TaxTMI 
TaxTMI 
2017 (10) TMI 49
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....s dated January 08, 2013 and February 02, 2014 passed by Additional Commissioner of Income Tax, Transfer Pricing-1 (1), New Delhi ('Learned TPO'), is bad in law and void- ab-initio. 2. That on facts and in law, the Learned AO has erred in computing the total income of the Appellant at INR 66,75,13,660 as against the returned income of INR 37,65,99,859 by making an upward adjustment of Rs. 28,92,41,993 and INR 16,71,808 with respect to transfer pricing (UTP") and corporate tax matters, respectively. Part I - Transfer Pricing Grounds 3. That on facts of the case and in law, the DRPI TPO/AO have erred in rejecting the economic analysis undertaken by the Appellant by conducting a fresh economic analysis for international transactions pertaining to provision of software development services, provision of Information Technology ("IT') back office support service and pre-sales marketing and postsales technical support service (impugned transactions") 4. That on facts of the case and in law, the DRPI TPO/AO have erred in rejecting certain companies and adding certain companies to the final set of alleged comparable companies on an ad-hoc basi....
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....014-15 on specific application by a taxpayer 10. That on facts of the case and in law, the TPO/AO have erred by making computational errors while computing the operating margin of the Appellant. 11. That on facts of the case and in law, the TPO/AO have erred by making computational errors while computing the unadjusted and working capital adjusted operating margin of the alleged comparable companies for the benchmarking of impugned transactions. 12. That on facts of the case and in law, the DRP/TPO/AO have erred in conducting a fresh economic analysis by using arbitrary filters for identifying companies comparable to the Appellant. The arbitrary filters applied by the TPO and confirmed by the DRP/AO inter-alia include the following: For international transaction pertaining to provision of software development services, IT back office support services and presales marketing and post-sales technical support service: * Rejecting companies having turnover less than INR 5 Crores; * Rejecting companies having different accounting year than that of the Appellant; and * Rejection of companies identified by the Appellant on acco....
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....he time of complying with the transfer pricing documentation requirements and disregarding the Appellant's claim for use of multiple year data for computing the arm's length price. 19. That on facts of the case and in law, the DRP/AO has erred in confirming that Assessing Officer/TPO has discharged his statutory onus by establishing that the conditions specified in clause (a) to (d) of Section 92C (3) of the Act have been satisfied before disregarding the arm's length price determined by the Appellant and proceeding to determine the arm's length price. Part II - Corporate Tax Grounds 20. That on the facts and circumstances of the case and in law, the AO/ DRP erred in allocating director's remuneration between STP unit and non-SSTP unit by ignoring the facts placed on recrd. 21. That on the facts and circumstance of the case and in law, the AO/ DRP erred in holding that the Appellant intentionally debited director's salary to non STP unit to reduce its taxable income, without appreciating the operating model (cost plus markup) of the Appellant. 22. Without prejudice to grounds 20 and 21 above, the AO/ DRP erred in not shift....
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....ces; and related pre-sales marketing and post sales technical support services. The assessee company provides R&D and IT services from its unit located in Noida Special Economic Zone, Noida and Software Technology Parks unit located in Bangalore. It is mainly a captive service provider and risk mitigated entity, which is compensated on a cost plus mark up basis for the services rendered to its Associated Enterprises (AE). In its transfer price study report and Form 3 CEB the assessee has reported following international transactions entered into with its AE:- S.No. Nature of Transaction Method Applied Value (in Rs.) 1 Provision of software research and development services TNMM 1,719,316,641 2 Provision of IT back office support services TNMM 470,689,564 3 Provision of pre-sales marketing and post-sales technical support services TNMM 250,438,819 4 Provision of bank guarantee TNMM 127,400 5 Payment of interest towards foreign currency loan CUP 10,481,177 6 Purchase of free of cost assets from associated enterprise - No benchmarking required 7 Employee stock purchase plan from assoc....
