TaxTMI 
TaxTMI 
2017 (1) TMI 1491
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....he margin was arrived taking the average of three year data. The assessee's net margin of 15.35 percent was higher than the arm's length margin of comparable companies. However, the TPO on his TP study, rejected assessee's 10 comparables, retained 5 of them. In the TP proceedings, the TPO * used single year data and modified certain filters * undertook a restricted working capital adjustment of 1.98% (actual working capital adjustment is 6.54%) * computed the operating margins of comparable companies by considering foreign exchange gain/losses as non-operating in nature. The final set of 11 comparables selected by the TPO and its operating margin are as under : Sl.No Name of the Company Operating Margin 1 ICRA Techno Analytics Limited (segmental) 24.94% 2 Infosys Technologies Limited 44.98% 3 Kals Information Systems Limited (segmental) 34.41% 4 Larsen &Toubro Infotech Limited 19.33% 5 Mindtree Limited (segmental) 14.83% 6 Persistent Systems & Solutions Ltd 15.38% 7 Persistent Systems Limited 30.35% 8 R S Software (India) Limited 10.29% 9 Sasken Communication....
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.... the assessee with respect to foreign exchange gain/loses as part operating revenue for computation of operating margins of the assessee and comparables. * Relying on the Jurisdictional High Court decision in CIT v Tata Elxsi 349 ITR 198, the CIT(A) held that while computing deductions u/s 10A & 10AA, respectively, data communication, voice communication and cell phone expenses incurred in foreign currency should be excluded from the export turn over as well from total turnover . * Following his decision rendered in ay 2009-10, the CIT(A) upheld the addition made u/s40(a)(i). 05. Aggrieved the assessee filed the appeal in IT (TP)A44/B/2015 with the following grounds : 06. The Revenue filed its appeal in IT (TP) A69/B/2015 with the following grounds : GROUNDS OF APPEAL ON TRANSFER PRICING ISSUES 07. The AR submitted that the AO has not made any disallowances on reimbursement of salaries at Rs. 8,397,648 under Section 40(a)(i) on the ground that the assessee has withheld and deposited taxes on Salary under Section 192. However, the CIT (A) has wrongly adjudicated on reimbursement of salaries, which was not the subject matter of appeal before the CIT (A) ....
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....ter that " My decision taken is hereby followed and the action of the AO is upheld" which resulted in the above impropriety. In the facts and circumstances, the matters connected in the assessee's appeal grounds nos 2 to 8 including the sub-grounds mentioned below ground no 8 are set aside to the CIT (A). The CIT (A) would decide them afresh after affording due opportunity to the assessee. Assessee's appeal grounds nos 2 to 8 are treated as allowed for statistical purposes. 10. On the TP matters, the AR submitted that the following comparables are to be rejected as they are functionally different from it and their turn over is more than 10 times of its turnover. The gist of his arguments and the cases relied on, are as under: 1. Infosys Technologies Ltd is functionally different, it owns significant intangibles and intellectual property. Differences in Risk levels assumed and has huge revenue from software products. Case laws : Electronics for Imaging India P Ltd ay 2010-11in IT (TP)A no. 212/Bang/2015 & CO No 94/Bang/2015 dt 24.02.2016, Ikanos Communications India Ltd ,ay 2010-11 in IT (TP)A no. 137/Bang/2015 & CO No 109/Bang/2015 dt 10.11.2015, Finserv India-....
