TaxTMI 
TaxTMI 
2023 (11) TMI 1185
X X X X Extracts X X X X
X X X X Extracts X X X X
....w in making an adjustment of Rs. 16,72.72.235 to the arm's length price of the international transactions of provision of software development services on the basis of order passed by the Transfer Pricing Officer (TPO) under section 92CA(3) of the Act. 2.1 That the Dispute Resolution Panel (DRP) erred on facts and in law in sustaining the action of the TPO in considering following companies in the final set of comparable companies allegedly holding them to be functionally comparable to the appellant: i. e-Infochips Bangalore Limited ii. E-Zest Solutions Limited iii. Infinite Data Systems Pvt. Ltd. iv. Infosys Technologies Limited v. Sonata Software Limited vi. Tata Elxsi Limited vii. Thirdware Solutions Limited viii. Evoke Technologies Limited ix. Persistent Systems Limited 3. That the assessing officer erred on facts and in law in making an adjustment of Rs. 1,15,08,130 to the arm's length price of the international transactions' of Business Support Services on the basis of order passed by the Transfer Pricing Officer (TPO) under section 92CA(3) of the Act. 3.1 T....
X X X X Extracts X X X X
X X X X Extracts X X X X
....acterizing the alleged delay in receipts of receivables as unsecured loans advanced to the associated enterprises and making a transfer pricing adjustment on that basis. 6.4 That the DRP/TPO erred on facts and in law in imputing interest on the opening receivables. i.e. receivables appearing in the books of accounts on 01.04.2009, for the entire financial year without appreciating that the interest, if any, is imputable, it shall be imputed only on the delay in receipt of receivable beyond the agreed credit period, up to the end of the said financial year i.e. 31 March 2010. 6.5 Without prejudice, that the assessing officer/DRP erred on facts and in law in not appreciating that after netting off the interest payable on delay in payment of royalty, imports of goods and fixed assets, payable by the appellant to the associated enterprise, applying the same methodology, there could not be a case of interest receivable on the delay in receipt of receivables. 6.6 Without prejudice, that the DRP/TPO erred on facts and in law in rejecting the delay in receipt of receivables on transaction undertaken with unrelated third parties as comparable uncontrolled price fo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ervices, Delphi India is remunerated at a mark-up of 10 percent on costs incurred for the provision of these services. 7. The assessee benchmarked these international transactions by comparing six companies whose arithmetic mean margin was worked at 12.90%. The profit level indicator (PLI) adopted by the assessee was operating profit/ operating cost (OP/OC). The assessee adopted Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) for benchmarking the international transaction in the software development segment. The PLI of the assessee was 8.12% which when compared with the comparable mean margin of 12.90% fall within the range of +/-5% tolerance band and accordingly the assessee concluded that its international transaction of provision of software development services was at Arm"s Length Price (ALP). The ld TPO did not agree with the contention of the assessee and made inclusion and exclusion of certain comparables of the assessee. The assessee preferred objections before the ld DRP. Based on the order of the ld DRP, the ld TPO arrived at the final set of comparable companies as under:- SL. NO. Name of the company OP/OC Working Capital Adjust....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Building No. A of Plot No. 157 from M/s Infinite Computer Solutions (India) Limited from their existing STPI facility in Bangalore." 10.1.1 The Annual Report of Infinite Data Services Pvt. Ltd (merged) for the year ending on 31.03.2010 is enclosed in pages 1 to 19 of the Annual Reports Paper Book. In the significant accounting policies and notes on accounts under the heading "Companies Overview", it has been mentioned as under:- "Infinite Systems Pvt. Ltd ("IDS" or "Company") was incorporated on 26th September, 2006. The company is wholly owned subsidiary of Infinite Computer Solutions (India) Ltd. It provides solution which encompass technical consultation, design and development of software, maintenance, systems integration, implementation, testing and infrastructure management services." 10.1.2. The ld AR argued that the ld TPO in assessee"s case had applied Related Party Transaction (RPT) filter of 25% i.e. the ld TPO had accepted a comparable company to have related party transaction with its associated enterprises upto the maximum of 25% of the transactions. The ld AR argued that in the instant case, Infinite Data Services Pvt. Ltd has rendered services to Fuj....