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2019 (11) TMI 1411
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....ount of adjustment to the arm's length price with respect to computer aided design ('CAD/CAM') services rendered by the Appellant to its associated enterprises. (b) The ld. AO/ld. TPO/Hon'ble Dispute Resolution Panel ('Hon'ble DRP' or 'the ld. Panel') erred in law and on facts in failing to establish that the Appellant shifted profits outside India. 2. Determination of arm's length price of international transactions (a) The ld. AO/ld. TPO grossly erred on facts and in law in rejecting the filters and search process adopted by the Appellant in the Transfer Pricing Study without considering the Appellants facts. Further, the ld. AO/ld. TPO also erred on facts and in law by conducting a fresh benchmarking analysis in respect of captive CAD/CAM services provided by the Appellant and wrongly comparing the Appellant's activities with companies operating as full-fledged entrepreneurs without considering the differences in functions performed, assets employed and risks assumed by the Appellant vis-a-vis comparable companies. (b) The ld. AO/ld. TPO erred in law in applying arbitrary filters as criterion for rejection of co....
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...., which was not contemporaneous and which was not available in the public domain at the time of conducting the transfer pricing study by the Appellant. (b) The ld. AO/ld. TPO erred in law erred in disregarding the application of multiple-year data while computing the margin of comparable companies. The ld. Panel erred in confirming the same. 4. Non-allowance of appropriate adjustment to the comparable companies by the ld. Panel and the ld. AO/ld. TPO (a) The ld. AO/ld. TPO/ld. Panel erred in law and on facts in not allowing appropriate adjustments under Rule 10B of the Rules to account for, inter alia, differences in (i) accounting practices, (ii) marketing expenditure adjustment, (iii) research and development expenditure between the Appellant and the comparable companies. (b) The ld. AO/ld. TPO erred in law and on facts in restricting the working capital adjustment to 1.63% as against 4.23% originally computed by the ld. TPO in the transfer pricing order. The ld. DRP erred in upholding the actions of the ld. AO/ld. TPO. 5. Variation of 5% from the arithmetic mean (a) The ld. AO/ld. TPO/ld. Panel erred in law in not granting the variation as per....
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.... Provision of product know-how by M & H Group 37,755,356 8 Provision of service by MHFPL 44,909,691 9 Provision of Guarantee by Mann + Hummel Holding GmbH 2,093,050 10 Internet lease & SAP charges 19,119,535 11 Recovery of expenses 939,372 12 Reimbursement of expenses 38,634,385 13 Issue of share capital 357,000,000 14 Share application money received 412,318,000 4.1 THE FINANCIAL RESULTS OF THE COMPANY FOR THE F.Y. 10-11 : Particulars Amount Amount Total Operating Income 741384445 Less: Other Income 67206409 Operating Income 674178036 Total Operating Cost 985025291 Less: Provision for doubtful debtors 9236319 Provision for obsolete inventory 123670 Provision for claims 89950000 Provision for warranties 7924575 Foreign Exchange loss 3719199 Finance charges 2089329 Operating Cost 871982199 Operating Profit -197804163 OP/OC -22,68% OP/OR -29.34% The assessee's margin computed on ....
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....t para 9 as final set of comparables which are as under : FINAL SET OF COMPARABLES CONSIDERED BY THE TPO : After considering the objections of the taxpayer to the comparables proposed in the show-cause notice, perusal of relevant annual reports and examination of additional comparables suggested by the taxpayer on the touchstones of filters and functionality, the final set of comparables are arrived as per the discussions in the following paragraphs. Sl. No. Name Sales Cost PLI 1 Acropetal Technologies Ltd.(seg) 814,016,893 616,754,876 31.98% 2 E-zest solutions (from Capitaline) 112866098 93255341 21.03% 3 E-Infochips Ltd 260384251 166447527 56.44% 4 Evoke (from Capitaline) 144869912 133996568 8.11% 5 I C R A Techno Analytics Ltd. (in 000) 158401000 126894000 24.83% 6 Infosys Ltd 253850000000 177,030.000,000 43.39% 7 Larsen & Toubro Infotech Ltd. 23318122096 19,764,861,289 19.83% 8 Mindtree Ltd.(seg) 8,783,000,000 7,937,143,242 10.68% 9 Persistent Systems & Solutions Ltd. 189,490,457 155,172,089 22.12% 10 Persistent System....
