TaxTMI 
TaxTMI 
2017 (7) TMI 995
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....price of the Appellant's international transactions which resulted in the enhancement of returned Income of the Appellant by INR 57,85,27,473. 3. That the reference made by the Ld. AO suffers from jurisdictional error as the Ld. AO has not recorded any reasons in the assessment order based on which he reached the conclusion that it was 'expedient and necessary' to refer the matter to the Ld. TPO for computation of the arm's length price, as is required under section 92CA(1) of the Income-tax Act, 1961 ('the Act'). 4. The Ld. AO/Ld. TPO/ Ld. Dispute Resolution Panel ('DRP') erred on facts and in law in making an upward adjustment of the arm's length price of the Appellant's international transaction in relation to provision of captive software development services by: 4.1. Not appreciating that the Appellant is entitled to deduction under section 10A of the Act, with respect to the provision of services and therefore, there is no incentive on the part of the Appellant to shift profits to any other jurisdiction; 4.2 Rejecting the comparable companies selected by the Appellant in its Transfer Pricing documentation....
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....P which supports the without prejudice contention of the Appellant, for application of Comparable Uncontrolled Price Method as the most appropriate method (purported to be applied by the Ld. TPO). These fresh evidences were in the form of copy of invoices on sample basis of similar capital equipment sold by the AEs to third parties. 7. Without prejudice to above, the Ld. AO erred on the facts and in law by following the order of Ld. TPO and enhancing the income of the Appellant by the amount capitalized in respect of such capital equipment amounting to INR 57,30,63,268, without appreciating the fact that the Appellant has claimed the amount of depreciation of only INR 25,57,43,681 (as per the Act read with the Income-tax Rules, 1962) thereon. 8. That on the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 274 read with section 271(1)(c) of the Act for furnishing inaccurate particulars without recording any adequate satisfaction for such initiation. 9. That the Ld. AO erred in facts and in law in charging and computing interest under section 234B, 234C and 234D of the Act." 2. Briefly s....
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....89,025/-. 6. Assessee company carried the matter before Disputes Resolution Panel by filing objections. For software development services segment, the ld. DRP ordered to exclude two companies as comparables, namely, Infinite Data Systems and Sonata Software Limited and directed to correct the computation margin of comparable company for the purpose of computation of arm's length price; and grant of working capital adjustment for difference in the working capital position of assessee vis-à-vis comparable companies. In accordance with the directions issued by the ld. DRP, the revised arm's length margin of comparable companies was determined at 19.73% vis-à-vis OP/OC of 20.81% earned by the assessee and consequently, adjustment on account of provisions of software development services came to be nil. 7. Ld. DRP granted working capital adjustment in working capital position of the assessee vis-à-vis comparable companies; correct computation of margin of comparable companies qua marketing support services segment and consequently, the revised arm's length margin of comparable companies was determined at 26.22% vis-à-vis OP/OC of 13.01% earned by the as....
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....n of : (i) E-Infochips Bangalore Ltd., (ii) Infosys Limited, (iii) Persistent Systems Limited, (iv) Thirdware Solutions Ltd. and (v) Wipro Limited on the ground of functional dissimilarity, risk assumed, extra ordinary circumstances, etc.. We would like to examine suitability of each of the aforesaid comparable companies for benchmarking the international transactions as under :- COMPARABLE COMPANIES SOUGHT TO BE EXCLUDED BY THE ASSESSEE COMPANY FROM THE FINAL SET OF COMPARABLES FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS QUA SOFTWARE DEVELOPMENT SERVICES E-INFOCHIPS BANGALORE LIMITED 14. Assessee company challenged the inclusion of this company as comparable on ground of functional dissimilarity; segmental information not available; fluctuating trend; abnormal super normal profit and significant intangible and relied upon decision rendered by coordinate Bench of ITAT, Delhi in case of Headstrong Services (India) Pvt. Ltd. in ITA No.714/Del/2015 order dated 18.03.2016. 15. However, ld. TPO brushed aside the objections by referring to the annual report. TPO observed that many companies treat IT and ITES as one industry and report them as one segment even though they ....
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....ives break up of this income with "Income from Software Services" at Rs. 37.13 crore and "Consultancy Charges" at Rs. 5.90 crore. Segmental information of this company is available on page 66 of its Annual Report which states that : "The Company is primarily engaged in Software Development and I.T. enabled services which is considered the only reportable business segment". This indicates that the revenue from Software Development and ITES has been clubbed by this company which also includes consultancy charges. No doubt Consultancy charges in relation to Software Development are part of overall Software Development, but the inclusion of ITES in the overall segment frustrates the comparability. We are currently dealing with the international transaction of 'Provision of Software Development services' and the international transaction of ITES is separate which has also been benchmarked distinctly. In our considered opinion, e-Infochips Bangalore Ltd. having a pool of both software developments and ITES segments into the overall segment designated as 'Software development', cannot be considered as comparable on entity level with the international transaction of 'Software development' ....