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t be compared with that of the assessee. The ld DR submitted that as per section 92B(1) of the Act, an international transaction means a transaction between two or more associated enterprises either or both of them should be non-resident. In the case of Infinite Data Services Pvt. Ltd, its associated enterprise is Infinite Computer Solutions India Ltd (holding company), which is also an Indian entity. Hence, both the comparable company as well as its holding company are Indian resident entities. The ld DR drew our attention to the provisions of section 92B(2) of the Act and also explanatory notes in the form of CBDT Circular No. 14/2001 and the amended provision of section 92B(2) of Finance Act, 2014 for which corresponding Circular No. 1/2015 dated 21.01.2015 was issued by CBDT. The ld DR argued that considering the intention behind introduction of transfer pricing provisions and also considering the fact that both the comparable company as well as its holding company are Indian resident entities, the provisions of section 92B(2) of the Act having deeming fiction cannot be made applicable to the facts of the instant case. With regard to the decision relied upon by the ld AR in the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tity which is a holding company of the comparable company) does not fall within the ambit of definition of international transaction as per section 92B(1) and 92B(2) of the Act. The logical conclusion then would be that the said comparable would become automatically outside the scope of comparability per se. Hence, even as per the Rule i.e. 10B(2) the said comparable company cannot be treated as comparable with the assessee and deserves to be excluded. 10.2. Exclusion of E-Infochips Bangalore Ltd The assessee pleaded that the said company is Information Technology (software development) and information technology enables services (ITES) i.e. BPO services company. Hence, it was pleaded that the said company is not functionally comparable with that of the assessee company which is only into software development. The Annual Report of the said comparable company for the year ended on 31.03.2010 is enclosed at pages 20 to 37 of the Annual Reports Paper Book. The assessee pleaded that as per the notes of accounts of the said comparable from audited financial statements, it had shown earnings in foreign currency as under:- Particulars 31.03.2010 31.03.2009 Software Devel....
X X X X Extracts X X X X
X X X X Extracts X X X X
....onsultation of manufacturing EVM and VDM electronic board etc. Further it was held that the comparable has varied revenue mix i.e. earning revenue from software development, hardware maintenance and information technology consultancy services. It was further observed that no segmental information was available in the Annual Report of the company as it records revenue from sales of products and revenue from software development and hence the margins from software development services alone could not be deduced and the impact of the revenue from software production on overall profit from the common pool of income from both streams of software products and software services could also not be deduced. It is pertinent to note that this order of the tribunal was upheld by the Hon'ble Jurisdictional High Court in ITA No. 515/2017 dated 18.07.2017, wherein, the Hon'ble High Court did not allow the question raised by the revenue to exclude E-Infochips Bangalore Ltd from the list of comparable companies for software development companies and upheld the factual findings of the tribunal. 10.2.4. Per contra, the ld DR referred to the Annual Report of the said comparable company and drew our ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e assessee. 10.3. Exclusion of Sonata Software Ltd As stated earlier, the ld. TPO had applied related party transaction (RPT) filter up to 25% to include the particular comparable. The ld TPO for the instant case had applied RPT filter upto 25% for both the expenses and income side in aggregate. Accordingly, the entire expenses and income side vis a vis the transactions of the comparable company with its related parties are as under:- Nature of related party transaction Amount (in INR) Purchase 24,293,864 Deputation expenses 110,782,495 Service charges 130,664,264 Services rendered 1,005,194,944 Living / sustenance allowance 43,555,884 Travelling expenses 6,542,614 Total related party transactions (A) 1,321,034,065 Service revenue (B) 2,360,942,195 RPT as a % of sales (A/B) 55.95% 10.3.1. The Annual Report for the year ended 31.03.2010 of Sonata Software Ltd from where the aforesaid figures could be verified is enclosed in pages 38 to 122 of the Annual Reports Paper Book. This fact was also pointed out by the assessee before the ld TPO. But the ld TPO ignored the components of services rendered of 100.51 crores an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e conspicuously absent in the assessee company. Further the ld. AR submitted that Infosys Ltd is also into diversified activities having diversified products. The total revenue earned by Infosys from products was Rs. 925 crores for the relevant year. The ld AR before us though conceded that having higher turnover may not be a relevant consideration for the purposes of ignoring a particular comparable company, further pleaded that the fact of existence of the said comparable company in the IT field for almost three decades would certainly given them an edge in the overall pricing of the services to be rendered and for the software products developed by them. This would certainly make the assessee company incomparable with Infosys. 