TaxTMI 
TaxTMI 
2018 (10) TMI 70
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....rder dated 23.07.2018, a copy placed on record, the Tribunal rejected the assessee's contention by chiefly observing that the TP study made available by the assessee was found to be not fully in compliance with the provisions of the Act and Rules and further the exclusion of some comparables and other adjustments made by the TPO tantamount to its implied rejection. This is how, the appeal is now being taken up for final disposal on all other grounds. PROVISION OF SOFTWARE DEVELOPMENT SERVICES (Hyderabad Unit) 3. The first issue raised by the assessee in its appeal is against the addition on account of transfer pricing adjustment amounting to Rs. 197,23,68,765/- made by the Assessing Officer (AO) in the international transaction of ' Provision of Software Development services'. 4. Briefly stated, the facts of the case are that the assessee was set up in India in May, 1998 and is a subsidiary of Microsoft Ireland Research Ltd., Ireland (99.99% shareholding) with the ultimate parent company, Microsoft Corporation, USA. The assessee is engaged, inter alia, in rendering Software development services and Information Technology Enabled Services (ITES). The assessee filed Audit Re....
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....tware product life cycle comprising of three phases, namely, Product Definition, Product Engineering and Servicing. Under the Product Definition (Conceptualization Phase), a value proposition and a product prototypes are developed based on customer feedback etc. Then, marketing research is performed to test the value proposition and the marketing feasibility of a product prototype, which closes the first phase. This phase was stated to be performed entirely in US by MS Corp except for a very limited role being played by the assessee in India. In the second phase of Project engineering which is a five-step process involving determination of the requirements, design, implementation, verification and release, the assessee submitted that the bulk of this activity takes place in the US at MS Corp. and the assessee has a limited input into the design of the product. The final phase of Servicing was stated to be performed in the US by MS Corp. In the entire software product lifecycle, the assessee submitted that it provided limited services to MS Corporation and that too under their directions. The assessee also stated to have provided software development services to Microsoft, USA, by d....
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....companies and also the exclusion of some of its selected companies by the TPO in/from the final list of comparables. 7. Comparability of companies can be gauged only after fully ascertaining the functional profile of the assessee in respect of the international transaction under challenge. Thus, the first and the foremost task at our end is to identify the nature of actual services rendered by the assessee to Microsoft, USA under this international transaction. The assessee's main plank of submissions before the TPO was that it provided limited services to MS Corp., USA in the product development cycle, which activity was wholly supervised by MS Corp., USA and done in different countries and the assessee was simply involved in creating some features within the overall product, which made it an ordinary captive low profile software developer. On the other hand, the case of the Revenue is that the assessee is engaged in providing high end software development services involving innovations and the same are in the context of products to be launched in future and such services result in creation of intangibles, which are distinct from a routine software development. 8. In this re....
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....rkets (page 15 of the TP study report); the assessee is creating ten inch language tools which are available for free for download from Microsoft (page 15 footnote of the TP study). The TPO has recorded in para 2.8 on page 46 of his order that the patents were created by the assessee in India in respect of the work done by it, which were registered in USA. This fact, in the opinion of the TPO, abundantly established that the assessee is rendering high-end software development services, which are unique and quite different from normal software activities. 9. The ld. AR heavily relied on interviews of certain employees of the assessee-company conducted by the Advance Pricing Agreement (APA) Authorities in September, 2013 to buttress his point that the assessee was providing routine software development services of coding and testing and that too, under the direct supervision of Microsoft, USA, and further such services were of little consequence in the overall MS products. It was submitted that in these interviews all the officials categorically stated that the direction for doing the work came from MS, USA and the execution was done strictly according to such directions. A view w....
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....ated that the same would be submitted later. There is nothing on record to substantiate that anything was submitted later. In response to question no. 6, he stated that the IDC team works on different features in different Windows versions e.g., Windows Store work going back to Redmond and the IDC team working on something totally different for the next version of Windows. In response to question no. 8 about the degree of functional autonomy, he stated that: "Once I have the feature or sub-feature task assigned to me, I would have autonomy to engineer/execute on this (as long as it is independent)." Next is the interview of Mr. Nitin Chandel with the designation of Partner Engineering Manager, Bing Ads Team, Bangalore. In response to question no.1, he stated that as a Partner Engineering Manager, Bing Ads team have carried out three functions, namely, Development, Test and PM. In response to Question no.3(e), he stated that they sometimes use vendors (such as Infosys) to do some work. A common thread running through all the interviews is that they admitted that the work was assigned to them by MS, USA which is only a feature of the overall product and not the product in itself and ....
