TaxTMI 
TaxTMI 
2020 (1) TMI 1030
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....facts and circumstances of the case. 2. The Ld. Transfer Pricing Officer/ Ld. Assessing Officer has erred on facts and circumstances of the case in determining the arm's length adjustment to the appellant's international transaction from associated enterprises and thereby resulting in the enhancement of returned income of the appellant by Rs. 1,57,79,500/-. 3. The Ld. Assessing Officer has completely ignored the facts in the submissions made before him and proceeded to make transfer pricing adjustment on the basis of TPO's order. 4. The Ld. Transfer Pricing Officer has erred in facts and in law to reject, based on his subjective grounds and presumptions, the economic analysis conducted by the appellant for determination of the arm's length price. 5. In relation to quantitative search filters applied in benchmarking analysis, the Ld. TPO has erred in facts and circumstances by: a) Rejecting/modifying the filters applied by the Appellant in its TP study and thereby erroneously holding that the TP Study is defective and unreliable; b) Erroneous understanding of the purpose of Appellant's usage of multiple year d....
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....rable company; e) Erroneously rejecting Melstar Information Technologies Ltd. on export sales filter and ignored Appellant's contention on reliability of export sales data, effect of outstanding receivables and geographical differences in markets to which exports are being made; f) Erroneously accepting Igate Global Solutions Ltd in final comparable set used by Ld. TPO after accepting Appellant's contentions regarding its exclusion on the basis of dissimilar business activities as mentioned in the Annual Report and also expressly stating in his order that this company should be rejected; g) Erroneously accepting companies (i.e. Infosys Ltd, Persistent Systems Ltd, Sasken Communication Technologies Ltd and Zylog Sytems Ltd) which are having high turnover and disregarding the Appellant's contentions w.r.t differences in functional profile arising due to differences in scale of operations; h) Erroneously accepting companies (i.e. Infosys Ltd, Sasken Communication Technologies Ltd) having intangibles/ intellectual property/patents in his final comparable set; i) Erroneously accepting companies which are functionally different or ....
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....he case in rejecting the appropriate filters as applied by the appellant and further modifying the filters arbitrarily without proper appreciation of the facts, law and commercial reality. 5. In relation to quantitative search filters applied in benchmarking analysis, the Ld. TPO/DRP has erred in facts and circumstances by: a) Rejecting/modifying the filters applied by the appellant in its TP study and thereby erroneously holding that the TP Study is defective and unreliable; b) Erroneous understanding of the purpose of appellant's usage of multiple year data and erroneously stating having objected to using contemporaneous data, whereas the appellant has used only current year in respect of comparables; c) Erroneously rejecting the turnover filter applied by the appellant and disregarding the contentions raised by appellant w.r.t differences in scale of operations between the appellant and the companies selected by Ld. TPO as comparables; d) Erroneous application of turnover filter applied by Ld. TPO without providing any evidence to support his rationale for not applying any upper cap filter, thereby comparing appellant having turno....
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....year under consideration and for which appropriate adjustments cannot be taken out; e) Erroneously accepting companies which are functionally different or having very less revenue from software development activities (i.e., Infosys Ltd, L& T Infotech, R S Software(India) Ltd., Sasken Communication Technologies Ltd, Spry Resources Pvt. Ltd., Tata Elxsi Ltd., Thirdware Solution Ltd. and Zylog Systems Ltd.) in his final comparable set. 7. The Ld. AO/TPO/DRP has erred in laws and facts of the case by ignoring the appellant's contention with respect to erroneous computation of transfer pricing adjustment by making the adjustment at entity level instead of the adjustment being made only in respect of international transactions undertaken by the appellant. 8. The Ld. AO/TPO/DRP has erred in laws and facts of the case by ignoring the idle capacity adjustment claimed by the appellant on account of the unutilized capacity during the year. 9. The Ld. AO/TPO/DRP has erred in laws and facts of the case by ignoring appellant's contention as to the requirement of suitable adjustment for difference in risk undertaken by appellant and comparable companies....
