TaxTMI 
TaxTMI 
2018 (7) TMI 2087
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.... Cypress range of products. The Assessee provides services to its parent company in the designing and development of integrated circuits, software and computer aided design tools. During the previous year relevant to the Assessment Year (`AY' for short) 201112, the Assessee provided SWD services to its AEs at a price of Rs. 1,49,91,75,237/- towards which the TPO made an adjustment of Rs. 20,08,18,017/-. Initially, a draft assessment order dated 27.03.2015 came to be passed by the Assessing Officer (`AO' for short) in which, inter alia, the aforesaid TP adjustment was proposed to be incorporated. The net margin on cost earned by the assessee is as under : Operating Income Rs. 149,91,75,237/- Operating Cost Rs. 136,89,75,080/- Operating Profit (Op. Income - Op. Cost) Rs. 13,02,00,157/- Operating/Net margin (OP/TC) 9.51% The assessee had selected sixteen comparables in its TP study, as under : SI. No. Name of the company Average NPI 1 Akshay Software Technologies Ltd. 4 2 Bells Softech Ltd. 5 3 FCS Software Solutions Ltd. 30 4 Helios & Matheson Information Technology ....
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....ologies P. Ltd .It was the case of the assessee that the DRP had wrongly excluded these comparables after applying the on-site filter. These companies are R. S. Software P. Ltd, Mindtree Ltd and Evoke Technologies P. Ltd. Persistent Systems Ltd : 05. The assessee is seeking exclusion of persistent Systems Ltd, it was submitted by the assessee that that this company is functionally dissimilar to it as it invests in intellectual property led solutions and also has a dedicated team for research and IP development. It also owns several IPs such as ChemLMS, ViewMOR etc. During the relevant financial year 2010-11, the company derived 8.8% of its total revenue from activities related to such IPs, and the relevant extract from its annual report is produced at pages 102-105 of the paper book. Even otherwise, the Assessee submits that this company is functionally dissimilar to it as it is engaged in rendering IT services and in the development of software products without there being separate segmental information disclosed in its Annual Report for such activities. The Assessee places reliance on the decisions of this Hon'ble Tribunal in Applied Materials India Pv....
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.... abnormal increase in its turnover of 183.97% as against the industry trend of 19%. It is submitted that this extraordinary increase in its turnover was occasioned by certain peculiar economic circumstances, i.e. the increased funding received by it from its holding company, viz. Persistent Systems Limited, for which no adjustment can be made to its margin to eliminate the material effects thereof and, therefore, the sad company cannot be considered as a comparable to the Assessee. The relevant extracts of its Annual report are available at page Nos. 112-114 of the paperbook. The Assessee places reliance on the decisions of this Hon'ble Tribunal in Applied Materials India Pvt. Ltd. v. ACTT [TS-815-1TAT2016(Bang)-TP at paras 9.2.1 to 9.2.4 on pages 18-22] and Commscope Networks (I) Pvt. Ltd. v. ITO [TS-161-ITAT2017(Bang)-TP at para 9 on pages 16-17] where, in the cases of assessees similar to the assessee herein, the said company was directed to be excluded for the same assessment year. 06. On the other hand the Ld. DR relied upon the orders passed by the lower authorities, in support of his plea that these three companies should not be excluded from the list of compara....
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....ucts and other services. The DRP has come to the conclusion that this company earned revenue from 3 segments. However, no segmental information is available. Accordingly, the DRP directed the AO to exclude this company from the comparables. 28. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. The DRP has reproduced the break-up of revenue in the impugned order as under:- Amount in Rs. lakhs Year ended March 31, 2010 Year ended March 31, 2019 Software Services 37,736.22 40,531.20 Software products 2,041.00 6,146.43 Other services 372.77 1,297.05 Total revenues 40,150.89 47,974.68 29. Thus, there is no dispute that this company earns revenue from 3 segments. However, the segmental operating margins are not available. Therefore, in the absence of segmental relevant data and particularly operating margins, this composite data cannot be considered as comparable with the assessee for software development services segment. Accordingly, we do not find any error or illegality in the findings of the DRP. Persistent Systems and Solutions Ltd.....