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....s. The TPO in pursuance to the directions of the DRP passed the final assessment order under Section 143(3) r.w.s. 254 on 28.12.2018. Aggrieved by the order, the assessee is in appeal before the Tribunal. 4. At the time of hearing, the ld. AR submitted that the assessee is in Software Development Services and has international transactions and the comparables selected by the TPO are to be excluded. The ld. AR emphasized that the comparables selected by the TPO are functionally different and are to be excluded and filed chart and relied on the decision of the co-ordinate Bench of the Tribunal. Contra, the ld. DR supported the orders of the TPO and DRP and filed written submissions. 5. We heard the rival contentions and perused the material on record. Prima facie, the learned Authorised Representative has made submissions on 8 comparables selected by the TPO for examination and Working Capital Adjustment. First we shall deal with the exclusion of comparables as under : (i) E-Zest Solutions Limited : This company is functionally different and has on-site services and significant presence of inventory and is functionally incomparable and is engaged in product developm....
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....ard the learned D.R. as well as learned A.R. and considered the relevant material on record. The DRP has rejected this company by recording the fact as under : "We examined the annual report from which it is evident that the entire revenue has been shown under service segment which indicates that the revenue from software development, consultancy, licensing and sub-licensing, annual maintenance charges for software support. WEB development and hosting has been reported in one segment, thus in absence of segmental information, we concur with the view of the DRP in preceding year and accordingly direct the Assessing Officer to exclude this company from comparables."' 17.2 We further note that the Tribunal in the case of DCIT v. Electronics for Imaging India Pvt. Ltd. (supra) has considered the comparability of this company in paras 14 to 16 as under : "(1) ICRA Techno Analytics Ltd. (seg) 14. At the outset, we note that apart from having the related party revenue at 20.94% of the total revenue, this company was also found to be functionally not comparable with software development services segment of the assessee. The DRP has given its fi....
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....he relevant material on record. At the outset, we note that the co-ordinate bench of this Tribunal in the case of Electronics for Imaging India Pvt. Ltd. (supra) has considered this issue in para 17 as under : "(2) Infosys Ltd. 17. The assessee objected against the selection of this company on the ground that this company has a big name and brand value and therefore it has a bargaining power. It also contended that the turnover of this company is Rs. 21,140 crore, which is 442 times higher than the assessee." Following the decision of this Tribunal in the case of Electronics for Imaging India Pvt. Ltd. (supra), we do not find any reason to interfere with the directions of the DRP on this issue.' (iv) M/s. L & T Infotech Limited : The said comparable company has site revenues more than 50% of total revenue with three different segments being financial services, manufacturing and telecom as per the Annual Report of the company and further no segmental results are available and cannot be functionally comparable. The comparable company is a market leader and on account of ownership marketing, intangibles IPRs for the proprietary software products....
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....arison to the assessee. It was also contended that Related Party Transaction (RPT) of this company is 18.66%. The DRP rejected objections of the assessee on the ground that TPO has applied 25% filter of RPT and annual report of the company does not show any other services rendered other than software development services provided by this company. Thus the DRP held that software development segment is comparable to the assessee and therefore this company has to be retained as comparable. 63. We have heard the ld. AR as well as ld. AR and considered the relevant material on record. The ld. AR has submitted that this company is having 18.66% RPT and further this company earns revenue from both services and products. Thus, the ld. AR submitted this company is also in the software products and therefore cannot be considered as good comparable. He has further contended that in a series of decisions, the Tribunal has applied 15% RPT filter and since this company is having more than 15% RPT, the same cannot be considered as a good comparable. 64. On the other hand, the ld. DR has submitted that TPO has applied RPT filter of 25% and therefore only for this company, the RPT....
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....his company has reported the entire receipt from sales and software services and product. Therefore, no segmental information was found to be available for sale of software services and product. Further, the DRP has noted that as per Note 1 of Schedule 15, this company is predominantly engaged in outsource software development service. Apart from the revenue from software services, it also earns income from licence of products, royalty on sale of products, income from maintenance contract, etc. These facts recorded by the DRP has not been disputed before us. 26. Therefore, when this company is engaged in diversified activities and earning revenue from various activities including licencing of products, royalty on sale of products as well as income from maintenance contract, etc., the same cannot be considered as functionally comparable with the assessee. Further, this company also earns income from outsource product development. In the absence of any segmental data of this company, we do not find any error or illegality in the findings of the DRP that this company cannot be compared with the assessee and the same is directed to be excluded from the set of comparables." ....