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....r that though the assessee claimed in Parent-Subsidiary Agreement (PSA) dated 01.07.2003 that it undertook the activity of research and development work as requested and approved in writing by MS Corporation from time to time, but, no such evidence was furnished by the assessee despite being specifically asked to do so vide letter no.543 dated 15.12.2014. Thereafter, it has been noted by the TPO in para 2.5 of the show cause notice, which has been reproduced in his order, that though the assessee admitted in its TP Study report that it had a varying role to play in all the three phases, namely, Product Definition, Product Development and Product Servicing, but no elaboration of the degree of role played was done by the assessee. 12. Notwithstanding the above interviews, the assessee itself summarized its role before the TPO in different stages of the Software Product Lifecycle by means of a Table, which has been reproduced on page 42 of the TPO's order, reading as under :- Type of functions MIRPL MS Corp. Conceptualisation and scoping of project work including defining functional specifications Very Limited Yes Project execution Yes subject to supervision....
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.... the Transfer Pricing Study Report, the assessee not only took a contrary stand before the TPO by trivializing its role as restricted only to coding and testing of some features of the Microsoft products but also failed to substantiate the same. 15. With a view to give one more chance to the assessee to substantiate its version about the nature of work carried out in this international transaction, the Bench required the ld. AR to produce primary evidence of the work actually done with the help of Requisition and disposal registers etc. divulging the date when a particular work was assigned to it, how many days it took in doing the same, how many man-hours went into its doing, what was the final output and when was it sent to the AE. The ld. AR refused to share any such primary data and harped on the interviews conducted by the APA Authorities, whose relevance at this juncture has been discussed supra. It is apparent that the assessee was not only obliged to but has, in fact, maintained such complete records. We have extracted infra the relevant parts of the PSA between the assessee and Microsoft, USA, which clearly provide that the 'Subsidiary (i.e. the assessee) hereby agrees ....
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.... fructified. 17. The ld. AR tried to justify his stand of not sharing the primary evidence by stating that the examination of such an evidence was not warranted as the interviews done by the APA Authorities gave enough hints about the work done. Such a submission that the authorities should decide the nature of work done without looking into primary evidence of the actual work done is not only strange but totally out of place. How an assessment is to be done falls in the exclusive domain of the authorities. The assessee cannot be allowed to dictate to the authorities as to the nature of evidence to be examined and the extent of such an examination for determining the issues which are of immense importance in the assessment. It is the sole prerogative of the authorities to decide the course of action and the nature of evidence to be examined for enabling them to complete the assessment, as long as their requirements do not breach the level of reasonableness and relevance. 18. Reverting to the point, the issue is the examination of comparables, which can't be decided unless the assessee's functional profile is fully understood. Examination of primary evidence of the work done b....
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....hts in such developments shall be and are hereby transferred, sold, conveyed and assigned to MSFT. To the maximum extent permitted by law, Subsidiary hereby assigns to MSFT and waives and agrees never to assert any and all moral rights, including neighboring rights, in such developments. Subsidiary shall itself, and shall require all individuals or entities working with Subsidiary in connection with the performing of research and development work for MSFT to execute and deliver such instruments and take such other action as may be required to carry out the transfer, sale, assignment or waiver of copyright, patent and other proprietary rights contemplated by this Section 5.1. Any documents, magnetically, optically or otherwise encoded media, or other materials created by Subsidiary, or under Subsidiary's direction, in performing research and development work for MSFT shall be owned by MSFT in their entirety. 5.2 Other Research and Development, including Without Limitation, Localization, Consulting and Training. As further consideration for the rights granted to Subsidiary by MSFT pursuant to this Agreement, Subsidiary hereby acknowledges MSFT ownership of all copyr....
