TaxTMI 
TaxTMI 
2020 (8) TMI 855
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....t services rendered by the Appellant to its parent company, viz., Fiserv Global Services Inc., USA. 2. That the TPO and the DRP erred in proposing an adjustment to the arm's length price computed by the Appellant without appreciating that since the Appellant was eligible to claim deduction under Section 10A of the Act in respect of income from the international transaction entered into between the Appellant and its AE, there was no motive to shift profits outside India by manipulating the prices charged in international transactions, which is a pre-requisite to make any adjustment under the provisions of Chapter X of the Act. 3. That the AO erred in making a reference to the TPO without recording reasons on the basis which the AO considered it "necessary or expedient" to refer the international transaction entered into by the Appellant with its associated enterprise ("AE"). 4. That on facts and in circumstances of the case and in law, the AO and DRP erred in partly confirming the action of the TPO in making an addition to the income of the Appellant without appreciating that the Appellant had computed arm's length price in respect of international tra....
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....anies selected by the Appellant without providing any cogent and/or sufficient reasoning. 8. That the AO and DRP erred in confirming the action of the TPO in selecting the following companies which were not functionally comparable to the Appellant for the purposes of benchmarking the international transaction entered into by the Appellant: a) E-Infochips Ltd. b) E-Zest Solutions Ltd. c) Infosys Ltd. d) Larsen & Toubro Infotech Ltd. e) Persistent Systems Ltd. f) Persistent Systems & Solutions Ltd. g) Sasken Communication Technologies Ltd. h) Wipro Technology Services Ltd. i) Zylog Systems Ltd. 9. That the AO and DRP erred in confirming the action of the TPO in selecting E-Infochips Bangalore Ltd. as a comparable for benchmarking the international transaction entered into by the Appellant with its AE without appreciating that the said company had fluctuating margins over the years. 10. That the AO and DRP erred in confirming the action of the TPO in selecting Wipro Technology Services Ltd. (WTS] without appreciating that the entire income of WTS was derived from rendering servi....
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....arned Transfer Pricing Officer (TPO). 2.1 The learned TPO observed that as per the service agreement between the assessee and its Associated Enterprises, it has been compensated on cost +15%. The International transactions carried out by the assessee are reproduced as under: Sl. No. Name of transaction Method selected Arm's length price as per taxpayer (i) Software Development Services TNMM Rs. 2,790,704,920 (ii) Reimbursement of expenses N.A. Rs. 62,696,974 2.2 The assessee has used Transactional Net Margin Method (TNMM) for determining arm's-length price of the International Transaction and Operation Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI). The assessee selected a set of 13 Comparable companies with average margin of 13.66% using multiple year data. The assessee worked out its own margin at 16.01%. According to the assessee, the PLI of the assessee being higher than the average PLI of the comparable companies, the International Transaction carried out by the assessee was at arm's-length. The learned TPO, however, approved three companies out of the 13 companies selected by the assessee and rejected the balance on....
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....ve heard both the parties on the issue of inclusion/exclusion of the eight comparables. Before we proceed to adjudicate inclusion/exclusion of companies from the set of the comparables, it is most relevant to summarize the Functions, Assets and Risk (FAR) analysis of the assessee i.e. profit of the assessee, which the assessee has reported in its transfer pricing study filed before the learned TPO. Profile of the Assessee: 5.(i) In schedule-G to the profit and loss account on page 12 of the paper-book (Volume-I) revenue of Rs. 271,60,67,008/- has been shown from "software services". (ii) In notes to financial statements (Schedule -M) on page 15 of the paper-book (Volume -I), the background clause reads that the company was incorporated to provide software development services, conversion, data entry and implementation of the software. (iii) On page 23 of the paper-book (volume-I), clause 8 of notice to the financial statements (schedule-M), segment reporting has been provided as under: "Segment Reporting The company provides software development services, conversion, data entry and implementation of Software and IT enables services. T....
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....ferred that the learned TPO has applied filter of service income more than 75% for selection of the comparable companies, but the instant company has shown revenue from software development amounting to Rs. 19,21,09,661/- out of the total revenue of Rs. 26,03,84,251/-, which constitute 73.77% and thus, the company fails the filter applied by the learned TPO. The Learned Counsel submitted that the learned DRP has combined revenue from the other services to hold that the company satisfy the filter of service income more than 75%. In view of the above arguments, the Learned Counsel sought to exclude this company from final set of comparables. 8.1 The Learned DR, on the other hand, relied on the order of the lower authorities and submitted that the company is primarily in software development which is evident from various pages of the annual report of the company. He referred to page 36 of the annual report (page 150 of the paper-book Volume-1) indicating information about the primary segment, which manifest that the company is primarily engaged in software development and IT enabled services. On the issue of hardware division, he submitted that revenue from the hardware division is....