10.4.1. Per contra, the ld DR submitted that the assessee did not object to the inclusion of L&T Infotech Ltd having turnover Rs. 1800 crores approximately and Mindtree Consultancy having turnover of Rs. 1232 crores approximately. Even these two companies are in the field for more than two decades and enjoying huge brand value and economies of scale and always would have edge over the pricing. The ld DR vehemently relied on the comparison chart made by ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... AY 2010-11. Respectfully following the said decisions, we hold that Infosys Ltd should not be treated as a comparable with low risk Captive Service Provider like that of the assessee company. Accordingly, we direct the ld AO/ TPO to exclude Infosys Ltd from the final set of comparables while benchmarking the international transaction of software development segment. 10.5. Exclusion of Thirdware Solution Ltd The copy of the Annual Report of this comparable company for the year ended 31.03.2010 is enclosed in pages 361 to 420 of the Annual Reports Paper Book. This company is engaged in software product development, implementation and consulting services of software based on ERP and Business Intelligence. The ld AR pleaded that the said company is functionally dissimilar with the assessee company. We find from the audited financial statements in Schedule 12 under the head "sales", the said comparable company has derived revenue from subscription, sales of license, software services amongst others. This goes to prove that this comparable company is selling software products license apart from software services and on perusal of the audited financial statement containing the segm....
X X X X Extracts X X X X
X X X X Extracts X X X X
....benchmarking international transaction of software development segment of the assessee. 10.6 Exclusion of Persistent Systems Ltd 10.6.1 Persistent Systems Ltd is engaged in the business of development and sale of software products. The audited financial statements of this comparable company for the year ended on 31.03.2010 are enclosed in pages 421 to 600 of the Annual Report Paper Book. In the Annual Report of the said company it has been mentioned that the said comparable company had released 3000 plus products in the last five years and catered to 300 customers across the globe. Further, Outsourced Software Products Development (OPD) is being developed by this comparable company and this comparable is a clear leader in the world of OPD, an emerging category in the outsourced software industry. The Annual Report of the said comparable company also categorically states that OPD is completely different from outsourced IT service. The Annual Report clearly goes to prove that the said comparable is into the business of software products apart from software development and their focus is more on product development. The revenue model of the said comparable company clearly shows ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... subsequent to the decision relied by the ld DR which was rendered on 28.09.2020. Further, we also find that this Tribunal in the case of Saxo India Pvt. Ltd Vs. ACIT in ITA No. 6148/Del/2015 dated 05.02.2016 had categorically held that Persistent Systems Ltd is functionally different from a regular software service provider and there was insufficient segmental information with regard to sale of software services and sale of software products. It is pertinent to note that the revenue had carried this matter before the Hon'ble Jurisdictional High Court and Hon'ble Delhi High Court in ITA 682/2016 dated 28.09.2016 had upheld the findings of the Tribunal. Further, the Hon'ble Delhi High Court in the case of PCIT Vs. Open Solutions Software Services Pvt. Ltd in ITA No. 201/2018 dated 18.05.2020 had also held that Persistent Systems Ltd had upheld findings of the Tribunal which held this comparable company is predominantly engaged in the product development and hence cannot be compared with routine software services provider. Further, the Tribunal had also held that segmental data is not available in the public domain. This finding of the Tribunal has been upheld by the Hon'....
