TaxTMI 
TaxTMI 
2017 (1) TMI 1574
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....rs Ground No. 1: Transfer Pricing adjustment The Learned Assessing Officer ('Ld. AO') pursuant to the directions of the Hon'ble Dispute Resolution Panel ('DRP') erred in rejecting the benchmarking approach adopted by the Appellant and thereby making a transfer pricing adjustment of Rs. 84,85,743 to the income of the Appellant by holding that the international transaction of provision of marketing and sales support services does not comply with the arm's length principle as envisaged under Chapter X of the Income-tax Act, 1961 ('the Act'). Ground No. 2: Erroneous rejection of the fresh search analysis conducted by the assessee The Hon'ble DRP / Ld. AO/ Ld. TPO erred in disregarding the fresh search analysis conducted by the assessee using the data for Financial Year ('FY') 2009-10, whereas the Ld. AO/TPO had himself carried out a selective fresh search/ analysis by applying certain additional quantitative / qualitative filters in order to eliminate companies that would otherwise be comparable resulting in cherry picking of comparables which contradicts with the principles of conducting search (for comparables) in a scientific m....
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....ntitled to tax holiday under section 10A of the Act on its profits derived from the software development services and therefore would not have any untoward motive of deriving a tax advantage by manipulating transfer prices of its international transactions. B. Corporate Tax matters Ground No. 6: Disallowance of interest income while computing deduction under section 10A of the Act The Hon'ble DRP / Ld. AO erred in not considering the interest income of INR 2,844,646 of the STP Unit as "profits and gains derived from the export of articles or things or computer software" of the STP Unit as required by the specific provisions of section 10A(4) of the Act in computing the deduction available to the STP Unit under section 10A of the Act. Ground No. 7: In any view of the matter and in any case disallowance of deduction under section 10A of the Act on interest income earned by the Appellant is bad in law 4. The Revenue in ITA No.334/PN/2015 has raised the following grounds of appeal:- 1. Whether DRP was correct in directing the AO to re-compute the operating margins of Mindtree Ltd. in accordance with the directions. 2. Whether DRP was correct in directing the AO to....
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....EOU) under the Software Technology Park of India (STPI) Scheme and had claimed tax holiday under section 10A of the Act. The assessee had entered into Software Research & Development Services Agreement with TIBCO, US wherein the assessee was providing software research & development services to TIBCO, US in accordance with design, production orders, plans, process specifications and production schedules provided to the assessee i.e. TIBCO, India by TIBCO, US. The TPO has noted that during the year under consideration, the assessee had entered into three kinds of services to its associate enterprises i.e. (i) provision of software research, development and support services of Rs. 45.02 crores, (ii) provision of marketing services to the extent of Rs. 6,77,76,671/- and (iii) external commercial borrowing was to the extent of Rs. 21,12,725/-. The assessee had applied TNMM method in respect of first two services and CUP method in respect of external commercial borrowings. The TPO further noted that the assessee had selected 16 companies in order to benchmark its international transactions and had adopted multiple years data for the same. However, during the course of proceedings before....
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....ables. The TPO thus, referred to the comments of assessee in respect of inclusion of 8 companies under para 16 and thereafter, dealt with each of them and held that the said companies were functionally different and hence, have to be excluded from the list of comparables. The TPO also noted the inconsistent approach of the assessee in selecting the comparables, wherein in the TP documentation, the assessee had submitted that it was captive service provider, however, it was consistently selecting comparables in product segment. In this regard, several companies were referred to and some more comparables were rejected by the TPO. The assessee also objected to the companies selected by the TPO in the show cause notice which have also been elaborately considered by the TPO. In the final analysis, the TPO selected 13 companies and even working capital adjustment was allowed except for few of the companies which were considered at segmental level and hence, no working capital adjustment could be provided. The list of comparables are enlisted under para 24 at page 37 of TPO's order. The PLI of assessee was 16.12% by taking operating revenue / operating cost and the average margin of compa....