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....velopment In accordance with product specifications defined by CDS. The code generated is subsequently tested to ensure that functions performed by the_c.ode are in accordance with the protocol design and standard specifications. Cadence India generates and makes available documentation for the software developed and transferred. The software developed by Cadence India is subsequently integrated into the final software product by CDS and other Cadence group entities. * Project management Although the day-to-day management of the project is undertaken by Cadence India, CDS is responsible for the overall project management. Cadence India's responsibility is confined to the project management and the end deliverables with respect to the module of the software being developed by it. CDS also regularly conducts meetings to analyse the progress and monitors the project plan. However, the ultimate responsibility of the work undertaken by Cadence India rests with CDS. * Quality control, testing and integration Cadence India is responsible for ensuring that requisite quality/ performance standards are complied with while rendering services. C....
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.... Nageshwar Rao after explaining the relevant facts and background, submitted that under this segment the assessee before this Tribunal is only challenging the exclusion of three comparables viz. (i) Bodhtree Consulting Limited; (ii) Infosys Technologies Limited; and (iii) Sonata Software Limited and inclusion of one comparable viz. (i) Gold Stone Technologies. (A) BODHTREE CONSULTING LIMITED (68.52%) 6.1 The assessee's case before the TPO as well as the DRP had been that, this company is a global IT consulting and product engineering service provider. Its key focus areas include product engineering, analytics, and cloud and enterprise services. The array of services provided by this company includes software consultancy; data management; data warehousing and providing end-to-end web solutions. Apart from that, it was submitted that there had been abnormal growth in the revenue by 67% and operating profit had jumped to 340.98% in this year, indicating that extra ordinary business operations have been carried out by this company. It was further submitted that there is a difference in revenue recognition model, as in the case of the assessee the revenue is recognized at the time....
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.... by the assessee itself has thrown such comparables. In such circumstances, the assessee is asking for exclusion based on deep scrutiny functionality which otherwise under TNMM is not required. Otherwise, this matter should be restored back to the file of the TPO by adopting different search criteria by not including the companies which are into software products. 6.4 We have heard the rival submissions and perused the relevant findings given in the impugned order as well as the material referred to before us. As discussed earlier, the assessee under the provision of software research and development services carries out R&D services for its AE for the development of software products to its CDS utilizing R&D technology of CDS only. CDS specifies R&D services to be performed; products to be developed or used; timeline for completion and specific result to be achieved. The entire conceptualizing of the marketing strategy for sales of its products and services, securing of orders of its products are done by CDS and not by the assessee. The assessee company is purely a 'captive service provider' and does not undertake any kind of marketing or development functions. Conceptualizatio....
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.... be done so as to carry out proper comparability analysis with the tested party so as to benchmark and arrive at a proper Arm's Length Price. If at the functional level, it is shown that functions performed by the assessee is entirely different from the functions carried out by the comparable companies, or it does found comparable either under risk analysis or assets deployed, then such comparable companies should not be excluded from comparability analysis. Accordingly, we hold that Bodhtree cannot be included as comparable for benchmarking the assessee's margin. (B) INFOSYS TECHNOLOGIES LIMITED (42.44%) 7. The assessee's main contention for exclusion of Infosys Technologies Limited had been that firstly, its services are incomparable with the assessee because Infosys is into technical consultancy design, development, re-engineering maintenance, system integration, package evaluation and implementation and infrastructure management services; secondly, it has huge R&D work for its products, which are more than Rs. 267 crores, whereas in the case of the assessee it is Nil; thirdly, Infosys has huge intangibles and brand value is also huge whereas in the case of the assessee it....
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....s ground alone, various Benches of the Tribunal have held that Infosys Technologies Limited cannot be compared with small software companies, who are into contract software development services. A company like Infosys with mega operations and having significant assets and brand value and full-fledged risk taking entrepreneur developing and selling proprietary products cannot be held to be comparable with the captive service and contract software development companies as the comparability analysis fails on all the factors of FAR. The Hon'ble Delhi High Court in the case of CIT vs. Agnity India technologies Pvt. Ltd. (supra) made a comparative chart while dealing with similar comparative analysis, which for sake of ready reference is reproduced hereunder:- Basic Particular Infosys Technologies Ltd. Assessee Assessee Operate as full-fledged risk taking entrepreneurs Operate at minimal risks as the 100 percent services are provided to AEs Nature of services: Diversified-consulting, application design, development, re-engineering and maintenance system integration, package evaluation and implementation and business process management, etc. Contract softwar....
