TaxTMI 
TaxTMI 
2019 (6) TMI 1705
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....ee were international transactions and the price received for rendering such services by the Assessee from its AE has to pass the Arm's Length Price (ALP) test as provided u/s.92 of the Income Tax Act, 1961 (Act). In this appeal two of the disputes are with regard to addition made consequent to determination of ALP and consequent upward revision and adjustment made to the price at which international transactions were carried out by the Assessee with its AE in respect of (1) Software development Services and (2) IT enabled Services. TP ADJUSTMENT RELATING TO IT SERVICES (Software Development Services: 3.There is no dispute that the Most Appropriate Method chosen for the purpose of comparison of the profit margin of the Assessee with that of the comparable companies was the Transaction Net Margin Method (TNMM) and the Profit Level Indicator (PLI) chosen for the purpose of such comparison was Operating Profit to Operating Cost (OP/OC). The OP/OC of the Assessee in the SWD services segment was as follows:- Description Amount Operating Revenue Rs.6,31,98,998/- Operating Cost Rs.5,86,25,045/- Operating Profit (PBIT) Rs. 45,73,953/- Operating Profit to Co....
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.... 19.7. Price received vis-à-vis the Arms Length Price: The price charged by the tax payer to its Associated Enterprises is compared to the Arms Length Price as under: Arms Length Price (ALP) At 119.68% of operating cost Rs.6,74,98,786/- Price charged in the international transactions Rs.6,31,98,998/- Shortfall being adjustment u/s.92CA Rs.42,99,788/- The above shortfall of Rs.42,99,788/- is treated as transfer pricing adjustment u/s 92CA." 6.Against the said adjustment proposed by the TPO which was incorporated in the draft assessment order by the AO, the assessee filed objections before the DRP. The DRP rejected those objections and confirmed the transfer pricing adjustment suggested by the TPO. The adjustment confirmed by the DRP was added to the total income of the assessee by the AO in the fair order of assessment. Against the said order of the Assessing Officer, the assessee has preferred the present appeal before the Tribunal. 7.The assessee filed a chart showing turnover and the margins of the 20 comparable companies finally chosen by the TPO after giving effect to adjustment towards working capital as allowed by the TPO and....
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....case of Chryscapital Investment Advisors (India) Pvt.Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt.Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of th....
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....ations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra)." 10.Respectfully following the aforesaid decisions of the Tribunal referred to above, we hold that the following companies whose turnover is above Rs.200 Crores should be excluded from the list of comparable companies:- (1)Flextronics Software Systems Ltd. 595.12 crores (2)iGate Global Solutions Ltd. 527.91 crores (3)Mindtree Ltd. 448.79 crores (4)Persistent Systems Ltd. 209.18 crores (5)Sasken Communication Technologies Ltd. 240.03 crores (6)Infosys Technologies Ltd. 9028.00 crores The AO is directed to compute the Arithmetic mean by excluding the aforesaid companies from the list of comparable. Improper selection of comparables: 11.It was submitted by the learned counsel for the Assessee that the following 2 companies are not functionally comparable with that of the Assessee. a)KALS Information Systems Limited b)Accel Transmission Limited. In this regard our attention was drawn to the de....
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....ven a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable." "(e) Accel Transmatic Ltd. 48. With regard to this company, the complaint of the assessee is that this company is not a pure software development service company. It is further submitted that in a Mumbai Tribunal Decision of Capgemini India (F) Ltd v Ad. CIT 12 Taxman.com 51, the DRP accepted the contention of the assessee that Accel Transmatic should be rejected as comparable. The relevant observations of DRP as extracted by th....
