TaxTMI 
TaxTMI 
TaxTMI 
2016 (6) TMI 1259
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....filed its return of income declaring an income of Rs. 13,53,49,060/-. During the year under consideration the assessee had reported following international transactions in form 3CEB: Nature of transaction Value of international Transaction Software Services rendered (SDS) 1,508,656,740 Marketing Support Services provided (MSS) 16,158,264 Back office support services function (ITES) 71,907,052 Purchase of fixed assets 62,293,945 Reimbursement of Expenses paid 26,741,824 Maintenance Services availed 259,688 3. Ld. TPO noticed that TNM method was selected as the most appropriate method for benchmarking these transactions. The OP/TC was taken as the PLI for all the transactions. 4. At the outset ld. counsel for the assessee pointed out that no adjustment has been made in regard to purchase of fixed assets, maintenance services availed and reimbursement of expenses paid. However, ld. TPO has made adjustment in regard to provision of SDS, provision of MSS and provision of ITES. 5. Ld. TPO noticed that as per the details submitted by assessee, the mean margin of comparables and number of comparables was as under: Particulars Software Development Market support ....
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....eceived vis-à-vis the Arm's Length price: The price charged by the tax payer to its Associated Enterprises is compared to the Arms Length price as under: Arms Length price Rs. 78,702,752 Price charged in the international transactions Rs. 71,972,052 Shortfall being adjustment u/s 92CA Rs. 6,800,700 9. As regards the market support services, ALP was computed as under: a. Computation of Arms Length Price: The arithmetic mean of the profit level indicators is taken as arms length margin. (Please see Annexure Y for details of PLI of the comparables). Based on this, the arms length price of the IT enabled services rendered by you is computed as under: Arithmetic mean PLI : 21.76% Arm's Length price : 21.76% Operating cost Rs. 24,561,743 Arms Length margin 21.76% of the operating cost Arms length price (ALP) Rs. 29,906,378 b. Price received vis-à-vis the Arm's Length price: The price charged by the tax payer to its Associated Enterprises is compared to the Arms Length price as under: Arms Length price Rs. 29,906,378 Price charged in the international transactions Rs. 26,158,256 Shortfall being adjustment u/s 92CA R....
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....ing addition on account of TPO's order of Rs. 8,44,55,162/-. 15. Being aggrieved, the assessee is in appeal before us and has taken following grounds of appeal: "That on the facts and circumstances of the case, and in law; 1. The Assessment Order passed in pursuance of the directions issued by the Hon'ble Dispute Resolution Panel ('Hon'ble DRP') is a vitiated order as the Hon'ble DRP erred both on facts and in law in partially confirming the addition made by the Ld. Assessing Officer ('Ld. AO') to the Appellant's income by issuing an order without appreciation of facts and law; 2. The Hon'ble DRP erred both on facts and in law in partially confirming the transfer pricing adjustment to the income of the Appellant by holding that the international transactions pertaining to its provision of Software Development Services ('11'), IT Enabled Services ('ITES') & Marketing Support Services ('MSS') do not satisfy the arm's length principle envisaged under the Act In doing so, the Hon'ble DRP has grossly erred in agreeing with the Learned Transfer Pricing Officer's ('Ld. TPO's) action of: 2.1. not apprec....
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....unctions performed, assets employed and risks assumed; 2.10. ignoring the business/ commercial reality that since the Appellant (vis-a-vis its IT, ITES & MSS) is remunerated on an arm's length cost plus basis, i.e. it is compensated for all its operating costs plus a pre-agreed mark-up based on a benchmarking analysis, the Appellant undertakes minimal business risks as against comparable companies that are full fledged risk taking entrepreneurs, and by not allowing a risk adjustment to the Appellant on account of this fact; 2.11. rejecting the Appellant's claim regarding Working Capital adjustment. 2.12. committing a number of factual errors in accept-reject of com parables and/ or in the computation of the operating profit margins of the com parables; 2.13. grossly erred in not providing the benefit of +/-5% range to the Appellant; 2.14. disregarding judicial pronouncements in India in undertaking the TP adjustment; and 2.15. ignoring the fact that the Appellant is entitled to tax holiday under section 10A of the Act on its profits in relation to provision of IT and ITES, and therefore would not have any untoward motive of deriving a tax advantage by manipulati....