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....ia P Ltd etc. 11. We have considered the rival submissions and gone through relevant materials. The relevant portion of the order from the case of Electronics for India Imaging India P Ltd ay 2010-11in IT (TP)A no. 212/Bang/2015 & CO No 94/Bang/2015 dt 24.02.2016 is extracted as under : "2. The assessee challenged the action of the TPO before the DRP and raised objections against some of the comparables selected by the TPO. The DRP in its directions rejected 8 out of 11 comparables selected by the TPO. Thus, the Revenue is aggrieved by the directions of the DRP insofar as the comparables are directed to be excluded from the set of comparables. 3. We shall deal with each comparable which has been disputed by the Revenue one by one as under:- (1) ICRA Techno Analytics Ltd. (seg) 4. At the outset, we note that apart from having the related party revenue at 20.94% of the total revenue, this company was also found to be functionally not comparable with software development services segment of the assessee. The DRP has given its finding at pages 13 to 14 as under:- "Having heard the contention, on perusal of the annual report, it is noticed....
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....nd to end business solutions that leverage cutting edge technology thereby enabling clients to enhance business performance. This company also provides solutions that span the entire software lifecycle encompassing technical consulting, design, development, re-engineering, maintenance, systems integration, package evaluation and implementation, testing and infrastructure management service. In addition, the company offers software product for banking industry. Thus, this company is engaged in diversified services including design as well as technical consultancy, consulting, re-engineering, maintenance, systems integration as well as products for banking industry. 5. In view of the above facts that Infosys Ltd. having a huge brand value and intangibles as well as having bargaining power, the same cannot be compared with the assessee who is providing services to its AE. (3) KALS Information Systems Ltd. 6. The assessee raised objections against this company on the ground that this company is engaged in the development of software and software products. Further, this company consists of STPI unit and also having a training centre engaged in training of soft....
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....ntenance contract, etc. These facts recorded by the DRP has not been disputed before us. 11. Therefore, when this company is engaged in diversified activities and earning revenue from various activities including licencing of products, royalty on sale of products as well as income from maintenance contract, etc., the same cannot be considered as functionally comparable with the assessee. Further, this company also earns income from outsource product development. In the absence of any segmental data of this company, we do not find any error or illegality in the findings of the DRP that this company cannot be compared with the assessee and the same is directed to be excluded from the set of comparables. (5) Sasken Communication Technologies Ltd. 12. The assessee raised objection that this company has revenue from software services, software products and other services. The DRP has come to the conclusion that this company earned revenue from 3 segments. However, no segmental information is available. Accordingly, the DRP directed the AO to exclude this company from the comparables. 13. We have heard the ld. DR as well as ld. AR and considered the re....
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.... of Telcordia Technologies Pvt. Ltd. (supra), the Mumbai Bench of the Tribunal vide its order dated 11.5.2012 in para 9.7 has held as under:- "7.7 From the facts and material on record and submissions made by the learned AR, it is seen that the Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of the learned AR that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company as fit for comparability analysis for determining the arm's length price for the assessee, hence, should be excluded from the list of comparable parties." 18. No contrary view has been brought to our notice regarding comparability of this company with that of a pure software development service provider. Accordingly, in view of the decision of the Mumbai Bench of the ....
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....Technologies Ltd., ii) L&T Infotech Ltd., We direct TPO to exclude the above referred comparables from the list of final comparables chosen by TPO in the ALP computation and re-compute the ALP accordingly". 14.2. It was the submission that once DRP has accepted the objections of Assessee whereas in Assessee's case DRP did not exclude L&T Infotech while excluding Infosys Technologies Ltd., it was the submission that similar facts exist for both the companies and DRP has excluded only Infosys Technologies and not L&T Infotech Ltd., 14.3. After considering the objections of Assessee and perusing the order of DRP in the case of M/s. Sumtotal Systems India Pvt. Ltd., (supra), as extracted above, we are of the opinion that this company cannot be selected as comparable by the same reasons which DRP in the above referred case accepted. Moreover, there are no segmental details and as seen from the annual report, revenues are reported from software development services and products, how much is from services and how much is from products could not be analysed. Even though TPO considered the software exports reported in earning in foreign currency as that o....
