TaxTMI 
TaxTMI 
TaxTMI 
2016 (6) TMI 1255
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....independent service essential to the launch and operation of private investment entities with activities ranging across and wide spectrum of traded instruments. During the relevant previous year, the assessee had entered into international transactions with its Associate Enterprise (A.E) abroad. For bench marking its international transactions, assessee had engaged independent external agency and transfer pricing study prepared by the said external agency was also submitted along with the return of income. As per the said transfer pricing study, the assessee classified its activities in two segments; (i) provisions of I.T. enabled services; (ii) provisions of software development services. For bench marking the price charged under both the segments, the assessee has followed Transaction Net Margin Method (TNMM) as most appropriate method with operating profit to total cost as the Profit Level Indicator (PLI). While bench marking the price charged for the international transactions, the assessee identified companies in both the segments, which according to the assessee were found to be functionally similar on the basis of multiple year data. On an analysis of average OP/TC of the co....
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....lected by the Transfer Pricing Officer with its profit margin is as under:- Sr. No. Name of Company NCP (OP/TC) 1. Ace Software Exports Ltd. 13.65 2. B N R Udyog Ltd. 17.12 3. Caliber Point Business Solutions 38.81 4. Cosmic Global Ltd. 18.75 5. Triton Corporation Ltd. 16.96 6. TSR Darashaw 11.78 7. CMC Limited TESC Segment 1.31 8. Goldstone Infratch Ltd. - BPO Segment 8.61 9. Datamatic Technology Ltd. 75.07 10. Saffron Global Ltd. 24.55 11. Tricom India Ltd. 45.60 12. Ultramarine Pigments Ltd. - ITES Segment 155.70 13. Vishal Information Technologies Ltd. 51.26 3. As far as software segment is concerned, the Transfer Pricing Officer selected 19 companies as comparables with average operating profit to cost ratio of 27.88% as against 15% of the assessee which resulted in adjustment of Rs. 39,90,598. Thus, the total transfer pricing adjustment proposed under both the segments was Rs. 2,62,84,830. In terms with the adjustment recommended by the Transfer Pricing Officer, the Assessing Officer completed the assessment under section 143(3) adding the amount of Rs. 2,62,84,830. Being aggrieved of the ass....
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....ws. The dispute in the present appeal is confined to selection/rejection of comparables by the learned Commissioner (Appeals). Hereinafter, we will deal with the contentions of the parties in relation to selection/rejection of comparables under both the segments and record our findings. At first, we will deal with the Department's objections with regard to selection/rejection of the comparables in the ITES segment. ICRA ONLINE LTD. 8. Though, this company was selected by the assessee in its transfer pricing study, the Transfer Pricing Officer rejected it for the reason that it is a consistent loss making company. However, learned Commissioner (Appeals) finding that the company has reported healthy profit for the financial years 2005-06 and 2006-07 held that it cannot be considered as a consistent loss making company. He further observed that the segmental results/disclosures is not available in the annual report of financial year 2003-04. He also observed that the company is otherwise functionally comparable as it is engaged in providing ITES. Learned Departmental Representative, referring to rule 10B(4) submitted, only the data relating to current year and in worst case previous....
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....revious two years financial result can be considered for computing the margin. Under no circumstances, data relating to subsequent assessment years can be considered for comparability analysis. Therefore, to that extent, the learned Commissioner (Appeals) was not justified in referring to the data relating to subsequent assessment years. However, on a perusal of the decision of the Hon'ble Delhi High Court in Chrys Capital Investment Advisors India Pvt. Ltd. v/s DCIT, [2011] 376 ITR 183 (Del.) relied upon by the learned Authorised Representative, it is noticed, the Hon'ble High Court referring to OECD guidelines stating that loss making comparables specifying comparability analysis should not be rejected on the basis that they suffered loss as well as provisions contained under rule 10B(2) and 10B(3), observed, there is nothing therein to suggest automatic exclusion of entities with extreme financial results. We find from the order of the Transfer Pricing Officer, he has not at all examined whether the company is functionally similar to assessee. Learned Commissioner (Appeals)'s finding on functional analysis is also cryptic and general in nature. In the aforesaid fact and ....
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....is functionally similar to the assessee. He submitted, only because the Transfer Pricing Officer assumes that its revenue from ITES segment is marginal, on that basis alone it cannot be excluded. The learned counsel drawing the attention of the Bench to the segmental results of the company submitted the revenue earned by the company is Rs. 21.90 crore which is more than the revenue earned by the assessee. Therefore, it cannot be excluded from the list of comparable. 14. We have considered the submissions of the parties and perused the material available on record. As could be seen the Transfer Pricing Officer has rejected this company as a comparable on the reason that ITES segment is only incidental to the main activity and provided on a marginal cost basis. Further, it is the contention of the learned Departmental Representative that the Revenue earned from ITES segment is only 11.09% of the total revenue earned. On a perusal of the order passed by the Transfer Pricing Officer it is noticed that he has not applied any specific filter while selecting comparables. Therefore, the argument of the Department that only those companies having more than 25% revenue from ITES segment can....
