, after fresh search was carried out as per the various filters adopted by TPO and margins were updates, 21 comparables were selected by assessee which are mentioned in para 4 of the show cause notice contained at pages 7 & 8 of TPO's order. He referred to page 9 of TPO's order and pointed out that ld. TPO rejected 14 comparables and accepted 7 comparables and further included 7 new comparables. Thus, in final analysis ld. TPO took 14 comparables which are given in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....was Rs. 20,871 crores). He pointed out that assessee is only a captive service provider and is rendering services to its AEs only. Further, AMP expenditure of Infosys was Rs. 215 crores (Approximately 1.02% of revenue) as against Nil expenditure on AMP by assessee. On the comparison of risk being undertaken by this comparable vis a vis assessee, ld. counsel pointed out that this comparable operates as full fledged risk taking entrepreneur whereas assessee being captive service provider does not take such risk. In support of various arguments noted above, ld. counsel has referred to annual report of this comparable contained in the paper book. 14. Ld. counsel relied on the decision of the ITAT in the case of Agnity India Technologies Pvt. Ltd. rendered in ITA no. 1204/Del/2011, wherein this comparable has been rejected. He also referred to the decision of Hon'ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. rendered in ITA no. 102/2015 for AY 2008-09 in support of the proposition that unless the comparable satisfies the test of functional comparability, the same cannot be taken as a comparable. 15. The second comparable disputed by ld. counsel is Wipro Technol....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise. 17. Ld. counsel pointed out that the nature of business of this company is not clear from the annual report The turnover of this company is Rs. 400 crores as against Rs. 142 crores of assessee. Further, the brand ownership gives leverage to this comparable. Wipro brand was taken over by the company on merger whereas assessee does not have any brand or proprietary products. Offshore Revenue of Wipro is Rs. 3,88,46,35,089, which shows its extent of its offshore operations whereas assessee is 100% captive service provider and rendering services to its AEs. He further pointed out that no details are available in the annual report regarding related party transactions. Further, no segmental information is available in the annual report. 18. He further pointed out that this comparable has abnormally high margin/ volatile profit margins of 72.48% as per correct computation and 68.84% as per TP order. He pointed out that the profitability earned by this company ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d. DRP has considered the brand, R&D and turnover filters and has given cogent reasons as to how that will not affect PLI. He pointed out that ld. DRP also included certain comparables and granted a relief of approximately Rs. 10 crores adjustment to assessee. 24. Ld. counsel for the assessee, in the rejoinder, submitted that assessee has specifically taken ground no. 4.1 wherein it has contested the modification/ rejection of the filters applied by assessee and ld. TPO's action in applying additional/ revised filters. He submitted that assessee has not conceded this ground but in order to avoid detailed hearing has not seriously contested the ground. He submitted that assessee is not per se disputing the contentions of lower revenue authorities that turnover per se cannot be a relevant factor for accepting/ rejecting the comparable. But when it becomes part of other dissimilarity, which he has demonstrated with reference to the three comparables noted above, then it assumes significance. Ld. counsel pointed out that assessee has relied on the decision in the case of Equant Solutions India Pvt. Ltd. (supra) and no distinction has been shown in the profile of assessee vis a vis E....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ant to functional differences between controlled an uncontrolled transactions in comparison with resort to gross profit margins. Yet the net profit indicators have potentiality to introduce an-element of volatility primarily for two reasons. Firstly, factors which do not affect gross profit margin and prices can influence net profit indicators due to variation of operating expenses or viceversa. This potentiality has reference to variation in operational expenses including AMP expenses. The other factors include tax- payers competitive position in the form of price and margins and in some cases, it may be difficult to eliminate or compute the effect of these factors. These difficulties in applying or accepting the TNM Method arise when there is complexity of functions and each party to the transaction(s) makes valuable unique contribution. Reliability of the TNM Method is sufficiently certain where one of the parties makes all contribution involved in the controlled transaction. This is the position even as per the Revenue's case in the present set of appeals. Revenue has asserted that the Indian subsidiaries, i.e. the assessees are mere dummies which implement, promote and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the decision as under: "13. Persistent systems Limited a. TPO has taken Persistent Systems Limited (Persistent) which has a margin 29.02% as comparable holding that the company is engaged in software developing services. The Id DRP rejected the claim of the assessee for its exclusion. Before us, the Id AR submitted that this company is functionally different because it renders outsourced product development services and developed product as paxpro, ChemLMS etc. He further contended that segmental information of sale of software services and sale of product are not available and therefore it should be excluded. He relied on the decision of 3DPLM Software solutions Limited V 42 tamann.com 333 ( bang.) and Yadlee Infotech Pvt limited TS- 465-ITAT 2014 ( bang.) b. Ld. DR Relied on the order of AO and submitted that AO has given sufficient reason for selection of this comparable. c. We have perused the arguments on the same. Firstly on perusal of the balance sheet of this comparable it is noted that that this company has not provided segmental information for sale of services and sale of products of software's. Further It is seen from the details on record that this com....