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2019 (12) TMI 1279
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.... Panel ['DRP' / Ld. Panel], is bad in law and on facts and is in violation of the principles of natural justice. Without prejudice to the generality of the above, the order passed by the Ld.AO is bad in law insofar as the fact that the Ld. AO did not issue to the Appellant a show cause notice, as per proviso to section 92C(3) of the Act b) The Ld. AO has erred in law in making a reference to the learned Deputy Commissioner of Income Tax [Transfer Pricing (1)(2)(1)] ['Ld. TPO']. The Ld. Panel erred in upholding the actions of the Ld. AO/ TPO. c) The directions issued by the Ld. Panel did not take cognizance of the objections raised by the Appellant while issuing the directions under section 144C(5). d) The order passed by the Ld. AO is without jurisdiction, inter alia, in so far as it purports to give effect to invalid directions of the Ld. Panel. e) The directions issued by the Ld. Panel and the order passed by the Ld.AO is without jurisdiction, inter alia, in so far as it purports to give effect to an invalid order of the Ld. TPO 2 The Ld. Panel and Ld. AO/ Ld. TPO has erred in justifying the motive of shifting profits ....
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....quantitative filters applied by the Appellant in its TP Study such as (i) use of multiple year data (ii) rejecting companies with R&D to Sales of more than 3% (iii) rejecting companies with net fixed assets to sales of less than 2OO% (iv) rejecting companies with advertisement, marketing and distribution (AMD) expenses to sales less than 3% and Ld. Panel erred in upholding the actions of the Ld. AO / Ld. TPO h) The Ld. Panel grossly erred in upholding the rejecting of the positive net worth filter applied by the Appellant, when in fact, the Ld. TPO had accepted the application of the said filter i) The Ld. AO / ld. TPO erred in law in applying arbitrary filters as criterion for rejection of companies identified by the Appellant in the Transfer Pricing Study such as (i) Companies whose data for financial year ('FY') 2013-14 was not available (ii) Companies with different financial year ending (i.e., other than 31 March 2014) (iii) Companies with employee cost less than 75% of its total operating revenues (vi) companies who have export services income less than 75% of the sales (v) Companies with employee cost less than 25% of turnover (vi) Companies with persistent....
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....low turnover companies r) The Ld. AO /kl. TPO erred in not applying the abnormal profit earning filter to reject companies which had earned abnormal profits, indicating the existence of peculiar economic circumstance having an impact on the margin of the companies. The Ld. Panel erred in upholding the same 4 Comparability Analysis adopted by the Ld. TPO for determination of arm's length price for the Information Technology Enabled ('ITe') services segment a) The Ld. AO/ In. TPO erred in rejecting the value of international transaction of provision of Information Technology Enabled services, as recorded in the books of account, as the arm's length price. The Ld. Panel erred in upholding the same b) The Ld. AO/ Ld. TPO erred in determining a new arm's length price in substitution of the arm's length price determined by the Appellant. The Ld. Panel erred in upholding the same c) The Ld. AO/TPO, contrary to the provisions of the Act and rules made thereunder, erred in computing the arm's length price of the ITe service segment by adopting the operating cost and operating income of both the international transaction and the do....
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.... was not available (ii) Companies with different financial year ending (i.e., other than 3l March 2ol4) (iii) companies whose ITeS income is less than 75% of its total operating revenues (iv) Companies who have export service income less than 75% of the sales (v) companies with employee cost less than 25% of turnover (vi) companies with persistent ross (Companies reporting loss for any 2 years out of last three years (vii) companies having related party transactions greater than 25% of the sales The Ld. panel also erred in upholding the actions of the Ld. AO/ Ld. TPO k) The Ld. AO/ Ld. TPO erred in considering data obtained u/s 133(6) of the Act. The Ld. Panel erred in confirming the same l) The Ld. AO/ Ld. TPO erred in rejecting Jindal Intellicom limited despite being functionally comparable. The Ld. panel also erred in confirming the same m) The Ld. AO/ Ld. TPO erred in rejecting Tech Mahindra Business Services Limited, from its own search which is otherwise functionally comparable and passes all the filters applied in the transfer pricing order. The Ld. Panel also erred in confirming the same n) The Ld. AO/ Ld. TPO erred in rejecting Ace BPO S....
