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2018 (5) TMI 1808
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....ness of provision of Software Development Services (SWD services), Information Technology Enabled Services (ITES) and Management Support Services (MSS) to its wholly owned holding company. In terms of the provisions of Sec.92-A of the Act, the Assessee and its wholly owned holding company were Associated Enterprises ("AEs"). In terms of Sec.92B(1) of the Act, the transaction of providing SWD Services, ITES and MSS was an "international transaction" i.e., a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. In terms of Sec.92(1) of the Act, the Any income arising from an international t....
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....1.2016 aggrieved by the order of the AO to the extent the addition made on account of adjustment to ALP survives. The Revenue is aggrieved by certain directions of the DRP and it has preferred appeal to the extent the directions of the DRP results in reduction of the addition on account of adjustment to ALP as suggested by the TPO. 7. The following Chart will explain the international transactions between the Assessee and its AE and the addition made to the total income pursuant to determination of ALP by the TPO. 8. We shall deal with each of the international Transaction of providing SWD Services, ITES and MSS, separately. 9. SOFTWARE DEVELOPMENT SERVICES SEGMENT: As far as the provision of Software Development services are concerned, the Assessee filed a Transfer Pricing Study (TP Study) to justify the price paid in the international Transaction as at ALP by adopting the Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) of determining ALP. The Assessee selected Operating Profit/Total Cost (OP/TC) as the Profit Level Indicator (PLI) for the purpose of comparison. The OP/TC of the Assessee was arrived at 12.50% by the Assessee in its TP study. T....
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....ssee as the same is operating in nature. III. Margin computation of companies: The DRP directed the AO/TPO to verify and rectify the errors if any in the computation of the margins of the comparables. IV. Working capital adjustment: As regards the Assessee's contention that the working capital adjustment ought to be allowed on actual and ought not to be restricted, the DRP upheld the action of the TPO is restricting the adjustment and directed the AO/TPO to verify and rectify the arithmetical errors if any in computing the working capital adjustment. 13. Pursuant to the directions of the DRP, the aggregate TP adjustment made by the TPO stood reduced to Rs. 21,64,56,087/-. Aggrieved by the directions of the DRP which was incorporated in the final assessment order of the AO, the Assessee has preferred the present appeal before the Tribunal. 14. We will deal with the grounds raised with regard to the selection of comparable companies. We have already seen that the final comparable companies chosen by the TPO was 13. We have also seen that the Assessee had chosen 16 companies as comparable companies but the TPO accepted only 2 companies as comparable companies and....
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.... company for fresh consideration by the AO/TPO. Respectfully following the decision of the Tribunal, we set aside the order of the TPO/DRP/AO including this company as a comparable company and remand the issue of comparability of this company be considered afresh by the TPO/AO. 17. The following 7 companies were excluded by the Tribunal ITAT Bangalore in the case of Applied Materials Pvt.Ltd., a company which is also engaged in providing software development services in IT (TP) A.No.17 & 39/Bang/2016 for AY 2011-12 order dated 21.9.2016. Following the said decision the ITAT Bangalore in the case of Commonscope Networks (India) Pvt.Ltd. IT (TP) A.No.166 and 181/Bang/2016 for AY 2011-12 order dated 22.02.2017 (vide Paragraph-9 of the said order). The seven companies so excluded were E-Inforchips Ltd., ICRA Technonogies Ltd., Infosys Ltd., Larsen & Toubro Infotech Ltd., Persistent Systems Ltd., Sasken Communication Technologies Ltd., and Tata Elxsi Ltd. Respectfully following the said decisions, we direct exclusion of these 7 companies from the list of comparable companies. 18. We now come to the plea of the Assessee for inclusion of 3 companies, viz., LGC Global Ltd., Thinksoft....
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....rged in the international transaction should be considered as at Arm's Length. 21. The TPO to whom the determination of ALP was referred to by the AO, accepted TNMM as the MAM and also used the same PLI for comparison i.e., OP/TC. He also selected comparable companies from the same database from which the Assessee had chosen comparable companies, viz., Prowess and Capitaline Plus. The TPO accepted only 4 out of the 14 companies chosen as comparable company by the Assessee viz., Cosmic Global Ltd., Infosys BPO Ltd., Jindal Intellicom Pvt.Ltd. and e4e Healthcare Business Services Pvt.Ltd. He rejected the remaining 10 companies as not comparable with the Assessee. The TPO on his own identified 6 other companies as comparable with the Assessee company and worked out the average arithmetic mean of their profit margins and adjustment to ALP as follows: 22. Aggrieved by the addition of Rs. 94,66,683/- to the total income of the Assessee, the Assessee filed objections before the DRP. Briefly, the directions issued by the DRP were similar to the directions that were issued while dealing with determination of ALP for SWD services. The Assessee's contentions challenging the exclusio....
