TaxTMI 
TaxTMI 
2018 (7) TMI 1903
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....Pricing-II (2) ("the TPO"), draft and final assessment order passed by Deputy Commissioner of Income Tax, Circle - 24(2) (erstwhile Circle 9(1 )), New Delhi ("the AO") pursuant to the directions of the Hon'ble Dispute Resolution Panel - III ("the DRP"), are bad in law and void ad-initio. 2. The AO has erred in law and on the facts of the case in determining the total income of the Appellant at Rs. 479,668,511 as against returned income of Rs. 197,866,765 and thereby made an upward adjustment of Rs. 281 ,801 ,746. Part I - Transfer Pricing Grounds 3. That on facts of the case and in law, the DRPI TPO/AO have erred in not demonstrating that the motive of the Appellant was to shift profits outside of India by manipulating the prices charged in its international transactions as envisaged under provisions of Chapter X of the Act. 4. That on facts of the case and in law, the DRPI TPO/AO have erred in rejecting certain companies and adding certain companies to the final set of alleged comparable companies on an ad-hoc basis, thereby resorting to cherry picking of comparable companies for benchmarking the international transaction pertaining to IC de....
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....AO have erred by not considering that the adjustment to the arm's length price, if any, should be limited to the lower end of the 5 percent range as the Appellant has the right to exercise this option under the second proviso to section 92C(2) of the Act. 14. That on facts of the case and in law, the DRP/TPO/AO have erred in using single year data for financial year ("FY") 2009-10 of alleged comparable companies without considering the fact that the same was not available to the Appellant at the time of complying with the transfer pricing documentation requirements and disregarding the Appellant's claim for use of multiple year data for computing the arm's length price. 15. That on facts and in law, the DRP/AO has erred in confirming that TPO has discharged his statutory onus by establishing that the conditions specified in clause (a) to (d) of Section 92C (3) of the Act have been satisfied before disregarding the arm's length price determined by the Appellant and proceeding to determine the arm's length price. Part II - Corporate Tax Grounds 16. That the DRP and learned AO has erred on facts and in law in treating the softwar....
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....on'ble DRP has erred in directing the Assessing Officer/Transfer pricing Officer (AO/TPO) to exclude M/s. Infosys Technologies Ltd. from the list of comparables for the purpose of benchmarking the International Transaction and computation of Arm's length price in relation to software development services. 2. Whether the decision of the Hon'ble DRP to exclude M/s. Infosys Technologies Ltd. is unsustainable in law, being cryptic and having been given without any cogent reasons in the face of detailed analysis given by the TPO for selecting the company as a comparable in benchmarking the international transaction. 3. Whether the Hon'ble DRP has erred in summarily holding that M/s.Infosys Technologies Ltd. is not a proper comparable ignoring the TPO's detailed analysis of the company on all the relevant parameters in support of his finding as to how M/s. Infosys Technologies Ltd. qualifies as a comparable for benchmarking the translation. 4. Whether the Hon'ble DRP has erred in mechanically and selectively relying upon the decision in the case of M/s. Agnity India Technologies Pvt. Ltd. without appreciating that the decision in the sai....
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....anies having export income of at least 75% of the total income excluding companies having related party transaction exceeding 25% of sales; rejecting companies having employee cost of less than 25% of the total cost; excluding companies affected by some peculiar circumstances like persistent losses, declining sales, extra ordinary income or expenses, mergers and acquisition. By applying the aforesaid filters, Transfer Pricing Officer (TPO) rejected 7 comparables chosen by the taxpayer and has selected 20 comparables having average OP/OC of 27.88% and working capital adjusted OP/OC at 22.47% for benchmarking the international transactions, detailed as under :- S.No. Company Name OP/OC (%) Working Capital adjusted OP/OC (%) i. Akshav Software Technologies Ltd. -1.04 -3.77 ii. E-Infochips Bangalore Ltd. 72.69 62.79 iii. Evoke Technologies Pvt Ltd 19.02 16.32 iv. E-Zest Solutions Ltd. 18.66 11.46 v. Infinite Data Systems Pvt. Ltd. 88.25 81.39 vi. Infosys Ltd. 45.08 43.05 vii. Larsen & Toubro Infotech Ltd. 20.48 17.63 viii. LGS Global Ltd. 12.79 5.11 ix. Mindtree Ltd. 16.....
