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2019 (6) TMI 1444
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....nsent of both the parties, the appeal in ITA No.6098/Mum/2018 for A.Y.2014-15 is taken up for adjudication first. 2. The ground No.1 raised by the assessee is general in nature and does not require any specific adjudication. 3. The brief facts of the assessee are that the assessee filed its return of income for A.Y.2014-15 on 30/11/2014 declaring total income of Rs. 155,49,76,710/-. The assessee company i.e Emerson Electric Company (India) Private Limited ('Emerson') is in the business of providing engineering support services including configuration engineering, framework design and graphical design, largely in connection with industrial automation projects undertaken by other Emerson group members. Emerson also provides IT services including database administration and help desk support to various members of the Emerson group. Emerson also maintains manufacturing and distributions operations. Emerson conducts its business through following segments: a) Manufacturing segment - This segment is engaged in trading of tools which are used in elevator applications. b) Distribution segment - This segment is engaged in importing ultrasonic welding and cleaning equi....
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....thmetic mean of the margins of the comparable companies selected by the assessee in Transfer Pricing Study Report ('TPSR') is as follows: Sr. No. Name of the company OP/TC (%) 1 Axis-IT&T Ltd. 12.48 2 Cades Digitech Pvt. Ltd. 0.98 3 COWI India Pvt. Ltd. 15.24 4 Hepatica Technologies Pvt. Ltd. -5.33 5 Acropetal Technologies Ltd. -EDS (segmental) 22.50 Mean margin 9.17 4.1.1. Accordingly, it was concluded that the international transaction of engineering and related service segment were at arm's length. 4.2. The ld. TPO asked the assessee to furnish the profitability of each of the three divisions in respect of engineering and related services segment. The assessee furnished the segmented statement before the ld. TPO vide its submission dated 14/06/2017 as under:- Engineering and related services - business division wise profitability Particulars FCEC EEEC EIC Total Amount (in INR) Segment revenue(a) Revenue from operations 28,51,93,726 3,25,90,93,366 1,48,38,23,394 5,02,81,10,486 28,51,93,726 3,25,90,93....
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....only in respect of EIC division for which purpose, he selected the following two comparables with its margins and arrived at the arm‟s length mean margin at 16.31% as under:- Particulars OP/TC Percentage(%) Axiz - IT & T Limited 7.15% Certification Engineers International Ltd., 24.82% Arm's length mean margin 16.31% 4.4. Based on the above, the ld. TPO worked out the adjustment in EIC division to ALP as under:- Particulars Amount (Rs.) Operating Revenue (A) 148,38,23,394 Operating Cost (B) 138,20,54,621 Arms length mean margin (C) 16.31% ALP of international transaction (D) 16,07,37,978 Adjustment over operating income (D-A) 12,36,14,584 4.5. The ld. DRP upheld the action of the ld. AO in disregarding aggregation approach of all the three divisions under engineering segment by observing as under:- "It is noted that the similar disallowances made by TPO in AY 20132014 (as discussed above) had been upheld by the DRP .Further it is seen that assessee has been not be able to file the evidence to prove that the three divisions of the assessee are engaged in the similar activity so as to form the unified ser....
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.... net margin method (TNMM) as most appropriate method (MAM) b. Adoption of Profit Level Indicator (PLI) as operating profit (OP) / total cost (TC). c. Margin of assessee was 32.43% 6.1. We find that the primary argument of the ld. AR was that in the case of the assessee, the segmental data of each of the divisions i.e., EIC, EEEC, and FCEC were available, whereas the very same data is not available with the comparable companies. Hence, the assessee was justified in adopting aggregated or bundled approach in respect of aforesaid three divisions in its engineering and related services segment. The ld. AR also argued that the assessee had followed a similar approach of determining ALP of international transactions pertaining to engineering and related services segment on an aggregated basis from A.Yrs. 2006-07 to 2012-13 and the same has been accepted by the ld. TPO in earlier years after due examination of the international transactions of the assessee. It was pleaded that there is no change in the functions performed, assets employed and the risks assumed by the assessee in A.Y.2014-15 i.e. the year under appeal vis-à-vis the previous assessment years. Hen....