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....The facts and circumstances under which the aforesaid companies were considered as comparable is identical in the case of the Assessee as well as in the case of Triology E-Business Software India Pvt.Ltd. (supra). Respecfully following the decision of the Tribunal referred to above in the case of Trilogy E-Business Software India Pvt.Ltd.(supra), we direct that KALS InfoSystems Ltd. And Accel Transmatic Ltd. be excluded from the list of 20 comparable arrived at by the TPO. 14.The learned counsel for the Assessee brought to our notice that the comparable company chosen by the TPO viz., Lucid Software Limited, has to be excluded as functionally not comparable with that of the assessee in view of the decision of the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India Private Ltd. in ITA No.7821/MUM/2011, which was followed by the ITAT Bangalore Bench in the case of Logica Private Ltd. ITA No.1129/Bang/2011 for AY 07-08, wherein it was held as under:- "7.2 Lucid Software Limited It has been submitted before us that this company, besides doing software development services, is also involved in development of software product. The learned A....
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....dispute before us that the related party transaction in the case of companies exceeds 15% and in view of the decision of the Tribunal in the case of 24 X 7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010, followed by this Tribunal in the case of Logica Private Ltd. (supra) wherein it was held that where the RPT exceeds 15%, such companies should not be taken as comparable companies. Following the said decision, we hold that the aforesaid companies referred to above be excluded from the list of comparable companies while working out the ALP. 17.As far as comparable company chosen by the TPO viz., Tata Elxsi Ltd., is concerned, the comparability of the aforesaid company with that of the software service provider such as the Assessee was considered by the Mumbai Bench of this Tribunal in the case of Logica Pvt.Ltd. IT (TP) 1129/Bang/2011 AY 07-08) wherein on the comparability of the aforesaid company, the Tribunal held as follows:- "14. As far as comparable at Sl.No.6 & 24 are concerned, the comparability of the aforesaid two companies with that of the software service provider was considered by the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India Pr....
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....he comparable companies was the Transaction Net Margin Method (TNMM) and the Profit Level Indicator (PLI) chosen for the purpose of such comparison was Operating Profit to Operating Cost (OP/OC). The OP/OC of the Assessee in the SWD services segment was as follows: Description Amount Operating Revenue Rs.4,87,32,573/- Operating Cost Rs.4,10,87,673/- Operating Profit (PBIT) Rs. 76,44,900/- Operating Profit to Cost Rati 18.61 % FINAL SET OF COMPARABLE COMPANIES CONSIDERED BY THE TPO AND THE OP TO TOAL COST % Sl.No Company Name OP to Total Cost% 1. Maple eSolutions Ltd. 32.66 2. AllsecTechnologies Ltd 28.51 3. Datamatics Financial Services Ltd. (Seg.) 24.99 4. Transworks Information Services Ltd. 19.56 5. Cosmic Global Ltd.(Seg.) 16.03 6. Vishal Information Technologies Ltd. 19.56 7. Asit C.Mehta Financial Services Ltd. (earl known as Nucleus & GIS (India) Ltd. 34.52 8. Goldstone Infratech Ltd. (Seg.) (earl known as Goldstone Teleservices Ltd.) 29.01 9. Spanco Ltd. (seg.) (earlier known as Span Telesystems & Solutions Ltd.) 20.86 10. ....
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....mately chosen by the TPO for the purpose of comparison are not functionally comparable with the Assessee as has been held by the Tribunal in various decisions rendered in the case of Assessees rendering ITES such as the Assessee. The learned DR relied on the order of the DRP. 25.We have considered the rival submissions. As far as comparable companies chosen by the TPO at S.No.1,3,6,7 & 8 viz., Maple ESolution Ltd., Datamatics Financial Services Ltd., Vishal Information Technological Services Ltd., Asit C.Mehta Financial Services Ltd., and Gold Stone Infratech Ltd., in the list of comparable companies chosen by the TPO, we find that the Hyderbad Bench of the ITAT in the case of HSBC Electronic Data Processing India Ltd. Vs. ACIT, ITA No.1624/Hyd/2010 by order darted 28.6.2013 considered comparability of these companies in the case of a company engaged in rendering IT enabled services to its AE similar to that of the Assessee in the present case. The tribunal held that the aforesaid companies are not comparable. The following were the relevant observations of the Tribunal. "8. The first objection is with reference to selection of comparable data by the TPO with reference ....