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.... case in ITA No.1672/Del/2014 for AY 2009-10 order dated 22.02.2017, available at pages 1966 to 2001of Vol.5 of the paper book, relevant page 1982, assessee has been treated as a captive service provider involved at the design and development stage only with a limited scope of work and is not involved in the process of conceptualization of any product or works and works only on the specification provided by the STE Group for the implementation of IC design, its maintenance, verification and software development. So, for the purpose of benchmarking the international transactions, the assessee is to be treated as a contract captive design centre. 10. TPO has accepted TNMM as Most Appropriate Method (MAM) with OP/OC as PLI adopted by the assessee for TP analysis. The major dispute raised by assessee is inclusion of certain companies in the final set of comparables which are functionally dissimilar; treating the foreign exchange gain and provisions/liability as non-operating in nature; treating amortization of goodwill as operating expenses. To arrive at the logical conclusion qua TP adjustment made by the TPO/DRP/AO, we would discuss grounds no.6, 7 and 12 first. TAXPAYER'S APPE....
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....We are not persuaded to give any mileage to the ld. AR on this count for the simple reason that Rule 10T is a part of Safe harbor rules notified on 18.09.2013 which are not applicable to the assessment year under consideration." 17. So, in view of the matter, order passed by TPO/DRP in not considering the foreign exchange gain / loss as operating in nature is not tenable in the eyes of law, hence hereby set aside. Ld. TPO is directed to treat the foreign exchange gain / loss as operating in nature in calculating the operating margin of the assessee as well as final comparable companies. So, ground no.6 is determined in favour of the assessee." 14. So, by following the decisions rendered by the coordinate Bench of the Tribunal, we direct the ld. TPO to treat foreign exchange gain/loss and provision of doubtful debt as operating in nature in calculating the operating margin of the assessee as well as final comparable companies. So, ground no.6 is determined in favour of the assessee. GROUND NO.7 15. Assessee has challenged the findings returned by TPO/DRP treating amortization of goodwill as not extra ordinary in nature. It is the case of the assessee that goodwill ....
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.... the margin of the comparables without knowing which risk was taken by the entity concerned and how its profitability was affected. Ld. DRP further stated that this exercise requires robust and reliable data available with the assessee as well as for the comparables and in the absence of which, risk adjustment cannot be considered for enhancing comparability and thereby rejected the objection. Finding of the ld. DRP shows that the ld. DRP has not denied the risk adjustment but requires robust and reliable data to quantify the risk adjustment. It is settled principle of law that claim cannot be rejected merely on the ground that it cannot be quantified. 20. Coordinate Bench of the Tribunal in case cited as Hyundai Rotem Company vs. ACIT (supra) decided the issue in favour of the assessee by returning following findings :- "18. Ld. DRP for the Revenue contended that the risk has to be explained in case of each comparable and economic analysis cannot be the basis for risk adjustment in the absence of complete data provided by the taxpayer. However, the ld. AR for the taxpayer contended that the risk adjustment is required to be given on each comparable as has been held by ....
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.... Tribunal in case of M/s. Supportsoft India Pvt. Ltd (supra), we are of the considered view that the taxpayer in this case is entitled for risk adjustment to the net margin of comparables for bringing them at par with the taxpayer. So, ground no.4 is determined in favour of the assessee. 21. So, following the decision rendered by the coordinate Bench of the Tribunal, we are of the considered view that the assessee is entitled for risk adjustment to the net margin of the comparables for bringing them at par with the taxpayer on supplying the complete data by the assessee. So, ground no.12 is determined in favour of the assessee for statistical purposes. GROUND NO.11, 13, 14 & 15 22. Grounds No.11, 13, 14 & 15 are dismissed having not been pressed during the course of arguments. GROUNDS NO.4, 5, 9 & 10 23. TPO has accepted the TNMM as most appropriate method with OP/OC as the PLI adopted by the taxpayer. The taxpayer in order to benchmark the international transactions sought exclusion of 9 comparables chosen by TPO/DRP viz. (i) E-Infochips Bangalore Ltd., (ii) Infinite Data Systems Pvt. Ltd., (iii) Wipro Technology Services Ltd., (iv) Larsen & Toubro Infotech Ltd., (v....