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....at revenue from hardware maintenance is of Rs. 3,92,48,562/- and balance is from software development and other IT enabled services. The function of the assessee under comparison are also software development and IT enabled services and this contention of the Learned Counsel that assessee is engaged only in providing software development services is not correct. In the profit and loss account of the assessee revenue is shown from the software services and thus we do not find any error in the finding of the learned DRP that service revenue of the company is more 85% of the total revenue and it satisfies the filter of service income more than 75%, therefore the profit results of the company are eligible for comparison with the software services of the assessee. However, details of margin on hardware sales is not available and if the margin on hardware is too high as compared to software services, the company may not be suitable for comparison. Due to lack of sufficient information in respect of the company available in the public domain, in the interest of substantial justice, we feel appropriate to restore the issue of comparison to the Ld AO/TPO with the direction to the TPO to obt....
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.... be excluded on this ground also. 9.2 The learned DR, on the other hand, relied on the authorities below. He referred to functional analysis of the assessee available on page 54 of the paper-book and submitted that assessee is engaged in project planning, which include development and maintenance of the project plan for the client. He also emphasized the "analysis" phase of the function of the assessee, under which documents are sent to the client for approval. He submitted that even the acceptance test is done under approval from the client and the associated enterprises. According to him, in view of the functions carried out by the assessee, the contention of the Learned Counsel that software development is not conceptualized by the assessee, is not correct. 9.3 We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. As far as issue of functional dissimilarity on the ground of conceptualization of the software is concerned, we do not agree with the argument of the learned Counsel of the assessee. On page 55 of the paper book, the assessee has provided detail of various phases of the activities under the functions of....
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.... 9.4 In view of the above, phases of the cycle of the software development carried out by the assessee, it is evident that the assessee is also engaged in conceptualization of the software for the clients of the associated enterprises, and thus contention of the learned Counsel of functional dissimilarity on this ground rejected. However, regarding the trading of the stock by the assessee, there is apparently contradictory information in the annual report of the company. According to page 225 of the paper-book volume 1, the quantitative details in respect of opening stock, purchase, sales and closing stock is not applicable as the company is engaged in providing computer software development related services only, whereas in the profit and loss account available on page 2 to 13 of the paper book, there is increase in the stock of Rs. 1,26,03,745/-. Thus, although the company is functionally similar to the assessee but in view of the figure of increase in the stock gives rise to the possibility of trading segment. As complete information is not available in public domain, in our opinion, the Learned TPO can collect the relevant information from the company using the authority under....
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....-11 on the issue of the comparability of M/s. Infosys Ltd has observed as under: "11.4 We have considered rival submissions, perused the material on the record. In the case of Agnity Technologies, ITA No.3856/Del/2010, a coordinate Bench has held as under:- "It is argued that the case of the assessee is not comparable with Infosys Technologies Ltd., the reason being that the latter is giant in the area of development of software and it assumes all risks, leading to higher profit. On the other hand, the assessee is a captive unit of its parent company in the USA and it assumes only limited Currency risk. Having considered these points, we are of the view that the case of aforesaid Infosys and the assessee are not comparable at all as seen from the financial data etc. of the two companies mentioned earlier in this order. Therefore, we are of the view that this case is required to be excluded" 11.5 The aforesaid order was upheld by the Hon'ble Delhi High Court after taking note of the chart as given below: Basic Particular Infosys Technologies Ltd. Assessee Risk Profile Operate as full-fledged risk taking entrepreneurs Operate at minima....
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....antial revenues on account of onsite software financial development - the activity which the assessee does not carry out. It is also submitted that besides this, the other distinguishing factor vis-a-vis that M/s Infosys Ltd. is that concern also owns brand intangibles- an advantage which the assessee does not possess. Lastly, the assessee is captive as opposed to status of M/s Infosys Ltd. With respect to M/s Persistent Technologies, it is pointed out that in a previous order in ITA No. 279/2016 dated 04.05.2016 (Principle Commissioner of Income Tax vs. M/s Cashedge India Pvt. Ltd) held that having regard to the rules i.e. Rule 10 B to 10 E of Income Tax Rules, the data of M/s Persistent Systems Ltd- could not have been included. Here, it is urged that the assessee is also a member of the Cashedge India group and is engaged in same and identical business. The AY also coincides with that of assessee i.e. AY 2010-2011. For these reasons, we are of the opinion that no substantial question of law arises on the first issue urged." 10.5 We find that the Tribunal has rejected the company mainly on the ground of giant company vis-à-vis the assessee being a captive servi....
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....her margins for rendering services to its clients. 11.3 We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. On perusal of the profit and loss account of the company reproduced by the learned TPO on page 36 of his order, it is evident that the revenue of Rs. 2331,81,22,096/- has been shown from software development services and products and there is no separate segment of the software development services available in the annual report of the company. In such a huge turnover, the composition of revenue from the software development services and from sale of the software products is not separately available in the annual report. In such circumstances, the company cannot be termed as functionally similar at entity level with the assessee, who was engaged in providing software services to its associated enterprises. In view of the functional dissimilarity, we direct the Learned AO/TPO to exclude this company from the final set of the comparables. Persistent Systems & Solutions Ltd. 12. The assessee objected inclusion of the company into set of the comparables on the ground of company engaged in development of the n....
