TaxTMI 
TaxTMI 
2019 (5) TMI 97
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....s appeal is against the addition on account of transfer pricing addition amounting to Rs. 6,37,64,290/- made in respect of international transaction of "Provision of Software Development Services" by the assessee to its Associated Enterprise (AE). 5. Briefly stated, the facts of the case are that the assessee, an Indian company, is engaged in providing Software Development Services and Sales Support Services to Deere and Company, USA and other group entities. The assessee filed its return declaring total income of Rs. 1,05,28,198/-. Certain international transactions were reported in Form No. 3CEB. The AO made a reference to the Transfer Pricing Officer (TPO) for determining the Arm's Length Price (ALP) of the international transactions. The assessee reported the first international transaction of "Provision of Software Development Services" to Deere & Company with transacted value of Rs. 1,07,58,57,364/-. The assessee applied the Transactional Net Margin Method (TNMM) for demonstrating that this transaction was at ALP. It selected 21 companies as comparable with multiple year data. The TPO did not dispute the correctness of the application of TNMM as the most appropriate method.....
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....re Developed by the assessee is passed over to Deere & Company, the same is integrated by the Deere & Company into the big overall Software developed by the latter. The assessee entered into Services agreement with Deere & Company on 26.5.2005, which is valid for the year under consideration as well. This Agreement provides that the assessee will render, inter alia, the Information Technology Services for John Deere business applications. The services include the development and support of the applications used in the business outside India, which are wholly owned or affiliated with Deere. Development of applications includes providing computer programming and code development etc. with the business knowledge provided by the recipient of the services. With the above background of the nature of services provided by the assessee under this segment, we will endeavour to see if the disputed companies are in fact, comparable or not. Kals Information Technology Systems Ltd. (Seg.) : 7. The TPO included this company in the list of comparables. The assessee objected to the same by contending that it is functionally different as it is also engaged in providing Software products since it....
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....om) has held that a Software product company cannot be compared with a company providing software services. As Kals Information Technology Systems Ltd. was engaged in selling of software products which was different from activity undertaken by assessee in that case, namely, rendering of software service to its holding company, the same was held to be rightly excluded from the list of comparables. In view of the foregoing discussion, we order to exclude this company from the final list of comparables. Thirdware Solutions Ltd. : 9. The TPO selected this company as comparable. The assessee objected to its inclusion by contenting that it was functionally different and also a super profit making company. The assessee claimed that this company was engaged in offering comprehensive implementation and Application Management Support Services in Enterprise Application. The TPO rejected the assessee's contentions. The DRP approved the action of the TPO in including this company in the list of comparables. The assessee has come up in appeal against the inclusion of this company. 10. We have heard the rival submissions and gone through the relevant material on record. The Annual report of....
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.... is uniquely placed with readymade Software products to cater to the needs of Hospitals and Healthcare Centres both in India and abroad especially in the USA". Profit and Loss account of this company appears at page 367 of the paper book, which records `Decrease in Inventories' by (Rs.1,50,80,060/-) under the head "Expenditure". Balance sheet of this company also has a figure of `Inventories'. Apart from this company being engaged in Software products also, it is pertinent to note that it has rendered on-site services of a greater magnitude. It can be seen from expenses of Rs. 55,85,57,169/- incurred under the head "Employee related and on-site Development Charges", this company incurred "on-site Development Expenses" at Rs. 42,32,55,491/-, which transpires that employees related costs incurred by the company on on-site development is roughly at 75% of total employees related costs. As against this, the assessee is not engaged in rendering any on-site services. A company engaged in providing on-site services cannot be compared with a company providing similar services from its own premises (in-house) due to several significant differences in operating costs and also the revenues ap....
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....e up with contention to include them in the list of comparables, which was not acceded to by the TPO. Here it is pertinent to mention that similar companies are appearing in other segments of the assessee as well. The DRP directed the AO to examine as to whether such companies including three in the extant segment, namely, (a) E-Zest Solutions Ltd. (b) Evoke Technologies Pvt. and (c) Maveric Systems Ltd. were part of accept-reject matrix of the assessee. If the same were found to be part of the same, then it was directed to consider these companies as comparables in case they meet all the relevant filters. 16. The ld. DR contended that the DRP could not have directed to consider such companies for inclusion as the same were not originally included in the list of comparables by the assessee. 17. We are disinclined to sustain the objection taken by the ld. DR that the assessee should be prohibited from taking a stand contrary to the one which was taken at the stage of the preparation of the TP study report. It goes without saying that the object of assessment is to determine correct income in respect of which the assessee is chargeable to tax. As the income not originally offered....