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....ct of certain concerns and rejected the plea of assessee in other concerns. 10. Both the assessee and the Revenue are in appeal before us in respect of selection / rejection of comparables. 11. The limited issue which was argued before us in the cross appeals filed by the assessee and the Revenue was against the inclusion / exclusion of certain comparables while benchmarking the international transactions both in IT sector and also in marketing support services. Admittedly, both these services provided by the assessee to its associate enterprises were independent and had to be benchmarked separately in order to work out the arm's length price of international transactions. The learned Authorized Representative for the assessee before us also pointed out that the issue of selection and rejection of comparables while benchmarking the international transactions in both the segments has been adjudicated by the Pune Bench of Tribunal in assessee's own case in ITA No.2536/PN/2012, relating to assessment year 2008-09 and in ITA No.94/PN/2014, relating to assessment year 2009-10 had elaborately considered the case of assessee in respect of several comparables. The assessee points....
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....d as not pressed. The TPO after considering the financial data of the comparable cases for the year under consideration selected the final set of comparables, which are as under:- Sr. No. Name of Company PLI-Unadjusted PLI-Adjusted 1 F C S Software Solutions Ltd. 48.38 40.15 2 Goldstone Technologies Ltd. 20.17 14.01 3 L G S Global Ltd. 11.95 7.46 4 Larsen & Toubro Infotech Ltd. Telecom Segment 19.24 19.24(*) 5 Mindtree Ltd. 16.17 16.17(*) 6 Acropetal Technologies Ltd. (Seg) 33.92 33.92(*) 7 Kals Information System Ltd. 34.41 34.41(*) 8 Third-ware Solutions Ltd. 34.18 31.73 9 Persistent System Ltd. 29.51 27.57 10 Infosys 45.01 43.86 11 Akshay Software Ltd. (-)0.01 (-)0.99 12 Thinksoft Global Ltd. 17.67 14.84 13 Sasken Communication Technologies Ltd. 16.96 16.96(*) Average 25.12 23.02 (*) Since, these comparables are considered at segmental level, no WCA could be provided. 15. The average PLI of comparable companies worked out to 23.02% as against 16.12% of the assessee ....
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....nctionally comparable but looking at the activities of said concern, the same was found to be functionally not similar. The learned Authorized Representative for the assessee pointed out that while arguing the issue before the DRP, the glaring profit volatility of the said concern was referred to, wherein the entry charges were shown to be at Rs. 1.27 crores and there was no such charges in earlier years. Our attention was invited to pages 225 to 229 of the Appeal Memo. The learned Authorized Representative for the assessee objected to the findings of DRP that the said concern was functionally comparable and also that it was not the case of super profit. The learned Authorized Representative for the assessee in this regard pointed out that the claim made by the assessee was on account of volatility in profits, being exceptional year. The learned Authorized Representative for the assessee in this regard placed reliance on the ratios laid down by the Special Bench of Tribunal in Maersk Global Centres (India) Pvt. Ltd. Vs. ACIT in ITA No.7466/Mum/2012, order dated 07.03.2014, Pune Bench of Tribunal in Cummins Turbo Technologies Ltd., UK Vs DDIT (IT) in ITA Nos.161 & 269/PN/2013, relat....
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....as engaged in marketing support services segment and hence, functionally not comparable. Further claim was that the other source of income i.e. sponsorship income, delegates fees and entry fees charges could not be considered as comparable to the assessee's marketing support services segment. 23. The second plea raised by the assessee was that another concern engaged in the similar business of Sporting and Outdoor Ad Agency Pvt. Ltd. was rejected by the TPO himself on the ground that its income was from hoarding and mounting charges. The inconsistent approach of the TPO was objected to by the assessee. One more factor was drastic fluctuations in operating margins wherein as against margins of 15.50% in financial year 2007- 08 and 24.55% in financial year 2008-09 and also 19.51% in financial year 2010-11, the margins shown by the assessee in financial year 2009-10 were 57.48%. The huge variation in the operating margins shown by Asian Business Exhibition and Conferences Ltd., as per the assessee, was an indicator of the fact that there existed certain abnormal factors, which had contributed to such abnormal variations. Reliance in this regard was placed on the ratio laid down by ....