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.... except in segmental information, nowhere in the annual report ITES has been mentioned nor any income has been attributed to it. However, we are of the considered view that when company has categorically claimed to be primarily engaged in software development and ITES and considered the same as the only reportable business segment, the same cannot be taken as a valid comparable particularly under TNMM under which large pool of comparable is available. 28. In view of the matter, we are of the considered view that when E-Infochip is engaged into software development as well as ITES and segmental information is not available, the same cannot be a valid comparable vis-à-vis the taxpayer which is a routine software development service provider, hence we order to exclude E-Infochip from the final set of comparables. INFINITE DATA SYSTEMS PRIVATE LTD. (INFINITE) 29. The taxpayer sought to exclude Infinite on three grounds inter alia it provides services to Fujitsu Services Ltd. (Fujitsu), UK under contract with the holding company; that it earns revenue from Fujitsu Services Ltd. under Build, Operate and Transfer (BOT) model and Infinite has provided services to Fujitsu un....
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.... vs. DCIT in ITA No.1051, 599, 617/Kol/2015 for AY 2010-11, also examined comparability of Infinite with Lab Advantage Solutions Pvt. Ltd., a software development service provider and ordered to exclude the same by returning following findings :- "8.3. Exclusion of Infinite Data Systems Pvt Ltd (Merged) We find that this company had reported NCP of 88.25%. It is not in dispute that the assessee is engaged in software development." Hence comparable should also be in the companies engaged in the similar sector. We find that this company is having a different business model and engaged in providing entire gamut of solutions comprising of technical consulting, design and development of software, maintenance, system integration, implementation, testing and infrastructure management services. We find from the paper book that the revenue is primarily derived from technical support and infrastructure management services. We find that Infinite Data Systems Pvt Ltd commenced its operations on 1st January 2009 and as per segment reporting disclosure, the company's operations predominantly relate to providing software technical consultancy services to its sole customer Fu....
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....fits of the company. We find that instead of carrying out the exercise, the AO has simply followed the order of the TPO in holding that the fact of amalgamation on the margin of the said company has no effect on the margin of the said company. This, in our opinion, is not a correct approach a/the AO. Where a direction has been given by the DRP to follow a certain procedures, the AO has simply followed the TPO order. Therefore, order of the AO on this issue needs to be set aside. In the case of Hyundai Motors India Engg. (P.) Ltd. (2015) 64 taxmann.com 442 (Hyd.-Trib.) which is also engaged in rendering of ITES to its AEs, the Tribunal has taken note of the same at para 9.1 and 9.3 of its order. Therefore, the decision of the Tribunal in the said case is applicable to the case on hand, more particularly since the comparables adopted by the TPO in the said case are the same ill the assessee's case also. In the case of Hyundai Motors India Engg. (P.) Ltd. (supra) at Page 20, para 18, the Tribunal has held as under: "18. As regards M/s. Accentia Technologies Ltd., is concerned, we find that the DRP has directed to exclude this company by placing reliance upon the order of ....
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....p;Since the order of the Tribunal in the case of Hyundai Motors India Engg. (P.) Ltd. (supra) for the same A. Y, we direct the AO;TPO to exclude this company from the final list of comparables. 11. TCS e-Serve International Ltd: As regards the comparability of this company with the assessee, the learned Counsel for the assessee submitted that the TCS international also provides software testing, verification and validation which are different from ITES services providers by the assessee. It is also submitted that the segmental information of TCS International are not available in the annual report. The exceptional circumstances of the company reported in annual report such as acquisition of India based captive business outsourcing arm, resulting in acquisition of an aggregate amount of $ 2.5 billion over a period of 9.5 years and its impact on the financial implications of the company also brought to our notice. It is submitted that these peculiar circumstances have been considered by the Coordinate Bench of this Tribunal in the case of Hyundai Motors India Engg. (P.) Ltd. (supra) for exclusion of the list of comparables. Respectfully following the decision of the....
