TaxTMI 
TaxTMI 
2018 (6) TMI 1628
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....nbsp; That on the facts and in the circumstances of the case, the order passed by the Learned Assessing Officer ("Ld. AO") is bad in law and void ab-initio. 2. That on facts and circumstances of the case and in law, the reference made by the Ld. AO suffers from jurisdictional error as the Ld. AO did not record any reasons in assessment order based on which he reached the conclusion that it was "expedient and necessary" to refer the matter to the Ld. Transfer Pricing Officer ("Ld. TPO") for computation of the arm's length price, as is required under section 92CA (1) of the Income Tax Act, 1961 ("Act"). 3. That on facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO/ Hon'ble Commissioner of Income Tax (Appeals) ("CIT(A)") erred in making an addition to the returned income of the Appellant by re-computing the arm's length price of the international transactions under section 92 of the Act. 4. The Ld. AO/ Ld. TPO/ CIT(A) erred in not accepting the quantitative filters selected by the Appellant in its Transfer Pricing Documentation/ fresh search and has instead applied his own additional/ quantitative....
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.... (A) has erred in rejecting the comparable viz. 1. Larsen Turbo InfoTech Ltd. 2. Persistent Systems Ltd, 3.Sasken Communication Technologies Ltd., 4. Zylog Systems Ltd., 5. Wipro Technologies Ltd., 6. Infosys Ltd. by ignoring the facts and without passing a speaking order." 4. Appellant, M/s. Clear 2 Pay India Pvt. Ltd. (for short 'the taxpayer'), by filing the present appeal (ITA No.594/Del/2017 AY 2012-13) sought to set aside the impugned order dated 30.11.2016, passed by the AO under section 144C read with section 143 (3) of the Income-tax Act, 1961 (for short 'the Act') qua the assessment year 2012-13 in consonance with the orders passed by the ld. CIT (A)/TPO on the grounds inter alia that :- "1. That on the facts and in the circumstances of the case, the order passed by the Learned Assessing Officer ("Ld. AO") is bad in law and void ab-initio. 2. That on facts and circumstances of the case and in law, the reference made by the Ld. AO suffers from jurisdictional error as the Ld. AO did not record any reasons in assessment order based on which he reached the conclusion that it was "expedient and necessary" to refer the matter to th....
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.... Technologies Park Scheme of Government of India. The taxpayer is engaged in providing routine software development and getting services to ISTS and is also providing services to unrelated parties customers overseas. During the year under assessment, the taxpayer entered into international transactions with its Associated Enterprises (AE) as under :- Sl.No. Nature of Transactions Value Rs. 1 Provision of Software Development Services 150818592 6. The taxpayer in its TP analysis applied Transactional Net Margin Method (TNMM) as Most Appropriate Method (MAM) with Operating Profit / Operating Cost (OP/OC) as Profit Level Indicator (PLI) and used multiple years data in order to benchmark its international transactions. The taxpayer computed its own OP/OC at 8.30% as against 7.21% of the comparable company and found its international transactions at arm's length. 7. TPO rejected the TP analysis made by the taxpayer being based on multiple years data and comparable being not proper one. TPO finally selected 17 comparables with OP/OC at 20.28% and thereby proposed the TP adjustment at Rs. 1,63,95,979/-. 8. The taxpayer carried the ....
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....so not in dispute that the ld. CIT (A) without disturbing the method has rejected 6 comparables viz. (i) Larsen & Toubro Infotech Ltd., (ii) Persistent Systems Ltd., (iii) Sasken Communication Technologies Ltd., (iv) Zylog Systems Ltd., (v) Wipro Technologies Ltd., and (vi) Infosys Ltd. as comparables. 13. Ld. AR for the taxpayer in order to cut short the controversy sought exclusion of Persistent Systems Ltd., Sankhya Infotech Ltd. and E-Zest Solutions. The taxpayer also sought working capital adjustment and correct computation of the margins. At the same time, ld. DR sought inclusion of 6 comparables viz. (i) Larsen & Toubro Infotech Ltd., (ii) Persistent Systems Ltd., (iii) Sasken Communication Technologies Ltd., (iv) Zylog Systems Ltd., (v) Wipro Technologies Ltd., and (vi) Infosys Ltd. rejected by the ld. CIT (A) in AY 2011-12. We would like to examine the comparability of each comparable sought to be excluded and included by the taxpayer as well as Revenue one by one. TAXPAYER'S APPEAL (ITA NO.2788/DEL/2017 FOR AY 2011-12) GROUNDS NO.1, 2, 3, 4 & 5 14. Grounds No.1, 2, 3, 4 & are dismissed having not been pressed during the course of....
