TaxTMI 
TaxTMI 
2018 (4) TMI 1755
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....g of Software Development Services and Information Technology Enabled Services by the Assessee to its holding company. The Assessee is a company engaged in the business of providing contract Software Development Services (SWD Services) and providing Information Technology Enabled Services (ITES) to its holding company in Netherlands BV as a captive service provider. The transaction of rendering software development services and ITES to holding company was a transaction with an Associated Enterprise (AE) and was therefore an international transaction. As per the provisions of Sec.92 of the Act, income from international transaction has to be computed having regard to Arm's Length Price (ALP). 3. The details of the international transaction between the Assessee and its AE in AY 2010-11 were as follows: Particulars Amount in Rs. Provision of S WD services 357,68,61,693/- Provision of ITeS 104,03,22,271/- 4. SOFTWARE DEVELOPMENT SERVICES SEGMENT: It is not in dispute between the Assessee and the revenue that the Transaction Net Margin Method (TNMM) was the Most Appropriate Method (MAM) for determination of ALP and that the profit level indicator to be adopte....
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.... Rs. 357,68,61,693/- Shortfall being adjustment u/s. 92CA Rs. 24,62,86,639/- 6. The difference between the price charged by the Assessee and the ALP determined by the TPO viz., Rs. 24,62,86,639/- was added to the total income by the AO in his draft assessment order dated 11.3.2014 as addition on account of shortfall being adjustment u/s.92CA of the Act. 7. The Assessee filed objections to the draft assessment order by the AO before the Disputes Resolution Panel (DRP). The DRP in its directions dated 3.12.2014 rejected the objections of the Assessee and confirmed the addition on account of shortfall being adjustment u/s.92CA of the Act. The AO passed a fair order of assessment making the addition on account of determination of ALP by the TPO. Aggrieved by the addition made in the fair order of assessment, the Assessee has raised several grounds of appeal challenging the addition on several counts. However, at the time of hearing of the appeal, the learned counsel for the Assessee submitted that if 5 out of the 10 comparables chosen by the TPO viz., (i) Infosys Ltd., (ii) Kals Informations Systems Ltd., (iii) Persistent Systems Ltd., (iv) Tata Elxsi Ltd.; and (v) Persi....
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.... Delhi Bench in the case of Agnity India Technologies (P.) Ltd. v. ITO [2015] 58 taxmann.com 167/154 ITD 293 (Delhi - Trib.), which was confirmed by the Delhi High Court. The Hon'ble Delhi High Court has observed that this company having brand value as well as intangible assets cannot be compared with an ordinary entity provide captive service. The Tribunal further held that this company provides end to end business solutions that leverage cutting edge technology thereby enabling clients to enhance business performance. This company also provides solutions that span the entire software lifecycle encompassing technical consulting, design, development, re-engineering, maintenance, systems integration, package evaluation and implementation, testing and Infrastructure management service. In addition, the company offers software product for banking industry. Thus, this company is engaged in diversified services including design as well as technical consultancy, consulting, re-engineering, maintenance, systems integration as well as products for banking industry. (2) KALS Information Systems Ltd.: In Paragraphs 21 to 23 of its order the Tribunal held that this company was so....
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....Ltd.: In paragraphs 60 & 61 of its order the Tribunal held that this company is in software development and products and no segmental details were Assessee available and therefore it was not possible to ascertain the profit margin in the software development service segment. 10. Respectfully following the decision of the Tribunal we hold that the aforesaid 5 companies be excluded from the final list of comparable companies for the purpose of arriving at the arithmetic mean of comparable companies for the purpose of comparison with the profit margins of the? In this regard we are also of the view that the plea of the learned DR for a remand of the issue to the DRP on the ground that the DRP has not given any reasons in its directions cannot be accepted. The DRP has endorsed the view of the TPO in its directions and therefore the reasons given by the TPO should be regarded as the conclusions of the DRP. If the above 5 comparable companies are excluded the arithmetic mean of the remaining comparables would be as follows: SI. No. Name of the Company Mark up on costs-unadj (in %) Mark up on costs-WC -adj (in %) 1 Larscn & Toubro Infotech Ltd. 19.33 19.63 2 ....
