TaxTMI 
TaxTMI 
2018 (4) TMI 1759
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....to its Associated Enterprises (AE). In the appeal by the revenue and the C.O. by the Assessee the disputes relate to determination of Arm's Length Price (ALP) in respect of provision of SWD services and ITES to the AE. 3. SOFTWARE DEVELOPMENT SERVICES SEGMENT: Grounds No. 1 to 6 raised by the revenue relate to the addition made consequent to determination of Transfer Price by the Transfer Pricing Officer(TPO) in the SWD Services segment, which addition was deleted by the DRP in its directions on the adjustment to Arm's Length Price (ALP) suggested by the TPO. We have already seen that during the relevant previous year, one of the international transactions that took place between the Assessee and its AEs was the provision of software development services ("SWD services for short) to them at a price of Rs. 223,06,23,932/-. Since the transaction of provision of Software service by the Assessee was an international transaction, income from such international transaction has to be determined having regard to Arm's Length Price (ALP) as laid down in the provisions of Sec.92 of the Act. 4. The TPO to whom the question of determination of ALP of the international transaction of provid....
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....ee Ltd.(seg) 10.66 9.15 Persistent Systems & Solutions 22.12 20.92 Persistent Systems Ltd. 22.84 21.35 R.S.Software (India) Ltd. 16.37 16.02 Sasken Communication Technologies Ltd. 24.13 24.20 Tata Elxsi Ltd.(seg) 20.91 18.71 AVERAGE MARK-UP 24.82 23.52 8. The TPO thereafter computed the Arm's Length Price as follows: Arm's Length Mean Mark-up 24.82% Less: Working Capital Adjustment 1.30%* Adjusted mean an mark-up of the comparables 23.52% Operating Cost Rs. 197,04,10,457/- Arm's Length Price h Price - 123.19% of Operating Cost Rs. 243,38,50,996/- Price Received Rs. 223,06,23,932/- Shortfall being adjustment u/s. 92CA Rs. 20,32,27,064 /- 9. The Assessee objected to the manner of determination of ALP by the TPO before the DRP. Briefly, the directions issued by the DRP are as follows: Functionality Filter: The following companies were directed to be excluded by accepting the contentions of the Assessee: (i) Acropetal Technologies Ltd. (ii) E-Infochips Limited (iii) ICRA Techno Analytics Ltd. (iv) Infosys Ltd....
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....s-objections which are being pressed are as follows: (i) That the TPO erred and the DRP further erred in including two companies, viz. Persistent Systems Ltd. and Sasken Communications Technologies Ltd., in the list of comparables although they fail the test of comparability. (Ground No.1.6) (ii) That the DRP erred in suo moto rejecting RS Software Pvt. Ltd., Mintree Ltd., and Evoke Technologies Ltd., from the list of comparables (Ground No.2). 13. As far as Gr.No.2 is Revenue's appeal is concerned, the sum and substance of the ground of appeal is that the DRP ought not to have excluded 2 comparable companies from the list of final comparable companies chosen by the TPO for comparison of profit margin of the Assessee with comparable companies. The two companies that were excluded by the DRP which is in challenge by the Revenue before the Tribunal are (i) Acropetal Technologies Ltd., and (ii) RS Software (India) Ltd. 14.Acropetal Technologies Limited - As far as exclusion of this company as a comparable company is concerned, it is seen from the Directions of the DRP that this company was excluded on the grounds that: (i) the segmental information containing the break-up of....
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....he list of comparables. In the proceedings before the DRP, the Assessee did not object to its inclusion in the list of comparables. However, despite the above, the DRP on its own directed its exclusion. We are of the view that since the revenue as well as the Assessee wants to retain this company as a comparable company, this company should be regarded as comparable company. 16. As far as Ground No.4 raised by the revenue is concerned, the Revenue seeks to challenge the exclusion of E-Infochips Ltd. on the ground that it failed the software service income filter at 75%. At the outset, the Assessee submits that EInfochips Ltd. was excluded by the DRP on the ground that: (i) no segmental information regarding its diverse functions is available; (ii) it failed the software service income filter at 75%; (iii) there were major fluctuations in profit and turnover every year which seems to be influenced by extraordinary/peculiar circumstances; and (iv) there is a presence of inventory (Page 10 and 11 of the DRP's direction). The Revenue, in its appeal, has challenged its exclusion only the second ground. In other words, the Revenue has not challenged its exclusion on the other grounds s....
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.... by the Assessee in it's cross objection in so far as it relates to determination of ALP of SWD services segment. The cross-objection is therefore dismissed as infructuous in respect of SWD Services segment. 22. ITES SEGMENT: As far as ITES segment is concerned, the final list of companies chosen by the TPO was 10 and the addition on account of ALP based on the average profit margin of these 10 companies was a sum of Rs. 3,66,42,275/-. Pursuant to the directions of the DRP only 4 companies remain in the list of comparable companies viz., (i) Accentia Technologies Ltd., (ii) ICRA online Ltd. (Seg.) (iii) Jindal Intellicom Pvt.Ltd. and (iv) Mindtree Ltd. 23. The Revenue in its appeal has challenged the order of the AO incorporating the directions of DRP excluding Acropetal Technologies from the final list of comparable companies chosen by the TPO (Gr.No.7 & 8). In its cross-objection the Assessee has objected to inclusion of Accential Technologies Ltd., in the list of comparable companies by the DRP (Gr.No.1.6). 24. As far as ground Nos. 7 and 8 in the Revenue's appeal is concerned, the same relates to exclusion of Acropetal Technologies Ltd., as a comparable company. The sub....