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.... by MSFT in their entirety. Such developments shall (to the extent possible) be deemed "works made for hire" created by Subsidiary for MSFT pursuant to 17 U.S.C. Section 102(b). All copyrights (to the extent (if at all) not already owned by MSFT as "works made for hire), patents and other proprietary rights in such developments shall be and are hereby transferred, sold, conveyed and assigned to MSFT. To the maximum extent permitted by law, Subsidiary hereby assigns to MSFT and waives and agrees never to assert any and all moral rights, including neighboring rights, in such developments. Subsidiary shall itself, and shall require all individuals or entities working with Subsidiary in connection with the performing of research and development work for MSFT to execute and deliver such instruments and take such other action as may be required to carry out the transfer, sale, assignment or waiver of copyright, patent and other proprietary rights contemplated by this Section 5.1. Any documents, magnetically, optically or otherwise encoded media, or other materials created by Subsidiary, or under Subsidiary's direction, in performing research and development work for MSFT shall be owned b....
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....s. In one general embodiment, this keyword extraction involves first accessing a set of topically related documents. A number of candidate keywords are then identified from the set of related documents. A weighted keyword candidate-document matrix is formed using these candidate keywords, and it is partitioned into multiple groups of keyword candidates. Dense clusters of keyword candidates whose density exceeds a prescribed density threshold are then identified in each of the groups of keyword candidates. Finally, the keyword candidates associated with each dense cluster are designated as topically related keywords." 25. Another creation of intellectual property by the assessee in India which has been patented in USA on 08.01.2013 is 'resource allocation framework for wireless or wired network.' Abstract of this work is as under:- A resource allocation framework for wireless/wired networks is described. In an embodiment, methods of end host based traffic management are described which operate separately from the underlying access control protocol within the network (e.g. wireless MAC protocol or TCP). The rate limits for each flow are set based on per-flow weights, which may ....
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....esearch activities and is significantly different from a routine software developer. 28. The assessee has harped on its role as limited to providing services in relation to certain functions or modules within a product and not for the whole product itself which, in turn, is assembled by MS Corporation in Redmond, USA. The ultimate products made by Microsoft, USA, involve several software, some of which are developed by its AEs in different parts of the world including the assessee. Even though integration of all the software developed in several countries is done in the USA, that does not mean that the research work done by the assessee or for that matter by AEs in the other countries, ceases to be a research work in itself. In such circumstances, it cannot be said that research work is done exclusively by Microsoft, USA, which is bringing together the research work done by several entities. In fact, all the entities contributing to the bringing out of a new product or a new version of the existing product by means of inventions, are doing research work. The assessee cannot be compared with a run-of-the-mill software developer as has been unsuccessfully attempted by the ld. AR. ....
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.... on the point : - "The CBDT has carefully considered the matter and lays down the following guidelines for identifying the Development Centre as a contract R&D service provider with insignificant risk. 1. Foreign principal performs most of the economically significant functions involved in research or product development cycle either through its own employees or through its associated enterprises while the Indian Development Centre carries out the work assigned to it by the foreign principal. Economically significant functions would include critical functions such as conceptualization and design of the product and providing the strategic direction and framework; 2. The foreign principal or its associated enterprise(s) provides funds/capital and other economically significant assets including intangibles for research or product development. The foreign principal or its associated enterprise(s) also provides a remuneration to the Indian Development Centre for the work carried out by the latter; 3. The Indian Development Centre works under the direct supervision of the foreign principal or its associated enterprise which has not only the capability ....
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....tee. It is pursuant to such reports that the CBDT came out with the above Circular specifying the guidelines for identifying if a Development Centre in India can be termed as a contract R&D service provider. The recommendations of the Committee, to the extent of incorporation in the Circular, should be considered to have been accepted by the Government. In that view of the matter, it is vivid that guidelines laid down in the Circular, though not conclusive, but are of some relevance in deciding if a particular Development Centre in India is a contract R&D service provider. On testing the facts of the case on the touchstone of the Circular, it is manifested that the assessee is satisfying all the ingredients except the one given at Sl. no. 5 which is not applicable to the facts of the instant case since Microsoft, USA is not located in a country perceived as a low tax or no tax jurisdiction. It can be seen that Microsoft, USA is performing most of the economically significant functions involved in research or product development cycle, while the assessee as an Indian Development Centre carries out the work assigned to it by the foreign principal (Sr. no. 1). Microsoft, USA is remune....
