TaxTMI 
TaxTMI 
2017 (10) TMI 687
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....ncome of the Appellant by INR 1,00,97,208 under section 143(3) of the Income-tax Act 1961 ('Act') and INR 5,99,003 under section 115JB of the Act. 2. The Ld. DRP and Ld. AO have erred on facts and in law in enhancing the income of the Appellant by INR 1,00,97,208 by holding that the Appellant's international transactions pertaining to provision of contract software development services and Information Technology ("IT") enabled back office support services does not satisfy the arm's length principle envisaged under the Act and in doing so have grossly erred in: 2.1 disregarding the ALP as determined by the Appellant in the Transfer Pricing ("TP") documentation maintained by it in terms of section 92D of the Act read with Rule 100 of the Income-tax Rules, 1962 ('Rules') as well as fresh search; 2.2 disregarding multiple year and prior years' data as used by the Appellant in its TP documentation and holding that current year (i.e. FY 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; 2.3 rejecting th....
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....pment, and IT Enabled back office support services to the Stryker Group. According to TP report, Stryker Technology has been characterized as a routine CAD / engineering contract software development and IT enabled back office support services provider and stated to use all the valuable intellectual property rights (know-how, copyrights etc.) and other commercial or marketing intangibles (brand names, trademarks etc.) owned by the Group. 3. During the year under assessment, the taxpayer entered into international transactions with its Associated Enterprises (AE) as under :- S.No. Type of International transaction Method selected Total value of transaction (Rs.) i. Purchase of fixed assets TNMM OP/OC 904,667 ii. Provision of CAD / Engineering services TNMM OP/OC 150,956,456 iii. Provision of contract software development services TNMM OP/OC 158,083,256 iv. Provision of IT enabled back office services TNMM OP/OC 38,037,799 v. Cost recharge from group companies TNMM OP/OC 58,521,893 vi. Cost recharge to group companies CUP NA....
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....e facts and circumstances of the case. GROUND NO.1 7. Ground No.1 is general in nature, hence does not require any adjudication. GROUND NOS.2, 2.1, 2.2, 2.3, 2.4, 2.5 & 2.6 8. Transactional Net Margin Method (TNMM) used by the assessee for benchmarking its international transaction as most appropriate method has been accepted by the TPO/DRP. TPO/ DRP have also provided working capital adjustment to the assessee for benchmarking its international transactions. 9. TPO has finally selected 15 comparables for benchmarking its international transactions qua software development services, which are to the following effect :- No. Name of the Company OP/OC (%) Working Capital adjusted OP/OC i. Akshay Software Tech Ltd. -1.04 -0.53 ii. E-Infochips Bangalore Ltd. 72.69 66.03 iii. Evoke Technologies Ltd. 19.02 19.56 iv. E-Zest Solutions Ltd. 18.66 14.71 v. Infinite Data Systems Pvt. Ltd. (merged) 88.25 84.63 vi. Infosys Ltd. 45.08 46.29 vii. Larsen & Toubro Infotech Ltd. 20.48 20.87 viii. LGS Global Ltd. 12.79 8.35 ix. Mindtree Ltd. 16.62 15.39 x. Per....
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....ude two comparables viz. E-Infochips Bangalore Ltd. and Infinite Data Systems Pvt. Ltd. (merged) for benchmarking international transactions relating to software development and maintenance services and TCS E-Serve Company for benchmarking international transactions relating to ITES. So, we will examine all the three comparable companies finally selected by TPO for benchmarking the international transactions one by one. COMPARABLE FOR BENCHMARKING INTERNATIONAL TRANSCTIONS QUA SOFTWARE DEVELOPMENT SERVICES E-INFOCHIPS BANGALORE LTD. (E-INFOCHIPS) 14. The taxpayer sought to exclude E-Infochips from the final list of comparables on the grounds inter alia that it is functionally dissimilar; it is engaged in product and semiconductor engineering services having 500 products for key verticals like aerospace and defence, security and surveillance, consumer devises, medical devices, retail and e-commerce and software technology; it is a Member of Indian Electronics and Semiconductor Association (IESA). Ld. TPO as well as DRP have dismissed the objections raised by the assessee by recording the findings that this comparable company is functionally comparable; engaged in maintenanc....