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....bles and then pleads for its inclusion in the final list of comparables. The Hon'ble Jurisdictional High Court in CIT Vs. Reuters India Pvt. Ltd. 288 CTR 741 (Bom.) has held that there can be no estoppel in pointing out the correct facts before the appellate authorities particularly when all facts are on record. In view of the foregoing discussion, we do not find any reason to interfere with the direction given by the DRP on this count in so far as the objection of the Revenue is concerned. The ld. DRP has simply directed to examine the comparability of these companies and did not, at the threshold, throw the assessee out simply on the reasoning that the relevant information was filed in respect of these companies only during the course of proceedings before the TPO. In view of the foregoing discussion, we are satisfied that the direction given by the DRP cannot be interfered. This ground is, therefore, not allowed. 18. Ground No.3 of the Departmental appeal is against the direction of the DRP to exclude the Infosys Technologies Ltd. from the list of comparables. The TPO included Infosys Technology Ltd. in the final tally of comparables. The assessee objected to such inclusion by....
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....he Hon'ble Delhi High Court in Agnity India (supra), we hold that Infosys Technologies Ltd. cannot be treated as comparable with the assessee company and the ld. DRP was justified in directing its exclusion. 20. Ground no.5 of the Revenue's appeal is against the direction of the DRP to the AO for allocating unallocable expenses to each segment in proportion to segmental turnover to total turnover. 21. The facts of this ground are that the TPO included certain companies on segmental basis in the list of comparables in the Software Development Services segment as well as the other segments of the assessee. For example, under the Software Development Services segment, the TPO considered R Systems International Ltd., Kals Information Technology Systems Ltd., and Acropetal Technologies Ltd. on segmental basis. However, while calculating the operating profits of the relevant segments of these companies, the TPO did not take into consideration their unallocated expenses. The DRP directed the AO "to allocate unallocable expenses to all segments in proportion to segmental turnover to total turnover and thereafter compute margins". The Revenue is aggrieved by such direction. 22. Having....
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....order and direct the AO/TPO to allocate common unallocated expenses on the basis of relevant keys as the case may be after allowing an opportunity of hearing to the assessee. DESIGN ENGINEERING SEGMENT : 24. The assessee, through ground no. 3 of its appeal, is aggrieved by the transfer pricing addition of Rs. 21,31,640/- in respect of international transaction of Design Engineering and Testing Services provided by the assessee company to its AE . 25. Shorn off unnecessary details, it is found as an admitted position that the assessee declared margin of 14.10%, which after the directions given by the DRP, stood computed at Arm's Length margin of 14.24%. Though the assessee has raised certain grounds against difference in its declared margin and that of comparables, but the same was admitted to have become academic in view of such difference in the operating margins, being within the permissible range not warranting any transfer pricing addition. The ld. AR further conceded that even if the ground of the assessee in this regard is rejected and all the grounds taken by the Revenue for this segment are allowed, still the assessee's operating margin would be within the permissible....
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.... a single segment, i.e. Exhibitions and Event Management and hence, comparable. On the basis of their overall operating margin of 24.13%, the TPO recommended a transfer pricing adjustment of Rs. 89,85,865/-. The AO passed the order making the above addition. The ld. DRP gave certain directions, including the exclusion of Asian Business Exhibition and Conference Ltd. from the list of comparables by observing that it was engaged only in organization of Exhibitions and Conferences which was different from the assessee's business of providing Sales Support Services. The Revenue is aggrieved by such direction of the ld. DRP. 30. We have heard both the sides and gone through the relevant material on record. In order to appreciate the comparability or otherwise of Asian Business Exhibition and Conference Ltd., it is sine qua non to consider the functional profile of the assessee under this segment. It has been recorded on page 14 of the TPO's order that Deere & Company develops a business plan in order to ascertain its requirements which involves market demand and supply analysis. Thereafter, Deere & Company intimates to the assessee about the materials required by it from time to time.....
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....hibitions and events. On going through the functional profile of this company, it becomes explicitly clear that it is nowhere close to the assessee's activities under this segment, which are confined to maintenance/updation of suppliers record and providing pay roll services etc. In our considered opinion, the ld. DRP was fully justified in directing to exclude this company from the list of comparables. 32. Other grounds of the Revenue in so far as the selection of comparables by the assessee during the course of transfer pricing proceedings, which were earlier excluded because of the nonavailability of the relevant financial data and allocation of unallocated expenses are similar to those discussed in the context of Software Development Services segment of the assessee. We adopt our view taken hereinabove on these two aspects in the context of this international transaction as well. 33. The only issue which remains in the assessee's appeal is against the confirmation of disallowance u/s.40(a)(i) of the Act in relation to payments of Rs. 24,88,60,369/- made to Deere & Company, USA towards Information System charges; Telecommunication charges; and also IT Software Licenses; Inte....