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....d as the cumulative adjustment u/s 92CA." 6. For AY 2012-13, the ld. TPO in order to benchmark the international transactions applied various filters detailed in para 2.1 of T.P. order rejected 12 comparables out of 13 comparables chosen by the assessee, introduced 13 new comparables and arrived at the average margin of 18.74% and computed the Arm's Length Price (ALP) of international transactions as under :- Operating Cost 18,33,62,071 Arm's Length Margin (%) 18.74% Arm's Length Price (ALP) 21,77,24,123 Price Received 20,19,41,697 Shortfall being adjustment u/s 92CA 1,57,82,426 The above shortfall of Rs. 1,57,82,426/- is being proposed as an adjustment to the price shown by the taxpayer u/s 92CA." 7. Assessee carried the matter before the ld. DRP by filing objections who has confirmed proposed adjustments made by the ld. TPO for AY 2011-12 by dismissing the objections. However, for AY 2012-13, ld. DRP directed the ld. TPO to correct computational error and to rework the OP/OC margin of taxpayer as well as comparables by removing computational errors in view of the Safe Harbour Rules notified by CBDT, granted working capital adjustment a....
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....ation Technologies Ltd. & Virnichi Technologies Ltd. and suitability thereof is being examined as under. CG VAK Software & Exports Ltd. (CG Vak) 13. Ld. TPO rejected CG Vak as a comparable on the ground that it fails employee cost filter (6%). Ld. DRP confirmed the rejection of CG Vak by TPO. 14. However, when we examine the filters applied by the TPO to benchmark the international transactions detailed in para 2.1, there is no such filter such as employee cost filter applied by the TPO. Even otherwise, when we examine annual report of CG Vak for AY 2011-12 at page 23 of the paper book-2 along with Notes annexed forming part of accounts employee cost is Rs. 4,73,01,685/- which is 70.50% of the total operating expenses of Rs. 6.7 crores. Functionality of CG Vak vis-à-vis taxpayer has not been disputed by the ld. TPO. In view of the financials of CG Vak, we hereby direct TPO/AO to verify employee cost of CG Vak with reference to next year annual report so as to decide the suitability of CG Vak as a comparable. KALS INFORMATION SYSTEMS LTD. (KALS) 15. Ld. TPO rejected Kals as a comparable chosen by the taxpayer on the ground that segmental information is not m....
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.... to software development service company also and such filter applied is 1/10th of the turnover of the tested party or 10 times of the turnover of the tested party. In the present case, the turnover of Infosys Ltd. is Rs. 21,140 crores which is many times more than the turnover of the assessee company of Rs. 108 crores. Under these facts, in our considered opinion, the turnover filter is applicable and by applying the turnover filter, this company has to be excluded. We direct the AO/TPO accordingly." 17. So, following the aforesaid order passed by the coordinate Bench of the Tribunal, we are of the considered view that low turnover cap applied by the TPO in case of taxpayer is required to be restricted to Rs. 1 crore instead of Rs. 5 crores. 18. Even by applying the rule of consistency, we are of the considered view that when there is no change in the business model of the taxpayer in AYs 2008-09, 2009-10 & 2012-13 as well as year under assessment for AY 2011-12, rule of consistency has to be followed and TPO is directed to apply the turnover cap of Rs. 1 crore as against cap of Rs. 5 crores applied by him. So far as, question of segmental information being not matching with....
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....ACIT (2018) 93 taxmann.com 227 (Delhi-Trib.) for AY 2011-12 examined the suitability of Wipro as a comparable vis-à-vis software development services provider and ordered to exclude the same on ground of related party transactions on the basis of Master Service Agreement with Citi Group for delivery of Technical Infrastructure Services Ltd. and application of maintenance services for a period of 6 years. So, in view of the mater, we are of the considered view that Wipro is not a suitable comparable vis-à-vis the taxpayer for benchmarking the international transaction qua software development services. INFOSYS LTD. (INFOSYS) 23. The taxpayer sought exclusion of Infosys on the grounds inter alia that Infosys also deals in software products; that it is having huge brand value and having patents; that its R&D expenditure is Rs. 527 crores i.e. 2.1% of the revenue; that Infosys has goodwill worth Rs. 916 crores and intellectual property rights worth Rs. 12 crores. All the aforesaid facts highlighted by the taxpayer finds mention in the annual report, available at pages 432, 438 & 470 of the paper book, and has not been refuted by the ld. DR for the Revenue. From the ....