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....e at page 510 of the Paper Book - II, shows that Sankhya is a leading simulation and training solutions company. Sankhya provides end to end simulation solutions which are customized to the end user and the company has developed customizable products for imparting training which can cater to any industry. The annual report further shows that Sankhiya has inhouse research and development centre involved in development activities for new products in the field of simulations and training and spend Rs. 321.12 lakhs on research and development. 20. Moreover, segmental reporting of Sankhya , available at page 525, shows that it does not have complete segmental financials. So, when we examine the functional profile of Sankhya, it is incomparable to the taxpayer which is a routine software development services provider. 21. Coordinate Bench of the Tribunal examined the comparability of Sankhya in Alcatel Lucent India Ltd. (supra) has ordered to exclude the same as a comparable vis-à-vis routine software development service provider. 22. In view of what has been discussed above, we are of the considered view that Sankhya being into diversified service....
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....hat the working capital adjustment has been allowed to the taxpayer by the TPO in AY 2012-13 and business model of the taxpayer has not undergone any change. In these circumstances, we are of the considered view that the issue is required to be sent back to AO/TPO to decide allowability of working capital adjustment in view of the settled principle of law applied by the Revenue itself in taxpayer's own case for AY 2012-13 after providing an opportunity of being heard to the taxpayer. GROUND NO.8 27. Ground No.8 is dismissed having not been pressed during the course of arguments. GROUND NO.9 28. The taxpayer by raising specific ground contended that AO/TPO/CIT(A) have erred in computing correct margins of the comparables. We are of the considered view that when the taxpayer has argued its case on the basis of facts and figures brought on record by way of evidence as well as submissions, AO/TPO is required to compute the correct margin. So, this issue is remanded back to the AO/TPO to compute the correct margin to be consistent with directions issued by the ld. DRP in taxpayer's own case for AY 2012-13 as there is no change in the business ....
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....e 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. (refer page 117 of the paper book) Contract Software Development Services. Revenue Rs. 9, 028 Crores Rs. 16.09 Crores Ownership of branded/proprietary products Develops/owns proprietary products like Finacle, Infosys Actice Desk, Infosys iProwe, Infosys mConnect, Also, the company derives substantial portion of its proprietary products (including its flagship banking product suite "Finacle‟) Onsite Vs. Offshore As much as half of the software development services rendered by Infosys are onsite....
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....d. 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." 36. So, we are of the considered view that keeping in view the functional dissimilarity, scale of operation, high brand value impacting profit, having own research and development centre with capital expenditure of Rs. 5 to Rs. 7 crores and revenue expenditure of Rs. 570 crores, creating huge intangibles for the company and the fact that Infosys is a full-fledged risk bearing company, hence cannot be a valid comparable vis-à-vis the taxpayer which is a routine captive software service provider working on minimal risk having no brand value nor having any research and development centre to produce its own intangibles. So, ld. CIT (A) has rightly excluded Infosys from the final....
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.... Operative part of the Director's report is extracted as under :- "On the hardware side we will leverage our extensive understanding and knowledge of this OEMs ecosystem and capitalize on the delivery centers in European Union and China regions. This geographical spread enables a cost efficient service mix to service opportunities in RF / Antenna design. The combination of our hardware and software knowledge gives us a competitive edge. Sasken key differentiators : Some of the unique capabilities of Sasken include its abilities to take a leadership position in : * Android Software Platform Services * Full Phone (device) Design Services * Intellectual Property (IP) Led Services * Operator Specific Services" 42. So, on the basis of functional dissimilarity alone, Sasken is not a valid comparable vis-à-vis the taxpayer. Moreover, its segmental financials are not available and it is having significant intangibles and research and development activities. So, ld. CIT (A) has rightly excluded Sasken from the final set of comparables. ZYLOG SYSTEMS LTD. (ZYLOG) ....