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....opment services segment. Accordingly, we do not find any error or illegality in the findings of the DRP." We further note that the DRP has not adjudicated the objections of the assessee whereas for the Assessment Year 2010-11, the DRP rejected this company as comparable. Accordingly, we set aside this issue to record of the A.O./TPO to verify the relevant facts and compare with the facts recorded by the Tribunal in the case of Electronics for Imaging India Pvt. Ltd. (supra) for the Assessment Year 2010-11 and then decide the issue after giving an opportunity of hearing to the assessee.' (vii) Tata Elxsi Limited : This company is functionally dissimilar and engaged in provision of niche products and development services which are dissimilar to assessee's services and has substantial R & D, and failed the export revenue filter at 75% and has incurred an amount of Rs. 12.65 crore towards R & D expenditure and incurred significant expenditure in foreign currency to the extent of 21.26% of total sales with High turnover. We support our view relying on decision of the co-ordinate Bench of the Hon'ble Tribunal in the case of Applied Materials India Limited (s....
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....the ld. DR as well as ld. AR and considered the relevant material on record. We find that this company even in the software development segment is engaged in diversified activities of product design services, innovation design, engineering services, visual computing labs, etc. We further note that in the case of Telcordia Technologies Pvt. Ltd. (supra), the Mumbai Bench of the Tribunal vide its order, dated 11.5.2012 in para 9.7 has held as under:- "7.7 From the facts and material on record and submissions made by the learned AR, it is seen that the Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of the learned AR that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company as fit for comparability analysis for determining the arm's leng....
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....s an important accounting concept that informs as to how liquid the firm is. Current Assets are divided by Current Liabilities to find out as to how capable the firm is to meet its current liabilities when they fall due by encashing the Current Assets. Therefore, the broad category 'Current Assets' includes all those assets which are easy to convert into cash. Unless the Current Assets are sufficiently liquid they cannot be converted into cash when the liabilities mature for payment. Apart from current assets being liquid they should be sufficient to take care of current liabilities. The formula Current Assets/Current Liabilities is used to find out the current ratio. It is also known as Working Capital ratio. The general rule of thumb for the current ratio is 2 to 1. It means that current assets which are twice that of current liabilities is considered to be an ideal current ratio. However, minimum ratio of 1:1 is considered necessary as current assets having lesser ratio compared to current liabilities may create liquidity problem. But In Transfer Pricing, we take into consideration the 'Net Working Capital'. Net Working Capital is calculated as follows ....
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....d. The working capital is computed as per definition by adding up all the Current Assets but in Transfer pricing, we take only the debtors and inventories as they are considered to be items of working capital relating to the operating business that have a cost which must be recovered from the customers. However, in view of the fact that some working capital calculated by adding up debtors and inventory is taken care of by the creditors in the balance sheet of the taxpayer it is reduced from it and accordingly only the net working capital requirement is found out. Thereafter the cost of capital is found out by multiplying the ratio of net working capital on the appropriate base (same which is used for arriving at the profit margin in TNMM such as sales, total cost etc.) by the prime lending rate for the relevant financial year. In the case of Wholly owned subsidiary, it is observed that the tested party receive lot of advances from their Holding company for whom they are rendering services on contract basis. Therefore, in their cases mostly there are neither debtors nor any inventory and therefore, the working capital is zero. Even if they are receiving lot of advances from....
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....ns and in the case of the tested party, reducing the cost of capital on the net working capital computed as follows: Net working capital of the tested party= (Debtors + Inventory) - (Payables/advances received to the extent of debtors plus inventory) The Balance payables not considered in calculation of net working capital of the tested party is due to the fact that they are Invested either in fixed assets or in the current assets having no cost, whereas in Transfer Pricing those receivables are taken into consideration that reduce the working capital requirement and accordingly the cost of working capital that must be recovered from the customers by factoring in the sales price. Any excessive advance which is received from the Holding company by the WOS cannot be factored In reducing the sales price and less sales price cannot be defended on the ground that due to negative cost of capital it is managing to have arm's length profit margin even if it is having low profit margin on operating activity as discussed in the example given above. In a related party scenario, the entire payables/advances cannot be considered in working capital adjustment as in any busi....