TaxTMI 
TaxTMI 
TaxTMI 
2017 (10) TMI 687
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....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 the economic and comparability analysis undertaken by the Appellant in its....
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....een 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 28,298,733 4. Assessee in its TP study has computed its margin at 17.03% as tested party and after selecting 16 comparables and by taking OP/TC computed the mean margin at 13.18% and found its internati....
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....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. Persistent Systems & Solutions Ltd. (merged) 15.38 12.74 xi. R S Software India Ltd. 10.29 11.07 xii. Sasken Communication Technologies Ltd. 17.54 18.75 xiii. Tata Elexi Ld. 19.82 17.93 xiv. Thinksoft Global Services Ltd. 17.35 14.51 xv. Thirdware Solutions Ltd. 41.63 38.94 Average ....
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....S 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 maintenance and development of software and its income from software services is Rs. 7,43,04,66,481/- and thus retained this company as a comparable. 15. Appraisal of the annual report, available at pages 1 to 85 of the paper book and Schedule VII, available at pages 1 to 41 make it clear that E-Infochips had income from software services to the tune of Rs. 37,13,88,107/-. From Schedule XI, available at pages 42 to 46 of the paper book, it is clear from para 9 of Schedule XI "that E-Infochips is engaged in development and maintenanc....
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....hat 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 dissimilarity of Infinite drew our attention to pages 98 to 102 of Annual Report. In para 17 at page 98 of Schedules to Financial Statements in Company Overview, it is categorically mentioned that Infinite provides solutions that encompass technical consulting, design and development of software, maintenance, systems integration, implementation, testing and infrastructure management services, whereas assessee company is a routine service provider. Furthermore when we examine para 17.1.3. at page 98 of the Annual Report undisputedly Infinite derives its revenue primarily from technical support and infrastr....
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....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 services is jointly given. Furthermore because of acquisition by TCS E-Serve from Citi Group effective from January 2009, the brand value of TCS E-Serve has impacted the profitability and revenue of business. Moreover, TCS E-Serve is having volatile profit margin as is evident from the table reproduced below :- Company Name FY 2007-08 FY 2008-09 FY 2009-10 TCS E serve -100% -27.50% 51.51% 28. Furthermore TCS E-Serve is having super-normal growth of 173% in revenue and is an industry giant as against the assessee which is a captive service provider rendering back-end support services to its AE. 29. So, in view of what has been....
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....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 life of the asset and of gain from appreciation in value or realisation of residual value. 6. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incident to ownership. Title may or may not eventually be transferred. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incident to ownership. 7. Since the transaction between a lessor and a lessee is based on a lease agreement common to both parties, it is appropriate to use consistent definitions. The application of these definitions to the differing circumstances of the two parties may sometimes result in the same lease being classified differently by th....