TaxTMI 
TaxTMI 
2019 (8) TMI 1394
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....ord in the form of Paper Book in light of Rule 18(6) of ITAT Rules. Judicial decisions relied upon were carefully perused. BUSINESS PROFILE OF THE APPELLANT COMPANY 4. The appellant company is a company incorporated in India under the provisions of the Companies Act, 1956. For the subject assessment year under consideration, the assessee was engaged in the business of manufacturing and trading of telecommunication network equipment and provision of related services such as network design, installation and commissioning. The company also provided support services to major telecom operators and IP service providers in India and to customers of its associated enterprises ("AEs"). 5. Further, the company also provided software development and certain network management support services. Further, NSN India rendered certain marketing support services to its AEs, such as, providing information on potential customers, providing assistance in marketing products of its AE. Other support services rendered by NSN India to its AEs include warranty support services. 6. During the course of assessment proceedings, the A.O referred the matter to the TPO. The TPO made the transfer pricing adju....
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....o-ordinate bench in assessment year 2008-09 in ITA No. 332/DEL/2013. We find that in assessment year 2008-09, Nokia Siemens Networks Pvt Ltd was assessed pre amalgamation and Nokia Siemens Network India was assessed post-amalgamation. While deciding appeal in ITA No. 332/DEL/2013, the co-ordinate bench observed as under: "The Ld. AR submitted that the assessee is also engaged in providing software development services to its AEs. Thus, it is an undisputed position that assessee's functional profile qua the software development service division is identical to that of the erstwhile entity which has been considered by the Tribunal in M/s Nokia Siemens Networks India (supra). The TPO selected 25 comparables to benchmark the transaction pertaining to software development services division. Subsequently, DRP deleted one of the comparables selected by TPO and thus the final set of comparables comes to 24. Out of these 24 comparables, the assessee wants to exclude 18 comparables and further wants inclusion of three comparables. Thus, the Ld. AR submitted that all the comparables under challenge were considered by this Tribunal in case of M/s Nokia Siemens Networks India (supra) for ....
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....eding year, i.e. AY 2007- 08 by the Tribunal on account of different risk profile, scale, nature of services, revenue ownership of branded/ proprietary products, onsite and offshore services etc. This fact is not contradicted by the revenue. 79. Further, the Assessee has placed reliance on Aircom (supra), in order to exclude this comparable company on the basis of its magnitude. The coordinate bench has rejected this comparable by making following observations:- "17.2. We have considered the rival submissions and perused the relevant material on record. It can be seen that the TPO has included this company in the list of comparables by rejecting the assessee's contentions. The assessee is providing and assigning software services to its AE alone without acquiring any intellectual property rights in the work done by it in the development of software. The Hon'ble Delhi High Court in CIT vs. Agnity India Technologies (P) Ltd. (2013) 219 Taxmann 26 (Del) considered the giantness of Infosys Ltd., in terms of risk profile, nature of services, number of employees, ownership of branded products and brand related profits, etc. in comparison with such factors prevailing in the ....
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....ompanies for benchmarking international transaction related to software segment. iv) LGS GLOBAL 85. Initially the assessee offered this company as a comparable, but the assessee claims to have found that this company is not a comparable and wrongly included in the final list of comparable companies. Inasmuch as the key determinative factor as far as the inclusion/exclusion of any company from the list of comparables is the functionality of an entity, we are of the considered opinion that this company has to be considered on the parameters of functionality and assessee cannot be prevented from challenging the same. 86. Page No. 26 of the 9th annual report 2007-08 of this company can be found at page No. 935 of the paper book clearly establishes that this company is engaged in a multifarious activities including an end to end service provider and offers variety of services. It is involved in product evaluation, design & development etc. of the products. Further, it also renders BPO services in the field of Human Resources, Life Sciences, Legal Services, Supply Chain Management, Sales, and Customer Support etc. Further, the financial statements lacks in providing the segmental....
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....ts that this company is not a good comparable with the assessee and consequently is liable to be excluded from the list of comparables. vi) PERSISTENT SYSTEMS 94. The Assessee claims to have excluded this company from the list of comparables while preparing its TP study on the ground that this company was functionally different from the assessee. However, This company was selected as comparable by the TPO and the assessee, during the course of TP proceedings, opposed the inclusion of this comparable on ground of functional dissimilarity but the TPO selected it as the final comparable by rejecting the argument of the Assessee and holding that this company is deriving revenue from both software as well as products and insufficient segmental information is available in the financial statements. 95. It is evident from a reading of page numbers 1085, 1090, 1136, 1140, 1154, 1162 & 1183 of the paper book containing the Annual Report of this company, that the company is engaged into software product development with complete life cycle and is functionally dissimilar to that of the Assessee. Further the profit and loss account at page No. 1154 of the paper book shows that the incom....
