AI Drafter 
TaxTMI 
TaxTMI 
2015 (12) TMI 1759
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.... being not pressed. Effective issue raised vide ground no. 5 to 8 is on account of transfer pricing adjustment Rs. 149,22,84,130/-, which are being taken up first. 3. The brief facts qua the issue of transfer pricing adjustment are that assessee, Capgemini India Pvt. Ltd. is an Indian Company owned substantially by Capgemini US LLC, a company incorporated in USA. The assessee company is engaged in the business of providing software development & export services mainly to its Associated Enterprises (AEs) i.e. Capgemini Group Companies and third parties. The main service line of the assessee company includes, software technology services; IT outsourcing services; and customizes service software development services. During the relevant assessment year, the assessee has reported following international transactions with its AEs in the Form 3CEB:- Nature of International Transaction Amount(Rs) Method Applied Software Programming Services 15,58,46,96,950 Transaction Net Margin Method ('TNMM') Payment for service' fees 28,25,500 TNMM Licensing of intellectual Property 87,83,495 Comparable Uncontrolled Price Method ('CUP') Business dev....
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.... 8 Lanco Global Systems Limited 26.26% 9 Larsen & Toubro Infotech Limited 17.54% 10 Maars Software International Limited (Segmental) 7.93% 11 Meistar Information Technologies Limited NC 12 Mindtree Limited (Segmental) 17.51% 13 Quintegra Solutions Limited 21.48% 14 R S Software (India) Limited 6.71% 15 S I P Technologies and Exports Limited -33.20% 16 Satyam Computers Services Limited NC 17 T V S Infotech Limited NC 18 V J I L Consulting Limited -6.06% 19 V M F Softech Limited 2.51% 20 Visualsoft Technologies Limited (Segmental) NA 21 Zylog Systems Limited 17.00% Arithmetic mean 10.39% Less : Marketing Adjustment 0.90% Less: Risk Adjustment 5.50% Adjustment Arithmetic Mean 2.99% However, the TPO rejected the assessee's transfer pricing documentation and the whole exercise of ALP determination by the assessee and carried out a fresh search of the comparables to determine the arm's length price (ALP) of the provision of software programming services to AE after detailed discussion. I....
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....Rs. 149,22,84,130/-. 5. Before us, the Ld. Counsel, Mr. M. P. Lohia submitted that, in the case of the assessee the Tribunal in the assessment year 2007-08 and 2009-10 had upheld the assessee's contention that the companies having turnover of less than Rs. 100 crores should be removed and if such an exercise is done, then the set of 16 comparables as confirmed by the DRP would get reduced to 7 comparable companies, out of which 2 companies are common, that is, they were selected by the assessee, hence there is no dispute. These 7 companies with the operating margin are as under:- Sr. No. Name of the Company Operating margins on costs 1 Infosys Technologies Ltd 41.20% 2 Wipro Ltd (Wipro Technologies Segment) 30.56% 3 Ancient Technology (Holdings) Ltd (Earlier known as Flextronics Software Systems Ltd.) 7.03% 4 Mindtree Ltd. (Earlier Mindtree Consulting Ltd) 15.89% 5 Persistent Systems Ltd 28.87% 6 Sasken Communication Technologies Ltd (Software Services Segment) 13.15% 7 LGS Global Ltd (Formerly Lanco Global Systems Ltd) 26.53% Arithmetic Mean 23.32% 6. Mr. Lohia, submitted that i....
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....d also on profit margins. Lastly, Hon'ble Delhi High Court in the case of Agnity India Technologies Private Limited in ITA No. 1204 of 2011 held that Infosys Technologies Ltd. should be excluded as a comparable from the captive service providing company, because Infosys is full risk bearing entrepreneurial entity and cannot be compared with interest mitigated captive unit. Thus, the Infosys should be removed from being comparable company. Catena of various Tribunal decision were also filed wherein the Infosys have not been held to be comparable with the captive software service provider companies. 9. Regarding Wipro Ltd also, he submitted that the said company should not be considered as a comparable mainly on the ground that : Firstly, the company is engaged in various services, other than software development services like BPO services, consumer products, software products etc. Secondly, segmental information is also not available in the public domain and whatever information which was made available by the Department that does not match with the revenue details of each stream of the income as provided in the Product Description Schedule of the Annual Report of the co....
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....cided the exclusion of these two comparables against the assessee and has held that Infosys and Wipro can be compared with the assessee company for the purpose of bench marking the assessee's ALP margin. He submitted that, however, the earlier decision of the Tribunal should not be followed in this year for the various reasons which has been highlighted in the following manner :- Sr. No. Tribunal's observation in AY 2007-08 CG India's observation on its relevance to AY 2008-09 Grounds on which the Tribunal has rejected the contentions of CG India Relevant extracts of Tribunal order 1 * Infosys and Wipro were selected as comparables by CG India in its own TP study * CG India has not raised any objections before the lower authorities (i.e. TPO/DRP) "We also note that Infosys and Wipro were the comparables selected by the assessee itself on the basis of its own transfer pricing study. The assessee was fully aware of its work profile, while selecting Infosys and Wipro as comparables. The assessee raised no plea either before the TPO or DRP for excluding these comparables though it had added some more comparables" (Refer para ....