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....cost, as can be seen from the Annual report placed in the paper-book and ITAT, Mumbai in the case of Maersk Global Service Centre (supra) has analysed and rejected this company as comparable, due to the reason that it has outsourced a considerable portion of its business and it is functionally different. This factor was also approved by the DRP in assessee's own case in the later year, as can be seen from the copy of the order placed on record, for assessment year 2008-09. In view of this, we direct the Assessing Officer to exclude this company from the list of comparables. Goldstone Infratech Ltd 10.The assessee's objection for inclusion of this comparable is on the basis of the filter on foreign exchange earnings, diminishing revenue filter and functionality, being run on lease basis. It was submitted that this company was rejected in the case of Stream International Services Pvt. Ltd. V/s. ADIT(International Taxation) by the Mumbai Bench of the Tribunal, vide its order dated 11.1.2013 in ITA No.8997/Mum/2010 for assessment year 2006-07. 10.1. After considering the rival contentions, we are of the opinion that the business model of the above company is ....
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....served that the TPO applied filter of "Companies with less than 25% related party transactions". The learned Counsel for the assessee took us through the Annual accounts of Datamatics Financial Services Limited, and submitted that the gross income of this company for the year ending on 31.03.2006 was at Rs. 2.31 crore as against total expenses of Rs. 1.84 crore. Referring to pages 319 and 320 of the paper book, our attention was drawn towards Annexure-2 to demonstrate that the "Transactions with the Associated Parties within the meaning of section 92A and 92B of the Income-tax Act, 1961" showed one major transaction with Datamatics Limited towards 'Reimbursement of expenses' at Rs. 99.14 lakh. The learned AR contended that the transactions of Datamatics Financial Services Limited with other AEs amounted to Rs. 14.31 lakh making total of transactions with the AEs at Rs. 1.13 crore. It was submitted that the percentage of transaction with related parties is much more than 25%, being, the filter adopted by the TPO himself and hence the same should be excluded. 12.In the opposition, the learned Departmental Representative contended that the major transaction of Rs. 99.14 lakh ....
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....nses was without any markup. As the so called comparable case of Datamatics Financial Services Limited was included by the TPO in the final list of comparables, in our considered opinion, the same is liable to be excluded as it involves related party transactions at much higher level, as against the filter adopted by the TPO himself, being companies with less than 25% related party transactions. We order accordingly." In view of the above, since this company fails in this filter adopted by the TPO, we direct the TPO to exclude this company from the list of comparables adopted. Maple e-Solutions Ltd. 12.The objection of the assessee with reference to this company is with regard to the financials of the company, on the ground of unreliability of data. It was submitted that selection of this company was rejected in the case of CRM Services India Pvt. Ltd in ITA No.468/Del/2009 and also in the case of Stream International Services (supra). Further, the assessee also relied on the DRP order in assessment year 2007-08, with reference to the above company. 12.1.We have considered the rival sub missions. We agree with the objections of the assessee. In t....
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....ny cannot be selected as a comparable not only on the reason of failing employee cost filter, but also due to amalgamation during the year, which has changed the business model of the company. 14.In view of the foregoing discussion, we agree with the assessee's objection that the above five comparables should be excluded. 26.The facts and circumstances and the Assessment year for which the aforesaid companies were not considered as comparable are identical to the case decided by the Hyderabad Bench of ITAT and that of the case of the Assessee. Respectfully following the decision of the Hyderabad Bench of ITAT, we direct the TPO to exclude the aforesaid companies from the list of comparable while arriving at the arithmetic mean of comparable. The relevant grounds of appeal of the Assessee are allowed. 27.We direct the TPO to compute ALP in ITES segment, after excluding the aforesaid companies from the list of comparable companies after giving the benefit of the second proviso to Sec.92(2) of the Act. The relevant grounds of appeal of the Assessee are treated as allowed. 28.Ground No.5 raised by the Assessee with regard to determination of ALP in the ITES segment re....