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....ing policy of the company thereby directly impacting margins of the company on the ground that the company has spent a meager amount of 0.06% of the revenues and could not have generated brand value with this amount and retained this company as a suitable comparable. 23. However, coordinate Bench of the Tribunal in assessee's own case qua AYs 2008-09 and 2009-10 ordered to exclude this company from the list of comparables by relying upon CIT vs. Agnity India Technologies Pvt. Ltd. (supra). Since the comparable company is a giant company in terms of risk profile, nature of services, number of employees, ownership of its branded products and brand related profits and having turnover of 135 times of the assessee, it cannot be a suitable comparable for benchmarking the international transaction of assessee company because assessee company is a captive service provider rendering services of its AE alone without having any intangible in the development of software having limited number of employees and not having any branded product. 24. Assessee company is also operating at minimum risk as the services are being provided to its AE and there is a huge difference in the revenue earn....
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.... exclude this company from the list of comparables. THIRDWARE SOLUTIONS 29. Assessee sought the exclusion of this company as a comparable on the grounds inter alia that it is functionally dissimilar being engaged in product development qua which segmental accounts are not available; that it has abnormal/super normal profit and that it is indicated in diversified services like sale of licences, software services, export and revenue from subscription, development of software product qua which no segmental disclosure have been made by the company in its audited financial statement and relied upon in the case of Fiserv India Private Limited (supra). 30. TPO rejected the objections raised by assessee by observing that the software development, implementation and support services are various sub-segments of software development services only and has also brushed aside the objection of assessee that it is only sale of licence by observing that out of total sale of Rs. 67.57 crores, the sale of licence is of Rs. 1.51 crores which is only 2.2% of the total sales. 31. Keeping in view the fact that this company is into diversified services like sale of licences, software servic....
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....om the TPO's order itself that the facts and circumstances of Wipro Ltd., are somewhat similar to Infosys Technologies Ltd., inasmuch as he has proceeded to reject the assessee's objections by relying on the reasoning given by him for the inclusion of Infosys Ltd. It is further observed that Wipro Limited (Seg.) was considered as comparable by the TPO in the case of Toluna India (supra) and Lear Automotive (supra). The Tribunal, in both the cases, has held Wipro Ltd. (Seg.) as not comparable. This company is also operating as a full-fledged risk taking entity; engaged in providing technology infrastructure services, testing services, package implementation having more than 82,000 employees. It has its own R&D centre. It incurred around 11% of net sales as expenditure on research and development. None of the above factors match with the assessee company. Respectfully following the above precedents, we hold that this company is not comparable. 10.3. There is another reason for holding this company as incomparable. It can be seen that there was a merger of Wipro Infrastructure Engineering Ltd., Wipro Healthcare IT Ltd., Quantech Global Services Ltd., with this company during ....
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....s : Non-operating Expenses Forex Liss 2,636,924 Total Operating Expenses 407,526,173 38. Assessee raised its objections before the ld. DRP who has issued the direction to the TPO to consider the computation submitted by the assessee to work out the margin of the comparable company but the TPO has failed to do so. Since the factual position as to the operating profit margin of Quintegra Solutions Limited (supra) is not in dispute, the TPO is directed to rectify the margin qua Quintegra Solutions Limited (supra) for benchmarking the international transaction. So, additional ground no.4.5 is determined in favour of the assessee. COMPANIES SOUGHT TO BE EXCLUDED AS COMPARABLES FROM THE FINAL SET OF COMPARABLES FOR BENCHMARKING THE ASSESSEE'S INTERNATIONAL TRANSACTION QUA MARKETING SUPPORT SERVICES APTICO LIMITED 39. Assessee sought to exclude this company as a comparable on ground of functional dissimilarity being engaged in complex and diversifying technical consultancy services and contended that this company is already ordered to be excluded from the final set of comparables for benchmarking the international transactions in assessee's own case in IT....