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....d out based on the specifications provided by the AEs. * The designs developedby the division is shared with AEs for their approvals * The division carries out modifications if any based on inputs provided by the AEs The AEs then share the designs with customers for approval. * Post customer approval, the AEs develops the product and conducts acceptance tests at the customer location * The division provides assistance to the AEs in relation to financial analysis and buy out assistance. These services are not undertaken on standalone basis and are ancillary to the engineering design services rendered by the division. * Customer approaches the AEs for supply of certain products. The engineering services in relation to the products are outsourced to the division. * Based on specification received from the AEs, designs are developed for the product and shared with the AEs for their inputs and approvals. * The division carries out modifications if any based on inputs provided by the AEs. * Post AEs approval, a prototype for testing purposes is developed. Third party vendors identified by the AEs are engaged to manufacture the ....
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....er book indicating fund transfer from each of the divisions as above. 6.5. We find that in all the aforesaid three divisions, manufacturing activity were only done by the AE and assessee company merely provides engineering and related services to its AE thereon. Hence, the Indian company i.e., assessee assumes lesser risks in all the three divisions. Hence, we hold that the ld. DRP had proceeded on an incorrect assumption of fact that assessee in EIC division is engaged in manufacturing activity. From the table reproduced above, it is very clear that assessee in EIC division subsequent to AEs approval, develops proto type for testing purposes. The assessee does not manufacture the proto type. The third party divisions identified by the AEs are engaged to manufacture the proto type and the proto types are tested by the assessee in its EIC division falling under engineering and related services segment. Later these designs and test reports are shared with the AEs and the AE in turn shares the same with the customers for approvals. Post customer approvals, the AEs manufacture and supply the products to the ultimate customers. Hence, the observation made by the ld. DRP that assessee....
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....termining ALP considering that the services rendered were identical and there were no significant functional differences. The TPO, while evaluating the transactions, chose to segregate and benchmark each of the units separately by assuming that the functions, assets and risks undertaken by each of the STPI units were distinct from each other. The Delhi Tribunal, observed that the TPO totally disregarded the unity of business, administrative control, and unity of funds for the three units. The Tribunal also stated that independent FAR analysis of each unit with existing comparables is practically not possible due to the common management and interlacing of funds. " 6.8. We also find that when the transactions are closely linked to each other, as in the case of the assessee before us, under the engineering and related services segment, it would be relevant in this regard to go into provisions of Indian transfer pricing regulations and other regulations as under:- Indian TP regulations Rule 10A of the Income Tax Rules, 1962 ('the Rules') defines transactions as - "includes number of closely linked transaction" 17. Other guidelines and regulations ....
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.....603A-3(c)(7)(vii). 6.9. We hold that the transactions under all the three divisions pertain to same class falling under engineering and related services segment. In this regard, the relevant legal provisions are to be looked into which are as under:- Rule 10C (2) of the Rules reads as follows: "(2) In selecting the most appropriate method as specified in sub-rule (i), the following factors shall be taken into account, namely: - (a) the nature and class of the international transaction; (b) the class or classes of associated enterprises entering into the transaction and the functions performed by them taking into account assets employed or to be employed and risks assumed by such enterprises; Rule 10D of the Rules inter-alia states as follows: "10D (i) Every person who has entered into an international transaction shall keep and maintain the following information and documents, namely:- (a).... (b).... (i) a description of the methods considered for determining the arm's length price in relation to each international transaction or class of transaction, the method selected as the most appr....