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....djustment towards working capital adjustment was as follows: Comparables selected by TPO and their arithmetic mean: SI. No. Name of the Company Markup WC Unadj. (%) WC adjusted (%) 1 Accentia Technologies Ltd. 43.06 39.84 2 Fortune Infotech Ltd. 22.80 20.79 3 ICRA Online Ltd. (seg) 43.39 42.98 4 Informed Technologies India Ltd. 26.15 27.09 5 Infosys BPO 31.23 34.40 6 Cosmic Global Ltd. 14.97 17.11 7 Jeevan Scientific Technology (seg) 21.05 16.74 8 Nittany Outsourcing Services Ltd. 30.67 32.54 9 Microland Ltd. -2.14 -2.06 ARITHMETIC MEAN 25.69 25.49 12. Computation of arm's length price by TPO and the adjustment made: Arm's Length Mean Margin 25.69% Less: Working Capital Adjustment 0.20% Adjusted mean margin of the comparables 25.49% Operating Cost Rs. 90,84,33,028/- Ann's Length Price (ALP) 125.49 % of Operating Cost Rs. 113,99,92,607/- Price Received Rs. 104,03,22,271/- Shortfall being adjustment u/s. 92CA Rs. 9,96,70,336/- 13. The difference between....
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.... for AY 2010-11, the comparability of the three companies for very same AY 2010-11, which the Assessee seeks to exclude in this appeal with a company rendering ITES was considered. The Tribunal held that the aforesaid three companies cannot be regarded as comparable with a routine ITES company. In this regard it was submitted that the functional profile of the Assessee is same as that of the Assessee in the case of Goldman Sachs Services Pvt. Ltd. (supra), inasmuch as the said company was also involved in providing ITES to its AE and the TPO had chosen same comparable companies that were chosen by the TPO in the case of the Assessee. His submission was that the decision rendered by the Tribunal in the case of Goldman Sachs Services (P.) Ltd. (supra) would be equally applicable to the Assessee in the present case also. The learned DR submitted that the DRP in its directions has merely accepted with the reasoning of the TPO and therefore the issue of exclusion of these companies should be directed to be examined afresh by the DRP. 16. We have considered the rival submissions. In the case of Goldman Sachs Services (P.) Ltd. (supra), this Tribunal considered the comparability of the....
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....comparables for the Appellant's IT Enabled Services segment: SI. No. Name of the Company Margin Unadj. (%). Margin - WC adjusted (%) 1 Cosmic Global Ltd. 14.97 17.11 2 Jeevan Scientific Technology (seg) 21.05 16.74 3 Nittany Outsourcing Services Ltd. 30.67 32.54 4 Microland Ltd. -2.14 -2.06 5 Fortune Infotech Ltd. 22.80 20.79 6 Informed Technologies India Ltd. 26.15 27.09 ARITHMETIC MEAN 18.92 18.70 +/- 5% of Appellant's Net Margin for IT enabled services: Particulars Margin (%) Net Margin of the Appellant 14.52 Arithmetical mean of margins of the comparables 18.70 + 5% of the Appellant's margin 20.25 - 5% of the Appellant's margin 8.80 Thus, since the arithmetical mean of the working capital adjusted margins of the above 6 comparables (18.70%) is within +/- 5% of the NCP margin of the Appellant (14.52%), the TP adjustment made by the TPO insofar as it relates to the ITE Services provided by the Assessee to its AEs in FY 2009-10 is liable to be deleted. Therefore, the other grounds raised in the Assessee's memorandum of appea....
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....-13 were as follows: Particulars Amount in Rs. Provision of SWD services 509,56,59,955 Provision of ITES 127,78,91,238 22. SOFTWARE DEVELOPMENT SERVICES SEGMENT: It is not in dispute between the Assessee and the revenue that the Transaction Net Margin Method (TNMM) was the Most Appropriate Method (MAM) for determination of ALP and that the profit level indicator to be adopted for comparison of the Assessee's profit with that of comparable companies was Operating Profit/Total Cost (OP/TC). The OP/TC of the Assessee was 12.63%. The Assessee in its TP study selected 14 comparable companies whose arithmetic mean of OP/TC was arrived at 13.08%. Since the profit margin of the Assessee was more than the arithmetic mean of OP/TC of the 14 comparables selected by the Assessee, it was claimed by the Assessee that the price charged by it in the international transaction was at Arm's Length. The Transfer Pricing Officer (TPO) to whom the determination of ALP was referred by the AO, accepted 1 (Mindtree Ltd.) out of the 14 comparable companies suggested in the TP study by the Assessee as comparable with the Assessee. The TPO on his own selected 9 other companies as ....
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....mpanies viz., (a) Genesys International Corpn. Ltd., (b) Infosys Ltd., (c) Larsen and Toubro Infotech Ltd., and (d) Persistent Systems Ltd. The Assessee had contended before DRP that these 4 companies are not comparable to the Assessee. (iii) directed TPO to recompute the margins of the Assessee and the comparables after treating foreign exchange fluctuations as operating income or loss as the case may be. 26. Pursuant to the above directions issued by the DRP, the list of comparables that remained for consideration was as follows: SI. No. Name of the Company 1 Genesys International Corpn. Ltd. 2 Infosys Ltd. 3 Larsen & Toubro Infotech Ltd. 4 Mindtree Ltd. 5 Persistent Systems Ltd. 6 RS Software (India) Ltd. 7 Sasken Communication Technologies Ltd. 8 Spry Resources India Pvt. Ltd. 27. Pursuant to the directions of the DRP, the AO passed the final assessment order wherein the TP adjustment stood reworked at a lesser figure than what was originally suggested by the TPO. The AO passed a fair order of assessment making the addition on account of determination of ALP by the TPO as modified by the DRP. Aggrieved by the addition ....