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.... 19. Moreover, E-Infochips is a product and semiconductor engineering services company and has designed 500 products for key verticals like aerospace, defence, semiconductor, security and surveillance, etc., thus functionally incomparable. So, we are of the considered view that E-Infochips is not a suitable comparable vis-à-vis assessee company, hence ordered to be excluded. INFINITE DATA SYSTEMS PRIVATE LIMITED (INFINITE) 20. Assessee sought to exclude Infinite from the final list of comparables for benchmarking international transactions on the grounds inter alia that it is functionally dissimilar; primarily it derives revenue from technical support and infrastructure management services; that it is having abnormally high margin and having exceptional growth in business operation over the last four years i.e. 908% in sales over previous year. 21. However, TPO/DRP have retained Infinite as comparable by holding that this company provides IT services, application services, IT infrastructure services, project engineering solutions and mobility & messaging solutions & platforms. 22. The ld. AR for the assessee in order to point out functional dissimilar....
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.... E-Serve vis-à-vis assessee drew our attention towards page 927 of Paper book (Annual Report Compendium II) wherein it is categorically mentioned that TCS E-Serve is engaged in business of providing Information Technology - Enabled Services (ITES) / Business Processing Outsourcing (BPO) services primarily to Citi Group entities globally. It is further mentioned in the Notes to Account that company's operations broadly comprise of transaction processing and technical services which includes broad spectrum of activities involving the processing, collections, customer care and payments in relation to the services offered by Citi Group to is corporate and retail client. Technical services involve software testing, verification and validation of software at the time of implementation and data centre management activities. So, the functions being performed by TCS E-Serve are diametrically dissimilar to the assessee company. 27. Furthermore segmental information of TCS E-Serve is not available to bifurcate ITES and CSD Services as is evident from page 916 of the Annual Report Compendium II, which is profit and loss account, because income from transaction processing and other se....
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....y returning the following findings :- "10. We have considered the rival submissions and have perused the record of the case. The scope of AS 19 does not extend, inter-alia, to lease agreements to use lands. Para 2 of scope reads as under :- "2. This Standard applies to agreements that transfer the right to use assets even though substantial services by the lessor may be called for in connection with the operation or maintenance of such assets. On the other hand, this Standard does not apply to agreements that are contracts for services that do not transfer the right to use assets from one contracting party to the other." 11. The classification of leases for the purposes of AS 19 are as under :- "Classification of Leases 5. The classification of leases adopted in this Standard is based on the extent to which risks and rewards incident to ownership of a leased asset lie with the lessor or the lessee. Risks include the possibilities of losses from idle capacity or technological obsolescence and of variations in return due to changing economic conditions. Rewards may be represented by the expectation of profitable operation over the economic....
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....t. 10. Lease classification is made at the inception of the lease. If at any time the lessee and the lessor agree to change the provisions of the lease, other than by renewing the lease, in a manner that would have resulted in a different classification of the lease under the criteria in paragraphs 5 to 9 had the changed terms been in effect at the inception of the lease, the revised agreement is considered as a new agreement over its revised term. Changes in estimates (for example, changes in estimates of the economic life or of the residual value of the leased asset) or changes in circumstances (for example, default by the lessee), however, do not give rise to a new classification of a lease for accounting purposes." 12. Now, if, we examine various definitions contained in paragraph 3, we find that the same deals primarily with defining of finance lease, operating lease, non-cancellable lease, lease term, fair value of asset, economic life, useful life, residual value, guaranteed residual value of lease assets. It clearly shows that the main object of the AS 19 is to deal with the leases concerning movable assets and it specifically excludes lease agreements to ....