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....d. TPO erred in law and on facts in not allowing appropriate adjustments under Rule 10B of the Rules to account for, inter alia, differences in (a) accounting practices, (b) Working capital adjustment (c) Risk profile between the Appellant and the comparable companies. The Ld. Panel erred in confirming the same. 7 Variation of 3% from the arithmetic mean The Ld. AO/Ld. TPO erred in law in not granting the benefits of proviso to section 92C(2) of the Income Tax Act, 1961 ('Act') available to the Appellant. The Ld. Panel erred in upholding the actions of the Ld. AO/ Ld. TPO. 8 The Ld. AO/Ld. TPO erred in law in erroneously not granting complete credit for advance tax and self-assessment tax paid by the Appellant, as claimed in the return of income 9 The Ld. AO/Ld. TPO erred in law in erroneously not granting credit for Minimum Alternate Tax (MAT), as claimed in the return of income under section 115JAA of the Act. 10 The Ld. AO/Ld. TPO erred in law in not granting consequential relief in the computation of interest under section 234B and 234C of the Act The Appellant craves leave to add to or alter, by deletion, substitution or ot....
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....n accordance with Section 92C(1) and 92C(2) of the Act. The TPO made comparison and examination of the comparables selected by assessee and found that the assessee has adopted 7 comparables on Software Development Services segment and Profit Level Indicator (PLI) i.e. OP/TC being 14.18%. Whereas the TPO has dealt on the filters in the TP Study and calculated the average Arithmetic Mean (AM) of comparables which has worked out to average OP/TC at 11.91%. After verification and examination of TP Document, the TPO found pertinent defects in the TP Study and finally the TPO has rejected the comparables selected by the assessee in TP Study and applied filters with criteria of current year data where the companies whose data for the F.Y. 2013-14 is excluded, the companies having different financial year ending falls within 12 months period for 1.4.2013 to 31.3.2014 were rejected. The companies whose income was less than Rs. 1 Crore were excluded and the companies were Software Development Services / ITES income is less than 75% were rejected. The companies who have more than 25% Related Party Transactions (RPT) of sales were excluded. The companies who have export sales for service....
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....de submissions on related grounds of appeal only. Contra, the ld. DR supported the orders of TPO and DRP and filed written submissions. 6. We heard the rival contentions and perused the material on record. The learned Authorised Representative submitted that the assessee has two segments (i) Software Development Services segment and (ii) ITES segment. We shall deal with the exclusion of comparables as submitted in the course of hearing by the learned Authorised Representative in Software Development Services segment. (i) Infosys Limited : This company is functionally dissimilar and provides end to end business solutions like business consulting technology engineering and outsourcing services and no segmental details in respect of services are available and made investments and products to establish as a tradable IPO owner. Further the comparable owns significant brand value products and focus on brand building and incurred expenditure on R & D. The company owns 7 edge products / platforms and six other product based solutions. The company leverages on its premium banking solution and during the year the company merged with its wholly owned subsidiary Infosys Consulting India Lim....
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....telecom business. As per the Annual Report of the company, the company has a significant capital work-in-progress and the company has developmental products. The comparable was excluded from the final list of comparable in assessee's own case for the Assessment Year 2011-12 by the DRP and further the comparable company was excluded by the co-ordinate Bench of Delhi Tribunal in the case of Pitney Bowes Software India Pvt. Ltd. Vs. ACIT 101 Taxman.com 350. The learned Authorised Representative also relied on CGI Information Systems & Management Consultants (P) Ltd. Vs. ACIT (2018) 94 taxman.com 97 and DCIT Vs. Taxman India Pvt. Ltd. (2016) 74 Taxmann.com 88 (Del). We found that the co-ordinate Bench of Tribunal in M.P. No.95/Bang/2019 in IT(TP)A No.3122/Bang/2018 for the Assessment Year 2014-15 has dealt on the issue at page 2 para 4 as under : "4. We heard Ld D.R and perused the record. We find merit in the miscellaneous petition filed by the assessee. Accordingly following paragraph is inserted after paragraph 10 in the impugned order of the Tribunal, which will adjudicate the issue relating to "L & T Infotech Ltd":- "10A The assessee has sought exclusion of M....
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....ect the Assessing Officer to exclude from the final list of comparable for determination of ALP. (iv) Thirdware Solutions Ltd. the company is functionally dissimilar and is engaged in rendering software development implementation and support services and engaged in the development of software products and earns revenue from sale of user licenses and purchase stock in trade during the year and has intangibles. Further the margins of the company fluctuate year on year basis due to different revenue recognition model which the company has adopted. The above comparable was excluded in assessee's own case on functional dissimilarity in the Assessment Years 2005-06 and 2007-08 and learned Authorised Representative also relied on Lime Labs (India) Pvt. Ltd. Vs. ITO 101 Taxman.com 201 (Delhi Trib.). We found the co-ordinate Bench of the Tribunal in the case of LG Software India Pvt. Ltd. Vs. DCIT in IT(TP)A No.3122/Bang/2018 dt.28.05.2019 for the Assessment Year 2014-15 has excluded the comparable as observed at paras 8 & 8.1 at page 4 as under : "8. We also notice that in A.Y 2008-09, the co-ordinate bench has excluded M/s. Thirdware Solutions Ltd also by followin....