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....is concerned, the argument of the learned counsel for the Assessee was that segmental details of this company was not available and therefore comparability of this company with the Assessee cannot be ascertained. The learned DR prayed that the comparability of this company can be remanded to the TPO/AO to enable them to issue notices u/s.133(6) of the Act to get the required segmental details to consider the comparability of this company. We accept the prayer of the learned DR and remand for consideration afresh the comparability of this company by the TPO/AO after exercising powers u/s.133(6) of the Act. 28. MARKETING SUPPORT SERVICES SEGMENT SEGMENT: As far as the provision of MSS is concerned, the Assessee filed a Transfer Pricing Study (TP Study) to justify the price paid in the international Transaction as at ALP by adopting the Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) of determining ALP. The Assessee selected Operating Profit/Total Cost (OP/TC) as the Profit Level Indicator (PLI) for the purpose of comparison. The OP/TC of the Assessee was arrived at 12.55% by the Assessee in its TP study. The operating income was Rs. 2,23,84,993/- and t....
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.... providing company. Following the said decision, we direct exclusion of the aforesaid 2 companies from the list of comparable companies. 33. We shall now deal with the other grounds of appeal which are common to all the three segments. In Gr.No.8 of its appeal, the Assessee has submitted that the AO/TPO erred in passing the final assessment order without rectifying the arithmetical errors in computation of margins of certain comparables. It was submitted that the TPO, while computing the margins of (i) L & T Infotech Ltd. and Tata Elxsi Ltd. in respect of the SWD segment, (ii) e4e Healthcare Business Services Pvt. Ltd., ICRA Online Ltd. and Jeevan Scientific Technology Ltd. in respect of the ITES segment and (iii) ICC International Agencies Ltd. in respect of the MSS segment has committed certain arithmetical errors and therefore the margins computed do not represent the actual figures. In its objections before the DRP, the Assessee had specifically contested the same and the DRP, upon taking the same into consideration had directed the AO/TPO to undertake verification of the same and rectify the errors if any that had crept into the computation (page No. 9 of the DRP's dire....
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....the working capital positions of the tested party and of the comparable. The IT Rules do not provide for the requirement of application of any cap or upper limit to such adjustments. This position under the Act and the IT Rules is also evident from the OECD Guidelines. In this regard, our attention was drawn to a decision of Hon'ble Tribunal in ARM Embedded Technologies P. Ltd v. ITO [IT(TP)A No. 1659 and 1560/Bang/2014] (paragraph 24-25) which supports the contention of the learned counsel for the Assessee. Hence it was submitted that the above action of the TPO and subsequent confirmation of the same by DRP is wholly erroneous and liable to set aside by this Hon'ble Tribunal. The learned DR relied on the order of the TPO/DRP. In the light of the decision cited by the learned counsel for the Assessee, we are of the view that the working capital adjustment has to be allowed on actual and there cannot be any cap that can be imposed in allowing adjustment to the margins of comparables or that of the tested party towards working capital adjustment. 36. The learned counsel for the Assessee also submitted that the working capital adjustment as computed by the TPO was also err....
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....s being determined, the same should alone be considered as part of the operating revenue or loss. The learned counsel for the Assessee pointed out that it is impossible to carry out such an exercise. The Assessee might be willing to carry out such an exercise but the same cannot be expected from the comparable companies who have to furnish the relevant data. He also pointed out that under rule 10B (3) of the criteria for comparability is the effect of profit on account of differences. Rule 10B(3) reads thus: "(3) An uncontrolled transaction shall be comparable to an international transaction if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences." The learned counsel for the Assessee therefore submitted that profit arising from comparable transaction will not be materially affected by adopting the foreign exchange gain as reflecte....
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....mbursement of expenses paid Reimbursement of expenses received Amount in Rs. Outcome of TP Order 187,42,64,681/- Adjustment of Rs. 21,64,56,087/- 10,70,09,444/- Adjustment of Rs. 94,66,683/- 2,23,74,447/- Adjustment of Rs. 11,33,279/- 3,98,95,584/- Accepted to be at arm's length 1,33,98,696/- Accepted to be at arm's length Document 2 A.6. Comparables selected by TPO and their arithmetic mean: SI. No. Name of the Company Mark-up on Mark-up on Total Costs Total Costs (WC-unadj) (WC - adj) (in %) (in %) 1 Acropetal Technologies Ltd. (seg) 31.98 30.17 2 e-Zest Solutions Ltd. 21.03 20.43 3 E-Infochips Ltd. 56.44 57.63 4 Evoke Technologies Pvt. Ltd. 8.11 9.45 5 ICRA Techno Analytics Ltd. 24.83 24.30 6 Infosys Ltd. 43.39 44.95 7 Larsen & Toubro Infotech Ltd. 19.83 21.35 8 Mindtree Ltd. (seg) 10.66 10.70 9 Persistent Systems & Solutions Ltd. 22.12 22.66 10 Persistent Systems Ltd. 22.84 23.09 11 RS Software (India) Ltd. 16.37 17.68 12 Sasken Communication Technologies Ltd. 24.13 ....