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....parable fails export earnings filter of more than 75% of total revenue (filer applied by the ld. TPO) as this company has insignificant export earnings. The assessee also pleaded before the ld. TPO to exclude this comparable on the ground that the said comparable is engaged in provision of certification, recertification, safety audit, HSE management system and third party inspection of equipment and installation services. The ld. TPO ignored all the contentions of the assessee and considered the said company as a good comparable with that of the assessee. We find that one of the filters applied by the ld. TPO was that the export earnings should be more than 75% of the total revenue to fall within the ambit of a comparable company. In this regard, from the perusal of the annual report of the said comparable, we find from page 468 of the paper book, that the total export earnings in foreign exchange towards professional fees for 31/03/2014 i.e. A.Y.2014-15 was only Rs. 50.21 lakhs whereas the total revenue of the said comparable was Rs. 27.63 Crores which works out to 1.81% of total revenue. We find that filters applied by the TPO and mentioned in pages 5 to 9 of his order, hence, th....
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....iew, question (b) as framed also does not give rise to any substantial question of law. Thus, not entertained. 6.14. In view of the aforesaid findings and respectfully following the decision of the Hon‟ble Jurisdictional High Court supra, we direct the ld. TPO to exclude the Certification Engineers International Ltd., from the list of comparables. 6.15. We also find that assessee has provided workings for working capital adjustments before the ld. TPO which is enclosed in page 402 of the paper book. Now it is well settled that working capital adjustment is to be given to the assessee while taking the margin of comparable companies for the purpose of benchmarking the international transactions of the assessee. We direct the ld. TPO accordingly. Accordingly, the grounds raised by the assessee in ground No.2 under engineering and related services segment are disposed off as per the aforesaid findings and directions. 7. Provision of IT Support and Related Services:- Ground No.3 of the assessee appeal:- 7.1. The brief facts of this issue are that assessee is engaged in providing ITeS services for the in-house consumption of the AEs, primarily in the nature of ....
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.... Ltd., has a first mover advantage in exploiting the market and establishing it as a premier technology solutions provider for publishers. The same market forces have also created immense opportunities for MPS Digitrak, the production targeting system developed by MPS Ltd., and MPS Digicamp, automated composition. Similar other solutions are being developed at MPS Ltd., as research and development (R&D) continues based on the market requirement. The assessee stated before the ld. TPO that MPS Ltd., is functionally not comparable by stating various functions performed by MPS Ltd., as under:- a) As per the Corporate information disclosed in the financial statements for the year ending 31/03/2013, MPS Ltd., the company is engaged in the business of providing publishing solutions viz., typesetting and data digitization services for overseas publishers. The company has a 100% Export Oriented Unit in Bengaluru, and units registered under the Software Technology Park of India (STPL) scheme that are located in Chennai, Delhi, Gurgaon and Dehradun. The Company also operates through its branch in United States of America. The company provides publishing services relating to typesett....
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....e of M/s. Google (India) Pvt. Ltd., vs. DCIT in ITA No.1368/Bang/2010 for A.Y.2006-07 dated 19/10/2012 is well founded wherein it was held as under:- "16. As far as (4) Apex Knowledge Solutions Pvt. Ltd., is concerned, we find that the assessee had taken objections before the TPO that it is functionally different, as it is provides services such as E-publishing knowledge based services etc. But TPO has rejected the objection on the ground the assessee has not considered the verticals or functional lines during the search process conducted by it and, therefore, it is not proper to make any objection on this basis now. We are not able to agree with the finding of the TPO as confirmed by the DRP on this issue. Merely because, the assessee itself has not considered the said filter while making its TP study; it cannot be said that it cannot raise such an objection before the TPO. It is the TPO who has adopted this company as comparable. On such adoption, the assessee has every right to raise the objections as regards the functional differences between the assessee and comparable. It is the bounden duty of the TPO to consider the said objections in accordance with law. As brough....
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....me its point that the said comparable had practically decided to close down its ITeS / BPO segment due to its diminishing revenue and profitability thereon as under: (all amounts are in Rs, crores) Particulars FY 15-16 FY 14-15 FY 13-14 FYU-13 FY 11-12 FY 10-11 Segment Revenue (A) 1.18 2.30 5.28 7.61 7.91 20.35 Segment expenses (C) Segment Result (B) 1.43 2.83 4.71 4.77 5.61 5.98 (0.25) (0.53) 0.57 2.84 2.30 14.37 OP/TC% (B)/(C) (17.92)% (18.87)% 12.10% 59.50% 41.07% 239.39% 10.1. Based on the aforesaid factors, the assessee pleaded that the said comparable is functionally different from that of the assessee and accordingly, deserves to be excluded. The ld. TPO however, held that the said comparable is engaged in IT services and BPO services providing voice based services, customer services which include out bound sales, marketing, voice, email response, real time chart, knowledge management and other value added services. 10.2. The ld. DRP while upholding the action of the ld. TPO observed as under:- "The claim of the assessee that this company is shifting foc....
