TaxTMI 
TaxTMI 
2016 (5) TMI 1412
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....;ble DRP') under section 143(3) read with section 144C of the Income-tax Act, 1961 (,Act'), is a vitiated order having been passed in violation of principles of natural justice and is otherwise arbitrary and is thus bad in law and is void ab-initio. 2. That on the facts and circumstances of the case and in law, the learned AO / DRP has erred in making an addition of Rs. 171,224,237 to the total income of the appellant on account of adjustment in the arm's length price of the international transaction entered by the Appellant with its associated enterprises. 3. That on the facts and the circumstances of the case and in law, the learned Transfer Pricing Officer (TPO') / AO ignored the fact that the appellant is entitled to a tax holiday under section 10A of the Act on its profits earned from the provision of software Services to associated enterprises and therefore does not have an ulterior motive of shifting profits outside India. 4. That on the facts and circumstances of the case and in law, the learned TPO / AO has erred in rejecting the com parables selected by the appellant and in conducting a fresh search and selecting a new set of com parables for the ....
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....he case and in law, the Hon'ble DRP / learned AO has erred in not following the ratio of Special Bench decision in the case of Sulzer India Limited (133 TTJ 385). 11.2 Without prejudice, based on the facts and circumstances of the case and in law, the learned AO has erred in not appreciating that waiver of deferred sales tax loan was in fact settled as per the provisions of Rule 127 A of the West Bengal Sales Tax Rules, 1995 which provides for settlement of such loan at equivalent to Net Present Value and accordingly no benefit arises to the appellant upon waiver of such loan. 11.3 Without prejudice, based on the facts and circumstances of the case and in law, the learned AO has erred in not appreciating that the provisions of Bombay Sales Tax Act are similar to the provisions of West Bengal Sales Tax Act, in as much as both the legislations provides for the settlement of deferred sales tax loan at or equivalent to Net Present Value. 12. Based on the facts and circumstances of the case and in law, the Hon'ble DRP/ learned AO has erred, in apportioning certain expenses that are specifically incurred in respect of non- STP unit to the STP unit of the appe....
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....parables duly detailed at para 15.2.1 of his order. The assessee company computed its Profit Level Indicator (PLI) at 16.71% on cost whereas TPO computed the same at 21.11% on cost on the basis of reply filed by the assessee company. 5. Assessee company is primarily engaged in manufacturing of telecommunication equipment and software development services. TPO concluded that average export revenue of 26 selected comparables is at 93.55% of their total revenue and the 26 selected comparables have average related party transactions at 4.87% of their total revenue. TPO also observed on the basis of FAR analysis of the taxpayer vis-à-vis the comparables that the taxpayer incurs 61% of its revenue on employee costs whereas 26 selected comparables have average employee cost at 51.46% of their total revenue. TPO, on the basis of TP analysis, initially determined the ALP of the international transactions for providing research and development services at Rs. 1,59,95,73,695/- instead of Rs. 1,38,90,75,786/- charged by the assessee in its international transaction resulted into adjustment to the extent of Rs. 20,14,97,909/-. However, subsequently TPO in compliance to the directions ....
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....9% P 4. Datamatics Ltd. 54.51 1.38% 0 7.16 13.14% 53.53 98.20% 23.00% 0 0.00% 0.14 0.26% 61.59% P 5. E-Zest Solutions Ltd. 6.26 36.12% 0 0 0.00% 6.14 98.08% 0 0 0.00% 0.07 1.12% 61.50% P 6. Flextronics Software Systems Ltd. (Seg.) 848.66 25.31% 9.21/1.08% 44.21 5.21% 807.75 95.18% 22.00% 3.88 0.46% 7.02 0.83% 46.31% P (Seg.) 7. Geometric Ltd. (Seg.) 158.38 10.71% 0 31.64 19.98% 134.71 85.05% 21.66% 0 %0.00 3.18 2.01% 60.86% 8. Helios & Matheson Information Technology Ltd. 178.63 36.63% 0 5.24 2.93% 101.86 57.02% 73.00% 0 0.00% 6.28 3.52% 35.67% P 9. IGate Global Solution Ltd. 747.27 7.49% 0 39.64 5.30% 747.27 100% 54.00% 0 0.00% 4.51 0.60% 69.74% P (EF) 10. Infosys Technologies Ltd. 13149 40.30% 538/4.1% 664 5.05% 12939 98.40% 51.70% 167 1.27% 719 5.47% 45.84% P 11. Ishir Infotech Ltd. 7.42 30.12% 0 1.63 21.97% 7.08....
