TaxTMI 
TaxTMI 
2018 (6) TMI 1628
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.... 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 filters which lacked valid and sufficient reasoning. ....
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....ologies 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 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....
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....tomers 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 matter before the ld. CIT (A) by filing the appeal who has partly allowed the appeal filed by the taxpayer by rejecting the comparables viz. (i) Larsen & Toubro Infotech Ltd., (ii) Persistent Systems Ltd., (iii) Sask....
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....s 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 arguments. GROUNDS NO.6 & 7 COMPARABLES SOUGHT TO BE EXCLUDED BY THE TAXPAYER PERSISTENT SYSTEMS AND SOLUTIONS LTD. (PERSISTENT) 15. The taxpayer raised objections before TPO as to the inclusion of Persistent as a comparable on ground of functiona....
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....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 services providing customized services to end users and has developed customized products for imparting training and having its own research and development centre cannot be a valid comparable visà-vis the taxpayer which is a routine software development service provider. E-ZEST SOLUTIONS (E-Z....
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....l 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 model of the taxpayer. So, ground no.9 is determined in favour of the taxpayer for statistical purposes. GROUND NO.10 29. Ground No.10 is dismissed having not been pressed during the course of arguments. GROUNDS NO.11 & 12 30. Grounds No.11 & 12 being consequential in nature need no specifi....
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....sk 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 (i.e., services performed at the customer's location overseas). And offshore (50.20%) (Refer page 117 of the paper book) than half of its service, income from onsite services. The appellant provides only offshore services (i.e., remotely from India) Expenditure on Advertising/Sales promotion and brand building Rs. 61 Crores Rs. Nil (....
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....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 set of comparables. WIPRO TECHNOLOGIES LTD. (WIPRO) 37. The ld. DR challenged the inclusion of Wipro by ld. CIT (A) on the ground that abnormally high margin and assuming entrepreneurial risk and marketing risk cannot be a ground to exclude any comparable and in such circumstances, only captive subsidiaries can be used as comparables which is not possible and relied upon findings retu....
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....d 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) 43. The ld. DR challenged the exclusion of Zylog by ld. CIT (A0 by relying upon the TP order and drew our attention to page 685 of the annual report of the paper book - 1, wherein revenue recognition is given as under :- "The company derives its revenues primarily from software development services / consultancy services, projects and egovernance projects. Revenue from software services and projects comprise income from time-a....
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....ral 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 upgrade, testing and maintenance. The Company's business applications are created with leading industry experts and experienced developers to help propel legacy systems and processes to fully leverage the current market technology. * E-waste & compliance framework(Manufacturing] * Vesalius - HIS [pharma] * Phoenix, M-Banking , M- Wallet[BFSI] * Smart card solutions (RTO, Healthcare, Agriculture) ,E-Police system (E-Governance] * Wi5, Field force autom....
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.... 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 change in the business model of the taxpayer since AY 2011-12 and during the year under assessment also, the taxpayer has been providing software development services to its AE. During the year under assessment, the taxpayer entered into international transactions with its AE as under :- Sl. No. Nature of International transactions Amount (Rs.) 1. Provision of Software Development Services 263,580,063 2. Reimbursement of expenses by AEs 491,117 51. There is no dispute regarding reimbursement of expenses by the AEs. ....
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.... 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. (Segment) 18.34% 13.66% 9. Persistent Systems Ltd. 26.13% 24.88% 10. Sankhya Infotech Limited 3.79% -0.08% 11. R.S. Software (India) Ltd. 15.61% 15.69% 12. Spry Resources Pvt. Ltd. 18.12% 19.96% 13. Thirdware Solution Ltd. 10.59% 9.84% (Segment) 14. Tata Elxsi Ltd. 13.89% 12.33% 15. Zylog Systems Ltd. 28.84% 27.72% Average 16.53% 15.79% Pursuant to the directions issued by ld. DRP, ALP of the international transactions have been computed as under :- Particular Amount Operating Cost 24,09,61,423 Arm's Length Price at a Margin of 15.79% 27,90,....
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..... 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 export sales as against export sales/total sales benchmark of 75% determined by the TPO. 62. The ld. DR for the Revenue challenging the exclusion of Zylog drew our attention to revenue recognition given in annual report of the Zylog, available at page 57 to 578 of the paper book. 63. When we examine the revenue recognition in the light of the Profit & Loss account, Zylog is having income from software development services and product with no segmental financials available. Similarly, annual report shows that Zylog operates in IT services, there is no other business segment. However, around 98% of the revenue accrues in USA and consequently, there is no other reportable geographical segment. Furthermore, we have examined strength of Zylog as exp....