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....companies. In fact. For this very reason, these two companies have not been considered as comparable in a number of decisions cited before us by the learned Authorised Representative. Therefore, respectfully following the consistent view of the Tribunal, we uphold the decision of the learned Commissioner (Appeals) on this issue. ULTRAMARINE PIGMENTS LTD. 19. When the Transfer Pricing Officer proposed this company as a comparable, the assessee objected stating that the company has reported abnormally high margin of 155.70% and the ITES segment of the company comprising of Lapiz Digital Services is also rendering engineering services. Thus, it was submitted by the assessee as the ITES segment consist of engineering services, the company should be rejected. The Transfer Pricing Officer, however, overruled the objection of the assessee stating that ITES has been reported as a separate activity, hence, should be selected as a comparable. Challenging the decision of the Transfer Pricing Officer the assessee had submitted before the first appellate authority that the company should be rejected on account of abnormally high margin shown by it and further accounts of the company cannot be....
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....he reason that the ITES segment is engaged in providing engineering services and the company has shown abnormally high margin, however, the fact that it is functionally dissimilar to the assessee has to be establish on record. Further, the high profit earned by the company is as a result of certain extra ordinary circumstances also has to be established on record. Though, it may be a fact that in the assessment year 1996-97, the company might have indulged in some undesirable activities for which it might have been penalized, but, how far that can influence the acceptability or otherwise of the company in the impugned assessment year needs to be examined. If the activities of the company in the impugned assessment year are above board and there are no irregularities or abnormalities resulting in the high profit shown by the company, in our view, it cannot be rejected as a comparable. However, as, neither the Transfer Pricing Officer nor the learned Commissioner (Appeals) has properly evaluated the functional profile of the company and has selected or rejected it on some superficial/extraneous consideration, we are inclined to remit the issue relating to comparability of this compan....
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.... it is not comparable to the assessee. 26. Learned Authorised Representative on the other hand strongly supporting the decision of the learned Commissioner (Appeals) submitted, the company cannot be treated as a comparable not only because of the fact that it is providing technical services and developing I.T. solutions but also for the fact that almost entire ITES segment is outsourced to third party vendor. 27. We have considered the submissions of the parties and perused the material available on record. On analysis of facts placed on record, it is noticed that personnel cost incurred by Vishal Information Technologies Ltd. during the year constitutes 1.38% of the total cost. Whereas, the personnel cost incurred by the assessee constitutes 56.94% of the total cost. This fact proves that this company is not carrying out the ITES activities on its own but is employing third party vendors to carry out the work on behalf of the customers, thus, this company is acting as a mere intermediary between its customer and the third party vendors. In other words, the entire ITES work was outsourced to others. It is also observed, considering the aforesaid facts, different benches of the Tr....
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....software development services. He, therefore, held that the company being functionally similar is to be treated as a comparable. 32. The learned Departmental Representative referring to the annual report of the company submitted that the company is engaged in ongoing application maintenance which cannot be treated as software development services. He submitted, the company is also engaged in diversified activities which makes it incomparable to the assessee. 33. Learned Authorised Representative on the other hand reiterating the stand taken before the learned Commissioner (Appeals) submitted, the company being engaged in software development services is comparable to the assessee. 34. We have considered the submissions of the parties and perused the material available on record. As could be seen from the order of the Transfer Pricing Officer, he has rejected this company primarily for the reason that segmental results were not available. However, as could be seen from the observations made by the learned Commissioner (Appeals) in Para-27.2 of the order, as per the annual report of the company segmental results are not only available but it indicates that it is primarily and fund....
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....ICS LTD. 39. The Transfer Pricing Officer rejected this company by stating that the company is also engaged in software product and engineering services. Further, segmental information is not available. 40. Before the first appellate authority, it was submitted by the assessee that as per the information available in the data bases company primarily offers off-shore and outside development services. It was submitted, the term "Engineering Services" is widely used and essentially means software development and I.T. solutions. The learned Commissioner (Appeals) agreeing with the assessee that the term "Engineering Services" has no other context other than in the context of software related services, the company should be treated as a comparable to the assessee. 41. The learned Departmental Representative objecting to the selection of the company submitted, the learned Commissioner (Appeals) has no basis for concluding that the company is engaged in software development services. He submitted, merely on presumption, he has arrived at the conclusion with the company is engaged in software development services. 42. Learned Authorised Representative on the other hand reiterating the ....