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.... 25.14% 10. The segmental detail pertaining to the software development services, which are in question, is detailed by the TPO as under :- Description Software Development Telecom Net Sales 1398075786 6245232150 Operating Expenses 1292375935 5769787646 Operating Profit 105699851 475444504 OP on Cost 8.17% OP on Sales 7.61% 11. Undisputedly, assessee company entered into international transactions as per report under section 92CE as under :- * Provision of software services Rs. 138,40,62,575/- * Purchase of raw materials, components etc. Rs. 147,52,30,169/- * Export of finished goods Rs. 8,97,30,310/- * Import of fixed assets Rs. 2,34,86,131/- * Royalty Rs. 3,82,68,828/- * Purchase of software Rs. 42,93,294/- * Commission income Rs. 16,93,62,494/- * Commission charges Rs. 1,59,65,014/- * Training charges Rs. 41,90,100/- Reimbursement of expenses paid Rs. 7,41,61,364/- 12. The ALP of aforesaid int....
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....e order passed by the Income Tax Appellate Tribunal, Delhi Bench 'I', New Delhi in ITA No.5645/Del/2011 AY 2007-08 in case entitled Toluna India Pvt. Ltd. vs. ACIT, Circle 12 (1), New Delhi (hereinafter "TOLUNA") contended to exclude this comparable from the final set of comparables. Undisputedly, TOLUNA is also into the business of software development and providing related services to the Greeenfield Group, its AE. The coordinate Bench in the judgment TOLUNA (supra), ordered to exclude this comparable company by making following observations :- "18.2. After considering the rival submissions and perusing the relevant material on record, we find from the annual accounts of this company, a copy of which is available on page 41 of the paper book, that it is engaged mainly in the developing the software products in the shape of tools etc., which are protected using the patent. This company developed a tool, "CELSUITE" to drug discovery in finding the lead molecules for drug discovery. As this company is engaged in developing software tools after enough research and development activity and the tools so produced by it are its intellectual property, it cannot be considered as compara....
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.... ordered to exclude this company from the list of comparables by making following observations :- "21.2. After considering the rival submissions and perusing the relevant material on record, we find this company to be not comparable to that of the assessee. The reason for our this decision is that the TPO has taken segmental data of `Product and service segment' of this company which has Product revenue of Rs. 92.1 crore. In contrast to it, the instant assessee is not selling any software products, but, is doing the job assigned to it on cost plus basis. The contention of the ld. DR that since the majority of the revenue from `Product and services segment' was from the services segment and, hence, this company should be considered as comparable, is bereft of any force. When figures of Products and services are combined, it cannot be ascertained as to how much contribution was made by the product division or the service division to the overall revenue of the Product and services segment. As the assessee is admittedly not engaged in selling its software products, such a company cannot be considered as comparable. It can be seen from the annual report of this company, a copy of whi....
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....echnology India Pvt. Ltd. vs. DCIT - ITA No.1167/Bang/2010; (viii) M/s. Cypress Semiconductor Technology India Pvt. Ltd. vs. DCIT - ITA No.1002/Bang/2011; (ix) Intoto Software India Pvt. Ltd. - ITA No.1196/Del/2010; (x) HCL EAI Services Ltd. - ITA No.1348/Bang/2011; sought the exclusion of this company on the same ground as set out before the TPO. 23. However, on the other hand, the ld. DR protected this company as comparable by relying upon TOLUNA (supra). Perusal of the annual report at page 283 apparently goes to prove that this comparable company has four divisions, namely, Transmatic Systems, Ushus Technologies, Accel Animations Studios and Accel IT Academy. Ld. DRP rejected the argument addressed by the assessee company by making the following observations :- "48. Accel Transmatic Limited: It is argued that the information of this company is unreliable and it also fails employee cost filter as per the information available in public domain. We find no force in this argument of the taxpayer. It seems that before the TPO no objection was raised by the taxpayer against its selection. The taxpayer in its reply dated 08.07.2010 did not offer any comments against this compara....
