TaxTMI 
TaxTMI 
2016 (9) TMI 1458
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....services to its Associated Enterprise (AE) Applied Inc as a captive service provider. The financials of the assessee as well as international transactions for the year under consideration have been reproduced by the Transfer Pricing Officer (TPO) as under : Software development & Engineering Services Rs.2,063,193,768 Total Expenditure Rs.1,875,630,698 Less : Foreign Exchange Loss Rs.23,976,188 Operating Expenditure Rs.1,851,654,510 Operating Profit Rs.211,539,258 OP/OC 11.42% Particulars Paid Received Software development services 1,955,823,476 Support Services 107,370,292 Reimbursement of expenses 31,949,528 Recovery of expenses 8,584,353 Recovery of withholding taxes of employees on Restricted Stocks Unit granted and remitted to local tax authorities. 13,610,607 3. The only dispute in these appeals is regarding the Arm's Length Price ('ALP') of software development services to the AE and consequent adjustment by the TPO apart from the issue of exclusion of expenses incurred in foreign currency while computing the deduction und....
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....ommunication Technologies Ltd. 24.13 25.46 13 Tata Elxsi Ltd. (seg) 20.91 19.95 AVERAGE MARGIN 24.82 24.77 After giving working capital adjustment, the TPO computed the adjusted average PLI at 24.77% and proposed an adjustment under Section 92CA of the Act of Rs. 23,41,94,490 as under : Computation of arm's length price by the TPO and the adjustment made : Arm's Length Mean Margin 24.82% Less: Working Capital Adjustment 0.05% Adjusted mean margin of the comparables 24.77% Operating Cost Rs. 175,52,43,966/- Arm's Length Price - 124.77% of Operating Cost Rs. 219,00,17,896/- Price Received Rs.195,58,23,477/- Shortfall being adjustment u/S. 92CA Rs.23,41,94,419/- The assessee challenged the action of the TPO/A.O. before DRP and raised various objections including the comparability of certain companies selected by the TPO as well as the issue of rejection of certain companies selected by the assessee in the TP Study. The DRP rejected 9 companies out of the set of 13 comparables selected by the TPO on various criteria and filters applied by it. The final list of comparables after the directions of the DRP is....
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....hat the motive of the Appellant was to shift profits outside India by manipulating the prices charged in the international transaction, which is a pre-requisite condition to make any adjustment under the provision of Chapter X of the Act. 3. Determination of arm's length price of international transactions 3.1 The Ld. Panel and AO/ TPO erred in rejecting the value of international transactions as recorded in the books of account, as the arm's length price. 3.2 The Ld. Panel and AO/ TPO erred in determining a new arm's length price in substitution of the arm's length price as determined by the Appellant. 4. Determination of Net Cost Margin of the Appellant 4.1 The AO / TPO had grossly erred on facts and in law in benchmarking the transactions of the Appellant without considering the differences in the functions performed, assets employed and risk undertaken by the Appellant visà- vis comparable companies. The Ld. Panel erred in confirming the same. 4.2 The Ld. AO / Ld. TPO had erred on facts and in law in not acknowledging that the sub-contracting charges, incurred by the Appellant, represents arm's length consideration, a....
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.... inconsistently such filter, without considering the specific segmental results and the Ld. Panel also erred in confirming the same. 6.7 The AO/ TPO erred on facts in arbitrarily rejecting companies having export revenues less than 75% of total sales and the Ld. Panel also erred in confirming the same. 6.8 The AO/ TPO erred in rejecting companies having employee cost less than 25% of total sales and the Ld. Panel also erred in confirming the same. 6.9 The AO/ TPO also erred on facts and in law in arbitrarily rejecting companies with different year ending (i.e. other than 31 March 2010) and the Ld. Panel also erred in confirming the same. 6.10 The AO/ TPO erred in facts in arbitrarily rejecting companies based on their financial results without considering the functional comparability. 6.11 The AO/ TPO also erred on facts in wrongly computing the margins of a certain companies identified as comparable by the TPO. 6.12 The AO/ TPO erred in rejecting Akshay Software Technologies Ltd, L G S Global Ltd, Powersoft Global Solutions Ltd, Helios & Matheson Information Technology Ltd. and Vama Industries Ltd despite these companies being ....
