TaxTMI 
TaxTMI 
2018 (2) TMI 2054
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....ns (as mentioned in the 92 CE report) 2. As regards the sales support service segment, the TPO accepted the same at arms length and therefore there is no dispute of arms length price in the said segment. Since there are disputes with regard to the arms length price in respect of software development services of ITES we will discuss the issue involved in these two segments one by one. 3. Software Development Services:- To bench mark its international transaction in software development segment, the assessee selected 17 comparable companies with an average profit margin of 13% of cost in comparison to the assessee's margin at 13.16%. Thus, the assessee claimed its international transaction at arms length. The TPO did not accept the TP study analysis of the assessee and carried out a fresh search. The TPO finally selected 11 companies as under. The TPO has computed the mean margin on cost at 24.32% and after allowing minus working capital adjustment 0.73% has computed adjusted margin at 25.05%. Thus the TPO has proposed an adjustment u/s. 92CA of Rs. 14,75,07,706/-. The assessee challenged the action of the TPO before the CIT(A). The CIT(A) has granted part relie....
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....nce in the risk level of the tested part and comparables was not established and also since it is not possible to convert the difference in risk level into numbers, quantitatively. Brief facts are as under. "(a) The Assessee is a wholly owned subsidiary of Misys India Holding Ltd., United Kingdom, which is a part of the Misys Group. The Assessee in engaged in the business of provision of SWD services, ITE services and marketing support services to its Associated Enterprises ("AEs"). (b) During the previous year relevant to the assessment year 2009-10, two of the international transactions that took place between the Assessee and its AEs were the provision of SWD services by the Assessee at a price of Rs. 1,27,96,01,655/-, for which a TP Adjustment was made by the TPO to an extent of Rs. 14,75,07,706/- and the provision of ITe Services by the Assessee at a price of Rs. 5,82,93,156/- in respect of which an adjustment of Rs. 51,52,442/- was made by the TPO. (c) An assessment order dated 28.03.2013 came to be passed by the Assessing Officer ('AO' for short) upon incorporating the aforesaid TP adjustments. Aggrieved, the Assessee filed an appeal to ....
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....ely. Further, it was submitted that the accounting principle adopted by the Bodhtree Consulting Ltd. is entirely different then the accounting principle adopted by the assessee and therefore the same is required to be excluded. The ld. AR relied upon the order of M/s. Infinera India Pvt. Ltd. Vs. ITO in IT(TP)A No. 1008/Bang/2014, in page No. 968 to the following effect "2) M/s. Bodhtree Consulting Ltd., For exclusion of this company also, reliance has been placed on the same Tribunal order rendered in the case of M/s. Cisco Systems (Ind.) Pvt. Ltd., (Supra) and in particular, our attention was drawn to para-26.1 available on page No. 98 to 99 of Case Law Compendium. In this case, it is noted by the Tribunal that this company is in the business of software product and was engaged in providing open and end to end web solutions software consultancy and design and development of software using latest technology and therefore, the same cannot be considered as a comparable in the case of companies rendering software development services, as in the present case. Therefore, by respectfully following this Tribunal order, we hold that this company is also excluded from the list of ....
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.... software development product development and owns its own intangibles and develop own branded products. The assessee, relies upon the order of coordinate bench in the matter of VMware Software India Pvt. Ltd. Vs. DCIT (supra) reproduced elsewhere in this order. On the basis of the above it was submitted that Sasken Communication Technologies Ltd. is required to be excluded from the list of selected comparables by the TPO. 12. The ld. DR of revenue raised the same objections as raised by the ld. DR in respect of Bodhtree Consulting Ltd. treating Sasken Communication Technologies Ltd. as comparable with the assessee being the software development and product company. 13. We have heard the rival contentions of the parties and perused the record. In our view Sasken Communication Technologies Ltd. is required to be excluded as facts of the present case are similar to that of the VMware Software India Pvt. Ltd. Vs. DCIT (supra) wherein the coordinate bench held as under: Sasken Communication Technology Limited. 17. We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. At ....