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....8 Operating Cost 8,94,79,015 Operating Profit 46,36,163 Assessee's Margin 5.18% 11.1. The assessee selected 7 comparable companies engaged in similar services and mean margin of the comparable companies was 5.05% as against assessee‟s margin of 5.18% and accordingly, the assessee concluded that it‟s pricing was at arm‟s length. 11.2. The ld. TPO rejected / modified the filters applied by the assessee in the TP study report and also introduced new filters, based on which the ld. TPO selected certain comparables with average mean margin of 25.57% and accordingly made adjustment to ALP as under:- Particulars Amount (Rs.) Operating Revenue (A) 9,41,15,178 Operating Cost (B) 8,94,79,015 Arms length mean margin (C) 25.57% ALP of international transaction (D) 11,23,58,541 Adjustment over operating income (D-A) 1,82,43,364 11.3. The assessee pleaded before the ld. DRP that the ld. TPO had not conducted a structured search for comparable companies and had instead resorted to cherry picking of comparables based on the order for the A.Y.2013-14. The ld. DRP accordingly directed the ld. TPO t....
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....and Pure Software Pvt. Ltd., are not disputed by the ld. AR before us. The same is reckoned as a statement from the Bar. The companies mentioned in Sr. Nos. 5,6,7,11 & 12 above were accepted by the ld. TPO viz., Evoke Technologies Pvt. Ltd; Daffodil Software Ltd; l2T2 India Ltd; Kireeti Soft technologies Ltd; Priya Softweb Solutions Pvt. Ltd., In effect, the ld. AR before us is contesting only companies mentioned in Sr. Nos. 2,3,4,8 & 9, namely seeking for exclusion of the same, viz. Cyber Infrastructure Pvt. Ltd; Infobeans Technologies Ltd; Ingenuity Gaming Pvt. Ltd; Nihilent Analytics Ltd; Cybercom Datamatics Information Solutions Ltd. Now let us examine each and aforesaid comparables which the assessee prays for exclusion from the list of comparables. 13.1. Exclusion of Cyber Infrastructure Pvt. Ltd., - Margin of 53.52% We find that the assessee had argued before the ld. TPO that this company is engaged in development of software and providing BPO services to customers based outside India. It provides end to end software solutions based on their requirements. It performs the complete range of activities such as requirement mapping, conceptualisation, development and ....
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....the revenue stream and margin derived from IT segment alone cannot be ascertained, thereby making it incomparable with the assessee. Hence, we direct the ld. TPO to exclude the same from the list of comparables. 13.2. Exclusion of Infobeans Systems India Pvt. Ltd - Margin of 48.97% With regard to this comparable, assessee has pleaded before the ld. TPO that the said company is engaged in diversified activities such as automation engineering services, ServiceNow implementation, big data, UI and UX customised software, data mining, data modelling, statistical analysis, machine learning techniques etc., whereas the assessee herein was engaged only in routine software development services. The ld. TPO however, did not heed to the contentions of the assessee and included the same as a comparable. The ld. DRP held that the said comparable has got only one segment i.e., sale of software and accordingly the same is comparable with the assessee. We find from the financial statements of the said comparable that it had derived revenue from sale of software (export) to the tune of Rs. 32,96,59,883/- which is enclosed in page 1069 of the paper book. We also find from note No.27 in p....