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....ed services and also Products. The Transfer Pricing Officer observed that the revenues of this company from Products was only 15% of total revenue and hence the same qualified to be eligible for comparison. The DRP did not allow any relief. 10.2 After considering the rival submissions and perusing the relevant material on record, we find that the Annual report of this company is available in the paper book with its Profit and loss account at page 1025. Schedule of Income indicates its operating revenue from software development, hardware maintenance, information technology, consultancy etc. Revenue from hardware maintenance stands at Rs. 3.92 crore, which has been considered by the Transfer Pricing Officer himself as sale of products. Such sale of products constitutes 15% of total revenue. There is no segmental information available as regards the revenue from sale of products and revenue from software development segment. As the assessee is simply engaged in rendering software development services and there is no sale of any software products, this company, in our considered opinion, ceases to be comparable. It is obvious that from the common pool of income from both the ....
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....; It was also the contention of the assessee before us that R S Software (India) Ltd, Mindtree Ltd and Evoke Technologies Ltd were selected by the TPO and were accepted by the assessee. It was also pointed out by the assessee before us that the Revenue is in appeal for inclusion of R S Software (India) Ltd. R S Software (India) 10. With respect to R S Software (India) Ltd, we do not find any reason to exclude this comparable when this comparable is sought to be included by both the assessee as well as the Revenue as a good comparable. Therefore considering the profile of R S Software (India) Ltd, we direct the inclusion of this comparable. Mindtree Ltd and Evoke Technologies 11. Now we are left with Mindtree Ltd and Evoke Technologies Ltd. The assessee has submitted that these comparables were considered by the coordinate bench in the matter of Applied Materials Applied Materials India P. Ltd (supra), (para 21 to 21.2) as under : 21. The revenue is also seeking inclusion of the following companies which were rejected by the DRP. i) Evoke Technology P. Ltd ii) Mindtree Ltd (seg) iii) R S Software India ....
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....sed by the assessee is with respect to working capital adjustment. As the TPO has restricted the working capital adjustment to 1.63% without any legal basis or irrationally, it was the contention of the assessee that in view of the Rule 10B(3) , the TPO is duty bound to give adjustment based on the difference in economy, geographical condition, compared with that of the assessee. In view of the above, working capital adjustment on actual basis is required to be given without any cap. An identical issue was also raised in the matter of VMware Software India P. Ltd (supra), wherein the Tribunal held as under at para 34 and 35 of the order : 34. The next issue raised by the assessee is regarding restriction of working capital adjustment benefit to 1.71%. 35. We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. The TPO while computing the working capital adjustment has restricted the benefit to 1.71% instead considering the actual figure in respect of each and every comparable companies. We find that there is no provision under FAR an....
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....e total employee cost of this company is 11.51 of the total operating revenue therefore it fails the employee cost filter of 25%. Further he has pointed out that this company also fails the software development services revenue filter of 75%. He has referred the details at page nos.39 and 53 of the Annual Report and submitted that the income from software development is Rs. 81.40 crores out of total revenue of Rs. 141 crores. Therefore this company fails this filter. 16.3 In a rejoinder the ld. DR has submitted that the TPO has considered only Information Technology transactions segment and therefore it satisfies software development services income filter as well as employee cost filter. 16.4 We have considered the rival submissions as well as the relevant material on record. As per the segmental reporting at page 53 of the Annual Report the income from Information Technology Services is Rs. 81.40 crores out of the total income of Rs. 141 crores. Therefore the revenue from Information Technology transactions services is less than 75% and consequently this company does not satisfy the filter of information technology revenue applied b....