X X X X Extracts X X X X
X X X X Extracts X X X X
....serving client of more than 8 industries across the globe with over 2000 professionals on board. The product engineering services/ outsourced product development services of this company include the product design and development, product feature enhancement, product volume migration, software product testing, product maintenance and support, produce release and license management, SAAS/ SOA services, Web 2.0 services etc; enterprises application development services include customer relationship management, enterprises resource planning, business intelligence, knowledge management, enterprises application integration, consulting etc; ID Services include global offshore software development, custom software development/ bespoke software development, intelligent software testing RIA/ AJAX application development etc and technology expertise of this company include the technology competency centre in relation to Microsoft Competency Centre, Sun Java Competency Centre, Open Source Competency Centre, Cloud Computing practice, mobility practice and BI practice. Accordingly, this Tribunal have concluded that this comparable company is rendering product development services and high end t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ics. Your Company has identified new business in defence and public safety, avionics and utilities and smartgrid applications which should drive its future growth. Innovation Design Engineering Services: This Division supports global corporations in the area of new brand/product introduction from concept to market. Its expertise lies in the areas of consumer insights, product/service innovation, industrial design, functional prototyping and engineering. It also engages in brand development and retail design. It services diverse industries ranging from FMCG, automotive, electronics and appliances to healthcare. During the year, the Division entered into an alliance with a leading hospital to jointly develop innovative healthcare devices with an emphasis on user and functional efficiencies: It also further strengthened its range of services in the areas of branding, signages and virtual marketing. It was involved in the creation of the marketing content for the launch of a new vehicle for one of India's leading automotive companies and also won a significant order for signages and graphic design from a metro transport operator. This is a testimony of th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....software and services and reducing its dependence on pure hardware business. The segment has geared itself to tap business opportunities in the high growth areas of security and surveillance, videoconferencing solutions, storage and server virtualization software and services etc." 10.8.1. The revenue stream indicates that this comparable had earned income from sales and support of Rs. 3167.51 lacs and income from service of Rs. 35469.53 lacs for the year under consideration. However, segmental data is available in the software development and services vide note 29 of the Notes of accounts. The ld DR drew our attention to the Director's report in page 663 of the Annual Report Paper Book and submitted that this company is predominantly a software development company and that the other activities carried out by the company is only 10% of total revenue and software development services constitutes 90% of the total revenue. The ld DR relied on the decision of the Delhi Tribunal in the case of Toluna India Pvt. Ltd. VS. ACIT (2014) 151 ITD 177 which is rendered for AY 2007- 08 dated 26.08.2014 wherein, it was held in para 20.2 that this company is functionally comparable with the sof....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ervices rendered by the assessee. 13. We have heard the rival submissions and perused the materials available on record. During the financial year 2009-10, the assessee provided Business Support Services amounting to Rs. 7,82,10,694/- to its associated enterprise. The company provides low end back-office administrative support services to its AEs. These services primarily include procurement support activities to its AEs for sourcing automotive components from India and other countries. In this respect, the assessee maintains contact and product details of various suppliers of automotive components in India as well as overseas, and provides these details to its AEs on the basis of which the AEs contact its vendors/suppliers and enter into discussions for sourcing components directly from such vendors. The assessee is not involved in the transaction between the AE and the supplier at all, and does not secure orders or negotiate on behalf of its AES. It only provides basic preliminary information about the vendors to its AES. The assessee also provides payroll support for its employees sent on secondment to its AES. Additionally, the assessee renders other administrative support a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rprise, Apitco Ltd was established to provide high end and technical consultancy services to other Govt. Companies and body corporate. This company was also involved in high end technical consultancy related to asset reconstruction and management services, micro enterprises development, skill development, entrepreneurship development, cluster development among other activities. The financial statements of Apitco Ltd for the year ended on 31.03.2010 are enclosed in pages 709 to 746 in Annual Report Paper Book. There is absolutely no dispute that this comparable company is a Govt. company and is subjected to audit and review by Comptroller and Auditor General (C&AG) of India u/s 619(4) of the Companies Act, 1956. This fact goes to prove that the said comparable is indeed a Govt. Company. Now the short issue that arises is whether a Govt. company could be considered as a comparable company with that of the private ITES service provider. It is a known fact that Govt enterprises operate on a model of zero risk with no profit intent, hence, the Govt. company cannot be compared with the private enterprises. This issue is no longer res integra in view of the decision of the Hon'ble Jurisdi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the 100% government owned companies namely ECIL and ITDCL as its comparables but that was not accepted by the TPO or the DRP. The reason for the ITAT excluding Apitco as a comparable is also for the same reason that it was a 100% government owned company. 