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....xport turnover, without considering the fact that the said travel expenses are not incurred for the purpose of rendering any technical services outside India. 10.3 The Ld. Panel erred in upholding the action of the Ld. AO in not making a corresponding reduction of the foreign exchange loss of Rs. 22,010,559 from the 'total turnover' after having reduced the same from the 'export turnover' and not following the decision of the Hon'ble Karnataka High Court in the case of Tata Elxsi Ltd vs. ACIT [2011] [349 ITR 198 wherein it was inter alia held that expenses reduced from the export turnover ought to be reduced from the total turnover as well. 11. Initiation of penalty proceedings The Appellant submits that based on the facts and circumstances of the case, there was no basis for the AO to initiate proceedings under section 274 read with section 271 of the Act. 12. Relief 12.1 The Appellant prays that directions be given to grant all such relief arising from the above grounds and also all relief consequential thereto. 12.2 The Appellant desires leave to add to or alter, by deletion, substitution or otherwise, any or all of the above....
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.... the said filter applied by the TPO. Therefore if the assessee is getting some of its work from third party it will be part of the operating cost of the assessee and cannot be excluded. He has further submitted that for the Assessment Year 2010-11, the DRP decided this issue against the assessee. The learned Departmental Representative has relied upon the orders of the authorities below. 7. We have considered the rival submissions as well as the relevant material on record. Undisputedly, the assessee is charging a mark up on the software development services provided to the AE being captive service provider. Therefore the assessee is not acting as an agent or distributor of the AE but is a provider of services of its own. It is not the case of rendering services of an agent without any value addition but the assessee is providing software development services to the AE and charging margin on the same. Therefore the cost on the software development activity is incurred by the assessee and charging the AE on the said services with a mark up of 10% on cost. The cost of subcontracting in software development services is also charged with 10% mark up to the AE. When the margin on the....
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....able of the assessee's software development services segment. He has relied upon the decision of the co-ordinate bench of this Tribunal dt.22.4.2016 in the case of Electronics for Imaging India Pvt. Ltd. Vs. DCIT in IT(TP)A Nos.227 & 285/Del/2013. 9.1.2 On the other hand, the learned Departmental Representative has submitted that the main activity of this company is software development services. Therefore the insignificant variation in activity if any cannot be a determinative factor while computing the ALP under Transactional Net Margin Method (TNMM). He has relied upon the decision of the Delhi Bench of ITAT in the case of Toluna India Pvt. Ltd. Vs. ACIT (2014) 151 ITD 177. 9.1.3 We have considered the rival submissions as well as the relevant material on record. We find that the assessee has raised objections against this company before the DRP. However the DRP did not adjudicate the objections raised by the assessee. The decision of this Tribunal in the case of M/s. Electronics for Imaging India Pvt. Ltd. Vs. DCIT (supra) relied upon by the learned Authorised Representative is based on two aspects. (i) The information received under Section 133(6) of the ....
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....refore the minor variation in the activity would not render these companies non-comparable when a comparable price is considered under TNMM. 9.2.4 We have considered the rival submissions as well as the relevant material on record. At the outset we note that the functional comparability of these two companies have examined by the co-ordinate bench of this Tribunal in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) in para 60 and 61 & paras 24 to 26 as under : " Persistent Systems & Solutions Ltd. 60. The assessee has the grievance against rejection of this company by the DRP. The ld. AR has submitted that assessee did not raise any objection against this company, however, the DRP has rejected the said company. Therefore, the said company should be retained in the list of comparables. 61. Having considered the rival submissions as well as relevant material on record, at the outset, we note that the DRP has examined the functional comparability of this company by considering the relevant details as given in the annual report of this company. The DRP has given the finding that the entire revenue has been earned by this company f....