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....e learned Authorised Representative submissions are that the company is functionally similar to the assessee's profile and services rendered are predominantly software development services and income from software products constitute a meager amount of total revenue shall not have any impact on the profitability of the company's software development segment. The learned Authorised Representative referred to the profit and loss account at page 1455 where the abridged statement profit and loss account was disclosed and as on 31.3.2014, the revenue from the operations of software products is Rs. 309.17 lakhs and software services are Rs. 3508.49 lakhs. The learned Authorised Representative emphasizing that there is no impact on the profits. We are of the opinion that the assessee company has customers in US and Europe area and the export revenue filter test has to be applied by the TPO. Accordingly we restore this issue to the file of TPO for fresh consideration. (iii) Maveric Systems Limited : This comparable was rejected by the TPO and it was sought for inclusion by the assessee and whereas TPO has rejected without any basis and was excluded on the ground that the company was....
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....omparable as profit and loss account is not available in public domain and the learned Authorised Representative referred to page 1755 to 1786 of Paper Book where the details of profit and loss account and Annual Report of the company are filed. Since the financial statements are available, we restore this issue to the file of the TPO to consider the financial statements, profit and loss account and Director's Report. Accordingly, we restore the comparable to the file of TPO for verification of the financial statements. 8. The learned Authorised Representative made submissions in respect of exclusion of three comparables in the ITES segment and substantiated with chart and Paper Book. (i) Infosys BPO Limited - The comparable is functionally dissimilar as it is engaged in provision of Integrated IT and end to end business process, outsourcing solutions and has high brand value and also made significant investment creating intangibles and made several IPs. The comparable also engaged in cloud based services as e-dictionary. The learned Authorised Representative supported his stand relying on the decisions of CGI Information Systems & Management Consultants (P) Ltd. Vs. AC....
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....ions back office services. The review and business functions of Cross Domain is as follows:- "With a decade of experience in Payroll Outsourcing, Crossdomain has created a re-engineered payroll service EFFIPAY - that processes and delivers accurate payroll to clients with headcount up to 1000 employees in just 4 hours*. With Effipay Lite and Effipay Lite Plus, our bouquet of services cover end to end payroll, retrials, reimbursement, tax proof verifications upto issue of Form 16 for employees of our clients across different industry verticals. Our processes are highly scalable and provide end to end payroll solutions to clients with headcount ranging from 5 to 65,000." "Crossdomain's IT knowledge and domain competence has provided the edge to develop information systems to implement process innovation and continuously increase efficiency and turn-around-time for business critical processes." Source: http://www.cross-domain.com As can be seen from the above, the business of Cross Domain ranges from high end KPO services, development of product suites and routine low end ITES service. However, there is no bifurcation available for such verticals of....
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....ble for determination of ALP. (iii) Accentia Technologies Limited, the TPO has rejected the comparable and DRP has upheld the exclusion of comparable altogether on a new basis that the company failed the RPT filter. The DRP has observed that the RPT is more than 25% therefore it cannot be comparable. Considering the facts and circumstances and material on hand, we consider it proper to restore this issue to the file of the TPO for verification and examination. 10. Further, the learned Authorised Representative argued on Ground of Appeal No.4C and 4D in respect of Revenue not considering the foreign exchange gain and Working Capital Adjustment. Whereas the TP Adjustment was made to non-AE transactions and foreign exchange gain in ITES has to be considered. Considering these facts, we restore this disputed issue to the file of the TPO to consider the assessee's submissions and facts envisaged for determination of ALP. Accordingly, Ground of appeal of the assessee is allowed for statistical purposes. 11. Whereas the charging of interest under Sections 234B & 234C are consequential in nature and we direct accordingly. 12. In the result, the assessee's appeal is partly a....
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....nual reports and examination of additional comparable suggested by the taxpayer on the touchstones of filters and functionality, the final set of comparable companies considered by the TPO in respect of Software Development Services Segment, is as under Document 5 Amounts in Rs. Lakh S NO NAME OF TAX PAYER OR/SALES 1 Infosys Ltd. Ð¾Ñ 46,91,700 32,77,700 11,84,200 OP/OC (in OP %) 36.13% 2 Larsen & Toubro Infotech Ltd. 4,54,360 3,64,619 89,741 24.61% 3 Mindtree Ltd. 2,99,010 2,48,290 5,072 20.43% 4 Persistent Systems Ltd. 1,18,412 87,649 3,07,625 35.10% 5 RS Software (India) Ltd. 6 Cigniti Technologies Ltd. 35,188 28,321 6,867 24.25% 5,563 4,359 1,204 27.62% 7 SQS India BFSI Ltd. 20,061 16,394 3,667 22.37% 8 Thirdware Solution Ltd. 19,883 13,742 6,140 44.68% Average 29.40% Document 6 19.4 Computation of Arm's Length Price: 19.4.1 The arithmetic mean of the Profit Level indicators is taken as the arm's length margin. Please see Annexure A for details of computation of PLI of the comparables. Based on this, the ....