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....ces 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 (as the 100% services are provide to AEs) Expenditure on Research & Development Rs. 102 crores Rs. Nil Other 100% offshore (from India) 6. Learned counsel for the Revenue has submitted that the tribunal after recording the aforesaid table has not affirmed or given any finding on the differences. This is partly correct as the tribunal has stated that Infosys Technologies Ltd. should be excluded from the list of comparables for the reason latter was a giant company in the area of development of software and it assumed all risks leading to higher profits, whereas the respondent-assessee was a captive unit of the parent company and assumed only a limited risk. It has also stated that Infosys Technologies Ltd. cannot be compared with the respondent assessee as seen from the financ....
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....in para 8.2 at page 25 of the TP order, he has ordered to exclude the same as a comparable by returning following findings :- "Assessee objected on the inclusion of this comparable submitting that this is an ITES company and produced various snap shots from the Annual Report of the company proving that dominatently it is an ITES company. Assessee's claim is verified from the Annual Report and this company is taken out from the final list of comparables in assessee's case." 27. When ld. TPO himself has verified the claim of the taxpayer as to non-suitability of I Gate as a comparable vis-à-vis the taxpayer and ordered to keep the same out of the final list, it appears that it has been erroneously included in the final set of comparables. Even otherwise, when we examine page 229 of the paper book Volume-3 which is fixed assets schedule, it has come on record that I Gate has goodwill worth Rs. 225.99 crores. Similarly, perusal of profit & loss statement, available at pages 300 to 302 of the Paper Book Vol.III, shows that I Gate is having turnover of Rs. 1184.55 crores which is 59 times of the taxpayer. 28. Hon'ble Delhi High Court in Agnity India Technologies ....
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....uitability of Sasken has been examined by the coordinate Bench of the Tribunal in Clear 2 Pay India (P.) Ltd. (supra) for AYs 2011-12 & 2012-13 and has been ordered to be excluded as a comparable vis-à-vis routine software development service provider by returning following findings :- "41. The ld.DR challenged exclusion of Sasken by ld. CIT (A) for the reason that the taxpayer has significant intangibles and research and development activities, Ld.DR contended that the Sasken is having no income from sale of licence and drew our attention towards page 324 of the paper book. However, when we examine Director's report available at page 300 of the annual report of Sasken, the contention raised by ld. DR is not sustainable. Operative part of the Director's report is extracted as under :- "On the hardware side we will leverage our extensive understanding and knowledge of this OEMs ecosystem and capitalize on the delivery centers in European Union and China regions. This geographical spread enables a cost efficient service mix to service opportunities in RF / Antenna design. The combination of our hardware and software knowledge gives us a competitive edge. ....
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.... been found to be similar and ordered to include Kals as a valid comparable by returning following findings :- 7 Kals Information Systems Ltd. The company if functionally comparable and satisfies all filters proposed by the TPO. Moreover 80.86% of revenue is derived from software export Different functional profile. Hence rejected (Page No.5 of the show cause notice issued by the Ld. TPO dated 07.12.2015). Functionally similar. KALS INFORMATION SYSTEMS LTD. is an established Software Products & Services organization in Bangalore, with a successful, international, Pan-Asian experience in Software Development & Technology Services. We offer unique range of Software Development, Transition and Migration Solutions to help large end-user organizations meet a variety of challenges. We have got a 15 year successful track record in servicing industries such as Financial Services, Government Telecom, Security, Manufacturing & Distribution. http://www.kalsinfo.com/ If it meets filters approved by DRP, TPO to include as a valid comparable. 36. Ld. AR for the taxpayer has contended that Kals satisfied all the filters applied by the ld. TPO and provided application of filters in ....