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....e 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." We further find from the Annual Report that there is no change in the activity and functions of these companies during the year under consideration in comparison to the Assessment Year 2010-11. Accordingly, following the decisions of the co-ordinate benches of this Tribunal (supra), we direct the A.O./TPO to exclude these two companies from the set of comparables. (iv) Sasken Communication Technologies Ltd. 9.3.1 The ld. AR of the assessee has submitted that this company is engaged in the development of software products as it has inventories, intangible assets as well as high expenditure on R&D. Therefore this company is functionally not comparable to the assessee. The ld. AR has referred to the Annual Report of this company and submitted that it derives income from software products specifically new products launched called 'Vyaparaseva' during F.Y. 2010-11. Thus this company is en....
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....ment services segment. Accordingly, we do not find any error or illegality in the findings of the DRP." We further note that the DRP has not adjudicated the objections of the assessee whereas for the Assessment Year 2010-11, the DRP rejected this company as comparable. Accordingly, we set aside this issue to record of the A.O./TPO to verify the relevant facts and compare with the facts recorded by the Tribunal in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) for the Assessment Year 2010-11 and then decide the issue after giving an opportunity of hearing to the assessee. 11. The next ground of assessee's appeal is regarding seeking inclusion of some of the comparables in the set of comparable companies which are as under : (i) Akshay Software Technology Ltd. (ii) Powersoft Global Ltd. (iii) R Systems International Ltd. (i) Akshay Software Technology Ltd. 12.1 This company was selected by the assessee in the TP Study however the TPO rejected this company on the ground that its functions appear to be more in the nature of support services or ITES. The DRP has confirmed the rejection on a different ground by applying a f....
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....a normal feature for a software development company for the simple reason that it is a skill oriented business. The skill-set required for the employees in the case of the assessee, required knowledge of Arabic also, making it all the more scarce. In any case, for A. Y. 2009-10, M/s. Akshay Software Technologies Ltd was considered as a proper comparable and not excluded. In his order dt.07.01.2015 for A. Y. 2009-10, after applying the onsite revenue filter of 50%, TPO himself had considered M/s. Akshay Software Technologies Ltd, as a proper comparable. As to the argument of the Ld. DR that Related Party Transaction, volume of M/s. Akshay Software Technologies was not provided by the assessee, leading to its rejection, we find that assessee had at para 5.172 and 5.173 of its objections before DRP, submitted that RPT of the said company was 4.33% only, compiling the figures from previous years'data available in Annual Report of Financial Year 2010-11 of the said company. This working stands unrebutted. We are, therefore of the opinion that the assessee has to succeed in its claim that M/s. Akshay Software Technologies Ltd, is a proper comparable. We direct the TPO to include the said....
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....he other hand, the learned Departmental Representative has relied upon the orders of the authorities below and submitted that there is no dispute that this company has not reported employee cost separately and therefore it is not possible to ascertain the employee cost and to apply employee cost filter. Further this company has also shown its goodwill in its balance sheet and therefore the intangible assets renders this company non-comparable to the assessee. 13.4 We have considered the rival submissions as well as the relevant material on record. This company has shown the purchases and personnel cost at page 39 of the Annual Report as a combined expenditure as under : Purchases & Personnel Cost : Rs. 250,61,55,607. Therefore the cost of employee is not separately reported by this company. Further it is not clear whether the goodwill is self-generated or acquired intangible asset. Accordingly, this issue is set aside to the record of the Assessing Officer/TPO to verify the relevant facts to ascertain the employee cost and then decide the functional comparability. Needless to say the information under Section 133(6) may be obtained for the purpose of ascertaini....