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....mpanies which were also chosen by the TPO in the case of the Assessee for the purpose of comparability. In the aforesaid decision the Tribunal held on the comparability of the 3 companies which the Assessee seeks to exclude as follows: (a) Infosys Ltd., was excluded from the list of comparable companies by following the decision of the Hon'ble Delhi High Court in the case of CIT v. Agnity India Technologies (P.) Ltd. [2013] 36 taxmann.com 289/219 Taxman 26 (Delhi). The discussion is contained in paragraphs 4.5 to 4.7 of the Tribunal's order. The Tribunal accepted that Infosys Ltd. is a giant risk taking company and engaged in development and sale of software products and also owns intangible assets and therefore not comparable with a software development service provider such as the Assessee in that case. (b) Larsent & Tourbro Infotech Ltd., was excluded from the list of comparable companies by relying on the decision of the Delhi Bench of ITAT in the case of Saxo India (P.) Ltd. v. Asstt. CIT [2016] 67 taxmann.com 155 (Delhi - Trib.). The discussion is contained in paragraphs 4.8 to 4.10 of the Tribunal's order. The Tribunal held that L & T Infotech L....
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.... geocontent including location based and other computer based related services. Pagc-38 of the Annual report 2012 containing the above description was brought to the notice of the TPO, Attention of the TPO was invited to the directors report to the shareholders at page ii of the annual report 2012, wherein the Directors have informed the shareholders that the company continued in its journey, to be innovators and leaders in the fields of location based services related geoplatforms and advanced survey techniques. There is no segmental reporting because it is stated in the annual report that this company is only in one segment viz., GIS based services and therefore there is no requirement of segmental reporting. It was also submitted that this company owns substantial intangibles equivalent to 10.42% of its total turnover. 32. The TPO however has regarded this company as a comparable company by observing that this company develops software for mapping and geospatial services and operates a few development centres in India. The company is predominantly into software development services. The intangibles in the possession of the company are only the GIS database which is only depre....
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....l transaction with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; In the given facts and circumstances, we are of the view that Genesys International Corporation Ltd., cannot be considered as a comparable company and the said company should be excluded from the final list of comparable companies. We hold accordingly. 36. If the aforesaid 4 companies are excluded from the list of comparable companies, the remaining comparable companies and the average arithmetic mean of those comparables would be as follows: SI. No. Name of the Company 1. Mindtree Ltd. 2. RS Software (India) Ltd. 3. Sasken Communication Technologies Ltd. 4. Spry Resources India Pvt. Ltd. The arithmetical mean of the working capital adjusted recomputed margins of the above comparables would fall within the +/-5% range of the Appellant's NCP margin of 12.63% for prov....
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....ion) 41.58 49.05 9. Excel Infoways Ltd (Seg)-(IT/BVPO) 29.79 36.77 10. e4e Healthcare Business Services Pvt. Ltd. 19.85 20.58 AVERAGE MARKUP 28.11 30.37 38. On the basis of the comparable companies, the TPO computed arm's length price of the international transaction of rendering of ITES by the Assessee to its AE and the consequent addition to total income by way of adjustment to ALP as follows: Arm's Length Mean Markup 28.11% Less: Working Capital Adjustment (after restriction) -2.26% Adjusted mean markup of the comparables 30.37% Operating Cost ('OC') Rs. 113,70,09,838/- Arm's Length Price ('ALP') = 130.37% of OC Rs. 148,23,19,726/- Price Received Rs. 127,78,91,238/- Shortfall being adjustment u/s. 92CA Rs. 20,44,28,488/- 39. The difference between the price charged by the Assessee and the ALP determined by the TPO viz., Rs. 20,44,28,488/- was added to the total income by the AO in his drat assessment order dated 29.2.2016 as addition on account of shortfall being adjustment u/s. 92CA of the Act 40. The Assessee filed objections before the DRP against th....