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.... came to the conclusion that this company is functionally not comparable as well as it possesses business and commercial rights of Rs. 3,75,33,159/-. When we go through pages 3564 to 3576 of the annual report of this comparable company, it becomes apparently clear that this company is engaged in pay roll processing services and has considered itself as an outsourcing service provider and as such, is not functionally comparable. So, in these circumstances, we order to exclude this comparable from the set of comparables for benchmarking the international transaction. TSR DARASHAW LIMITED 44. Assessee sought to exclude this company from the final set of comparables on the grounds inter alia that on ground of functional dissimilarity that this company is into share registry, transfer services, depository services, record management share register services and corporate fixed deposit management, which are not identical to the marketing support services being rendered by the assessee and relied upon Trend Micro India Private Ltd. vs. DCIT in ITA No.1585/Del/2015 order dated 20.11.2015, available at pages 35 to 59 of the compilation of case laws, and LG Chemical India Pvt. Ltd. (sup....
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....are of the considered view that since the comparable company is into under record management activity vide which it undertakes storage, retention and retrieval of physical or electronic records and also into Payroll and Trust Fund Activity and is handling Payroll and Retirement Funds, it has no functional comparability with the assessee company to be a suitable comparable. So, we order to exclude this company as a valid comparable. CYBER MEDIA INDIA ONLINE LTD. 47. Assessee sought to exclude this company as comparable for benchmarking the international transactions qua marketing support services on the grounds inter alia that this company is functionally incomparable; this company is providing high end services entailing higher risk and is having significant intangibles i.e. trademark and websites contributing up to 14.55% of its total net block. 48. However, TPO retained this company as a comparable on the ground that under TNMM method comparability of financials is required to be seen rather than fixing on product/service comparability as in other methods for benchmarking international transactions. 49. Perusal of the annual report, available at pages 3540 to 3559 of ....
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....grounds no.5, 5.2 and 5.3 are partly determined in favour of the assessee. GROUNDS NO.6, 6.1, 6.2, 6.3, 6.4, 6.5 & 6.6 53. Assessee imported capital equipment to the tune of Rs. 57,30,63,268/- from its AE during the year under assessment, the detail of which is tabulated as under :- Particulars Total amount capitalized for import of capital equipment As per Companies Act As per Income Tax Rules New equipment 32,23,16,507 5,09,04,398 14,57,25,592 Used equipment 25,41,03,286 3,55,64,922 11,00,18,090 Total 57,64,19,793 8,64,69,321 25,57,43,681 54. Ld. AR for the assessee contended that these equipments were imported from its AE in order to help assessee to develop software. However, the TPO held that the arm's length price of the equipment should be nil. 55. The ld. AR for the assessee further contended that the coordinate Bench of Tribunal in assessee's own case for FY 2009- 10, copy of which is available at page 279 to 311 of the Paper Book, on identical facts held the issue in favour of the assessee. For facility of reference, operative part of the order rendered by the coordinate Bench in assessee's own case for AY 2009-1....
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.... lead to the transfer pricing adjustment. At this juncture, it is pertinent to note the language of section 92(1) which provides that any income arising from an international transaction shall be computed having regard to the arm's length price. It does not say that the total income is to be computed in accordance with the ALP. It is rightly so because the international transactions which have no direct bearing on the total income, cannot give rise to addition on account of difference between their transacted value and ALP. Since the transaction of purchase of fixed assets is a capital transaction, this, in itself, does not affect the total income of the assessee. It is only the off-shoot of such transaction in the capital field, being depreciation allowance on such ALP of the transaction, which affects the total income. To illustrate, if a fixed asset is purchased by an enterprise from its AE for a sum of Rs. 100 and rate of depreciation on such asset is 10%, then the enterprise will charge depreciation amounting to Rs. 10 in its Profit and Loss account. If the ALP of such transaction is determined at Rs. 80, then the difference of Rs. 20 cannot be considered as income. Rather....
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....t costs incurred plus a particular mark-up. The cost base includes not only direct but all the indirect costs. The amount of depreciation allowance on fixed assets, including those purchased from AE, is also compensated with the same mark-up. Thus we can say that depreciation allowance and remuneration to the assessee on such depreciation are inseparable transactions. The income in the shape of remuneration to this extent directly depends upon the amount of deprecation allowance. When the assessee is getting mark-up of 13%, the amount of deprecation at Rs. 10 in our above hypothetical example will fetch remuneration of Rs. 11.30. If the amount of depreciation is reduced to Nil, the amount of income to that extent will also be Nil, because the mark-up can be applied only if there is depreciation cost to the assessee. In other words, the transactions of depreciation on one hand and the resultant revenue on the other, go hand in hand. In such a case, where the income is directly based on the costs incurred including depreciation, then these two transactions become 'closely linked' transactions, eligible for processing under the TP provisions on a combined basis. It is illogical to com....