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....ired to be made in accordance with Rule 10B(3) of Income Tax Rules. However, since this adjustment was not possible, therefore, this company should not have been included in the list of comparables. Further, we find that the company owns IPR and has branded products which also distinguishes it from the assessee and, therefore, keeping in view the decision of Hon'ble Delhi High Court in the case of Agnity India Technologies Pvt. Ltd.(supra), we direct the ld. TPO to exclude this comparable from the list of comparables. If we follow the coordinate bench decision in the case of Motorala Solution (India) P. Ltd., Sasken Communication Technologies Ltd. needs to be excluded. However, as mentioned by us at para 24 above, where the contested comparable formed part of assessee's own study, then the AO/TPO has to be given a chance for verification, in view of judgment of Hon'ble Pun jab & Haryana High Court in the case of Quark Systems India P. Ltd. (supra). Accordingly we remit the issue of comparability of Sasken Communication Technologies Ltd. back to the AO/TPO for consideration afresh as per law. Ordered accordingly." "30. Accordingly we direct the AO to ex....
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....charged by the comparable or assessee in the light of judgment of Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) (P.) Ltd. Vs. DCIT as reported in 376 ITR 183. In the present set of appeal Persistent Systems Ltd., Larsen & Toubro infotech Ltd. and Infosys Ltd. were required to be examined on the touch stone of FAR analysis by the ld. CIT(A), but it has not been done as these comparables were removed from the list of comparables on account of turnover filter. Therefore we are remitting back the matter with respect to FAR analysis of Persistent Systems Ltd., Larsen & Toubro infotech Ltd. and Infosys Ltd. to the file of CIT(A) with the direction to decide the functionality of these companies in accordance with the rules and regulations and by following the judicial pronouncements of High Court and Tribunal decisions. As we are remitting back FAR analysis of Persistent Systems Ltd., Larsen & Toubro infotech Ltd. and Infosys Ltd., to file of CIT(A) therefore the issue of turnover and applicability of turnover filter in these appeals became academic and leave it open to be decided in appropriate appeal. Hence Ground 2 of the Revenue appeal is disp....
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....ts and could not be therefore taken as proper comparables. Reasons given by the TPO for excluding these two companies, appear at paras 3.6.5.1, of her order which reads as under: b) Two companies proposed in the show-cause notice are functionally similar to the taxpayer. However, when the working capital of these companies is considered, the profit margin gets distorted. It may not be out of context to mention that our search for comparable is primarily focus on those companies whose profit margin is predominantly from operating business and not from financial activities. This prerequisite is not different in case of software development companies as they do not need any interest bearing funds to manage their working capital requirement. Therefore, with the purpose to identify only those uncontrolled comparables who are having profit margin from core operating activities and not from financial activities, the following two companies having working capital impact of more than 4% on profit have been excluded. 21. TPO has accepted that these companies were functionally similar to that of the assessee. However, according to her, the margins of these companies had not ....
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....ar to the observation recorded by the coordinate bench in the matter of VMware Software India Pvt. Ltd. Vs. DCIT (supra). In our considered opinion the case of inclusion of these two companies FCS Software Solutions Ltd. and Thinksoft Global Services Ltd. is covered in favour of the assessee and we accordingly hold the same. 20. Now we deal with the ITES. In this regard the ld. AR has submitted that the ld. CIT(A) has excluded this company viz., Infosys BPO Ltd. and Aditya Birla Minacs Worldwide Ltd. on the ground that these companies are required to be excluded on the ground of high turnover and therefore these are not comparable with the assessee. However it was submitted by the ld. AR of assessee that there was specific objection raised by the assessee with respect to functional dissimilarity of Infosys BPO Ltd. and Aditya Birla Minacs Worldwide Ltd. However this aspect of functionality has not been examined by the CIT(A) and therefore it was urged by the AR of the assessee that these two companies we also send back to the file of CIT(A) for examining afresh on the FAR analysis without being influenced by the turnover filter. 21. On the other hand, the ld. DR has submitted....
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....ansactions and services provided by Accentia Technologies Ltd., and submitted that this company is in the various segments of activities like medical transcription, medical coding, medical billing, etc. The activity of medical transcription and medical coding is entirely different from the service of contact centre service provided by the assessee to its AE and therefore, this company cannot be considered as functionally comparable with the assessee. The learned AR of the assessee has referred to the revenue earned by the said company and submitted that substantial revenue has been earned by the said company from the business activity of medical transcription apart from billing and collection as well as medical coding activity. i) On the other hand, learned Departmental Representative has submitted that this company satisfies the filter test applied by the TPO for selecting companies in the category of Information Technology Service (ITES) company. The assessee is also engaged in the activity of providing ITeS to its AE and therefore, both the assessee as well as Accentia Technologies Ltd., are engaged in the similar business activity. He has referred to the findings of th....