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....ssessee, we now proceed to examine the companies challenged before us. First of all, we take up the exclusions sought by the assessee from the list of comparables finalized by the TPO. In fact, the TPO shortlisted four companies, including Persistent Systems Ltd., which was assessee's comparable. The assessee has assailed the inclusion of all the four including its own comparable. We will deal with all of them in seriatim. (i) E-Infochips Bangalore Limited. 37. The TPO proposed to include this company. The assessee objected to the same by contending that it was functionally different and failed the service income filter along with diversified operations and non-availability of segmental data. The TPO rejected such contentions by noticing that the assessee as well as E-Infochips Bangalore Ltd., were engaged in the development of software. He, therefore, included it in the list of comparables, against which the assessee has come up in appeal before us. 38. Having heard both the sides and perused the relevant material on record, it is observed from the Annual report of this company for the year ending 31.03.2011, a copy of which has been placed on record, that its income from....
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....been generated from its product 'Finacle', reference to which has been made on page 8 of the Director's Report. The extent of profit from software services, in the overall kitty of profits from software services and software products, cannot be separated because of the merged expenses. In view of the fact that the total profit of this company includes profit from software development services as well as software products and there is no separate profit available of the software development services, we are unable to countenance the comparability of this company as the assessee is not engaged in licensing of any software products. We, therefore, order to exclude Infosys Technologies Ltd. from the list of comparables. (iii) Persistent Systems Ltd. 41. Though this company was included by the assessee in its list of comparables, the same has still been challenged before us. The ld. AR contended that this company was erroneously included in the list of comparables as it is also a product company which is apparent from the Annual report of this company. 42. The ld. DR raised a preliminary objection to the effect that once a company has been considered by the assessee as comparab....
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.... the Tribunal in DCIT vs. Quark Systems Pvt. Ltd. (2010) 132 TTJ (Chd) (SB) 1 has held that a company which was included by the assessee and also by the TPO in the list of comparables at the time of computing ALP, can be excluded by the Tribunal, if the assessee proves that the same was wrongly included. Similar view has been upheld by the Hon'ble Delhi High Court in Xchanging Technology Services India Pvt Ltd [TS-446-HC-2016(DEL)- TP]. The Hon'ble Bombay High Court in Tata Power Solar Systems Ltd [TS-1007-HC-2016(BOM)-TP] and the Hon'ble Punjab & Haryana High Court in CIT VS. Mercer Consulting (India) P. Ltd. (2017) 390 ITR 615 (P&H) have also approved similar view. In view of the foregoing discussion, we do not find any substance in the preliminary objection taken by the ld. DR. 44. Coming to the comparability or otherwise of this company, we find from its Profit & Loss Account that its income from 'Sale of software services and products' stands at Rs. 6,101.27 millions. Product revenue is 7.2% of the total revenue. Thus, it is established that this company is engaged in rendering software development services as well as sale of software products. Even though the percentag....
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....s of the relevant transaction are determined in substance between such other person and the associated enterprise'. On going through the prescription of sub-section (2) of section 92B, it is clearly borne out that a transaction with a non-AE shall be deemed to be a transaction entered into between two AEs if there exists a prior agreement in relation to the relevant transaction between the third person and the AE or the terms of the relevant transaction are determined in substance between the third person and the AE. When we consider section 92B(2) in combination with Rule 10A(a), it follows that the transaction between non-AEs shall be construed as a transaction between two AEs, if there exists a prior agreement in relation to the relevant transaction between third person and the AE. If such an agreement exists, the third person is also considered as an AE and the transaction with such third person becomes international transaction within the meaning of section 92B. Once there is a transaction between two associated enterprises, it ceases to be an 'uncontrolled transaction' and, thereby, goes out of reckoning under Rule 10B(1)(e)(ii). 47. Coming back to the facts of this compan....
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....d by the DRP. 50. Having heard both the sides and perused the relevant material on record, we find from the Directors' report of this company, whose copy has been placed on record by the ld. AR, that it is also engaged in sale of Products, which fact gets reflected from the first item, being 'Income from Software Services and Products' under point 1(i), that is, 'Financial Results'. Page 5 of the Annual report, being, Annexure to the report of Board of Directors records that: "The company is a service provider and therefore has not set up a formal Research and Development unit." Page 15 of the Annual report is a copy of its Profit & Loss Account, which shows income from operations as 'Income from software services and products' at Rs. 11,47,22,327/-. Thus it becomes apparent that this company, unlike the assessee, is not only not engaged in rendering Research and development services, but is also in the sale of Products, thus losing the comparability. The reasoning given above for exclusion of Infosys Technology Ltd. and Persistent Systems Ltd., as those also being Product companies, applies with full force to the exclusion of this company as well. 51. The ld. AR submitted th....
