AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2019 (6) TMI 1696
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....ng effect to the directions of the Dispute Resolution Panel-II, New Delhi ('the DRP'). 2. Rejection of the transfer pricing documentation The DRP and the TPO erred in rejecting the transfer pricing documentation undertaken by the Appellant u/s 92C(3)(c ) of the Income-tax Act, 1961 ('the Act') and undertaking a fresh analysis. 3. Rejection of use of multiple year data The DRP erred in upholding the action of the TPO of rejecting use of multiple year data and using data for the Financial Year ('FY') 2008- 09 only. 4. Eligibility under section 10A of the Income-tax Act, 1961 The DRP and the TPO erred in not appreciating that the Appellant is eligible for tax holiday under section 10A of the Act for the software development services and hence, there is no incentive for shifting of profits. 5. Use of additional/modified filters The DRP erred in upholding the TPO's action of using the following additional/modified filters. i. Diminishing Revenue/Persistent Loss Filter - Rejection of comparables having diminishing revenues or persistent losses; ii. Use of turnover filter - Rejection of comparables using mini....
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....e business support services The DRP erred in upholding the TPO's action of the undertaking an objective comparative analysis and inter alia rejecting the following companies as comparable to the business support services rendered by the Appellant: i. Educational Consultants (India) Limited; ii. India Tourism Development Corporation Limited; and iii. Overseas Manpower Corporation Limited. 10. Non-inclusion of comparable companies in the final set The DRP erred in upholding the TPO's action of not including Technicom Chemie India Ltd. and Ma Foi Management Consultants Limited as comparable to business support services though these companies qualify all the filters adopted by the TPO. 11. Carving out of technical support services from business support services The DRP erred in upholding the TPO's action of carving out technical support services from the business support services rendered by the Appellant and not appreciating that primarily the technical support services would fall within the ambit of business support services. 12. Selection of functionally different companies as comparable companies to technical s....
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....e relief based on the said grounds of appeal and the facts and circumstances of the case." 2. Brief facts of the case are as under: Assessee filed its return of income declaring Rs.3,61,88,970/-, for year under consideration. The case was selected for scrutiny and notice under section 143(2) was issued to assessee along with notice under section 142(1), questionnaire accompanied by it. In compliance to statutory notices, representative of assessee appeared before Ld.AO and filed requisite details/documents as called for from time to time. 2.1. As assessee had entered into international transactions during year under consideration, reference under section 92C was made by Ld.AO. Ld.TPO upon receipt of reference issued notice u/s 92C (2) of the Income Tax Act, 1961 (the Act) read with 92D (3) of the Act and called upon assessee to submit documents maintained in terms of transaction entered into by assessee with its AE. Ld.TPO observed that assessee is wholly owned subsidiary of QUALCOMM group and provides following services to the group: • R&D services in new technologies for enhancements and improvement of groups existing and new products; • Develop....
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....ce to assessee under these 2 segments. He objected for various filters adopted by assessee as assessee used multiple year data instead of current year data, Ld. TPO objected for not correctly analysing functions of comparables. He thus rejected comparables selected by assessee and used following set of comparables with an average margin of 28.74% by applying PLI as OP/TC under software development service segment: No. Company Name OP/TC OP/TC (W/o Fx) 1. Akshay Software 12.38 8.16 2. Aztecsoft 6.98 27.37 3. Bodhtree Consult. 68.63 69.80 4. Cat Tech. 41.69 34.43 5. Goldstone Tech. 51.08 10.28 6. Infosys 44.46 40.74 7. L&T Infotech 16.96 21.33 8. LGS Global 21.27 18.79 9. Mindtree 4.24 27.36 10. Persistent Sys 11.73 37.77 11. RS Software (I) 9.87.35.05 10.15 12. Sasken Comm. Tech. 16.89 51.44 13. Tata Elxsi 27.76 16.88 14. TCS 19.33 31.44 15. Thinksoft Global Services Ltd. 23.09 16.56 16. Thirdware Solutions Ltd. 25.71 37.27 28.74 ....
