TaxTMI 
TaxTMI 
2017 (1) TMI 1574
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.... 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 manner. Ground No. 3: Erroneous inclusion / exclus....
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....herefore 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 exclude Infosys Ltd., FCS Software Ltd. from the set of comparable companies and to include E-zest Solutions Ltd., Evoke Tech....
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....e 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 the TPO, the assessee submitted single year data of OP/OC ratio of the comparables along with its submissions. The TPO analyzed the....
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.... 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 comparables worked out to 23.02% and hence, an adjustment of Rs. 2,67,41,651/- was proposed by the TPO to the international transactions ....
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....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 out that the functionality of said comparables in the earlier years and in the present year are similar and the principles laid down by the....
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....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 and an adjustment of Rs. 2,67,41,659/- was thus, worked out by the TPO in software development segment. The DRP deleted the aforesaid addition of Rs. 2.67 crores, against which the Revenue is in appeal. 16. Further, in respect of marketing support s....
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....herein 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, relating to assessment years 2007 -08 & 2008- 09, order dated 29.09.2014, in Q Logic (India) Pvt. Ltd. Vs. DCIT in ITA No.227/PN/2014, relating to assessment year 2009-10, order dated 21.10.2014 and in John Deere India Pvt. Ltd. Vs. ACIT in ITA No.1319/PN/2011, relating to assessment year 2007-08, order ....
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....econd 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 the Special Bench of Tribunal in Maersk Global Centres (India) Pvt. Ltd. Vs. ACIT (supra), wherein it was held that if there existed certain exceptional circumstances, then the company making abnormally high profit needs to be excluded. 24. Coming to the next objection of the TPO that the assessee himsel....
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....r 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 stopped from pointing out that the said concern was wrongly taken as comparable. Accordingly, we direct the TPO to exclude Asian Business Exhibition and Conferences Ltd. from the final set of comparables. 26. The learned Authorized Representative for the assessee thereafter, pointed out that it had selected the....
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....ents 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 available with the assessee during TP proceedings, the same could not be applied by the TPO. Hence, we find no merit in the plea of assessee and the same is rejected. 31. The ground of appeal No.6 raised by the assessee is against the claim of deduction under section 10A of the Act on the interest income on FDRs. The Asse....
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....2, 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 was eligible for the benefit of deduction under sections 10A and 10B of the Act. The Tribunal applying the said principle held that the interest income earned on FDR, which were made for the purpose of keeping margin money or for availing credit facilities from banks, was eligible for deduction under section 10B of the Act. Th....
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....ence 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 for the assessee pointed out that first of all, Infosys Ltd. was the product company, hence was functionally not comparable and in respect of L&T Infotech Ltd., since segmental details were available, the same were applied to benchmark the international transaction. Our attention was drawn to the final set of comparables prepared by t....
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....g 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 appeal No.3 is against the directions of DRP to the TPO to verify the working of RPT in the case of Crisil Ltd. The Revenue is in appeal on the limited issue of application of RPT filter. The DRP had directed the TPO to verify the RPT filter in respect of Crisil Ltd. and in case it was greater than 25%, then the said concern is to be excluded fr....
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....ate 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 System Ltd. was engaged in the same business but it also was providing products and hence, not to be considered as comparable while benchmarking the international transactions of the assessee. The learned Authorized Representative for the assessee pointed out that similar issue of inclusion of said companies arose before the Tribunal in earlier years a....
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....on 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 are of the view that the high profit margin making entity should not be included in the list of comparable for the purpose of determining the arm's length price of an international transaction. Otherwise, the entity satisfying the comparability analysis with its high profit margin reflecting normal business condition should not be rejected solely on the basis of s....
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....nvolved 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.732 of 2014, vide judgment dated 26.09.2016 have also observed that KALS Information System Ltd. is functionally not comparable to the assessee which is rendering software services to its holding company since KALS Information System Ltd. was engaged in selling of software products. Following the same parity of reasoning, we hold that KALS Information System Ltd. is not to be included in the final set of comparables in orde....