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.... company engaged in providing software development services to its related parties alone. Similar view has been taken by the Tribunal in Lear Automotive India Pvt. Ltd. Vs. ACIT (ITA No.5612/Del/2011) vide its order dated 22.12.2014. The ld. DR could not point out any distinguishing feature in the factual matrix of the assessee in question and Toluna India Pvt. Ltd., and Lear Automotive India Pvt. Ltd. Respectfully following the precedents, we order for the exclusion of this company from the list of comparables." 97. In view of the functional dissimilarity coupled with the fact of nonavailability of the segmental information, while respectfully following the decision in Aircom (supra), we hold that this company is liable to be excluded from the list of comparables. vii) R. SYSTEMS . SOFTWARE "103. Assessee objected the inclusion of this company in the set of comparables on the ground that this company was functionally different from the assessee. However, this company was selected as a comparable by the TPO and the assessee has argued for its exclusion on the ground that it functionally dissimilar to that of the Assessee as this company is engaged in the Outsourced Product ....
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....s. The Tribunal in Toluna India Pvt. Ltd. VS. ACIT (2014) 151 ITD 177 (Delhi) and Motorola Solutions India Pvt. Ltd. (supra), both of which were rendering software development services, has treated this company as functionally not comparable. We, therefore, order for the exclusion of this company from the list of comparables." 111. No change of circumstances is brought to our notice either by the assessee or by the revenue, as such, by respectfully following the reasoning of this Tribunal in assessee's own case for the immediately preceding year, we conclude that this company is not a suitable one to be continued in the set of comparables. We therefore direct the exclusion of this company from the final set of comparable companies for benchmarking international transaction related to software segment." 16. As no new facts have been brought to our notice, except the fact of amalgamation, which has been taken care of by the Tribunal in its order in ITA No. 333/DEL/2013, we find no reason to interfere with the findings of the co-ordinate bench. Respectfully following the same, we direct the TPO to exclude the aforementioned comparables from the final set of comparables. 17. ....
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.... the revenue expenses have substantially impacted the profit margin of this company. The intangibles as per fixed asset schedule in the balance sheet shows that they have been fully depreciated during the year. 22. The acquisition mentioned in the Annual Report also does not show any substantial impact in the profit margin of this company. Keeping in mind that TNMM has been accepted as the most appropriate method, it is difficult to find exact replica of the comparable with tested party. In our considered opinion, the TPO has rightly included this company in the final set of comparables and we do not find any error or infirmity in that. Accordingly, TCS stands included in the final set of comparables. THINKSOFT GLOBAL SERVICES LTD 23. Pleading for exclusion of this company, the ld. counsel for the assessee argued that this company is engaged in the software validation and verification services to the banking and financial industry worldwide and, therefore, is functionally dissimilar. The ld. counsel for the assessee further stated that for software testing, revenue is recognised based on software tested and billed to clients as per the terms of specific contracts. For fixed pri....
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....s primarily into software development services and, therefore, functionally similar and placed reliance on the findings of the TPO. 29. On careful consideration of the Annual Report of this company, we are of the considered opinion that it is functionally dissimilar. Our view is fortified by the decision of the co-ordinate bench in the case of St Ericsson India Pvt Ltd. Further, revenue recognition model of this company cannot be accepted, as there is no room for any adjustment for different revenue recognition model. As mentioned elsewhere, the assessee recognises its revenue at cost +5%. Therefore, this company cannot be accepted as a good comparable. The same is directed to be excluded. CG-VAK SOFTWARE & EXPORTS LIMTIED 30. We find that the issue relating to this company was remanded by the Tribunal in assessee's own case for assessment year 2008-09 and the ld. counsel for the assessee pointed out that while giving appeal effect, the TPO has accepted to include this company. 31. The ld. DR fairly conceded to this submission of the ld. counsel for the assessee. 32. Considering the past history of the assessee, qua the inclusion of this company, we restore this matter to....
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....nt proceedings observed that the assessee has not bench-marked these services separately and combined with other operations of network division. The TPO dismissed the claim of the assessee that all these transactions are integral to each other and cannot be separated. 37. A show cause notice was issued to the assessee to explain how these transactions are intricately connected with each other. In its reply, the assessee once again contended that the support services were integral and intricately connected to the net work division. Rejecting this contention of the assessee, the TPO observed that from the TP report, it can be seen that the transactions are not intricately inter-connected. The TPO further observed that these support services are being provided to AEs and contracts executed by AEs in India for various clients. The TPO was of the opinion that it is not the case of the assessee that these services are being provided only in respect of contracts executed by it or sales made by it. 38. According to the TPO, support services provided by the assessee are separate and distinct from the contract and sales being made by the assessee. The TPO further observed that the cost bas....