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....pressed by Ld.AR. Accordingly Ground No.1 and Ground No.4 stands dismissed. 5.2. It has been submitted by Ld.AR that Ground No.3, Ground No.5, Ground No.6 can be considered together for purposes of deciding comparables under Software Development Service Segment. Ld.AR submitted that Ld.TPO rejected Transfer Pricing study filed by assessee. It has been submitted by Ld.AR that comparability analysis undertaken by assessee was based on well accepted TP principles, and in absence of any information to the contrary, it was inappropriate to reject comparability analysis undertaken by assessee. Ld.AR submitted further that in case of Sony India (P.) Ltd. v. CBDT reported in (2006) 157 Taxman 125 (Delhi), it has been held that acceptance of Arm's Length Price declared by assessee is the rule and its rejection is the exception based on the presence of factors enumerated in Section 92C (3) (a) to (d) of the Act. The Ld. A.R thus submitted that Ld.TPO should have accepted assessee's analysis, since it was in accordance with law, and it was undertaken by an external agency. Ld.AR thus submitted that Ld.TPO had no reason nor has recorded reasons to believe that transactions were n....
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....ft Global Services Ltd. 12.80% 12.80% 12.80% Average of A 18.70% 18.70% 18.70% B Uncomparable Companies selected by TPO 11 Tata Consultancy Services Limited 30.47% 12 Infosys Technologies Limited 38.38% 13 Cat Technologies Limited 32.96% 14 Tata Elxsi Ltd. (Segmental) 17.80% 17.80% 15 Thirdware Solutions Limited 34.62% 34.62% Average of B 30.85% DIV/0 26.21% Arithmetic mean of all companies 22.75% 18.70% 19.95% He submitted that from above list, even if following comparables are considered for exclusion, then assessee would fit into +/-5% range: I. Tata consulting services Ltd II. Cat technologies Ltd III. Tata LXE Ltd IV. Thirdware solutions Ltd V. Infosys Ltd 6.3. Before we take up comparability analysis, it is sine qua non to analyse functions, assets involved and risk assumed by assessee under this segment. Provision of software development and chip design service segment While provid....
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....y ways compensated for work done, even if final product is unsuccessful, or other substantial reworking is required, to make the final product to meet the market requirement. Assessee also undertakes foreign exchange risk, as consideration is received in US Dollars, and therefore it bears foreign exchange fluctuation. Other risks such as Product Development Risk, Credit and Collection Risk, Utilisation Risk, Service Liabilities Risk, IP Address are borne by AE. Thus in TP study assessee has been categorised to be operating at minimal risk, since 100% services are provided to its AE, developing of software is carried out along with AE for AE. And the intangibles that get generated out of such software developed jointly by assessee and AE, is entirely owned by the AE. Thus assessee has been characterised as captive service provider with absolutely minimal risks. 7. Now with the above background of assessee in terms of functions performed and risk assumed, we shall examine comparability of assessee with the comparables disputed before us. Tata Consultancy Services Ltd (TCS) Assessee objected inclusion of this company proposed to be used in the final set of comparables by L....
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....ies is engaged in providing development and maintenance of computer software and it also produces and sells software, being engaged in other diverse activities. It has been submitted that this company faces competition from consulting, offshore technology, BPO firms etc. Ld.AR further submitted that this company enjoys high market ranking in terms of its ownership of brands and it offers its product to banking industry (Finance) while assessee is only a captive service provider to its AEs. He further submitted that in assessee's own case for assessment year 2011-12, 2013-14 and 2014-15, DRP excluded this company by following decision of Hon'ble Delhi High Court in case of Agnity India Technologies Pvt. Ltd. for the reason that, Infosys being a giant operating full-fledged risk leading to maximum profit having huge revenues and expanding, its turnover on R&D having huge intangibles is not a suitable comparable with the assessee, who is only a captive provider operating on a minimum risk. 8.3.1. On the contrary Ld.DR submitted that it is incorrect to say that Infosys is a giant company, because giantness is a comparative factor. He submits that assessee is also a giant with....