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....vices to its associate enterprises and the concern engaged in sale / leasing out the stalls space in exhibition and events is earning income in the nature of rent and the same could not be compared with the services undertaken by the assessee. The TPO had also excluded another concern i.e. Sporting and Outdoor Ad Agency Pvt. Ltd. on the ground that its income from hoarding and mounting charges. Another aspect of the comparability to be considered is the drastic fluctuations in the operating margins of said concern. The said concern was showing lower operating margins in earlier as well as later years as against the operating margins of 57.48% shown during the year. On such ground, the said concern is to be rejected from the final set of comparables on the basis of ratio laid down by the Special Bench of Tribunal in Maersk Global Centres (India) Pvt. Ltd. Vs. ACIT (supra). Another aspect was raised by both the TPO and the DRP was the selection of said concern by the assessee. However, since the assessee has pointed out that differences in the said concern which are material itself, then even if the said concern was originally picked up as comparable but the assessee could not be sto....
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....dhna Media Pvt. Ltd., the Profit and Loss Accounts of the companies were not available. The assessee had only filed Balance Sheet and had not furnished further details in this respect and hence, the said concerns were rejected. The defects pointed out by the TPO have not been removed by the assessee even in the documents submitted before us. The Profit and Loss Accounts of Hansa Vision Pvt. Ltd., Denave India Pvt. Ltd. And Sadhna Media Pvt. Ltd. are not available on record as evident from pages 749 to 785, 786 to 807 and 808 to 833 of Paper Book and the breakup of details in respect of Crystal Hues Ltd. are also not available Accordingly, we find no merit in the plea of the assessee on this account also. 30. In respect of Crystal Hues Ltd., the assessee had furnished the Balance Sheet and Profit and Loss Account but no other details were available. In the absence of any details, it is not possible to establish the margins of concerns and to determine whether they are functionally comparable or not. The assessee had not furnished any such details before the TPO or the DRP. Though the assessee claims that it has now furnished the said details but in the absence of the details avai....
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.... assessee. Both the learned Authorized Representatives have placed reliance on different decisions. It may be pointed out that the learned Departmental Representative for the Revenue has relied on the decision of Hon'ble High Court of Delhi in Thomson Press (India) Ltd. Vs. CIT (supra), which relates to assessment years 1991-92, 1992-93 i.e. preamended provisions of section 10A of the Act. The learned Authorized Representative for the assessee has placed reliance on the decision of Hon'ble High Court of Karnataka in CIT & Anr Vs. Motorola India Electronics (P) Ltd., which relates to assessment years 1998-99 and 2001-02 and has further relied on the ratio laid down by the Delhi Bench of Tribunal in Universal Precision Screws Vs. ACIT (2015) 168 TTJ 84 for assessment year 2009-10. The year under appeal is assessment year 2010-11 i.e. provisions of section 10A of the Act after amendment have to be considered. The Tribunal had applied the ratio laid down by the Hon'ble High Court of Karnataka in CIT & Anr Vs. Motorola India Electronics (P) Ltd. (supra) that where the interest income had close nexus with the business activity of the assessee which was assessable as income from business ....
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....rvices segment of Mindtree Ltd. was comparable to the assessee's software development services segment. The DRP directed the Assessing Officer to examine the computation of margins furnished by the assessee and if necessary, to re-compute the same. 37. The Revenue is in appeal against the aforesaid directions of DRP and the reference to the Safe Harbour Rules by the DRP. We find no merit in the ground of appeal raised by the Revenue against the directions of the DRP, wherein the TPO was directed to apply the margins of IT services segment of Mindtree Ltd. while benchmarking the arm's length price of software development services segment of the assessee. The DRP has given specific directions, which may be complied with. However, reference to other Safe Harbour Rules may not be taken into consideration. Accordingly, the ground of appeal No.1 raised by the Revenue is dismissed. 38. The issue raised in ground of appeal No.2 is against exclusion of Infosys Ltd., wherein the TPO had applied the margins of Infosys Ltd., as the assessee itself for three years was selecting L & T Infotech Ltd. but was cherry picking in respect of Infosys Ltd. The learned Authorized Representative ....