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....it has to stand the scrutiny of the taxing authorities. If, on a deep examination, it is found that the comparables chosen by the assessee do not stand the test of FAR analysis, requirement of the statutory provisions and correct selection of most appropriate methods, the same can be rejected. At the same time, if during the course of transfer pricing proceedings, if the assessee points out the cogent reasons and gives proper analysis as to why the comparables chosen by it were not correct, it cannot be said that the assessee is out rightly precluded from raising such objections. The ultimate aim of the transfer pricing provisions is to determine the appropriate ALP, which can be done only by bench marking with the proper comparables based on FAR analysis and under the prescribed methods. If in the course of the proceedings, it is found that certain comparables do not stand the test of functional analysis or for some other reasons, then Tata Power Solar Systems Ltd. the same should be excluded and we do not find any reason that they should to be included simply because the assessee had included the same initially. If the cogent reasons have been given by the assessee for excluding ....
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....round that profit & loss account of the Annual Report of this company reveals that it has a huge income from services which indicates that it is mainly into software development, therefore, it is functionally comparable and annual report of the company shows that its RPT is at 14.65% which is overall less than the filter applied at 25%. 8.1 Before us, the ld. Counsel for the assessee, submitted that if proper calculation is done then, RPT is more than 50% and in the case of Fiserv India (P.) Ltd. (supra), the Tribunal has taken note of this fact and that its RPT in this year is more than 25%. 8.2 The ld. D.R., submitted that the matter can be sent back to the TPO so as to examine how much is the related party transaction and if it exceeds more than 25%, then the same can be excluded. 8.3 After considering the aforesaid submissions, we are of the opinion that both the assessee as well as the authorities below, have disputed the percentage of related party transactions. In order to ascertain the exact related party transactions, we are of the opinion that this matter should be restored back to the file of TPO, who shall examine the exact RPT, because at the face of its annua....
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.... * Determining the scope of services The broad scope of work to be undertaken by Cadence India in connection with the identified transaction is outlined in a Service Agreement between Cadence India and CDS. * Provision of Services Cadence India is responsible to provide the agreed services as and when requested by overseas group entities as per terms laid out in the Agreement. * Quality assurance Though there is no penalty for a lapse in quality, Cadence India is required to ensure that services provided are of a certain requisite quality and adhere to established international group standards. 11. So far as risk analysis is concerned, the assessee stated that it did not had any kind of business risk; credit and collection risk; service liability risk; utilization risk; foreign exchange risk; and very limited service liability risk. Thus, in this segment also the assessee was risk mitigated entity. Under this segment, the assessee was compensated for services rendered with a fee which is equal to operating expenses incurred plus an amount equal to 15% of operating expenses and the payment terms laid down that the assessee would invoice CDS for its servi....
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....stems International Limited (segmental); (iii) Micro Land; and (iv) Microgenetics Systems Limited. Another comparable company, Allsec Technologies Limited was though raised for inclusion in comparable list, however, at the time of hearing the same was not pressed. Accordingly, we are ceased with exclusion and inclusion of 4 comparables each. (A) ACCENTIA TECHNOLOGIES LTD. (48.78%) 14. The assessee has sought for exclusion of this company mainly on the ground that this company is engaged in providing health care receivable cycle management services and software development services. Hence it was submitted that it is functionally not comparable. Apart from that, it was stated that the annual report of this company shows that it has insufficient segmental information, because it has various streams of income like medical transcription; billing and collections; income from coding all under one head of income. In the absence of such segmental information, it would be very difficult to benchmark its operating margin with that of the assessee. However, the TPO as well as the DRP relied upon CBDT Circular SO-890(E) dated 26/9/2000 wherein it has been clarified that medical transcript....