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.... the financial year 2004- 05 and 2005-06, the company is providing various kind of software development services, therefore, being of the view that the company is primarily engaged in the software development services, he treated it as a comparable. 46. Learned Departmental Representative relying upon the observations of the Transfer Pricing Officer submitted, as segmental details of the activities carried on by the company are not available in the annual report, it cannot be treated as comparable. 47. Learned Authorised Representative on the other hand submitted, as all services rendered by the company is in relation to software development, the observations of the Transfer Pricing Officer that segmental details are not available is totally irrelevant. 48. We have considered the submissions of the parties and perused the material available on record. As per the extracts of annual report of the company, a copy of which is placed at Page-90 of the paper book, it is noticed that the company itself has mentioned that it provides services in three segments i.e., software services, GIS services and engineering solutions. That being the case, in our view, it requires examination wheth....
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....nt training and consultancy. Thus, as could be seen, it has three segments. Further, perusal of the annual report, reveals that there is no segmental reporting of revenue earned and expenditure incurred for each segment. It is also noticed that the Assessing Officer has taken the sales at entity level. For the aforesaid reasons, in our view, the company cannot be treated as a comparable. EXENSYS SOFTWARE SOLUTIONS LTD. 53. Though, the assessee objected to the selection of the aforesaid company on the reason that it is mainly into products and consultancy, further it had abnormal gain on account of amalgamation but the Transfer Pricing Officer overruling the objections of the assessee selected the company. The learned Commissioner (Appeals), after considering the submissions of assessee in the context of facts and material on record found that as per the annual report of the company, the increase in earning of high margin during the relevant previous year was as a result of amalgamation of Holool India Ltd. He, therefore, held that the company cannot be treated as comparable. 54. We have considered the submissions of the parties and perused the material available on record. Undis....
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.... uphold the decision of the learned Commissioner (Appeals) on this issue. GEOMETRIC SOFTWARE SOLUTIONS CO. LTD. 60. Before the Transfer Pricing Officer, the assessee objected to selection of the company as a comparable stating that it is engaged in diversified activities, no break-up of revenue earned is available and company owns substantial trade-marks which indicate its into product development. The Transfer Pricing Officer, however, rejected the claim of the assessee. 61. When the matter came up before the learned Commissioner (Appeals), accepting assessee's claim, the learned Commissioner (Appeals) held that as majority of the revenue earned by the company is from sale of trademark product and related activities, it is not functionally comparable to the assessee, hence, cannot be treated as comparable. 62. We have considered the submissions of the parties and perused the material available on record. On a perusal of the annual report of the company, it is noticed that as per its own admission company is engaged in development of product. That being the case, the business model of the company being different from the assessee, it cannot be treated as a comparable. INFOSYS ....
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.... company. The decisions relied upon by the learned Authorised Representative also support this view. In view of the aforesaid, we uphold the rejection of Infosys Technologies Ltd. as comparable. SANKHYA INFOTECH LTD. 67. The assessee objected to the selection of this company as a comparable stating that it is engaged in diversified activities segmental details are not available and revenue earned is predominantly from software product. Though, the Assessing Officer rejected the objections of the assessee but the learned Commissioner (Appeals) having found merit in the submissions of the assessee held that the company cannot be treated as comparable as the company is engaged in development of software product. 68. We have considered the submissions of the parties and perused the material available on record. The fact that the company is engaged in development and sale of products has not been controverted by the Department with cogent evidence. Further, it is noticed that considering the fact that this company is engaged in development of product, different Benches of the Tribunal in case of some other assessees for the very same assessment year have held that aforesaid company c....
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....ansfer Pricing Officer, the assessee objected to inclusion of this company on the ground that it is primarily engaged in development of software products but the Transfer Pricing Officer rejecting the objections of the assessee, included it as a comparable. 75. The learned Commissioner (Appeals), however, on a perusal of the annual report of the company for the current financial year as well as two previous financial years and analysing the details of revenue earned by the company found that it carries out activities in the nature of trading/resale of software products. Further, he also observed that the company has substantial related party transactions. Accordingly, he held that it cannot be treated as comparable to the assessee. 76. We have considered the submissions of the parties and perused the material available on record. As could be seen from the order of the learned Commissioner (Appeals), on a perusal of the annual report of the company for the current year as well as two previous years, he has given a factual finding that the company is engaged in resale/trading of software products. Aforesaid factual finding of the first appellate authority has not been controverted ....