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....on 21.01.2009 by the Wipro Ltd. as a subsidiary. As a part of the arrangement, the existing contracts pertaining to the work of the Citi Group continued to be with the newly created entity, i.e., Wipro Technology Services. Equally importantly, is that there was no published segmented data as far as software development or its finances were concerned with respect to Wipro Technology Services. In these circumstances, the findings of the ITAT are purely factual and cannot be gone into as no substantial question of law arises for consideration." 39. Similarly, coordinate Bench of the Tribunal in case cited as Open Solutions Software Services Pvt. Ltd. (supra) examined the comparability of Wipro avis-avis Open Solutions Software Services Pvt. Ltd. engaged in software development, research and other related services and found the same to be invalid comparable in the light of the provisions contained u/s 92B(2) of the Act by returning following findings :- "The aforesaid provision clearly envisages that, if a transaction has been entered into by an enterprise with unrelated party, then for the purpose of Section 92B(1) it is deemed to be transaction entered into between relate....
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.... Systems Integration (SI) and Software Development Services. At the same time, segmental data is not available. 45. Keeping in view the functional dis-similarity and nonavailability of segmental data, coordinate Bench of the Tribunal in taxpayer's own case for AY 2009-10 (supra), ordered to exclude Tata Elxsi from the final set of comparables by returning following findings :- "45. Assessee raised objection before the TPO/DRP that this company is not a valid comparable as this is an IT enabled and software product company. TPO/DRP overruled this objection by observing that it can easily be included in the list of comparable as it is providing software services and only verticals are different. 46. From the annual report of this company, available at page 1465 to 1540 of the Paper Book, we can easily make out that this company is into software development services, product design services, innovation design engineering services, system integration and support services. But the TPO has taken software development services only for the purpose of comparability with the assessee. However, perusal of the detail segment goes to prove that design and development ....
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....what has been discussed above, in the face of the fact that Thirdware is having substantial revenue from sales and operating sales of licence; software services; export from SEZ Unit; export from STPI Unit; and revenue from subscription and its segmental results are not available, it is functionally incomparable, so it cannot be taken as a valid comparable. Hence, we order to exclude the same. PERSISTENT SYSTEMS LTD. (PERSISTENT) 49. The taxpayer sought exclusion of Persistent on ground of functional dissimilarity being a software product company having significant IPs and earning its revenue from its monetization, having intangibles in the nature of software licenses. 50. When we examine profit & loss account for the year ending March 31, 2010 of Persistent, available at page 1848 of the Paper Book - IV, it shows that the substantial income of Persistent is from sale of software services and products and has earned its revenue from sale of licensing of products and royalty. For ready perusal, revenue recognition of Persistent, available at page 1858, is extracted as under :- "H. Revenue recognition Revenue is recognised to the extent it is probable that ....
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....arables for benchmarking the international transaction." 54.In view of what has been discussed above, we are of the considered view that Persistent having a different business model with no segmental data available and having huge intangibles is not a valid comparables vis-à-vis the taxpayer which is a routine captive software development service providers, hence ordered to be excluded. E-ZEST SOLUTIONS LTD. (E-ZEST) 55. The taxpayer sought exclusion of E-Zest on ground of functional dissimilarity being into broad portfolios of services (diversified services) with no segmental reporting. Perusal of Profit & Loss account for the year ending 31.03.2010, available at page 1946 of the Paper Book - IV shows that the E-Zest has substantial income from operations whereas it has three business segments viz. Product engineering services/ outsourced product development services, Enterprise application development and IT services. However, no segmental information is available. 56. Comparability of E-Zest was examined by the coordinate Bench of the Tribunal in case of ST Microelectronics Private Ltd. (formerly Genesis Microchip (India) Pvt. Ltd. in IT (TP) A.No.949/Bang./20....