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....; secondly, the employee cost is less than 2% of the turnover as compared to the assessee which has much higher employee cost; and lastly, it is engaged in providing services of translation charges; medical transcription and is also into BPO services for which segmental accounts are not available. 15.1 The ld. Sr. DR, submitted that this comparable was taken by the assessee in the earlier year which has been accepted by the TPO as well as DRP. Not only that, he further pointed out that this comparable was again taken as set of comparable by the assessee in the assessment year 2010-11 and also in AY 2011- 12. It is only in this year that assessee seeks for exclusion just because in this year the margin is more. Therefore, there cannot be exclusion only in this year without change in material facts this year. 15.2 On the other hand, the ld. counsel for the assessee, submitted that functional comparability has to be seen for inclusion or exclusion and, therefore, looking to the fact that in several cases this comparable company has been excluded from the companies, which are rendering purely ITES services, therefore based on these decisions this comparable should be removed. ....
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....finitely there cannot be any estoppel for objecting to for exclusion, but such material facts and incorrect approach has to be demonstrated which has not been done in this year. This inconsistency is further accentuated by the fact that this comparable continues to be part of assessee's comparable in subsequent years. Thus, we agree with the contention of the ld. Sr. DR that assessee cannot be allowed to resort to such cherry picking. Accordingly, we confirm the action of the TPO in including Cosmic Global Ltd. as comparable following rule of consistency. e-CLERX SERVICES LTD. (55.90%) 16. The assessee has sought for exclusion of this company mainly on the ground that it is functionally dissimilar as it is rendering high level KPO services and provides data analytics operation management and audit reconciliation services. The TPO and DRP have included this company on the ground that the services provided by this company are basically in the nature of ITES. 16.1 Before us, the ld. counsel for the assessee reiterated that this company is providing high end KPO services which is different from the functions performed by the assessee, In support for its exclusion on similar po....
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....es have been held to incomparable with the companies operating on its own resources. 17.1 On the other, the ld. DR, strongly relied upon the order of the DRP that this company is operating under one segment, i.e., ITES services and solutions and therefore, functionally it is a comparable company. 17.2 After considering the rival submissions made by the parties, we find that there is no dispute that, Vishal Info Tech. (Coral Hub) has a different business model inasmuch as its outsourcing charges is 90.57% which reflects that it has a different business model all together and deployment of human resources in an outsourcing model definitely is different from a company which carries its work through its own resources and there is huge difference in employees cost ratio to turnover. Thus, in the outsourcing model, the assets deployed (in the form of human resources) and other intangible differs from an entity which operates mostly on its own resources. The ratio laid down by the Hon'ble Delhi High Court in the case of Ramp Green Solutions Pvt. Ltd. (supra) is clearly applicable and accordingly, we direct the TPO to exclude this company from the list of final comparable. CG VAK ....
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.... reasonably accurate adjustment for eliminating the differences on account of such material effects. Mere circumstance of a company which otherwise confirm to the comparability analysis in terms of Rule 10B(2) and (3), huge profit or huge turnover ipso facto does not lead to its exclusion unless and of course it is shown that turnover or huge profit is on account of factor leading to a different results in FAR analysis. We find that the Hon'ble Delhi High Court in the case of Cryscapital Investment Advisors India Pvt. Ltd. vs. DCIT (supra) after detailed analysis of rule 10B(3), same principle has been reiterated that if the company is functionally comparable then same cannot be rejected on the basis of turnover. The Hon'ble High Court in its very detailed judgment wherein it was required to answer, whether the comparable can be rejected on the ground that they have high profit margin as compared to the assessee in TP analysis, has also dealt upon the turnover factor in detail and reiterated that if the company is functionally comparable then same cannot be rejected on the basis of turnover. Thus, following the ratio laid down by the Hon'ble Delhi High Court, we hold that the compa....