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.... Total operating Expenditure 5,64,27,677 4,82,74,953 11,52,68,853 21,99,71,482 Add: Reimbursements made by AE 53,27,085 Less: Reimbursements made by Appellant 6,25,090 Total operating Expenditure 5,64,27,677 5,29,76,948 11,52,68,853 22,46,73,477 Gross Profit Operating Profit / (Loss) 67,71,321 4,57,620 (1,09,33,804) 4,53,435 (32,51,427) Operating Profit/Operating Cost 12.00% 0.86% 30.In its submission before the DRP, the Assessee pointed out the following mistakes in the computation of profit margins in the ITES segment by the TPO:- "The Assessee had submitted before the TPO, on 15 September 2009, the summary segmental P&L account of the Company, split into inter-cilia IT and ITES segments, arriving at the NCP margins, computed at 7.80 % and 18.61 % from IT and ITES, ....
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....ars Software development services IT enabled services ' STPI STPI Non STPI Income Income from associated enterprises 63,198,998 37,994,463 10,738,109 Total Income 63,198,998 37,994,463 10,738,109 Personnel cost 31,411,197 15,689,252 4,732,726 Other operating expenses 22,788,880 15,390,892 2,269,601 Depreciation 4,424,969 2,937,701 67,501 Total operating expenses 58,625,046 34,017,845 7,069,828 Operating profit 4,573,952 3,976,618 3,668,281 Add: Other income 92,656 69,642 Total operating income 4,666,608 4,046,260 Operating profit from STPI and non- STPI operations 8,712,868 3,668,281 A copy of the computation of total income of the Assessee (filed with the return of income) is enclosed as Exhibit I. A copy of Form No. 56F obtained by the Company from an accountant is enclosed as Exhibit 17). The Assessee humbly requests your goodself to rectify the captioned....
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.... and every receipt is a part of revenue and an integral component of the international transaction. We find no justifiable reasons for interfering with the approach of the TPO." 32.It is clear from the order of the TPO/DRP and the submission of the Assessee before DRP that the DRP has not considered the main contention of the Assessee regarding improper allocation of operating expenditure to ITES segment. The TPO has increased the Operative revenue of the Assessee in ITES by adding reimbursements made by AE, which cannot be regarded as part of the operating revenue. The TPO has also tampered with the operating expenditure by allocating the total cost of the entity on the basis of proportionate segment revenue of the ITES segment. While allowing deduction u/s.10A of the Act, the AO has accepted the segmental details as given by the Assessee for the SWD segment and the ITES segment. The question is, can the treatment be different when it comes to determining ALP. The issue requires reexamination by the TPO. The parties therefore agreed that the issue requires to be examined afresh by the TPO in the light of the submissions made by the Assessee before DRP extracted in paragraph-29 ....
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.... of the department (No.794 dated 9-8-2000) understood the situation, it is only logical and natural that the stage of deduction of the profits and gains of the business of an eligible undertaking has to be made independently and, therefore, "immediately after the stage of determination of its profits and gains. *At that stage the aggregate of the incomes under other heads and the provisions for set off and carry forward contained in sections 70, 72 and 74 would be premature for application. The deductions under section 10A therefore would be prior to the commencement of the exercise to be undertaken under Chapter VI for arriving at the total income of the assessee from the gross total income. The somewhat discordant use of the expression 'total income of the assessee' in section 10A has already been dealt with earlier and in the overall scenario unfolded by the provisions of section 10A the aforesaid discord can be reconciled by understanding the expression "total income of the assessee" in section 10A as 'total income of the undertaking'. *For the aforesaid reasons it is held that though section 10A, as amended, is a provision for deduction, the s....