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....lude Informed Technologies India Ltd. and Jindal Intellicom Ltd., in the list of comparable companies. The submission was that these companies was selected by TPO and Assessee or the AO never objected to inclusion of these two companies in the final list of comparables. It is the stand of the Assessee that the DRP cannot suo motu exclude or include a comparable company which the parties do not want to include or exclude. 44. The learned counsel for the Assessee submitted before us that 3 out of the 5 companies which the Assessee seeks to exclude from the list of comparable companies viz., Infosys BPO Ltd. TCS B-service Ltd. and Excel Infoway Ltd., were considered for exclusion by the Tribunal in the case of a similar Assessee such as the Assessee engaged in providing ITES in the case of Baxter (I) (P.) Ltd. v. A.CIT [2017] 85 taxmann.com 285 (Delhi - Trib.). The learned DR relied on the order of the DRP/TPO. 45. We have considered the rival submissions. In the case of Baxter (I) (P.) Ltd., (supra) the Delhi ITAT Bench considered comparability of the aforesaid three companies with a company engaged in providing ITBS such as the Assessee. The functional profile of the Assessee ....
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....4 of paper book) that the TPO had applied revenue filter of more than 75% being from non-financial service income. The Assessee pointed out that the percentage of income from ITES was only 21.63% of the total revenue from operations of this company as per its annual report. The Assessee also pointed out that in the Pre-press BPO segment this company was providing integrated print solutions to its customers, which includes scanning, design/layout, trapping, hand-outlined clipping path and image masking and magazine and catalogue publishing. The Assessee submitted that the aforesaid services are not in the nature of ITES. The Assessee pointed out that as per the safe harbour rules introduced by the CBDT ITES has been defined as business process outsourcing services provided mainly with the assistance or use of information technology. It was also submitted that this company does not satisfy the definition of ITES as contained in Rule IOTA(e) of the Rules. Since use of information technology is absent .in the various services provided by this company, it cannot be regarded as ITES company. The Assessee also submitted that this company fails the employee cost filter. The employee cost f....
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....shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely:- (a) to (d)** ** ** (e) transactional-margin method, by which, (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (if) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margi....
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....plied at entity level. It cannot be argued that when the TPO himself applied the filters at the entity level he was not entitled to apply the filters at segmental level. As we have already stated if clear segmental information is available the filters can be applied at the segmental level in TNMM. Therefore the objection with regard to this company failing the employee cost filter and service revenue filter in our view was rightly rejected by the TPO and DRP. It is however seen that this company has four segments viz., Repro. Label Printing, Offset Printing and Pre-press BPO. Whether the label printing and offset printing segments supplement the functions performed in the Pre-press BPO segment has to be seen. We therefore set aside the order of the DRP in this regard and remand for fresh consideration by the TPO the comparability of this company. In terms of Rule 10B(3) of the rules the profit margins of Pre-Press BPO have to be adjusted taking into account the fact that two other segments supplement the pre-press BPO segment. If such adjustment cannot be reasonably or accurately made then this company has to be excluded from the list of comparable companies. The TPO for this purpo....
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....ce this company passes RPT filter as well as income from providing ITES being more than 75% of its revenue, this company has to be regarded as comparable company. No other arguments were advanced for exclusion of this company. Hence this company is held to be comparable with that of the Assessee. 55. The next submission of the learned counsel for the Assessee was for inclusion of two companies viz., (i) Informed Technologies India Ltd., and (ii) Jindal Intellicom Ltd., in the final list of comparable companies. In this regard it was argued that both these companies were held to be comparable companies by the TPO and the Assessee did not object before the DRP to inclusion of these two companies as comparable companies. The DRP suo motu excluded these two companies from the list of comparable companies vide paragraphs 6.18 & 6.19 of its directions. On a perusal of the Order of the DRP it is clear that the DRP did not put the Assessee on notice as to its proposed action of excluding these two companies from the list of comparable companies. As far as the company Informed Technologies India Ltd., is concerned, it was excluded by the DRP for the reason that this company had advanced ....
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....ts own directed its exclusion on the premise that since it catered only to customers in USA, where there was allegedly an adverse business climate for outsourcing work, its profitability was impacted. According to the DRP the Assessee's AE was in Netherlands where there was no adverse market conditions and therefore Jindal Intellicom Ltd., was liable to be excluded from the list of comparable companies. The DRP did not put the Assessee on notice as to its proposed action of excluding this company. We find that the Assessee does not merely provide services to its AE in Netherlands. It also provides ITE services to its AE's in UK, Finland, Germany, Sweden, Belgium, Denmark, Norway and USA. A perusal of its Form 3CEB for the instant assessment year which is produced at pages 1035-1046 of the paper book, shows that it provided services to AE's at USA also. Therefore, the entire basis for its exclusion is wholly misconceived and erroneous and, accordingly, its suo motu exclusion by the DRP is not proper. The functions performed by this company are comparable to the services provided by the Assessee and have not been disputed whatsoever by the DRP. That apart, Jindal has been....