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....ices only and no revenue has been shown from sale of the products or from royalty etc. Merely mention of the method of the recognition of the revenue in the notes to the account, cannot indicate revenue has been earned from sale of the products or from the royalty. No other information has been pointed out by the learned Counsel to support his contention that the company is engaged in sale of the products. No such information in respect of sale of products or income from royalty is available in the public domain, therefore in the interest of the justice, we feel it appropriate to restore this matter to the Learned AO/TPO with the direction to gather information using authority under section 133(6) of the Act and if he finds presence of substantial income from sale of the products or royalty and income from software development services cannot be segmented, then the company shall be excluded from the set of the comparable. The assessee shall be afforded adequate opportunity of being heard. Persistent Systems Ltd. 13. The learned TPO held the company as functionally similar and rejected the objection of the assessee of the different business model, intangible and intellectual p....
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....n the year under consideration there are no such circumstances and the assessee has filed annual report on page 541 to 732 of the paperbook. On perusal of page 656 of the paper-book, we find that revenue from sale of software services and product has been shown that Rs. 6,101.27 million. There is no separate bifurcation of the revenue from the software services and therefore in absence of segmental data of software services, the company cannot be included as a comparable at entity level. Accordingly, on the ground of the functional dissimilarity of the entity level, we direct the Learned AO/TPO to exclude the company from the final set of the comparables. Wipro Technology Services Ltd. 14. The assessee objected inclusion of this comparable on the ground of the extraordinary event and lack of information of software development segment. The learned TPO referred to annual report of the company and held that company was engaged in activities of providing software related support services, primarily information technology software solutions/maintenance and technology infrastructure support services, which are similar to the services rendered by the assessee to its Associated E....
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....A No. 6247/Del./2015- pages 28 to 30 para 46 to 47 vii. Bechtel India Pvt. Ltd. vs. DCIT (AY 2011-12 ) ITA No. 6779/Del./2015, pages 43 to 45 para 63 to 65 14.2 The learned DR, on the other hand, relied on the order of the lower authorities. 14.3 We have heard rival submission and perused the relevant material on record. As far as the function of the company is concerned, in our opinion the assessee has also rendered similar services of the software development and maintenance including information technology related services to its Associated Enterprises and, therefore, it is functionally similar to the company. But as far as the transaction of the company with Citigroup company held as tainted/controlled transactions and exclusion of the company on this ground, in the case of 'Element K India Private Limited (supra), the Tribunal has given the detailed finding to reject the company on the ground of transactions covered under "3. Wipro Technology Solutions Ltd: This Comparable has been included by Ld.TPO. Ld. Counsel objected for inclusion of this company in the list of comparables by arguing that apart from this company being functionally differen....
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....th by coordinate bench of Delhi Tribunal in Saxo India Pvt.Ltd vs. ACIT (supra) as under: "We have noticed above from the language of Rule 10B(1)(e)(ii) that it is the net profit margin realized from a comparable uncontrolled transaction, which is considered for the purposes of benchmarking. The ITA No. 6001/Del/2015 Element K India Pvt. Ltd.epitome of `comparable uncontrolled transaction' is that the companies or transactions in order to fall within the ambit of sub-clause (ii) of rule 10B(1)(e), should be both comparable as well as uncontrolled. `Uncontrolled transaction' has been defined in Rule 10A(a) to mean: 'a transaction between enterprises other than associated enterprises, whether resident or non-resident.' This shows that in order to be called as an uncontrolled transaction, it is necessary that the same should be between enterprises, other than associated enterprises. Section 92B(2) provides that: "A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if ther....
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.... same we also direct removal of this company from the list of comparables." 14.4 The Hon'ble Delhi High Court in the case of PCIT Vs Cashedge India Private limited (supra) has held as under: "6. As far as the first company, i.e., Persistent Systems Ltd. is concerned, the material on record - as found by the ITAT - shows that this company was involved in software development, software products and marketing. Furthermore and perhaps more importantly published segmental data was not available. In these circumstances, having regard to the specificity of the Transfer Pricing Rules under Rule 10 (b) to 10 (e) of the Income Tax Rules, the data of the said firm, i.e., Persistent Systems Ltd. could not have been included. Likewise as far as the Wipro Technology Services goes, it was part of the Citi Group and was during the financial year in question acquired on 21.01.2009 by the Wipro Ltd. as a subsidiary. As a part of the arrangement, the existing contracts pertaining to the work of the Citi Group continued to be with the newly created entity, i.e., Wipro Technology Services. Equally importantly, is that there was no published segmented data as far as software development or i....