TaxTMI 
TaxTMI 
2018 (5) TMI 1536
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....vices) to its AE. The transaction of rendering software development services to its AE was an international transaction. As per the provisions of Sec.92 of the Act, income from international transaction has to be computed having regard to Arm's Length Price (ALP). 3. The details of the international transaction between the Assessee and its AE in AY 2012-13 was as follows: Particulars Amount in Rs. Provision of SWD services 357,68,61,693/- Provision of ITeS 104,03,22,271/- 4. In this appeal, we are concerned only with the International transaction of providing SWD Services by the Assessee to its AE. It is not in dispute between the Assessee and the revenue that the Transaction Net Margin Method (TNMM) was the Most Appropriate Method (MAM) for determination of ALP and that the profit level indicator to be adopted for comparison of the Assesee's profit with that of comparable companies was Operating Profit/Total Cost (OP/TC). The OP/TC of the Assessee was 13.09%. The Assessee in its TP study selected 11 comparable companies whose arithmetic mean of OP/TC was arrived at less than the OP/TC of the Assessee. Since the profit margin of the Assessee was more than the arithmetic me....
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....t of shortfall being adjustment u/s.92CA of the Act. The AO passed a fair order of assessment making the addition on account of determination of ALP by the TPO. Aggrieved by the addition made in the fair order of assessment, the Assessee has raised several grounds of appeal challenging the addition on several counts. However, at the time of hearing of the appeal, the learned counsel for the Assessee submitted that if 3 out of the 7 comparables chosen by the TPO viz., (i) CG VAK Software Exports Ltd., (ii) Larsen & Toubro Infotech Ltd., (iii) Persistent Systems Ltd., are excluded and if two comparable suggested by the Assessee in its Transfer Pricing Study viz., (i) Cigniti Tech Ltd. and (ii) Helios & Mathesons Ltd.,are accepted and if the arithmetic mean of the profit margin of the remaining 6 companies when compared with the price charged by the Assessee, then the price charge by the Assessee would be at Arm's length. The grievance of the Assesssee in this regard is projected by the Assessee in Grounds No. 6 to 8 of its appeal. The grievance of the Assessee that the correct margins of some of the comparable companies were not computed by the TPO will get addressed by directing the....
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....he international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction. Rule 10B(2) specifically provides that for the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks an....
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....d from the list of comparable companies by the TPO himself in Assessee's own case on the ground that this company is into product development, product maintenance, product testing and BPO services hence functionally different. The DRP in AY 2012-13 had also upheld such exclusion. 10. A copy of the Annual report of this company for the year 2013 is placed at page-222 of the Paper book Volume-II. The Significant Accounting policies given as annexure to notes forming part of the Account, gives the revenue recognition policy followed by this Company. Revenue from SWD services, products are recognized when services are recognized on completion of contract or stage of completion as per applicable terms and conditions agreed with customers. It is this significant accounting policy that is the basis for the Assessee to contend that this company also develops Software Products and is not only in the business of rendering SWD services and hence not comparable. In a reply to the notice u/s.133(6) of the Act issued by the TPO, this company has responded by pointing out that it develops custom application development services to client. The TPO has relied on the reply by this company to come t....
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....WD service provider and that it develops Software products ; (ii) Segmental Information of various segments are not available; (iii) Scale of operation and presence of intangibles, brand etc. 16. As far as functional dissimilarity of this company is concerned, this company also renders SWD services in three clusters, in the form of Service Cluster for banking, financial services, insurance, Media & entertainment and Travel & Logistics), Industrial Cluster comprising of all manufacturing sectors, telecom cluster relating to product engineering services. As rightly held by the DRP all the above activities are SWD services. The fact that the Assessee mainly caters to SWD services in banking industry cannot be the basis to hold that this company and the Assessee are not functionally comparable. The difference pointed out by the Assessee are not material differences in terms of Rule 10B(2) of the Rules. 17. As far as the objection that this company apart from rendering SWD services is also engaged in developing its own Software Products, the TPO has brought out in his order that the products developed by the Assessee are platforms used by this company to enable design and developing s....
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....ich is at pages 648 to 841 of Volume-III Paper Book filed by the Assessee. The learned AR pointed out that even in the annual report this company is stated to be in the business of developing software products. The reference by the learned AR is to the consolidated Accounts, i.e., inclusive of the activities of the group (AE companies). The unconsolidated accounts of this company is at page 787 of Volume-III paper book filed by the Assessee. The profit & Loss account is at page-793 of Volume-III paper book filed by the Assessee. Income from operation is Rs. 9967.53 million. Note 21 to the note on accounts gives the break of this revenue which is at page- 814 and it is fully from providing software development services. This revenue has been compared with costs and the OP/TC of this company arrived at by the TPO. Note 26 to the notes on accounts gives the segmental break-up and the segments are all software services segment and there is no product segment at all. The learned AR placed reliance on decisions where this company was excluded from the list of comparable companies. These decisions do not relate to AY 13-14. We can therefore safely proceed on the basis that those decisions....
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....e of comparability would be served. The question in each case was whether despite the financial years of the Assessee and of the other enterprise being different, the financials of the corresponding period of each of them was available. If they were, the TPO must refer to the corresponding period of both the entities in determining whether or not the two were comparable for the purpose of determining the ALP. The learned AR referred to page-221 of Paper Book Volume-I wherein the required details were available. His plea was for a remand to the TPO to compare the financials of this company for the corresponding FY as that of the Assessee and include this company in the list of comparable companies. 24. The learned DR however submitted that Data to be used for comparability should be the same financial year and in this regard placed reliance on decision of Hon'ble Bombay High Court in the case of CIT Vs. PTC Software (I) Pvt.Ltd. 395 ITR 176 (Bom.) & Mumbai ITAT in the case of Tevapharm India Pvt.Ltd. Vs. DCIT (2017) 81 taxmann.com 416(Mum- Trib) wherein it was held that data to be used for comparability analysis should be the same Financial year in which the international transacti....