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....company is committed to deliver the cost effective software products, services and solutions to its customers for which no segmental information is available. It is also noticed that in the profit and loss a/c, software development expenses of 7 69.92 crore has been debited out of which RS. 55.77 crore has been incurred on technical sub contract. In respect of such on-site expense, segmental information is not available, Further, in the segmental information, the unallocated expenses are to the extent of Rs. 21,52 crore. All these differences makes it clear that even if the engineering design segment is considered as comparable, the correct margin and comparability cannot be arrived at, Further, due to the functional differences, Hon'ble Bengaluru ITAT in the case of - Symphony Marketing Solutions India Pvt. Ltd. vs. ITO (IT (TP) A No. 1316/Bang/2012), held that Acropetal cannot be considered as comparable as it performs engineering design services in addition to other judicial pronouncements relied by the assessee, accordingly we direct the assessing officer to exclude the company from the comparables". 28. The fact that segmental details are not available is not the only re....
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....ry and their products were customised and not similar to what assessee was doing. As per the Ld. AR the work done by Accentia Technologies Ltd, required skilled knowledge and advanced analytics. Ld. AR submitted that during the relevant previous year, the said company had invested in another company which had an expertise in EMR Software and Saas. In any case, as per the Ld. AR, segmental results of Accentia was not available in between various segments like MT billing collection and coding. When segmental results were not available, as per the Ld. AR it was not proper to consider Accentia Technologies Ltd, as a good comparable. Reliance was also placed on decision of Delhi Bench of the Tribunal in the case of Equant Solutions India P. Ltd v. DCIT [ITA.1202/Del/2015, dt.21.01.2016] and that of coordinate bench in the case of Amba Research (India) P. Ltd, v. DCIT [IT(TP)A.286/Bang/2015, dt.09.03.2016]. As per the Ld. AR though the above decisions were for A. Y. 2010-11, Accentia Technologies Ltd, was doing the very same activities during the relevant previous year also. Hence according to him these decisions could be taken as a precedence for excluding the said company from the list....
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....eport. This is reproduced hereunder : 14. If we have a look at the billings made by M/s. Accentia Technologies Ltd, its income for the relevant previous year read as under : Not only was the medical transcription work done by it of a highend variety, it also had substantial income from coding coming to about 16% gross receipts. No segmental results were also available. Its audited financial statements at para 7 of the notes to accounts mentioned as under : 15. As against the above, Assessee was providing back office support to its group companies and affiliates, in the field of reinsurance, which its affiliates were engaged in. Work done by the assessee has been captured by us at para three above. This in our opinion was entirely different from the type of activities that Accentia Technologies Ltd, was into. Type of services rendered by the assessee is also clear from the service agreement entered with its AE called Swiss Re, Zurich, dt.01.02.2009. Annexure-1 to this agreement, is reproduced hereunder : 16.A reading of the above would show that assessee was functioning in a field different from M/s. Accentia Technologies Ltd. What it was providing may not be low-end ser....
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.... not be correct to compare the results of two companies. 19. In the case of Amba Research India P. Ltd (supra), this Tribunal had directed exclusion of Accentia Technologies Ltd, for comparison purposes. Assessee in the said case was providing ITES services to its holding company at British Virgin Islands. Observation of the Tribunal at para 8 of the order dt.09.03.2016, is reproduced hereunder : 08. We have perused the orders and heard the rival contentions. No doubt Accentia Technologies Ltd, formed a part of the list of comparables considered by the assessee in its TP study. However assessee had objected to its inclusion citing functional dissimilarity before the AO as well as the DRP. Question regarding comparability of Accentia Technologies in the ITE segment for A. Y. 2010-11 had come up before this Tribunal in the case of Novo Nordisk India P. Ltd (supra). It was held as under at paras 31 and 32 of the order dt.30.07.2015 : 31. We deal with the comparable companies which the Assessee seeks exclusion. 1. Accentia Technology Ltd., 2. Infosys BPO Ltd. The comparability of these company with a ITES company was considered by this Tribunal in the case of Paraxel Internati....
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....unsel, this year also, the acquisition of some companies by that company may have impact on the profit. Considering the profit margins of the company and insufficient segmental data, we are of IT(TP)A No.146/Bang/2015 Page 42 of 52 the opinion that this company cannot be selected as a comparable. Moreover, this is also not a comparable in the case of M/s. Mercer Consulting (India) P. Ltd. (supra), which indicates that the TPO therein has excluded it at the outset. In view of this, we direct the Assessing Officer/TPO to exclude this comparable, from the list of comparables selected." 13. As pointed out by the learned counsel for the assessee, there was acquisition of a company by M/s. Accentia Technologies Limited during the relevant year, and the said company, therefore, cannot be considered as comparable due to this extraordinary event which occurred in the relevant year as rightly held by the Tribunal inter alia in the case of Excellence Data Research P. Ltd. (supra). Although the learned Departmental Representative has sought to contend that the acquisition of a company by M/s. Accentia Technologies Ltd. took place at the fag end of the year under consideration, the learned coun....