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....the total income of Rs. 141 Crores. Therefore the revenue from Information Technology transactions services is less than 75% and consequently this company does not satisfy the filter of information technology revenue applied by the TPO itself. Accordingly, we do not find any reason to interfere with the order of the DRP for this issue. (ii) Icra Techno Analytic Ltd. 17.1 We have heard the learned D.R. as well as learned A.R. and considered the relevant material on record. The DRP has rejected this company by recording the fact as under : " We examined the annual report from which it is evident that the entire revenue has been shown under service segment which indicates that the revenue from software development, consultancy, licensing and sublicensing, annual maintenance charges for software support. WEB development and hosting has been reported in one segment, thus in absence of segmental information, we concur with the view of the DRP in preceding year and accordingly direct the Assessing Officer to exclude this company from comparables." 17.2 We further note that the Tribunal in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) has cons....
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....ered this issue in para 17 as under : " (2) Infosys Ltd. 17. The assessee objected against the selection of this company on the ground that this company has a big name and brand value and therefore it has a bargaining power. It also contended that the turnover of this company is Rs. 21,140 crores, which is 442 times higher than the assessee." Following the decision of this Tribunal in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) , we do not find any reason to interfere with the directions of the DRP on this issue. (iv) L&T Infotech Ltd. 19. We have heard the learned D.R. as well as learned D.R. and considered the relevant material on record. The DRP rejected this company by recording the facts at page 15 as under : We further find that the comparability of this company has been considered by the co-ordinate bench of this Tribunal in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) in paras 62 to 65 as under : " 62. The assessee has raised objection against this company on the basis of high turnover in comparison to the assessee. It was also contended that related party transac....
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....s 73.30% which is less than 75% applied by the TPO. Therefore this company does not qualify the export earning filter applied by the TPO. Further the co-ordinate bench of this Tribunal in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) has considered this issue in paras 30 to 33 as under : 30. The assessee has raised objections against this company on the ground that the company is functionally different from the assessee. Though the TPO has considered the software development and services segment of this company as comparable to that of assessee, however, the assessee contended that even within the software segment, this company is engaged in diverse activities. The assessee placed reliance on the information in the annual report under the Directors Report and submitted before the DRP that even under the software development services segment, this company is engaged in various diversified activities including product design service, innovation design, engineering service, visual computing labs, etc. The assessee also placed reliance on the decision of Mumbai Bench of the Tribunal in the case of Telcordia Technologies Pvt. Ltd. v. ACIT, 137 ITD 1 (Mum)....
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.... Ltd. (ii) Mindtree Limited (Seg.) (iii) R S Software India Pvt. Ltd. 21.1 At the time of hearing, the learned Authorised Representative of the assessee has submitted that the assessee has no objections if these three companies are restored to the set of comparables as the assessee did not raise any objection before the DRP but the DRP rejected this company suo moto. 21.2 In view of the fact that both the revenue as well as the assessee are seeking inclusion of these companies in the set of comparables, we set aside the directions of the DRP qua these comparables and restore these three companies to the set of comparables. 21.3 As we have directed to exclude certain companies as well as include some of the companies in the set of comparables therefore the TPO/A.O is required to recompute the ALP on the basis of the final set of comparables after giving effect to this order. Needless to say the benefit of tolerance range of +/- 5% as per the proviso to section 92C(2) be also considered. 22. The next ground of the assessee's appeal is regarding exclusion of sub-contracting charges from export turnover while computing deduction under....