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....providing any R&D services. The view taken by the authorities is, thus upheld. (iii) Caliber Point Business Solutions Ltd. (Others segment). 54. The TPO held this company to be not comparable by noting on page 56 of his order that it was not rendering any high-end software services. He further held on page 69 that this company was carrying BPO services. 55. After considering the rival submissions and going through the Annual report of this company, a copy of which has been placed by the ld. AR on record, it can be seen from Schedule-12, being, Significant Accounting Policies and Notes Forming Part of Accounts that under the head 'Revenue recognition', it has been mentioned that: "The company's revenue from process outsourcing and software support and related activities arise from unit priced contracts, time based contracts and fixed price projects." Unlike the assessee, this company is not rendering any research and development software services to its AEs. On the contrary, it is also providing BPO services, which make it non-comparable with the segment of the assessee-company under consideration. We, therefore, approve the view taken by the authorities on the exclusion of....
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....essee tried to make out a case before the TPO that his calculation of margin was not correct by advancing its own calculation which has been set out at page 71 of the TPO's order. It is apparent even from such calculation that from the year ending 31.03.2008 to year ending 31.03.2011, there are persistent losses at (-) 2.01%, (-)2.35%, (-) 14.36% and (-) 3.70% respectively. In view of the fact that this company is a persistent loss making company in the relevant segment, the same ceases to be comparable. Even otherwise also, this company is not functionally similar as has been noted by the TPO on page 57 of his order that it is not engaged in rendering high-end services. The ld. AR could not draw our attention towards anything from the Annual report that this company under the relevant segment was also rendering any software research and development services. We, therefore, uphold the impugned order in removing this company from the list of comparables. (vi) Evoke Technologies Pvt. Ltd. 60. The assessee included this company, which got excluded by the TPO by observing on page 57 of his order that it was not engaged into any research and development, as was the assessee doing.....
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....e from rendering Research and development services as against its operating income of Rs. 56.90 crore. On the other hand, there is only a spend of Rs. 45.63 lac on research and development. Since R&D activity done by this company is meant for its own use and it has not earned any revenue from rendering R&D services, we hold that this company cannot be considered as comparable with the assessee, which is engaged in providing R&D software services to its AE under the current segment. Following the view taken hereinabove on similar lines, we approve the impugned order on excluding this company from the list of comparables. (ix) Mindtree Ltd. (IT Service Segment) 65. The TPO held this company to be not comparable by observing on page 58 of his order that it was not involved in rendering any high-end software services. 66. We have examined the Annual report of this company, a copy of which has been placed on record. Annexure to the Directors' Report provides under the head 'Research and Development' that this: "Company has a dedicated business unit for research and development which offers innovative solutions to clients and also fosters R&D within all business units to cre....
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....be considered as comparable. It is therefore, held to have been rightly excluded. (xi) R. Systems International Ltd. (Segment) 69. The assessee included the 'Software Development & Customisation Services Segment' of the company in the list of comparables. The TPO excluded the same by noticing on page 58 of his order that it was not involved in high-end software services. Then, on page 76, the TPO also noticed that the financial data of this company was available for a period of 12 months ending 31.12.2010. That is how, he held this company to be not includible in the list of comparables. The assessee is aggrieved by this exclusion. 70. We have heard both the sides and perused the relevant material on record. First of all, we take up the functional difference as noticed by the TPO on page 58 of his order. We have gone through the Annual report of this company, a copy of which has been provided in the paper book. It can be seen from the message of the company's Chairman, which is there on page 13 of the Annual report that under the heading 'Our business', it has been narrated that its : 'core service offerings include Product Engineering, sold under our brand of iPLM Service....
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....hairman that the : 'Company's Service Management team has announced that its Software-as-a-Service 'SaaS' based ITIL incident management software, iCare, is now available on Research in Motion's Playbook platform as well as on website'. This graphically demonstrates that the company is also engaged in sale of Products like iCare, which fact becomes more glaring from its Profit & Loss Account which has the first item under the head income as 'Sales and services.' It is further pertinent to note that though this company is also engaged in Research and development as is apparent from page 9 of its Annual report, but, the : "R&D activities include tools development with the object of devising efficient methods of preproduction phase." Thus, the R&D activity carried out by this company is meant for creating tools for its internal use and is not done as a service to its customers, as the assessee in question is doing. In view of the fact that this company has also income from software products and is not engaged in rendering research and development software services, we hold that this company was rightly excluded. 74. Having dealt with the inclusions or exclusions challenged by the a....