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....the TPO has failed to appreciate that the cost of service to AE was only Rs. 36.32 crores ,which reflected in the operating margin Rs. 64.89 crores on operating cost to the assessee, which is far in excess of operating margin from the company selected by the TPO. 42. The ld. counsel for the assessee further drew our attention to the fact that this issue was raised before the DRP and arguments were made but could not be supported by any documentary evidence and hence the DRP did not give any direction to the TPO. The ld. counsel for the assessee pointed out that now the documentary evidences are available. Therefore, this issue should be remitted to the file of the TPO for fresh consideration as per working supported by certificate from the Chartered Accountant. 43. The ld. DR strongly supported the findings of the TPO though agreed for remittance to the file of the TPO for fresh consideration in the light of documentary evidences brought on record. 44. We have heard the rival submissions and have given thoughtful consideration to the orders of the authorities below. It is an undisputed fact that the assessee has recharged the total cost of marketing team alongwith markup of 3% f....
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....lopment Yes Yes Installation and commissioning Yes No Quality control Yes Yes Post sales support Yes No 47. During the TP assessment proceedings, the TPO found that the assessee has not bench-marked these services separately and combined them with other operations of network division. Being not satisfied with the action of the assessee, the TPO used the following set of comparables for bench marking of this segment: No. Company Name Sales NW lnt/TC% Service% Emp% RPT% OP/OC OP/OC (w/o Fx) 1 Archohm Consulta 1.94 0.64 3.33 100.00 28.67 0.00 29.79 29.79 2 Engineers India 1532.46 1375.34 0.17 100.00 31.29 0.32 59.16 59.16 3 IBI Chematur 13.54 7.39 0.00 100.00 43.94 0.00 20.99 20.66 4 Indus Technical & Financial Consultants Ltd. 1.45 0.83 0.72 98.62 27.74 WA 6.78 6.78 5 L&T Ramboll Cons 24.46 16.94 0.39 100.00 51.52 0.00 41.79 41.79 6 Mahindra Consulting Engineers Ltd. 8.48 3.50 0.00 99.07 38.62 0.08 25.67 25.75 7 MN Dastur 162.82 99.75 0.00 100.00 42.14 9.49 7.42 7.42 8 Rites 582.84 609.75 0.19 100.00 40.37 6.12 24.83 24.83 9 Semac Ltd. 34.68 14.60 0.22 97.31 43.22 WA 25.22 ....
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....on also. The ld. counsel for the assessee further pointed out that under Appendix 1A, details of cover transaction between the assessee and the AE relate to the network division has been mentioned at Item VIII. 51. It is the say of the ld. counsel for the assessee that the same view should be adopted for the year under consideration also as there is no change in the business model of the assessee. In support of its contention the ld. counsel for the assessee placed reliance on the decision of the Tribunal in the case of Ranbaxy Laboratories 68 Taxmann.com 322. 52. Per contra, the ld. DR strongly supported the findings of the TPO and it is the say of the ld. DR that the TPO has rightly segregated the transaction and has used the comparables as per filters accepted by the assessee and, therefore, no interference should be made with the findings of the TPO. 53. We have heard the rival submissions and have given thoughtful consideration to the orders of the authorities below. We have also accordingly perused the advance pricing agreement u/s 92CC of the Act between the CBDT and the assessee which is exhibited at pages 18 to 76 of the paper book. It is true that the agreement is appl....
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....imachal Futuristic Communications Ltd 15.78 2 ORG Informatics Ltd -3.5 3 Telecommunications Consultant India Ltd 5.17 Average 6.94% 56. The assessee used TNMM as the most appropriate method with operating profit to total cost as profit level indicator and PLI of the assessee is arrived at 10% on cost whereas operating PLI of the comparables mentioned hereinabove at 6.94% and hence the transaction was treated as Arm's length. During the TP proceedings, the TPO was not satisfied with the bench marking made by the assessee and used final set of comparables for ITES segment. S No. Company Name Sales NW Service% Fx% RPT% OP/OC (w/o Fx) 1 Accentia Tech. 80.14 120.37 100 98.23% 0.00 52.52 2 Aditya Birla Minacs Worldwide Ltd. 231.49 255.51 100 85.33 4.47 11.95 3 Coral Hub Ltd. 61.09 254.38 100 100 0.18 37.03 4 Cosmic Global Ltd. 7.37 2.67 100 85.07 #N/A 50.70 5 Crossdomain 33.76 17.93 100 88.60% #N/A 25.63 6 Eclerx Services Ltd. 197.09 165.25 100 91.54 13.76 66.01 7 Genesis International Corporation Ltd. 83.18 71.25 100 115.14 0 59.21 8 Igate Global 900.88 509.3 100 102.87 12.12 22.58 9 Infosy....