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....TPO had chosen 16 comparable companies out of which 6 companies chosen by the TPO in the case of the Assessee for the purpose of comparability were the same. His submission was that .the decision rendered by the Tribunal in the case of Agilis Information Technologies India (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 IPO and therefore the issue of exclusion of these companies should be directed to be examined afresh by the DRP. 29. We have considered the rival submissions. In the case of Agilis Information Technologies India (P.) Ltd. (supra), this Tribunal considered the comparability of the 3 companies which the Assessee seeks to exclude from the final list of comparable companies chosen by the TPO. The functional profile of me Assessee and that of the Assessee in the case of Agilis Information Technologies India (P.) Ltd. (supra), is identical inasmuch as the said company was also involved in providing SWD services to its AE and the TPO had chosen some comparable companies which were also chosen by. ....
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....lea 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 bas 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 Document 12 7. Infosys BPO Ltd., ('Infosys') 7.1 This company 'Infosys' was selected as a comparable company by the TPO. The assessee objected to its inclusion both before the TPO as well as the DRP, but both the authorities below rejected the assessee's objections to its inclusion. 7.2.1 Before us, the assessee objected to the inclusion of this company, 'Infosys' on the following grounds:- I Functionally Different (1) It is engaged in diversified activities and provides services in the area of Analytics, Legal process outsourcing, etc., unlike the assessee in the case on hand which provides low end ITES. Document 13 (ii) (iii) It provides business process management services, consultancy and management services and end-to-end outsourcing, as can be seen from pages 5, 14 and 33 of its Annual Report. It is engaged in research and ....
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.... 'Infosys' offers a gamut of different and diversified services which cannot be compared with routine back office services provided by the assessee. In fact, it is mentioned at page 14 of the Annual Report that the company 'Infosys' provides business process management services which are different from routine back office services. It is also seen that this company enjoys significant brand value and owns intangible assets which clearly establish that Infosys is different from the assessee in the case on hand. Document 14 7.4.1 We also further observe that this company, 'Infosys' has consistently been rejected as a comparable to companies rendering routine back office services in various judicial pronouncements of the Tribunal; including the two decisions cited by the assessee (supra). In the case of CGI Informaiton Systems & Management Consultants (P) Ltd. (supra) cited by the assessee, this company 'Infosys' has been excluded from the list of comparables for the reason that it has brand value which had an impact on its pricing and margins. As the facts of the year under consideration are similar, the decision rendered in the earlier year would....
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....C Software (I) (P.) Ltd. This Court dismissed the Revenue's above appeal on 16 April 2018 upholding the view of the Tribunal. The Revenue does not dispute that the above decision in PTC Software (I) (P.) Ltd. (supra) of this Court rendered on 16 April 2018 would apply to this case. 5. Therefore for the reasons indicated in our order dated 16 April 2018 in case of PTC Software (1) (P) Ltd. (supra) the entities listed at serial nos.(i) to (iv) cannot be held to be comparable to the Respondent-Assessee. 6. So far as the entity listed at serial no.(v) above, namely Crossdomain Solutions Limited, is concerned the impugned order of the Tribunal has excluded it from the list of comparables. This by following its decision in Dy. CIT v. Wills Processing Services (India) (P) Ltd. vide ITA No.2152/Mum/2014, dated 10-10-2014. Mr. Suresh Kumar learned counsel appearing for the Revenue states that inspite of his best efforts, the Revenue is unable to instruct him whether or not an appeal has been preferred against the order of the Tribunal dated 10 October 2014, in the case of Wills Processing Services under (P.) Ltd. (supra). 7. In the above view we pro....
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....les in this year. In support of the claim that this company 'Jindal' was functionally comparable to the assessee in the case on hand, the learned AR placed reliance on the decision in the case of CGI Information Systems & Management Consultants (P.) Ltd. (supra), wherein this company 'Jindal' was held as comparable to companies rendering ITES. 12.3 Per contra, the learned DR for Revenue supported the orders of the TPO/DRP in not including this company 'Jindal' in the final set of comparables. 12.4.1 We have considered the rival contentions/submissions put forth and perused the material on record. We have also perused the Annual Report of this company, 'Jindal'; which is placed at pages 498 to 975 of the paper book. At page 130 of the Annual Report (i.e., page 627 of the paper book), it is mentioned that the company is engaged in providing call centre services, both in the overseas and domestic market; export of call centre services forming a major part of its business activities. In these circumstances, the observation of the DRP that this company 'Jindal' is engaged in software development services and ITES and segmental information is not av....