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....; We believe the following aspects of our business help our customers address the challenges posed by today's business and information technology environment. > Solutions based customer entry approach ZSL's forte is evolving IT Services and Consulting into business solutions to meet the needs and goals of clients, leveraging accumulated knowledge of subject matter experts and best practices in numerous fields. We empower the businesses in several domains by integrating our Best Practices in both-Business and Technology through our Rapid Application Frameworks and Latest Technologies to create real Solutions. When your business depends on leveraging the right technology at the right budget, ZSL's portfolio of proven applications can take you where you need to go, in budget and on time. The Company offers value to 2ur customers and market place through value-added research and development, product engineering, and product lifecycle management (PLM) solutions from conceptualization, prototyping, development, integration with enterprise applications, migration, porting, performance tuning, application upgra....
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....ent by contending that no income from licence of product has been shown rather 100% income is from the software export. However, when we examine revenue recognition of Persistent, available at page 542 of the annual report of paper book - 1, revenue from licensing of product is recognised on delivery of product, revenue from royalty is recognised on sale of products, products in accordance with the terms of relevant agreements. So, in these circumstances, the contention of the ld. DR is not sustainable. Moreover, when the Persistent is engaged in software product development and development of end to end solution qua software services, its business profile is dissimilar, which cannot be taken as a comparable in the absence of segmental financials. Furthermore, Persistent owns significant intangibles as against the taxpayer which has nil intangibles. Keeping in view the aforesaid facts, the ld. CIT (A) has rightly excluded Persistent from the final set of comparables. TAXPAYER'S APPEAL (ITA NO.594/DEL/2017 FOR AY 2012-13) 50. At the very outset, it is fairly conceded by ld. ARs for the parties to the present appeal that there is no ch....
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.... 16.53% 53. On the basis of TP analysis, TPO computed the ALP of international transactions relating to provision of software development services as under :- Operational Cost 240,961,423 Arm's Length Price at a Margin of 16.53% 280,792,346 Price Received 264,071,180 105% of Price Received 277,272,739 Total Adjustment u/s 92CA 16,721,166 54. The taxpayer carried the matter before the ld. CIT (A) by way of filing the appeal who has disposed of the objections. After directions of the ld. DRP, following comparables have been finally selected to benchmark the international transactions which are as under :- Sr.No. Name of the Company As per TPO Order DRP Directions 1. Akshay Software Technologies Ltd. 8.51% 8.87% 2. Celstream Technologies Pvt. Ltd. 10.88% 10.68% 3. Cigniti Technologies Ltd. 6.68% 5.97% 4. Evoke Technologies Ltd. 11.81% 11.90% 5. Infosys Ltd. 41.04% 40.55% 6. Larsen & Toubro Infotech Ltd. 23.13% 22.45% 7. Lucid Software Ltd. 10.54% 12.49% 8. Mindtree Ltd. (Seg....
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....ver been into development of product rather a pure software development and other services provider as the entire income is from SDOS. 60. So, we are of the considered view that keeping in view the functional dissimilarity, scale of operation, high brand value impacting profit, having own research and development centre with capital expenditure of Rs. 5 to Rs. 7 crores and revenue expenditure of Rs. 570 crores, creating huge intangibles for the company and the fact that Infosys is a full-fledged risk bearing company, hence cannot be a valid comparable vis-à-vis the taxpayer which is a routine captive software service provider working on minimal risk having no brand value nor having any research and development centre to produce its own intangibles. So we order to exclude Infosys from the final set of comparables. ZYLOG SYSTEMS LIMITED (ZYLOG) 61. Zylog is engaged in product development along with software development services of which it has revenue of 38%. At the same time, segmental information is not available. Furthermore, Zylog fails the export sales filter applied by the TPO as it has merely 18.87% revenue from the....
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.... of software and acquired rights which is 14% of the net fixed assets whereas the taxpayer does not own any intangibles. Persistent is also incurring significant expenditure on research and development to the tune of Rs. 44.72 crores as against nil expenses of the taxpayer on such research and development activities. 68. Persistent has been ordered to be excluded in Alcatel Lucent India Ltd. vs. DCIT (supra) on the aforesaid ground that it is a product company having no segmental financials and has undergone extra ordinary events impacting profit. So, in view of the matter, we order to exclude Persistent from the final set of comparables for benchmarking the international transactions. LARSEN & TOUBRO INFOTECH LTD. (L&T) 69. is functionally dissimilar being product development company. Perusal of the annual report, available at pages 561 to 564 of the paper book, shows that L&T is into sale of software product, such as, Unitrax and Accurusi which fact has been brought to the notice of the TPO as well as DRP by the taxpayer in its TP study, available at page 206 of the paper book. 70. L&T is also developing new technology especially the clo....