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....nt of RPT filter. Exclusion of Acropetal Technologies Ltd. (Seg) is coYe're0 in favour of the assessee by the same tribunal order rendered in the case of *Applied materials India Pvt. Ltd. vs. ACIT (Supra). Respectfully following the same, we uphold its exclusion. Exclusion of 1) e - Zest Solutions Ltd., 2) Infosys Ltd., 3) Larsen & Toubro Infotech Ltd., 4) Persistent Systems & Solutions Ltd., 5) Persistent Systems Ltd., 6) Sasken Communication Technologies Ltd. and 7) Tata Elxsi Ltd. are also covered in favour of the assessee by the same tribunal order rendered in the case of Applied materials India Pvt. Ltd. vs. ACIT (Supra). Respectfully following the same, we uphold the exclusion of these Seven comparables also. Exclusion of E Infochips Ltd. is covered in favour of the assessee by the tribunal order rendered in the case of Saxo India Pvt. Ltd. vs. ACIT in ITA No. 6148/De1/2015 dated 05.02.2016 Para 10.1 & 10.2 available at pages 221 to 223. Respectfully following the same, we uphold its exclusion. In this manner, we uphold the exchision of six comparables excluded by DRP out of 9 comparables excluded by DRP and exclude 4 comparables retained by DRP and we have already held ....
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....; He had also drawn our attention to the order passed by the coordinate bench in the matter of Electronics for Imaging India Ltd (supra), where the coordinate bench relying upon the decision of the Hon'ble Delhi High Court in the matter of Saxo India P. Ltd, had held as under : 9. The functional comparability of these two companies have been examined by the Delhi Bench of ITAT in the case of Saxo India (P.) Ltd. (supra) in paras 10.1 to 10.2 and 15.1 to 15.2 as under: " (i) E-Infochips Limited: 10.1 The Transfer Pricing Officer included this company in the list of comparables. On being called upon to explain as to why it should not be considered as a comparable, the assessee contended that there was functional dissimilarity inasmuch as this company was engaged in software development and IT enabled services and also Products. The Transfer Pricing Officer observed that the revenues of this company from Products was only 15% of total revenue and hence the same qualified to be eligible for comparison. The DRP did not allow any relief. 10.2 After considering the rival submissions and perusing the relevant material on record, we find that the Annual r....
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.... development services provided to its associated enterprises, holding that the international transactions do not satisfy the arm's length principle envisaged under the Act. That the directions of the learned Panel and the consequent assessment order is bad in law and on facts while upholding the learned TPO's approach of using data as at the time of assessment proceedings, instead of that available as on the date of preparing the transfer pricing documentation for comparable companies while determining the arm's length price, ignoring the fact that this data was not available to the Appellant at the time of complying with the transfer pricing documentation requirements. That the directions of the learned Panel and the consequent assessment order is bad in law and on facts while upholding the learned TPO's approach of disregarding application of multiple year/ prior year data as used by the Appellant in the transfer pricing documentation and holding that current year (i.e. Financial Year 2010-11) data for companies should be used for comparability. That the directions of the learned Panel and the consequent assessment order is bad in law and on fa....
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....net profit margin realized by the taxpayer in the international transaction shall alone be computed for comparability analysis under TNMM." Document 3 "24. Now coming to the issue of working capital adjustment, findings of the TPO in this regard as it appears at para 3.7, reads as under: 3.7. Working Canital Adjustment: The working capital adjustment is computed as per the formula given in Annexure to the OECD Guidelines, 2009. In this case, the average PLR adopted by SBI, the largest scheduled bank, for short term working capital loans for the relevant FY 2008-09 is considered. The average PLR of 12.50% p.a was adopted by the TPO while computing the working capital adjustment. The working capital adjustment is restricted to the average cost of capital computed at 1.71% in the case of the uncontrolled comparables selected by the TPO. Hence, the working capital adjustment in the case of the taxpayer is allowed as per the calculation in annexure -C or the average cost of capital to the comparables whichever is the least. The detailed discussion on this is given in the Annexure-D to the order. The computation of the working capital adjust....