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....rred to the financial statements of the said concern, wherein in the Profit & Loss Account, the said concern had declared income from software development charges at Rs. 10.86 crores for the year under appeal. The DRP had directed the TPO to include the margins of the said concern in the final set of comparables, in view of the concern being functionally comparable. Similarly, DRP directed inclusion of E-Zest Solutions Ltd. and E-Infochips Ltd. We find merit in the directions of DRP in this regard in respect E-Zest Solutions Ltd. as the same was held to be functionally comparable in assessment year 2008-09 and E-Infochips Ltd. was held to be functionally comparable by the Tribunal in assessee's own case in assessment year 2009-10. There is no change in their functioning, hence, are to be included as functionally comparable. In respect of Evoke Technologies Ltd., there is no observation of TPO . In view of financial declaration made by the said concern in its Profit & Loss Account for the year under consideration, we uphold the directions of DRP and dismiss the ground of appeal No.2 raised by the Revenue. 42. The last ground of appeal raised by the Revenue by way of ground of app....
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....1, order dated 25.01.2017, wherein the Tribunal observed as under:- "10. Now, coming to the second issue raised in the present appeal i.e. adjustment made on account of transfer pricing provisions. The assessee was captive service provider to its associate enterprises Approva, US. The assessee had provided software development services to its associate enterprises and in order to benchmark its international transactions, the assessee had applied TNMM method which was also applied by the Assessing Officer. The limited issue which arises before us is vis-à-vis selection / rejection of certain comparables. The assessee had drawn list of 14 comparables in its list of comparables, some of which were rejected and some of which were accepted by the Assessing Officer. The assessee is aggrieved by the selection of KALS Information System Ltd. and Thirdware Solution Ltd. and it is pointed out by the learned Authorized Representative for the assessee that both the concerns are functionally different i.e. they are both service providers and are also product companies, hence, the same are not comparable with the assessee. He pointed out that there was no dispute that KALS Information ....
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.... case of the assessee before the Special Bench is concerned and the same therefore no more survives for consideration in the present case. In generality, we are of the view that the answer to this question will depend on the facts and circumstances of each case inasmuch as potential comparable earning abnormally high profit margin should trigger further investigation in order to establish whether it can be taken as comparable or not. Such investigation should be to ascertain as to whether earning of high profit reflects a normal business condition or whether it is the result of some abnormal conditions prevailing in the relevant year. The profit margin earned by such entity in the immediately preceding year/s may also be taken into consideration to find out whether the high profit margin represents the normal business trend. The FAR analysis in such case may be reviewed to ensure that the potential comparable earning high profit satisfies the comparability conditions. If it is found on such investigation that the high margin profit making company does not satisfy the comparability analysis and or the high profit margin earned by it does not reflect the normal business condition, we....
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....he ground that it is functionally dissimilar. We therefore find force in the submission of the Ld. Counsel for the assessee that Thirdware Solutions Ltd. should not be included as a comparable. We accordingly set-aside the order of the CIT(A) and direct the Assessing Officer to exclude the same from the list of comparables. 12. Both the learned Authorized Representatives have admitted that Thirdware Solutions Ltd. was involved in similar functions as in earlier year and in view thereof, we hold that the said concern is functionally different and is to be excluded from final list of comparables. 13. Now, coming to the second concern i.e. KALS Information System Ltd. vis-à-vis other concern, the CIT(A) in assessment year 2009-10 had excluded the said concern and the Tribunal following series of decisions including Bindview India Pvt. Ltd. Vs. DCIT (2013) 34 taxmann.com 164 held that the said concern was functionally different as it was engaged in the development of software products and its sale and was not comparable to the software development services provided by the assessee. The Hon'ble Bombay High Court in CIT Vs. PTC Software (I) Pvt. Ltd. in Income Tax Appeal No.....