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....eeds." In the light of the co-ordinate Bench finding, as afore-stated, we direct the exclusion of this company from the list of comparables. So, the assessee's objection is upheld. 17. Consistent with the view taken in AY 2007-08, we exclude this comparable from the list of comparables. Assessee succeeds. (xii) KALS Information Systems Ltd. (Seg.) Ld. AR contended that this company cannot be compared with, the assessee company because the company fails on software service revenue filter and has significant revenue from product. This company has no segmental details available. Ld. AR submitted that this comparable was excluded in Toluna (supra). We find force in the said contentions of the AR. In Toluna (supra), the co-ordinate bench while accepting the contentions of the AR, held as under :- "27.1. The TPO observed that this company was engaged in Software development and training. As the software products constituted only 3% of its revenue and training revenue constituted 8.56%, the TPO held that this segment of KALS Information Systems Limited was rightly includible. 27.2. After considering the rival submissions and perusing the relevant material on record, it is a....
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....basis of certain parameters, which are fully applicable to the instant assessee as well. It is, therefore, directed to exclude this company from the list of comparables. The assessee succeeds." In the light of the co-ordinate Bench finding, as afore-stated, we direct the exclusion of this company from the list of comparables. So, the assessee's objection is upheld." 19. Consistent with the view taken in AY 2007-08, we exclude this comparable from the list of comparables. Assessee succeeds. ITES SEGMENT (i) Accentia Technologies Ltd. The TPO repelled the objections of the assessee and placed reliance on the response received to the notice issued under Section 133(6) to hold that Accentia is comparable, despite the fact that the company admitting in writing that it is into medical transcription service. According to ld. AR, the TPO erred in comparing the medical transcription segment of Accentia to ITES segment of assessee. The Ld. AR submitted that Accentia provides high end functions such as Knowledge Process Outsourcing, Legal Process Outsourcing, Data Process Outsourcing, high end software services delivery besides offering Software As A Service ("SaaS") Model in the....
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....he BPO Industry is its ability to move up the value chain through KPO service offering. For the aforesaid reasons, the Special Bench of the Tribunal held that ITeS Services could not be bifurcated as BPO and KPO Services for the purpose of comparability analysis in the first instance. The Tribunal proceeded to hold that a relatively equal degree of comparability can be achieved by selecting potential comparables on a broad functional analysis at ITeS level and that the comparables so selected could be put to further test by comparing specific functions performed in the international transactions with uncontrolled transactions to attain relatively equal degree of comparability. 34. We have reservations as to the Tribunal's aforesaid view in Maersk Global Centers (India) Pvt. Ltd. (supra). As indicated above, the expression 'BPO' and 'KPO' are, plainly, understood in the sense that whereas, BPO does not necessarily involve advanced skills and knowledge; KPO, on the other hand, would involve employment of advanced skills and knowledge for providing services. Thus, the expression 'KPO' in common parlance is used to indicate an ITeS provider providing a co....
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....ble would not be warranted and the transfer pricing study must take that into account at the threshold. 36. As pointed out earlier, the transfer pricing analysis must serve the broad object of benchmarking an international transaction for determining an ALP. The methodology necessitates that the comparables must be similar in material aspects. The comparability must be judged on factors such as product/service characteristics, functions undertaken, assets used, risks assumed. This is essential to ensure the efficacy of the exercise. There is sufficient flexibility available within the statutory framework to ensure a fair ALP." In the light of the above, we find that Accentia is into high end service (KPO), which cannot be compared with the assessee. So, we direct its exclusion from the list of comparables." 20. Consistent with the view taken in AY 2007-08, we exclude this comparable from the list of comparables. Assessee succeeds. (viii )Coral Hub (Vishal Information Technologies Ltd.) (vii) Eclerx Services Ltd. "As regards the aforesaid two comparables [mentioned at sl.nos.(vii) & (viii)], The ld. AR at the outset itself pointed out that Eclerx and Vishal are into KPO ....
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....cal data management services. Clearly, the aforesaid services are not comparable with the services rendered by the Assessee. Further, the functions undertaken (i.e. the activities performed) are also not comparable with the Assessee. In our view, the Tribunal erred in holding that the functions performed by the Assessee were broadly similar to that of eClerx or Vishal. The operating margin of eClerx, thus, could not be included to arrive at an ALP of controlled transactions, which were materially different in its content and value. In Maersk Global Centers (India) Pvt. Ltd. (supra), the Special Bench of the Tribunal had noted the same and had, thus, excluded eClerx as a comparable. It is further observed that the comparability of eClerx had also been examined by the Hyderabad Bench of the Tribunal in M/s Capital Iq Information Systems(India) (P.) Ltd. v. Additional Commissioner of Income- tax (supra), wherein, the Tribunal directed the exclusion of eClerx as a comparable for the reason that it was engaged in providing KPO Services and further that it had also returned supernormal profits. 38. In our view, even Vishal could not be considered as a comparable, as admittedly, its bu....