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....rter, whose results are being worked out and the transactions of the Company are carried out in the normal course of business, then we do not find any reason to reject the comparable out rightly on the aforesaid ground. The working of PLI based on audited accounts as incorporated above clearly clinches the point. The Hon'ble P&H High Court in CIT Vs. M/s. Mercer Consulting India Pvt. Ltd., in the context of R-Systems only had made a very important observation which reads as under:- "27. The TPO excluded the case of R-Systems International Limited from the list of comparables. The ITAT included the same. The Transfer Pricing Officer excluded the case of RSystems International Limited on the ground that it follows the calendar year i.e. 1st January to 31st December for maintaining its annual account whereas the accounting year of the assessee is 1st April to 31st March. The Transfer Pricing Officer followed an order passed by the Mumbai Bench of the Tribunal in ACIT v. Hapag Lloyd Global Services Ltd. 2013- TH-68-ITATMUM-TP in which it had been held that a company with a different financial year ending cannot be compared. 28. We are unable to agree with the deci....
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....ement with the decision of the Tribunal that if the data relating to the financial year in which the international transaction has been entered into is directly available from the annual accounts of that comparable, the same cannot be held as not passing the test of sub-rule (4) of Rule 10 B." Thus, respectfully following the judgment of Hon'ble High Court, we hold that this company should be accepted as comparable company for the purpose of benchmarking the assessee's margin. MICROLAND LTD. (-15.69%) 20. It has been submitted by the ld. Counsel for the assessee that this comparable company was requested by the assessee for inclusion before the DRP by way of detailed submissions. And giving all the details of comparability. However, DRP did not provide its comments on this comparable, therefore, he requested that this comparable should be sent back to the file of the TPO. He also relied upon the decision of the Tribunal in the case of Xchanging Technology Services India Pvt. Ltd. vs. DCIT in ITA No.1897/DEL/2014 for assessment year 2009-10, wherein on similar ground the matter was remanded to the TPO for fresh consideration. The ld. D.R. too admitted that this matter can b....
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....ervices as one segment and for the purpose of benchmarking the margin, it has shortlisted 15 comparable companies after adopting TNMM as MAM. Had The TPO rejected all the 15 comparables and selected 4 comparable companies and after the stage of DRP, it has been reduced to 3 comparable companies and thereby, adjustment of Rs. 3.30 crores has been made. 23.1 It has been informed by the ld. D.R. that in assessment year 2008-09, identical issue was sent back to the TPO vide order dated 20/5/2016 in ITA No.39/DEL/2013 in the assessee's own case. 23.2 The ld. Counsel for the assessee, pointed out that in the order giving effect to the order of the Tribunal by the TPO (order dated 30/3/2017), the TPO had held that pre-sales marketing and post-sales technical service cannot be benchmarked separately, because the assessee itself has consolidated the figures of both the segments under one single head. However, he pointed out that in assessment years 2011-12 and 2012-13, the assessee had benchmarked both these services separately in its TP study report and the same has been accepted by the TPO vide order dated 29/1/2016 and no fault has been found with such approach and no adjustment ha....
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....mount in advance from its AE. Thus, there was no point in imputing any kind of interest rate of 15.77%. Otherwise also, he submitted that if the working capital adjustment is allowed, then no further adjustment towards outstanding receivables is warranted. In support, he strongly relied upon the judgment of the Hon'ble Delhi High Court in the case of Kusum Health Care Pvt. Ltd. in ITA No.765/2015. 24.2 On the other, the ld. D.R., strongly relying upon the order of DRP, submitted that the decision of the Hon'ble Delhi High Court in the case of Kusum Health Care Pvt. Ltd. (supra) was based on its fact. He relied upon the decision of Delhi Bench of ITAT in the case of McKinsey Knowledge Centre Pvt. Ltd. vs. DCIT in ITA No.154/DEL/2016. Alternatively, he submitted that the matter can be restored back to TPO to verify, whether the working capital adjustment has any impact on receivables. 24.3 We have heard the rival submissions and perused the relevant findings given in the impugned order as well as the decisions referred to before us. In the case of McKinsey Knowledge Centre Pvt. Ltd. vs. DCIT (supra) as relied upon by the Ld. Sr. DR, the Tribunal has discussed this issue....