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....& Toubro Infotech Ltd, Mindtree Ltd (seg), Persistent System Ltd, Sasken communication Technologies and Tata Elxsi Ltd(seg) against which the Revenue filed appeals. However, from the decisions extracted, supra, the assessee has made out a case for the exclusion of ICRA Techno Analytics Ltd. (seg), Infosys Technologies Ltd., KALS Information Systems Ltd, Persistent Systems Ltd, Sasken Communication Technologies Ltd, Tata Elxsi Ltd and L&T Infotech Ltd. Following them, we direct the TPO to exclude them from the list of comparables. To that extent, the assessee's appeal grounds are allowed and the Revenue's appeal grounds are dismissed. With regard to the comparable Mindtree Ltd (seg), since the assessee has not opposed the Revenue's appeal, the Revenue's appeal on that comparable is treated as allowed. 14. The next issue that the AR submitted that the TPO has considered foreign exchange fluctuations as non-operating in nature. Its foreign exchange gain should be considered as operating in nature. The CIT (A) has, inter alia, directed the TPO to accept the assessee's claim, on which, the Revenue is on appeal. We have considered the rival contentions. This issue is remitted back to ....
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....mer Corporation, expenses in the nature of salary that had been incurred by Cemer Corporation on behalf of the Appellant. The leamed CIT(A) has erred in law and in fact by concluding that the expenses reimbursed by the Appellant to Camer Corporation on account of expenses incurred on behalf of the Appellant cannot be treated as a pure reimbursement of expense. The learned CIT(A) has erred in adjudicating on a ground which was not appealed by the Appellant and disregarded the fact that the expenses reimbursed by the Appellant to Camer Corporation are in the nature of salary expense and have already been subject to applicable tax under Section 192 of the Act and accordingly should not suffer further tax under Section 195 of the Act. The leamed CIT(A) has erred in law and in fact by concluding that the reimbursement of expenses related to salaries by the appellant to Cemer Corporation would be in the nature of Fees for technical services under the Act as well as the India - USA Double Tax Avoidance Agreement. The learned CIT(A) has erred in law and in fact by concluding that the above reimbursements of expenses related to salaries by the Ap....
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....nterprises ("AES"); The leamed CIT(A) has arred in law and facts by not accepting the Appellant's plea entirely and confirming with the leamed Assessing Officer ("AO)/Transfer Pricing Officer ("TPO") on not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income-tax Rules, 1962 (Rules), and conducting a fresh economic analysis for the determination of the arm's length price in connection with the impugned international transaction and holding that the Appellant's international transaction is not at arm's length; The learned CIT(A) has erred in law and facts by upholding the action of AO/TPO in determination of the arm's length margin price using only FY 2009-10 data which was not available to the Appollant at the time of complying with the transfer pricing documentation requirements; The leamed CIT(A) has erred in law and facts by upholding the action of AO/TPO in rejecting certain comparables considered by the Appellant in the comparability analysis by applying different quantitative and qualitative filters a) The leamed CIT(A) has erred, in law and in facts, by not a....
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....uding that once the working capital adjustment is granted, there is no necessity of providing any further adjustments. The learned CIT(A) has emred, in law and facts by, ignoring the fact that the Appellant is availing tax holiday under section 10A and 10AA of the Act, and there is no motival reason to shift the profits out of India, which is one of the basic intention of the introducing the transfer pricing provisions. The learned CIT(A) haserred, in law and facts, in computing the ALP without giving benefit of +/- 5 percent under the proviso to section 92C(2) of the Act; General Grounds of appeal 21. 22 23. The leamed CIT(A) has emred, in law and facts by not appreciating and considering the arguments put forth in the submissions made by the Appellant on the above issues. The learned CIT(A) has erred, in law and tacts, in confirming the imposition of Interest under Sections 2348 and 2340 of the Act by the learned AO. The learned CIT(A) has erred, in law and facts, in upholding initiation of penalty proceedings under section 271(1)(c) at the Act by the leamed AO. Document 4 GROUNDS OF APPEAL ON CORPORATE ISSUES 1) The orde....