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....own PLI. In this regard, it was submitted that rental income earned by it to the tune of Rs. 17,22,16,198/- was considered as non-operating income. However, the assessee inadvertently did not exclude the corresponding expenses relating to such rental income from the total operating expenses. It was shown that the TPO himself, for the assessment year 2014-15, allowed deduction of such expenses from total operating expenses for the purpose of computation of the ALP. It was further pointed out that the DRP directed the TPO in relation to the assessment year 2012-13 for allowing deduction of expenses concerning the rental income from total operating expenses. 79. Having heard both the sides and perused the relevant material on record, it is seen that the assessee did earn rental income amounting to Rs. 17,22,16,198/- apart from income from operations as charges towards Software development and IT enabled services. Once rental income has been treated as non-operating qua the international transactions, as a sequitur, the corresponding expenses incurred in relation to earning of such rental income are also required to be removed from total operating expenses for the purposes of comput....
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....ustomer segments, from individual home users to corporate users. We have also gone through the assessee's Transfer pricing study report, which also throws some light on the nature of services provided under this international transaction. It is borne out from page 59 of the TP Study Report that the assessee's team in India tracks the calls made by the customers and routes them to the relevant support team. These teams, on receiving calls from the customers, understand their requirements, verify the service contracts of the customers and prepare the support requests and forward the same to the right support teams. The support requests prepared is serviced by India GSC's support engineer as a part of its product support services. In case any specific support request is not resolved by the support engineers at India GSC, the same is escalated to specific escalation queues and handled by the escalation teams based elsewhere in the world. In certain cases, the team at India GSC acts as escalation team and handles the cases escalated by other teams. We have also gone through the Product Support Service Agreement (PSSA) effective from 01.07.2002 between the assessee and Microsoft Corporat....
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....parability of the companies challenged before us. First of all, we take companies included by the TPO, which the assessee has contested as not comparable. (i) Accentia Technologies Ltd. 83. The TPO treated this company as comparable despite the assessee's initial inclusion and later exclusion, by observing that it is engaged in Medical transcription and income from coding and billing and collection, which falls under the overall umbrella of IT enabled sector. The assessee is aggrieved by the inclusion of this company. 84. Having heard both the sides and gone through the relevant material on record, we find from the Annual report of this company, whose copy is available on page 2153 onwards of the paper book, that it is engaged in rendering KPO services. The Managing Director of this company has said in his message to the shareholders on page 6 of the Annual report that the company decided to develop its own EMR (Electronic Medical Records) software rather than depending on third party offering and market the same all over the US. It has further been mentioned that due to these developments, the company invested large amount of funds in the development of EMR software and S....
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....is, hence, not comparable with a company providing ITES. This decision has also been rendered for the assessment year 2011-12, which is under consideration in this appeal. We, therefore, order to exclude this company from the list of comparables. (ii) ICRA Techno Analytics (Seg) 85. The TPO included this company in the list of comparables despite the assessee's objection of functional non-comparability etc., against which the assessee has come up before the Tribunal. 86. We have gone through the Annual report of this company, a copy of which is available on page 2237 of the paper book. Internal page 27 of this Annual report divulges that: 'the company is engaged in the software development and consultancy, engineering services, web development and hosting and subsequently diversifying itself into the domain of business analytics and business process outsourcing.' Under the head 'Revenue recognition', this company has recorded that: 'Revenue from services consists of revenue earned from services performed for software development and consultancy, licensing and sub-licensing fee, annual maintenance charges for software support, web development and hosting which is recognized....