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....medical billing etc. We note that these activities are quite different from the service of contact centre provided by the assessee to its AE which is purely in the nature of call centre. Therefore, we are of the view that the company Accentia Technologies Ltd. cannot be considered as a functionally comparable company with the services provided by the assessee to its AE. The TPO is directed to exclude this company from the set of comparables. 11.2. Eclerx Services Ltd. The learned AR of the assessee has submitted that this company is engaged in the high-end services and therefore, this company is basically a KPO and not a BPO. He has referred to Annual Report of this company at page 26 of the paper book-II and submitted that as it is clear from the Annual Report that this company is a knowledge process outsourcing (K.P.O.) providing data analytics and data process solutions to global enterprise clients. This company supports core and complex activities for its clients using proprietary processes and a scalable offshore delivery model. This company has access to the capital market and therefore, this company is a public listed KPO company in India. The company is al....
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....ess improvement and automation. It is claimed to have employed over 1500 domain specialists working for the clients. It is claimed that eClerx is a different company with industry specialized services for meeting complex client needs, data analytics KPO service provider specializing in two business verticals financial services and retail and manufacturing. It is claimed to be engaged in providing solutions that do not just reduce cost, but help the clients increase sales and reduce risk by enhancing efficiencies and by providing valuable insights that empower better decisions. M/s. eClerx Services Pvt. Ltd. is also claimed to have a scalable delivery model and solutions offered that include data analytics, operations management, audits and reconciliation, metrics management and reporting services. It also provides tailored process outsourcing and management services along with a multitude of data aggregation, mining and maintenance services. It is claimed that the company has a team dedicated to developing automation tools to support service delivery. These software automation tools increase productivity, allowing customers to benefit from further cost saving and output gains with ....
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....ny cannot be considered as functionally comparable with the assessee for the purpose of determining the ALP. In support of his contention, he has relied upon the decision of the co-ordinate bench of this Tribunal in the case of Lam Research (India) Pvt. Ltd. vs. DCIT in ITA No. 1437/Bang/2014 dated 30/4/2015. i) On the other hand, learned Departmental Representative has submitted that the comparability of this company has been examined by the TPO as well as by the DRP. The TPO has rejected the objections raised by the assessee in respect of this company by holding that the translation service are in the nature of ITeS and therefore, it qualifies all the filters applied by the TPO. He has relied upon the orders of the authorities below. ii) We have considered the rival submissions as well as the relevant material on record. There is no dispute that this company is in the business of providing service of medical transcription and consultancy services, translations services and accounts BPO. The segmental revenue from the operations are given in schedule 8 to the Profit & Loss account which reveals that major revenue of Rs. 6,99,35,756/- out of total revenue of Rs. 7....
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....ltancy services at Rs. 9.90 lacs, Translation charges at Rs. 6.99 crore and Accounts BPO at Rs. 27.76 lac. The Ld. AR has made out a case that outsourcing activity carried out by this company constitutes 57% of total expenses. The reason for which we are not agreeable with the Ld. AR is that we have to examine the revenue of this case only from Accounts BPO segment and not on the entity level, being also from Medical transcription and Translation charges. When we are examining the results of this company from the Accounts BPO segment alone, there is no need to examine the position under other segments. The entire outsourcing is confined to Translation charges paid at Rs. 3.00 crore, which is strictly in the realm of the Translation segment, revenues from which are to the tune of Rs. 6.99 crore. If this segment of Translation is not under consideration for deciding as to whether this case is comparable or not, we cannot take recourse to the figures which are relevant for segments other than accounts BPO. Thus it is held that this case cannot be excluded on the strength of outsourcing activity, which is alien to the relevant segment. 13.3. However, we find this case to incom....
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....t of the assessee, vis-à-vis of the assessee on actual basis, if any. Accordingly the ground of working capital adjustment is allowed for statistical purpose. 27. The revenue is also challenging the order of the CIT(A) regarding the risk adjustment. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. We find that though the CIT(A) has directed the TPO to work out the risk adjustment as per the prevailing norms and grant the same to the assessee however it is pertinent to note that the onus is on the assessee is to provide all the relevant details and computation of quantum of level of risk in the case of the assessee as well as comparables. Therefore we direct the AO/TPO that in case the assessee provides these details the TPO has to consider and decide this issue as per the rules. 28. In the result, the appeal filed by the assessee is partly allowed and revenue is allowed for statistical purposes . Pronounced in the open court on this 21st day of February, 2018. ============= Document 1 Operating Revenues Operating Expenses Operating Profit 141,59,06,091 125,01,01,547 16,58,04,544 Op Profit on cost % ....