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....re, assumption of risk leading to high profits etc. Hon'ble High Court upheld view expressed by this Tribunal for excluding Infosys from list of comparables. 9.1. We, therefore, direct Ld.TPO/AO to exclude this company from final list of comparables for benchmarking international transactions. 10. Cat Technologies Ltd. (standalone) Ld.AR objected for inclusion of this company proposed to be used in the final set of comparables by Ld.TPO by contending that it was not functionally comparable. It has been submitted by Ld.AR that this company derives its income from training, software development and medical transcription and has no segmental information. Further, it is submitted that during year under consideration, this company had entered into field of job placement portal and also plans to expand such operations. It is also submitted that management has accepted that this company is well placed in the market as a leading HR BPO service provider. 10.1. On the other hand Ld.CIT DR submitted that, services rendered by assessee, are similar to services rendered by this company which is very much evident from annual report placed before us under the sub heading "Outlook o....
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....placed before us. 11.3. It is observed that that this company derives income of Rs.77,03,21,375/- from sales whereas other income is Rs.2,30,48,603/-Schedule XII relates to sales shows that this company is deriving income of Rs.2,32,37,588/- from sales of licences, Rs.8,91,77,023/- from software services, Rs.47,85,72,420/- from export of SEZ unit, Rs.16,29,00,630/- from export from STPUI unit and a sum of Rs.1,64,33,744/- from subscriptions. No segmental information is available. We accordingly direct Ld.AO to exclude this company from the final list of comparables. 12. Tata Elxis Ltd (segmental) The assessee objected inclusion of this company proposed to be used in final set of comparables by Ld.TPO, by contending that it was not functionally comparable. It has been submitted by Ld.AR that this company is into diversified business activities deriving income from sale of software as well as products. 12.1. On the contrary Ld. DR submitted that like assessee Tata Elxsi is a software developer, and they are involved in product design services. Ld.CIT DR contended that in profit and loss account, there is no break up, however, referring to observations of Ld.TPO, he sub....
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....erty to raise the issue in any other assessment years for the purposes of comparability analysis. 14.1. Accordingly we dismiss this ground as 'not pressed' with liberty to raise the issue at appropriate circumstances. 15. Before arguing Ground No. 8-10, Ld.AR submitted that, it would be pertinent to decide Ground No.11, as assessee is challenging carving out technical support services from business support services by Ld. TPO without any basis. 15.1. Ld.AR submitted that assessee is engaged in rendering routine business support services to its AEs like identifying business opportunities, marketing AE's products/solutions in Indian market, sharing information on local market conditions etc. He submitted that Ld. TPO carved out a separate segment called technical support service segment from business support service segment on footing that assessee was engaged in rendering technical services. He submitted that such carving out without any basis is inappropriate as technical support services provided by assessee to its AEs form an integral part of marketing support services performed by it under business support service segment. He submitted that Ld.TPO has accepted the appro....
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....d without the other. If above criteria is satisfied, then, two or more related transactions can be considered as one international transactions for purpose of determining their ALP. 15.5. On the contrary, if above criteria is not satisfied, then, these transactions are to be viewed separate from each other and, accordingly, their ALP should also be determined in a distinct manner as if these are two separate independent transactions. The mere fact that both intra-group services and goods are utilized by assessee for manufacture of the final product, cannot be treated decisive to consider such separate transactions as a single transactions. 15.6. Coordinate Bench of this Tribunal in case of Gurner India Pvt. Ltd. vs DCIT reported in 70 Taxmann.com 240 has observed as under: "5.2 The key question which, therefore, falls for our consideration is whether the segregation of these two transactions of payment of Royalty and Fees for technical services from the other international transaction, is justified? 5.3 The Hon'ble jurisdictional High Court in Sony Ericson Mobile Communication India (P.) Ltd. v. CIT [2015] 374 ITR 118/231 Taxman 113/55 taxmann.com 240 (D....
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....xman 318/63 taxmann.com 186, has held that in case of a package deal where each item is not separately valued, but, all are given a composite price, this should be considered as one international transaction and processed accordingly for the transfer pricing purpose. It further held that where a number of transactions are priced differently, but, on the understanding that the pricing was dependent upon the assessee accepting all of them together (i.e., either take all or leave all), then also, the separate transactions be considered as one international transaction. In such circumstance, burden has been placed on the assessee to prove that although each transaction is priced separately, but, they were provided under one common understanding. It further laid down emphatically that : 'the contention that as the services and goods are utilized by the assessee for the manufacture of the final product they must be aggregated and considered to be a single transaction and the value thereof ought to be computed by the TNMM is not acceptable. Merely because the purchase of each item and the acceptance of each service is a component leading to the manufacture/production of the final prod....