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....al adjusted margin of the comparables and, therefore, "any further adjustment to the margins of the Assessee on the pretext of outstanding receivables is unwarranted and wholly unjustified." 9. Mr. Raghvendra Singh, learned counsel appearing for the Revenue submitted that the ITAT overlooked the fact that the expression "international transaction" as defined in Explanation (i) (c) to Section 92B of the Act included "payments or deferred payment or receivable or any other debt arising during the course of business", and therefore, the outstanding receivables could by themselves constitute an international transaction. He further referred to the OCED Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. Paras 3.48 & 3.49 under Chapter III para A.6.1 of the said Guidelines titled "Different types of comparability adjustments" spoke of the need to eliminate differences that may arise from different accounting practices between controlled and uncontrolled transactions. In particular, it was noted under para 3.49 that "a significantly different level of relative working capital between the controlled and uncontrolled parties may result in further inv....
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.... adjustment on outstanding receivables. Thus, the TPO is directed to follow the ratio laid down by the Hon'ble Jurisdictional High Court and decide this matter accordingly after giving opportunity to the assessee. Since the Ld. Counsel has only pleaded the aforesaid point that working capital adjustment will subsume the interest component on delayed receivables, therefore, we are not giving any finding on the quantum of interest rate applied by the TPO. 25. Now coming to the issue whether foreign exchange fluctuation cost is operating or not, we find that the TPO has treated it as non-operating cost, whereas the assessee has treated it as an operating cost. The ld. Counsel for the assessee, before us has relied upon the decision of the Hon'ble Delhi High Court in the case of Pr. CIT vs. Fiserv India (P.) Ltd. in ITA No.17/2016 and referred to para 10 thereof. He submitted that the DRP has directed TPO to apply "safe harbour rules". However, the same will not apply in this year because, it can be applied prospectively. On the other hand the Ld. DR relied upon the order of the TPO as well as DRP. 25.1 We have heard the parties and gone through the impugned orders. As regard....
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....t assessee's STP unit has its own finance/operational team which is responsible for the day to day affairs/functioning of the said unit. The directors of the assessee have no active involvement on the affairs of STP units. All cost related STPI unit and non-STPI unit of assessee were being booked into irrespective unit and no apportionment was required/done for any other cost. He submitted further that assessee was operating on cost + mark up arrangements with its overseas group companies. Under the said arrangement, the assessee was entitled to receive pre-agreed mark up on cost incurred by it. Allocating cost from non-STP unit to STP unit will result in reducing the cost based for the assessee, which will eventually lead to lower taxable income. Thus, the reason provided by the Assessing Officer for making the adjustment does not stand correct in the case of assessee. The Learned AR submitted that in the subsequent years 2009-10 and 2010-11, the claimed deduction under sec. 10A was allowed. He referred page Nos. The Learned AR also tried to point out typographical and arithmetical errors in the working of the disallowance under sec. 10A of the Act by the Assessing Officer at ....
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....f deduction under sec. IOA of the Act and the claim of deduction under sec. 10A of the Act only needs to be seen in first year. Against the objection of the Assessing Officer that additions shown in block of computers is not in agreement with records maintained in computers, the submissions of the assessee remained that as per fixed assets schedule provided to the Assessing Officer total addition in computer made during financial year 2007-08 in STP unit was Rs. 32,05,095; in the assessment order, the Assessing Officer stated that as per details provided to him, addition made in block of computer was of Rs. 31,73,495 which is against the facts on record; the Assessing Officer compared alleged additions of Rs. 31,73,495 with details extracts from SAP and wrongly concluded that amounts do not match. The Learned AR in his above submissions has pointed out as to how the Assessing Officer has committed mistake in coming to the conclusion that amounts do not match. The Learned AR submitted that total addition made to block of computers as per SAP details after correcting above mistakes made by the Assessing Officer is Rs. 32,05,095 which matches with fixed assets scheduled submitted to t....