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....r as laid down by the Hon'ble High Court in the case of Tata Elxsi Ltd. (supra). A similar issue has been raised by the revenue regarding exclusion of telecommunication and travel expenses from export turnover which is also covered by the decision in the case of Tata Elxsi Ltd. (supra). The Hon'ble High Court while dealing with the definition of export turnover as well as total turnover as per the provisions of section 10A has held as under : "10. The Bombay High Court had an occasion to consider the meaning of the word 'total turnover' in the context of Section 10-A, in the case of CIT v. Gem Plus Jewellery India Ltd. [2011] 330 ITR 175 [2010] 194 Taxman 192 (Bom.). Interpreting sub-Section (4) of Section 10-A, it is held as under: "Under sub-section (4) the proportion between the export turnover in respect of the articles or things, or, as the case may be, computer software exported, to the total turnover of the business carried over by the under-taking is applied to the profits of the business of the undertaking in computing the profits of the business of the undertaking in computing the profits derived from export. In other words, the pro....
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....has been defined. The definition of "export turnover" excludes freight and insurance. Since export turnover has been defined be Parliament and there is a specific exclusion of freight and insurance, the expression "export turnover" cannot have a different meaning when it forms a constituent part of the total turnover for the purposes of the application of the formula. Undoubtedly, it was open to Parliament to make a provision to the contrary. However, no such provision having been made, the principle which has been enunciated earlier must prevail as a matter of correct statutory interpretation. Any other interpretation would lead to an absurdity. If the contention of the Revenue were to be accepted, the same expression viz. "export turnover" would have a different connotation in the application of the same formula. The submission of the Revenue would lead to a situation where freight and insurance, though it has been specifically excluded from "export turnover" for the purposes of the numerator would be brought in as part of the "export turnover" when it forms an element of the total turnover as a denominator in the formula. A construction of a statutory provision which would lead ....
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.... commonality, the understanding should also be the same. In other words, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover. The components of the export turnover in the numerator and the denominator cannot be different. Therefore, though there is no definition of the term 'total turnover' in Section 10-A, there is nothing in the said Section to mandate that, what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. Though when a particular word is not defined by the legislature and an ordinary meaning is to be attributed to the same, the said ordinary meaning to be attributed to such word is to be in conformity with the context in which it is used. When the statute prescribes a formula and in the said formula, 'export turnover' is defined, and when the 'total turnover' includes export turnover, the very same meaning given to the export turnover by the legislature is to be adopted while un....
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....epartmental Representative has relied upon the orders of the authorities below. 23.3 We have considered the rival submissions as well as the relevant material on record. It is pertinent to note that the turnover is considered on mercantile basis and not on realization basis. Therefore any loss on account of fluctuation of forex rate would be a business loss and should have effect of reduction of profits and corresponding eligible profits for deduction under Section 10A of the Act. Such loss cannot be reduced from export turnover based on the invoices and the loss on realization is a business loss not affecting the turnover. Therefore we direct the Assessing Officer to recompute the deduction under Section 10A by considering the profit after loss on Forex fluctuations on realization and not by reducing the export turnover. In any case, if the loss is excluded from export turnover then the corresponding total turnover should also be reduced by such amount as per the decision of the Hon'ble jurisdictional High Court in the case of Tata Elxsi Ltd. (supra). 24. In the result, the appeal of the assessee as well as the revenue are partly allowed. Order pronounced in the open ....
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....s an art and not exact science as no two companies are exactly same and also the DRP erred in applying the service revenue income filter by taking 'software service income' to turnover ratio rather than 'service income' to turnover ratio. Document 2 Corporate Issue: 8. The DRP erred in directing the AO to follow the ratio laid down by the Hon'ble Court in the case of Tata Elxsi Limited 349 ITR 98 and exclude sub- contracting charges, travel expenses and communication expenses from the total turnover also while computing the deduction u/s 10A of the I.T. Act, without appreciating the fact that there is no provision in section 10A that such expenses should be reduced from the total turnover also, as clause (iv) of the explanation to section 10A provides that such expenses are to be reduced only from the export turnover. 9. The DRP erred in not appreciating the fact that the jurisdictional High Court's decision in the case of Tata Elxsi Limited 349 ITR 98 has not been accepted by the department and an appeal has been filed before the Hon'ble Supreme Court. 10. For these and such other grounds that may be urged at the time of hearing, ....