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....avel and Insurance industry. The Annual Report of the company was not available. RPT information was also not available. Thus 133(6) notice was issued to the company to get complete information. As per the reply received from the company, it qualifies all the filters applied by the TPO, As it qualifies all the fillers applied by the TPO, the same was proposed as a comparable vides this office letter dated 31-05-2010. The taxpayer in its reply dated 08-07-2010 objected to it as under : "8.1 Avani Cimcon Technologies Ltd. ("Avani") The assessee submits that Avani is earning super profits and such companies should be rejected while arriving at arm's length price. The assessee wishes to bring to your office's notice the following judicial decisions: * E-Gain Communication Pvt. Ltd. (ITA No.1885/PN/ 2007) Ruling of the Hon'ble Pune ITAT in the case of E-Gain Communication Pvt. Ltd. (supra) while reviewing the comparability analysis of some companies: "A cursory look at the chart ill the assessment order of 20 compatibles would reveal that the margin of profit shown by Thirdware Solutions Ltd. and WTI Advanced Technology is extraordinary at 67.65 per cent and 54.72 per....
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....while making following observations :- "17.1. The TPO found this company to be engaged in software development. Notice u/s 133(6) was issued to the company to get complete information. According to the TPO, this company qualified all the filters. The assessee argued before the TPO that this company was into software products and the segmental results were not available. The TPO rejected such contention by relying on the specific information collected from the company u/s 133(6) which divulged that this company was a purely software development company engaged in providing software development and consulting IT services to its clients. This company was concentrating on internet enabled business information systems in a wide range of industries. Resultantly, this company was included in the list of comparables. 17.2. After considering the rival submissions and perusing the relevant material on record, we find from the description of business activity of this company as reproduced on internal page 90 of the TPO's order, that it is a pure software development service provider. In the absence of any other specific objection against this company, we are of the considered opinion th....
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....ted it as comparable to the assessee rendering software development services. Merely because the nature of service rendered by this company within the overall software development services, is not identical, will not make it incomparable, when it is otherwise similar to that of the assessee on all other scores. As such, we hold that this company was rightly included by the TPO in the list of comparables. The assessee fails." 29. So, in view of the findings returned by the coordinate Bench, comprehensive order passed by the ld. TPO showing segmental detail and the fact that this company is functionally similar vis-àvis assessee company, we are of the considered view that this company is a valid comparable for transfer pricing adjustment in this case. (vi) INFOSYS TECHNOLOGIES LIMITED : 30. Assessee opposed the inclusion of this company in the final list of comparable on the grounds inter alia that this is functionally dis-similar; that it has large scale of operation vis-à-vis assessee company; that it has a brand impact to determine the premium pricing; that it has a different model of revenue recognition and this comparable company has been rejected in asses....
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....ee cost filter the TPQ has discussed this issue on page 86 of the order which clearly shows that the employee cost is 48.32%. The objection regarding inclusion of professional fees as part of employee cost has also been discussed by the TPQ on page 86/87 of the order. In view of the reasons given by the TPa we find no force in the taxpayer's objections." 35. Coordinate Bench in the case cited as TOLUNA (supra) examined this company to be taken as a valid comparable vis-à-vis assessee company, which is undisputedly similarly situated as assessee company and directed to retain this company as a valid comparable by returning following findings :- "26.2. Having heard both the sides and perused the relevant material on record, we find this company to be comparable to that of the assessee. The assessee's objection that employee cost of this company was 4% only, is not correct because of the exercise carried out by the TPO indicating that the employees cost was more than 25%. The ld. DR has taken us through the Annual accounts of this company which show that some part of the employees cost was also included in 'Administrative expenses' apart from direct Establishment expe....
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....er considering the rival submissions and perusing the relevant material on record, it is an admitted position that the TPO adopted Software development segment of this company by noticing that this segment also included revenues from software products and training. In view of the fact that the assessee is not engaged in imparting any training on commercial basis or selling its software products, we hold that the financials of this company under this segment cannot be compared with the assessee. The contribution by the sale of software products or training to the overall revenue of this segment cannot be precisely ascertained to determine the question of its comparability. As such, this case is directed to be excluded. The assessee succeeds." 39. Perusal of the annual report of this company available on file goes to prove that software development segment of this company also includes revenues from software and training whereas assessee company is not engaged in imparting any training or selling its software product to attract revenue. So, the finances of this company are not comparable with the assessee company. In view of the matter, we hereby direct that this company is not a ....