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sment Year 2010--11, wherein the Infosys owns of its brand name was held to be incomparable on the same analogy, brand value of 'Wipro' does help this comparable. Hence, we direct TPO to exclude this comparable, it is ordered accordingly. 32. Apart from these considerations, we further find considerable force in the submission of ld. counsel for the assessee as regards Wipro Technology Services Pvt. Ltd. that the agreement between Wipro and Citi Group had bearing on the pricing. It is true that after the merger of Citi Technology Services Ltd. with Wipro the existence of the Citi Technology Services Ltd. was no more there but the pricing agreed by earlier agreement between Wipro and Citi Group remained operational. The brand of Wipro continued even after acquisition. Therefore, in view of the provision of section 90B(2), the pricing got affected by the agreement and this factor on standalone basis was sufficient enough to reject this comparable from the list of comparables. We, accordingly, direct for exclusion of Wipro Technology Services Pvt. Ltd. and Persistent Systems Ltd. following the decision in the case of Equant Solutions India Pvt. Ltd. (supra) and also for the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o of investments. Further, it also provides support to various individual investors whose funds are being managed by Fidelity, brokers, financial advisors etc., resolving various queries and issues on specific funds. 38. In the backdrop of above functional analysis, it is evident that assessee is primarily captive service provider and is primarily catering to the needs of individual investors of Fidelity group. 39. In regard to the IT enabled services, rendered by assessee, the PLI of the company was arrived at 14.98% on cost in the TP study whereas the average PLI of the comparables was arrived at 13% by taking into account 15 comparables. Thus, assessee's claim was that international transaction was at arm's length. 40. After the fresh search was conducted during the course of T.P. proceedings, assessee provided in total 20 comparables, which have been listed in para 9 of ld. TPO's order at page 12. Out of this 16 were rejected by TPO and following 4 comparables were accepted: - Cosmic Global Ltd. - Infosys BPO Ltd. - Jindal Intellicom Ltd. - Microland Ltd. 41. Ld. TPO further added 5 comparables which were as under: - Accentia Technology Ltd. - E4e ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....enders services to worldwide Citigroup entities. Such services are rendered in continuation of the related party agreements which were executed when the company was under the management of Citi group. 51. As regards risk profile of this company, ld. counsel pointed out that this company operates as full fledged risk taking entrepreneur, whereas assessee is a captive service provider to Fidelity Group companies. Further, during the year there is abnormally high margin/ volatile profit margins earned by this company which is 60.49% as per correct computation. He pointed out that profitability earned by this company in FY 2007-08 was 24.50%; FY 2008-09 45.94%; FY 2009-10 60.49%. Ld. counsel relied on the decision of ITAT in the case of Equant Solutions India Pvt. Ltd. (supra). 52. Ld. DRP while considering the assessee's objection has pointed out that this company is primarily in ITes field which is evident from various extracts reproduced in DRP's direction from the annual report. Ld. DRP further considered the assessee's objection on taking over of this company by the TCS group and referring to page 13 of annual report observed that the company was taken over by the TCS in the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pany cannot be taken as a comparable to the tested party. 57. As far as TCS E-Serve International Ltd. is concerned, ld. counsel for the assessee pointed out that as per the annual report, the functions performed by this company is to provide business process management services in banking and financial services verticals. It provides services comprising transaction process and technical services. Transaction processing includes processing, collections, customer care and payments in relation to the services by Citigroup to its corporate and retail clients. Technical services involve software testing, verification and validation of software at the time of implementation and data centre management activities. Segmental details for income from transactions processing services are not available in annual report. 58. Ld. counsel pointed out that other dissimilarities which have been referred with reference to TCS-e-serve, are also in this comparable. He, therefore, submitted that this comparable should be excluded. He relied on the order of the ITAT in the cases of Equant Solutions India Pvt. Ltd. (supra) and Bechtel India Pvt. Ltd. (ITA no. 1478/Del/2015). 59. We have heard bo....