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....Para 5.3.10) * The Assessee whishes to state that Infosys and Wipro other than being giant companies have huge brand value and own significant intangibles as against the Appellant who is a routine software service provider owning no intangibles. * The same has been fortified by the Delhi High court in the case of Agnity India Technologies Private Limited (refer page 909 to 911) * Further, the Assessee also wishes to submit that Infosys and Wipro being risk bearing entities cannot be considered comparable to the Assessee which has the role of a captive delivery centre and hence does not bear any risks. He, further submitted that, now there are umpteen number of decisions wherein it has been held that, Infosys and Wipro cannot be accepted as comparable companies with those of captive service provider company and finally, there is a decision of Delhi High Court in the case of Agnity India Technologies Private Limited (supra), wherein Delhi High Court has rejected the inclusion of Infosys with that of service provider unit. Thus, the Tribunal decision for AY 2007-08 should not be followed as far as inclusion of these two companies is concerned. 11. On the other....
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....lowed. 13. We have carefully considered the rival contentions put forth by the parties, perused the relevant finding given in the impugned orders and material referred to before us. The dispute regarding transfer pricing adjustments is mainly on account of software programming services. The functions carried out by the assessee qua the said transactions are mainly software technology services; IT outsourcing services and customize software development services. All these services are provided to Associate Enterprises i.e. Capgemini Group companies and very minor portion of sales is also made to third parties. The assessee's PLI has been worked out by using operating profit/ operating cost which has been worked out at 12.79%. The TPO had rejected the entire transfer pricing documentation and comparability analysis carried on by the assessee and also the most of the comparables selected by the assessee. He had finally chosen 17 comparables which also happens to include 4 comparables selected by the assessee. The average arithmetic means of these comparables were worked out to 23.79% and accordingly, an adjustment on account of PLI difference of 11% was made which had led to transf....
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.... comparables quantitative filter of turnover should be applied so as to evaluate in qualitative terms the selected few in a given range. Thus, we hold that, in this year also there could not be any deviation for rejecting the comparables having turnover of less than Rs. 100 crores. Accordingly, we direct the TPO/AO to remove the comparables having turnover of Rs. 100 crores. 17. In this manner, we are only left with the exclusion of two comparables as contended by the assessee's counsel, i.e. Infosys Technologies Ltd. and Wipro Ltd. (segment). However, we shall deal first with the one comparable company which has been contended for inclusion by the assessee, namely Aztecsoft Limited which was a comparable selected by the assessee and rejected by the TPO. The TPO has rejected the said comparable on the ground that it fails on the export earning filter of 25%. The assessee's objection before the DRP has been that, it has export earnings at 89% and, therefore, it could not have been rejected on the basis of export earning filter of 25% applied by the TPO. However, the DRP has not given its finding on this objection/submission of the assessee. As pointed out by the Ld. Counsel, the ....
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.... selecting these companies. Further, the assessee has raised no plea either before the TPO/DRP for excluding these comparables. As compared, in this year the assessee has not included Wipro as part of its TP study and comparables and secondly, in the case of Infosys Technologies Ltd., which though was chosen, but had immediately raised objection before the TPO for rejecting the said comparable based on detailed analysis of differences. In this year, the TPO has rejected the entire transfer pricing documentation maintained by the assessee and, therefore, now it cannot be held that assessee is precluded from raising the objection when TPO has selected these comparables for comparability analysis. Another main reason given by the Tribunal was that assessee had strongly contended that these companies have a very high turnover as compared to the assessee, to which Tribunal held that high turnover cannot be the criteria for rejecting the said comparables. 19. As regards the first reason that assessee itself has included these comparables in the TP study report and, therefore, assessee is precluded from objecting the same, we have already observed above that these facts are not applica....
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....hether they are based on transfer pricing principles and statutory provisions or not. If he himself founds some irregularity or mistake in any of the process or the steps undertaken, then he is bound to correct in accordance with the settled principles and law. If the assessee points out some mistake or any irregularity in the arm's length result, then it is incumbent upon the TPO to examine and consider the same and it the assessee's contentions are found to be correct or tenable, then he has to accept the same. There cannot be estoppel against correct procedure of law and principles solely on account of acquiescence or mistake of the assessee. The TPO is required under law to analyze every comparables and then only determine the correct ALP based on proper comparability analysis. Hence, we hold that assessee is not precluded from raising objections for exclusion of these two comparables on the ground that they were in the earlier year or in this year have been chosen by the assessee in TP study, more so in the circumstances when the assessee's TP study documentation has been rejected and assessee has duly objected at the initial stage. 20. Now, coming to the second reason of t....