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.... that the said company is engaged in diversified activities in the IT gaming space whereas assessee is into routine software development services thereby making it functionally not comparable. It was pleaded that the said company also deals in inventories which indicates that the said companies revenue stream includes sale of products even though it is not mentioned specifically in the financial statements. The ld. TP however, did not heed to the contentions of the assessee and included the same in the list of comparables. The ld. DRP while upholding the action of the ld. TPO observed that the said company is engaged only in software development and the outcome is in terms of games. The said company is not deriving any income from sales of goods other than software development. The ld. DRP also observed that the allegation that the said company has inventories is misplaced. 13.3.1. We find that the said company is engaged into gaming business and from the perusal of the profit and loss account of the said comparable it had reflected export revenue from software development services to the tune of Rs. 10,80,37,386/- and also as inventories of Rs. 11,59,834/-. We also find from th....
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....to be in excess of the prescribed filter. The ld. TPO again verified the workings of the assessee and observed as under: On verification of the annual report of the company it is seen that a) Services rendered related parties is -Rs. 6.22 Crores b) Reimbursement of expenses by related parties -Rs. 0.6 Crores c) Reimbursement of expenses to related services -Rs. 0.4 Crores Hence, RPT divided by sales is (service rendered to related parties + reimbursement of expenses by related parties) divided by sales(Rs. 6.22 Crores +.6 Crores)/27.9 x 100 = 24.4%. The ld. TPO observed that the assessee had taken both reimbursement paid to and received from related parties while calculating the RPT ratio and accordingly objected that the same is above 25%. 13.4.1. The ld. TPO did not agree to this computation made by the assessee and accordingly held that since the RPT transaction are not more than 25%, the said company is a good comparable. We find under various filters applied by the ld. TPO for benchmarking the international transactions, one such filter applied thereon is with "companies with related party transactions less than 25% of the revenues are....
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....and hardware systems, enterprise and embedded technologies in the telecom and other industries. This goes to prove that the said comparable is into diversified activities, high end services provider in the information technology sector for which segmental data is admittedly not available. Even from the accounting policy on "revenue recognition‟ of the said comparable, we find that the company has mentioned that revenue from technical and software services is recognised on a time and material basis when services are rendered and related costs are incurred. However, there is no break-up of revenue derived from technical services and revenue derived from software services separately for the purpose of ensuring comparability with that of the assessee in IT segment. In this regard we find that the reliance placed on the decision of the Hon‟ble Andhra Pradesh High Court by the ld. AR in the case of CIT vs. Intoto Software India Pvt. Ltd., in IT(TP)A No.233 of 2014 dated 24/03/2014 is well founded wherein it was held as under:- We have heard learned Counsel for the appellant, and have gone through the judgment and order of the learned Tribunal. The learned Tr....
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....ld. DRP, the ld. TPO selected final four comparables as under:- S. No Name of the company OP/TC% 1 MCI Management India Pvt. Ltd. 5.18 2 Jubilant Biosys Ltd 15.02 3 AXIS Integrated Systems Limited 23.81 4 Priya International Limited - Intending segment 34.07 Arithmetic Mean 19.52 14.2. Based on the above, the ld. TPO made adjustment under MSS segment in the final assessment order to the tune of Rs. 36,77,080/- as under:- Particulars Amount (Rs.) Operating Revenue (A) 13,07,21,842 Operating Cost (B) 11,24,48,897 Arms length mean margin (C) 19.52% ALP of international transaction (D) 13,43,98,922 Adjustment over operating income (D-A) 36,77,080 15. Aggrieved, the assessee is in appeal before us. 16. We have heard rival submissions. Out of the four comparables finally selected by the ld. TPO pursuant to the order of the ld. DRP, the ld. AR before us contested for exclusion of only one comparable i.e., Axis Integrated Systems Ltd., The ld. AR argued that the said comparable fails the export filter applied by the ld. TPO in as much as there was no export revenue de....