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....prejudice to the additional ground 1, the Ld. TPO has erred in determining the PLI at entity level despite the fact that the Assessee had brought to his notice the segmental results of Mindtree Ltd. as has been noted by him in his order dated 25.11.2014 at page 197 (para 3.1 (i) of the Appeal Memo. (Segmental results are at page 55 of the Annual Report at page 1251 of Volume III)" on the ground that at the time of TP analysis on the basis of information then available in the data bases-prowess etc., certain comparables were taken for benchmarking the international transactions but subsequently form the annual report, it has come to the notice of the taxpayer that L&T and Mindtree are also not valid comparables since both these comparables are taxpayer's own comparables having been accepted and the taxpayer has now sought to challenge the same by way of additional evidence on the ground that TPO had no complete data at that time and there is no estoppel against statute as the issue can be challenged at any point of time during proceedings, the application for additional ground is allowed. Moreover no evidence is required to be brought on record to adjudicate the controve....
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.... case is whether despite the financial years of the assessee and of the other enterprise being different, the financials of the corresponding period of each of them are available. If they are, the TPO must refer to the corresponding period of both the entities in determining whether the two are comparable or not for the purpose of determining the ALP. 29.As noted by the Tribunal, the audit accounts of R System International Ltd. for the year ending 31.12.2008 had been given under one column and the data for the quarter ending 31.03.2009 and 31.03.2008 (both audited) had been given in two other columns. Thus, as rightly held by the Tribunal, if from the yearly data ending 31.12.2008, the results of the quarter ending 31.03.2008 are excluded and if the results for the quarter ending 31.03.2009 are included, it is possible to obtain the data for the financial year 01.04.2008 to 31.03.2009. 30.This view is not contrary to Rule 10(B)(4) which reads as under:- "10B(4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the internationa....
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....d that this issue has been considered by the Hyderabad Bench of the Tribunal in the case of Kenexa Technologies (P.) Ltd. v. Dy. CIT [2014] 51 taxmann.com 282/[2015] 67 SOT 195 (URO) for assessment year 2009-10 by observing as under: "43. In ground No. 2, 6, 5, the assessee has objected to the rejection of comparable companies by TPO in the course of applying employee cost filter. The ITAT Bangalore Bench in the case of CISO Systems India Pvt. Ltd. has held with respect of CG-VaK Solutions & Exports Ltd. has held as under: (ii) The submission of the ld. counsel for the assessee was that in the case of assessee, this test is satisfied. In this regard our attention was drawn to page 818 to 824 of the assessee's paper book wherein annual report of this company has been provided. Attention was drawn to the fact that in the profit & loss account of the audited accounts, he cost of services has been shown as an expenditure and in Schedule 15 to the Notes to Accounts, it has been elaborated as follows:- Cost of services Rs. Cost of services - Overseas 2,77,32,337 Cost of services - Domestic 2,58,40,435 Transcription charges 3,97,389 Web Des....
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....ple of law that turnover should not be the sole criteria to choose a particular company for comparability rather functional similarity is a fundamental requirement. Reliance in this regard is placed on the judgment cited as Chrys Capital - (2015) 376 ITR 183 and CIT vs. Mckinsy Knowledge Centre India Pvt. Ltd. - ITA No.217/2014 order dated 27.03.2015. 54. Since this company passes employee cost ratio and export cost ratio filter employed by the TPO, the turnover filters cannot be a ground for rejection of this comparable as discussed in the preceding para, so we hereby order to include this company in the list of comparable." 67. So, following the decision rendered by the coordinate Bench of the Tribunal, we order to include SIP in the final set of comparables for benchmarking the international transactions. GROUND NO.8 68. This issue was raised by the taxpayer before ld. DRP who has directed the AO/TPO to verify the correctness of the computation of operating margin of comparables and working capital adjustment margin of the alleged comparable companies for determining the ALP of the international transactions of the taxpayer in accordance with the provisions of ....