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....nt intellectual property and branded products. These factors go to affect significantly the pricing mechanism and the profit margins. Such a huge risk bearing entrepreneurial entity cannot be compared with a risk mitigated captive service provider. Further, the other qualitative differences have already been discussed and highlighted while dealing with the contentions raised by the assessee. On such a qualitative level, these two companies cannot be held to be good comparable for benchmarking the assessee's profit margin. Though we are not applying any upper turnover filter but on qualitative level, we are of the opinion that these companies having huge presence of brand value and intangible R&D activities etc which cannot be chosen for comparability analysis with a captive service provider company like the assessee. Thus, on these reasons, we are deviating from the conclusion reached by the Tribunal, because the material facts as highlighted by the Tribunal is absent in the present year. In view of our above discussion, we hold that, these two companies are to be removed from the final list of comparables. Thus, in all, there would be 6 comparable companies in the final stage of c....
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....e taxable profits of units which are not eligible for deduction under section 10A. Section 10A provides for deduction of profits derived by the eligible undertaking and no longer provides for exemption. 23. It has been contended before us that, as per the provisions of section 10A deduction is allowed in respect of profits and gains derived by an undertaking from the export of articles or things or computer software for a period of 10 consecutive assessment years beginning with the year in which the undertaking begins to manufacture or produce such article or things or computer software while computing the total income. Further, it was clarified by the amended provisions of section 10A w.e.f. 1.4.2001 that the section 10A provides for a "deduction" of profits derived by the eligible undertaking and no longer provide for an "exemption". It was also clarified by the CBDT circular no.794 dated 9.8.2000 that the deduction under section 10A is in respect of a particular undertaking and not from the total income. There is no provision in section 10A for setting off the loss of other eligible undertakings before arriving at the deduction under section 10A. Prior to Assessment Year 2001....
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....st. yr. 2001-02 when s. 10A was an exemption provision, s. 10(6) provided restriction on set off and carried forward of business loss and unabsorbed depreciation. However, subsequently, s. 10(6) was amended by Finance Act 2003 with effect from asst. yr. 2001-02 and such restriction was withdrawn which was consistent with the new scheme of s. 10A which is a deduction provision and not exemption provision from asst. yr. 2001-02. Therefore the loss from s. 10A unit has to be adjusted against taxable profits of other units after deduction under s. 10A has been allowed in respect of each eligible unit. Same view has been taken by the Hon'ble High Court of Bombay in case of Hindustan Unilever Ltd. vs. Dy. CIT (supra) in which it has held that deduction has to be allowed in respect of three eligible units and loss of the fourth s. 10A unit has to be set off against the normal business income. The Tribunal in case of Honeywell International (India) (P) ltd. vs Dy. CIT (supra) has also followed the same view. Therefore respectfully following the above judgments, the order of the Addl. CIT cannot be sustained. We accordingly set aside the order of the Addl. CIT and allow the claim of the ass....
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....s that the above expenses are not to be included and not that the export turnover should be reduced by such expenses. Accordingly, it is submitted that only expenses those are separately charged to the client in the invoice, should be reduced in computing the export turnover if such expenses are already included in the turnover. In the present case, CG India's turnover does not include any such expenses. Hence, it is submitted that the same should not be reduced from the export turnover. Such a legal arguments have been upheld by the Bombay High Court in assessee's case for AY 2006-07 which for the sake of ready reference is reproduced herein below :- "These expenses have been incurred for the purposes of the business of software development at the software units in India. It is that finding which the Assessing Officer was unable to controvert or unable to bring any contrary material to disprove the same. It is in that light that the Tribunal found that the Assessing Officer could not have insisted on the deduction. It is that exercise undertaken by the Assessing Officer which has not been upheld but rather disapproved by the Tribunal. This is a finding purely on the f....
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....d. Counsel submitted that this issue is covered by the decision of Tribunal in assessee's own case for the assessment year 2009-10 wherein it is held it is similar to issue of telecommunication expenses and accordingly, decision of Bombay High Court will be followed. Thus, respectfully following the order of the Hon'ble Bombay High Court and the ITAT decision for AY 2009-10 we set aside the orders of the revenue authorities and direct the AO to delete the disallowance and compute the exemption as per law. 32. In ground no. 14, assessee has challenged the disallowance of interest amounting to Rs. 1,86,089/- and expenses amounting to Rs. 8,62,370/- u/s 14A of the Act, as expenditure incurred for earning dividend income. 33. The relevant facts are that, the assessee has earned dividend income of Rs. 2,83,000/- from units of mutual fund, which were claimed as exempt. The assessee's case had been that, it had made investment out of its surplus funds which was at Rs. 244 crores in the beginning of the year against which it has invested only Rs. 17 crores, therefore, no interest expenses can be attributed to the earning of exempt income. For the purpose of indirect expenses, the ass....