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....43. Perusal of the findings returned by the TPO/DRP apparently goes to prove that the same are factually incorrect because from the balance sheet of this company available on the file, it is proved that this company is developing software product in-house and the expenditure incurred on product development has been duly capitalized by this company. Whereas TPO has stated that this company does not have any revenue by way of sale of product/licence. So, by respectfully following the findings returned by the coordinate Bench, we hereby direct to exclude this company from the list of comparables for TP adjustment. (xi) MEGASOFT LIMITED : 44. This company was not in the accept/reject matrix of search process in the TP study. It has OP/TC for the financial year 2006- 07 at 60.23%. TPO retained this company as a comparable despite objections raised by the assessee on the grounds inter alia that this company is functionally dis-similar being into the sale of software product along with provision of software development services; that the information provided by the company u/s 133(6) of the Act is not reliable nor it is available in the public domain and again relied upon the case o....
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....d that this company also cannot be considered as comparable because of merger of another company into it, which fact is evident from page 196 of the paper book. It can be seen that a subsidiary company was merged into this company pursuant to judgment of Hon'ble Bombay High Court w.e.f. 1.4.06. Because of the merger of subsidiary into this company, we hold that the financial position of this company cannot be construed as normal capable of a good comparison. Following the Mumbai Bench decision in Petro Araldite (P) Ltd. (supra), we direct the exclusion of this company from the list of comparables. The assessee succeeds." 47. Following the decision rendered by the coordinate Bench in the case of TOLUNA (supra), we hereby direct to exclude this company form the final list of comparable on ground of merger which has impacted the financial result of this company necessary for comparison for transfer pricing adjustment. (xiii) R SYSTEMS INTERNATIONAL LIMITED (SEGMENTAL) 48. This company has been selected as a comparable by the TPO having OP/TC for the financial year 2006-07 at 15.07% despite objections raised by the assessee that this company is deriving revenue from both produ....
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.... assessee. It can be seen that this company is into development of hardware and software for embedded products such as multi-media and some other electronics, etc. Apart from that, this company is also engaged in making some programmes developing technology intellectual property. As the nature of activity carried out by the assessee in question is nowhere close to that of Tata Elxsi Ltd., we hold that this company cannot be included in the list of comparables. Accordingly, this company is directed to be excluded. The assessee succeeds." 53. Keeping in view the fact that this comparable company is developing hardware and software for embedded products, such as, multi-media and some other electronics etc. and is also making some programmes developing technology in the form of intellectual property. So, the functional profile of the assessee company vis-à-vis comparable company is dis-similar and makes it incomparable for transfer pricing. So, we hereby direct to exclude this company from the final list of comparables. (xv) THIRDWARE SOLUTIONS LIMITED : 54. This is TPO's own comparable finding place in the final list of comparables despite objections raised by the asse....
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.... the comparable company is into diversified business operation like application, development and maintenance, R&D services, infrastructure outsourcing, testing services, implementation services and BPO services and it is also a giant company vis-à-vis assessee company having turnover of Rs. 9616.09 crores vis-à-vis Rs. 140 crores in case of the assessee, it cannot be kept as a valid comparable for correct transfer pricing adjustment. So, we hereby order to exclude this company from the final list of comparables. 58. In view of what has been discussed above, the impugned order is set aside and the case is restored to the ld. TPO/AO for redetermination of ALP of international transactions undertaken by the assessee during the year under assessment in the light of the directions given hereinbefore. COMPARABLE COMPANIES SOUGHT TO BE INCLUDED BY THE ASSESSEE FOR BENCHMARKING ITS INTERNTAIONAL TRANSACITON : (i) GOLDSTONE TECHNOLOGIES LIMITED : 59. This is assessee's own comparable which has been rejected by the TPO on the grounds inter alia that the assessee has not taken into account the data pertaining to financial year 2006-07; that the assessee has failed to....
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....ging the impugned order contended that ld. DRP/AO have erred in apportioning certain expenses that are specifically incurred in respect of the non-STP units to the STP units of the assessee and thereby reducing the deduction available to the said STP units by an amount of Rs. 65,03,158/-. 64. Perusal of the assessment order passed by the AO for apportionment of certain expenses goes to prove that he has apportioned the same by considering the letter dated December 22, 2010 filed by the assessee that "no expenditure except for an amount of Rs. 33,45,506/- that has been allocated to the STP unit of the assessee company, in respect of which tax holiday u/s 10A has been claimed" and the assessee has not submitted detail of any other expenses incurred by the Head Office and equated to the 10A unit. AO further observed that the contention of the assessee that no other expenditure has been incurred, cannot be accepted. So, the findings returned by of the AO are comprehensive based upon the material relied upon by the assessee. 65. Then ld. DRP rejected the argument addressed by the assessee by returning following findings :- "134. It is submitted before us that the assessee's....