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.... the use of the copyright in software, but what is transferred is the right to use the copyrighted material or article which is clearly distinct from the right in the copyright which is too for only limited period." 59. So, these expenses, to our mind, are in the nature of revenue expenses incurred for the purpose of business. Moreover, one time expenditure to purchase time based software licenses cannot be deferred and as such, are revenue expenses to run the business. So, the AO is directed to re-examine the issue accordingly and as such, this ground is determined in favour of the assessee." 70. So, following the decision rendered by the coordinate Bench of the Tribunal on the identical issue in taxpayer's own case for AY 2009-10 (supra), the amount of Rs. 12,27,686/- on account of software expenses capitalized by the AO/DRP is ordered to be treated as Revenue in nature. Hence, ground no.16 is determined in favour of the taxpayer. GROUND NO.17 71. Ground No.17 has become infructuous in view of our findings returned on ground no.16, hence dismissed. GROUND NO.18 72. AO/DRP have treated expenditure of Rs. 13,84,084/- claimed by the taxpayer as expenditure on....
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....xpayer. GROUND NO.21 75. Ld. AO/DRP have denied the depreciation on goodwill amounting to Rs. 2,64,53,670/- claimed by the taxpayer during the course of proceedings by relying upon the decision rendered by Hon'ble Supreme Court in Goetze India Limited - (2006) 284 ITR 323 (SC). However, the identical issue has already been decided by remanding the case back to the AO after providing an opportunity of being heard to the taxpayer in taxpayer's own case for AY 2009-10 by returning following findings :- "64. Assessee claimed depreciation on goodwill amounting to Rs. 1,38,93,062/- during the course of assessment proceedings by relying upon decisions rendered by Hon'ble Supreme Court in case of Smifs Securities Ltd. - (TS-639-SC-2012) (Supreme Court) but the AO remained silent on this issue. 65. However, DRP by applying the decisions rendered by Hon'ble Supreme Court in Goetze (India) Ltd. - (2006) 284 ITR 323 (SC) rejected the claim of the assessee on the ground that assessee did not claim such depreciation on goodwill in its return of income. However, it has not been disputed by both the ld. Repre....
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.... Technologies Pvt. Ltd. which is a contract software development services provider has upheld the findings returned by the Tribunal. Operative part of the judgment in CIT vs. Agnity India Technologies Pvt. Ltd. (supra) is extracted as under :- "5. The tribunal has observed that the assessee was not comparable with Infosys Technologies Ltd., as Infosys Technologies Ltd. was a large and bigger company in the area of development of software and, therefore, the profits earned cannot be a bench marked or equated with the respondent, to determine the results declared by the respondent-assessee. In paragraph 3.3 the tribunal has referred to the difference between the respondent-assessee and Infosys Technologies Ltd. For the sake of convenience, we are reproducing the same: Basic Particular Infosys Technologies Ltd. Agnity India Risk Profile Operate as full-fledged risk taking entrepreneurs Operate at minimal risks as the 100% services are provided to AEs Nature of Services Diversified-consulting, application design, development, reengineering and maintenance system integration, package evaluation and implementation and business process management, etc. (re....
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....ed in para 3.1.2 of the order passed by the TPO. TPO, as noted above, however had taken three companies, namely, Satyam Computer Service Ltd., L&T Infotech Ltd. and Infosys Technologies as comparable to work out the mean. 8. It is a common case that Satyam Computer Services Ltd. should not be taken into consideration. The tribunal for valid and good reasons has pointed out that Infosys Technologies Ltd. cannot be taken as a comparable in the present case. This leaves L&T Infotech Ltd. which gives us the figure of 11.11 %, which is less than the figure of 17% margin as declared by the respondent-assessee. This is the finding recorded by the tribunal. The tribunal in the impugned order has also observed that the assessee had furnished details of workables in respect of 23 companies and the mean of the comparables worked out to 10%, as against the margin of 17% shown by the assessee. Details of these companies are mentioned in para 5 of the impugned order." 80. In view of what has been discussed above and following the decision rendered by the Hon'ble Delhi High Court in case of CIT vs. Agnity India Technologies Pvt. Ltd. (supra), we are of the considered view that taxpaye....