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....nd considerable force in the submission of ld. Counsel for the assessee that ideally if sufficient number of 100% uncontrolled comparables are found, then no comparable having related party transactions should be considered. We are in agreement with ld. Counsel that only when sufficient comparables are not found, the related party threshold should be relaxed and ITA No. 5637/D/2011 99 only gradually to the extent that sufficient comparables are found, the limit should be relaxed. Therefore, we accept the assessee's plea that no sacrosanct threshold limit should be fixed for this filter. Ld. DRP has also noted that neither there is any judicial consensus on the numerical limit nor the section so prescribes. However, there is consensus on the effect of RPT i.e. it should not materially affect the international transaction. Therefore, considering the submissions of both the sides, we are of the opinion that if by applying the threshold limit of 15% of related party transaction, sufficient comparables are available then there is no reason to further extend the limit to 25%. Therefore, we direct the TPO to take into consideration only those comparables where related party transactio....
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....have to examine the market support services rendered by assessee to its AEs. In the TP study, it is stated in para 3.3 that assessee provides marketing support services to Avaya Ireland. Assessee's marketing support activities include providing information about Avaya products, customer awareness etc. The assessee had renewed its Market Services Agreement effective from 1.4.2007, under which Avaya US compensates Avaya India at an increased mark up of cost plus six point five percent from the previous mark up of five percent. It is further stated in para 4.2 that assessee is responsible for briefing and updating the customers on various promotional initiatives and new product launches of the Avaya Group entities. Assessee advices Avaya Group entities of the local law and business, political and regulatory practices and policies. 28. Ld. counsel has relied on the order of the ITAT in the case of Ciena India Pvt. Ltd. (supra) and, therefore, it is necessary to examine the functional profile of Ciena India Pvt. Ltd. (supra) also in regard to marketing support segment. In this regard we find that the Tribunal in paras 13 & 14 of its order has observed as under: "13. We have heard the ....
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....o each other, as regards the functions performed by market support segment of these two viz. assessee and Ciena India Pvt. Ltd.. Therefore, the decisions in the case of Ciena India Pvt. Ltd. will be applicable to the facts of the present case also. 30. He pointed out that the first comparable which is disputed is Apitco Ltd. In this regard he submitted that this company is functionally different. In this regard he referred to page 275 of the PB containing the annual report of this company and pointed out that the company's major business segments were as under: - Asset reconstruction and Management Services (Rs. 201.93 lakhs) - Project related services (Rs. 201.64 Lakhs) - Micro Enterprises Development (Rs. 150.09 lakhs) - Infrastructure Planning & Development (Rs. 136.15 lakhs) - Research Studies & Tourism (Rs. 126.22 lakhs) - Spill Development (Rs. 112.88 lakhs); - Environment Management (Rs. 42.08 lakhs); - Entrepreneurship Development & Training (Rs. 34.79 lakhs); - Cluster Development (Rs. 24.08 lakhs); - Energy related services (Rs./ 16.24 lakhs); - Emerging areas (Rs. 5.30 lakhs) 31. Thus, he submitted that this company was engaged in provision of high end techn....
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....t Reconstruction & Management Services, Emerging Areas. It can be seen from the nature of operations carried out by this company that the same is towards Micro enterprises development, Skill development and Project related services, etc., also including Infrastructure planning and development along with Energy related service and Cluster development. A part of its activities has got some resemblance with the nature of service provided by the assessee under this segment. The ld. CIT(A) has recorded that 'only 12% of total income of this company is from research studies which is akin to the nature of services provided by the assessee company. This contention has not been controverted by the ld. DR with any clinching evidence. When we consider the operations of this company as enumerated above and the fact that this company has maintained accounts on entity level and there is no bifurcation available in respect of the services similar to those provided by the assessee under this segment, this company on entity level cannot be considered as comparable. We, therefore, hold that the ld. CIT(A) was justified in considering this company as not comparable." 36. We, therefore, followin....
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....e 381 of the annual report and pointed out that in the segment reporting this company has identified two business segments viz. consultancy and engineering projects and lump sum trunkey. He, therefore, submitted that this company has not reported any market support services segment separately. Therefore, both on the count of functional profile as well as segmental reporting, this company cannot be taken as comparable. He pointed out that this company has been directed to be excluded in the case of Ciena India Pvt. Ltd., supra. 43. Having heard both the parties, we find that this company is mainly imparting technical consultancy services and there is no separate marketing support segment. In the case of Ciena India Pvt. Ltd., supra, the Tribunal has observed in para 16.2 as under: "After considering the rival submissions and perusing the relevant material on record, we find from the Annual report of this company that it has two segments, namely, 'Consultancy and engineering projects' and 'Lumpsum turnkey projects.' The TPO has taken 'Consultancy and engineering project segment' for the purposes of comparison with the assessee company. This company is engage....