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....ed by us in respect of these two comparables namely Excel Infoways Ltd., and MPS Ltd., for ITeS segment of the assessee and recompute the ALP and decide as to whether any adjustment, if any, is warranted thereon. The ground No.3.1 raised by the assessee for A.Y.2013-14 is disposed off accordingly. 21. The ground No. 2.2 in respect of IT segment, Ground No.3.2 in respect of ITeS segment and ground No.4.2 in respect of MSS segment are common in nature, wherein the assessee had contested that suo moto addition made by the assessee during its benchmarking , in respect of each of those segments were not considered by the ld. TPO in the final order passed for the A.Y.2013-14 whereas the same was duly considered by the ld. TPO for the A.Y.2014-15. We direct the ld. TPO to consider the suo moto disallowances made by the assessee in respect of aforesaid three segments and re-compute the ALP of those segments accordingly. Hence, ground Nos. 2.2, 3.2 and 4.2 raised by the assessee are allowed for statistical purposes. 22. Ground No.5 raised by the assessee in respect of engineering and related services is similar to ground No.2 raised by the assessee for A.Y.2014-15 and the decision ren....
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....l set of comparables as under:- s. No Name of the company OP/TC% 1 Spry Resources India Pvt. Ltd. 9.60 2 Aspire Systems India Pvt. Ltd. 50.21 3 CG-VAK Software and Exports Limited 12.29 4 Cyber Infrastructure Pvt. Ltd. 43.79 5 Harbinder Software Pvt. Ltd. 21.98 6 Ingenuity Gaming Pvt. Ltd. 40.94 7 Thirdware Solution Ltd., 37.15 Arithmetic Mean 30.85 23.4. Based on the above, the TP adjustment made in IT segment in the final assessment order was Rs. 4,70,36,254/- which is worked out as under:- Particulars Amount (Rs.) Operating Revenue (A)* 16,96,35,715 Operating Cost (B) 16,55,88,054 Arms length mean margin (C) 30.85% ALP of international transaction (D) 21,66,71,969 Adjustment over operating income (D-A) 4,70,36,254 23.5. In this order also, the ld. TPO failed to give effect to DRP directions with regard to voluntary adjustment made by the assessee in IT segment. 24. Aggrieved, the assessee is in appeal before us. 25. We have heard the rival submissions and perused the material available on record. We find that the final list of 7 comparable....
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....The decision rendered by for A.Y.2014-15 in respect of these two comparables will hold good for A.Y.2013-14 also and would apply accordingly in the absence of change in facts which has been agreed by both the parties before us. 27.3. Exclusion of Thirdware Solutions Ltd., We find that the ld. AR argued before us that the said company is functionally not comparable with that of the assessee in view of the fact that the said company provides various diversified services as it is into ERP, BI and BPM, application implementation, application management, application development and derive revenue from various sources such as sale of license, revenue from subscription etc., 27.3.1. The ld. AR also argued that primary segmental data is not available indicating break-up of revenue from various streams in respect of this comparable in the annual report. We have gone through this annual report of the said comparable and we find that the said comparable had derived revenue from sale of services to the tune of Rs. 14,225.84 lakhs. From the revenue recognition policy reflected in the said annual report, it is mentioned under the caption "income from services" that "Reven....
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..... This company has intangibles worth Rs. 108.22 crores. 25. We further find that this comparable has been rejected by the Tribunal in assessee's own case in assessment year 2010-11 in ITA No. 609/DEL/2015 and the relevant finding is given at page 1644 Volume IV. Considering the functional profile of this company in the light of the finding of the co-ordinate bench [supra], we direct for exclusion of this company from the final list of comparables. 27.3.3. In view of the aforesaid findings and respectfully following the aforesaid judicial precedents, we direct the ld. TPO to exclude Thirdware Solutions Ltd., from the list of comparables. 27.4 Inclusion of Evoke Technologies Ltd, Kals Information Systems Ltd. CITL Ltd. We find that one of the filters applied by the ld. TPO in his order for benchmarking the international transactions is turnover filter wherein he had proposed to include companies which are falling within the range of turnover from 1.73 Crores to 173.90 Crores. We find that the turnover of Evoke Technologies Ltd., is Rs. 37.39 Crores; turnover of Kals Information Systems Ltd., is Rs. 2.52 Crores and turnover of CTIL Ltd., is 14.04 Crores from so....