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....resolving problems of the enterprise customers in the software products, being categorized as ITES, this company ceases to be comparable. We, therefore, order to exclude it from the list of comparables. 89. Now, we take up the companies challenged by the assessee, which were included by it, but, excluded by the TPO from the list of comparables. (i) Microland Ltd. (Seg.) 90. The TPO excluded this company from the list of comparables drawn by the assessee on the ground that it was incurring persistent operating losses under the relevant segment considered by the assessee. The TPO has drawn a table on page 25 of his order which shows that the concerned segment is showing OP/TC at (-) 12.94%, (-) 3.79% and (-) 19.51% in respect of year ending 2011, 2010 and 2009 respectively. The assessee is aggrieved by this exclusion. 91. We have heard both the sides and perused the relevant material on record. The ld. AR contended that the TPO erred in considering persistent losses in the relevant segment by ignoring that this company was not into consistent losses on entity level. We have gone through the Annual report of this company, whose copy has been made available. On page 2524 of....
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....93. We have heard both the sides on the issue. Unlike the international transaction of 'Provision of Software development services', the TPO has not disputed functional similarity of the relevant segment of this company with the assessee's international transaction of 'Provision of IT enabled services' under consideration. However, it is noticed that the assessee company is having financial year covering the period 1.4.2010 to 31.3.2011. In that view of the matter, a valid comparison can be made only if the potential comparable company has also the same financial year. In this regard, we consider it appropriate to note the relevant part of sub-rule (4) of Rule 10B which provides that: "the data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction had been entered into." It is obvious from the language of sub-rule (4) that the comparability of an uncontrolled transaction can be analyzed only with the "data relating to the financial year" in which the international transaction has been entered into. In other words, if the tested party has March....
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....d into is directly available from the annual accounts of that comparable, then it cannot be held as not passing the test of sub-rule(4) of rule 10B.' We direct accordingly. (ii) Calibre Point Business Solutions Ltd. (Seg.) 94. The TPO held this company to be not comparable on the ground that it was having a different financial year ending i.e., December. But for that, the functional similarity under the instant segment is not disputed. 95. We have gone through the Annual report of this company, a copy of which is placed in the paper book. Its income from operation has been divided into two segments, namely, 'Business process outsourcing (BPO)' and 'Others'. Only the BPO segment of this company has been considered by the assessee as comparable. The only reason assigned by the TPO for excluding the BPO segment of this company is that its figures for the year ending 31st March, 2011 are not available. But for that, the functional comparability has not been challenged. We have discussed above the case of M/s R. Systems in which the TPO made exclusion only on the ground that its year ending was different from that of the assessee. The same has been disposed with some directions. O....
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....the ground of higher or lower profit rate or higher or lower turnover. There is no mention in the language of the provision for the exclusion of potential comparable companies simply on account of high or low turnover or profit rate. The Special bench of the tribunal in Maersk Global Centres (India) (P.) Ltd. VS. ACIT (2014) 147 ITD 83 (Mum)(SB) has also held that potential comparables cannot be excluded merely on the ground that their profit is abnormally higher. There can be no justifiable reason to exclude such high or low profit companies unless it is shown that such high or low profit was due to abnormal factors. Same logic applies to the high or low turnover companies also. The mere fact that a company has a high or low turnover can be no reason to justify its exclusion if it is otherwise functionally comparable. The exclusion of companies on such a rationale runs contrary to the express provisions of the Act. The Hon'ble jurisdictional High Court in ChrysCapital Investment Advisors (India) P. Ltd. VS. DCIT (2015) 376 ITR 183 (Del) has also laid down to the same effect. We, therefore, direct to include Informed Technology; Micro Genetics Systems Ltd.; and CG-Vak Software and ....
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....e nature of work carried on by the assessee under this international transaction is that of receiving complaints from the customers of Microsoft Corporation and then resolving their technical problems. Thus, this activity cannot be described as KPO. The Hon'ble Delhi High Court in Rampgreen Solutions (supra), has held that EClerx, being engaged in KPO, cannot be compared with a company providing BPO services. Recently, the Hon'ble Delhi High Court in B.C. Management Services (supra), has also reiterated that E-Clerx is not comparable to an assessee providing IT enabled services. In view of the foregoing discussion, we are satisfied that the DRP was justified in ordering the exclusion of E-Clerx from the list of comparables drawn by the TPO under this segment. 102. To sum up, we set aside the impugned order on the issue of transfer pricing additions in the above referred two international transactions of 'Provision of Software development services' and 'Provision of IT Enabled services' and remit the matter to the file of AO/TPO for fresh determination of their ALP in consonance with our above observations/directions. Needless to say, the assessee will be allowed a reason....