11. The Court finds that the view taken by the ITAT in the present case, which is consistent with the view expressed by the Mumbai Bench of the ITAT and which has been affirmed by the Bombay High Court, is indeed a plausible one to take. 12. Whether taking up a 100% government owned company as a c would be justified or not would depend on the facts and circumstances of the case. The basic rule as contained in Rule 10B of the Income Tax Rules would apply. In the facts of the present case, however, the Court finds tha the view taken by the ITAT does not give rise to any substantial question of law. 13. The appeal is dismissed." 18.1. It is also pertinent to note that against this decision, the revenue carried the matter before the Hon'ble Supreme Court and the Special Leave Petition in Civil Appeal No. 18255/2018 dated 03.07.2018 was dismissed by the Apex Court. 18.1.1. Per contra, the ld DR veh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cy Services Ltd. The audited financial statements of this comparable company for the year ended 31.03.2010 are enclosed in pages 547 to 912 of the Annual Report Paper Book. From the perusal of the same, it is found that the said company provides wide range of services in diversified fields such as corporate, industry, banking and the Govt. The nature of services provides by this comparable company varies from the power project to even serving entrepreneurs from small and medium enterprises in their startup efforts. This company is more into EPC consultancy services for 12 cogen power plants along with concurrent sugar factory modernization of Tamil Nadu Electricity Board; EPC consultancy services and Environment clearance for two integrated sugar, cogen power & ethanol plants in Bihar for Hindustan Petroleum Corporation Ltd., a major public sector client; Successful commissioning of 8 MW cogen power plant of Kranti SSK & 16 MW Cogen power plant of Yashwantrao Mohite Krishna SSK; Introduction of additional business lines like ESCo, Conditioning & Monitoring, Wind Resource Assessment & Micro sitting, Carbon Foot Printing etc.; Start of project management consultancy services for S....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f the assessee herein. Accordingly, we direct the ld AO/ TPO to exclude this comparable company from the final list of comparables while benchmarking the international transaction of the assessee in respect of its ITES segment. 18.4. Exclusion of HCCA Business The audited financial statements of this comparable company for the year ended 31.03.2010 are enclosed in pages 913 to 931 of the Annual Report Paper Book. From the perusal of the same, the activities carried out by the said comparable company are not discernable at all. Functions performed by the assessee company is not discernable from the information available in the public domain such as audited financial statements. Then it would not be appropriate on the part of the ld AO/ TPO to refer to the information contained in the website of the comparable company. We find from the perusal of the ld TPO order, the assessee had provided information about the functions performed by the said comparable company based on the data available in the website of the comparable company. In principle, we do not uphold the view of placing reliance on any information that is available in the website of the company as it may not depict th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ompany under the control of Govt. of India. As we have already held that the Govt company cannot be compared with the private concern like that of the assessee, we hold that this comparable company had been rightly excluded by the ld TPO. 18.7. With these above observations the grounds Nos. 3, 3.1 and 3.2 raised by the assessee are disposed of in the above mentioned terms. 19. Ground No. 4 and 4.1 raised by the assessee are challenging the transfer pricing adjustment of Rs. 63,30,719/- to the ALP of international transaction undertaken in relation to manufacturing segment of the assessee. 19.1. We have heard the rival submissions and perused the materials available on record. We find that the ld AO/ TPO pursuant to the directions of the ld DRP had arrived at the final set of comparables in the manufacturing segment of the assessee and after granting working capital adjustment thereon as under:- SNo Name of the company Companies considered after DRP OP/OI (WC adjusted) 1 A N G Industries Ltd. 6.37% 2 Banco Products (India) Ltd. 20.36% 3 Precision Camshafts Ltd. 20.13% 4 Rane Engine Valve Ltd. 4.71% 5 Roots Industries India ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....+ transportation cost/interest cost/profit margin or the cost of manufactured in case the tools were manufactured by the AE." 20.2. The assessee placed 3rd party purchase order in page 353 of the PB. The assessee also filed copy of invoice of Tata Motors Ltd and back to back invoice raised by Delphi Automotive System, LLC before the Ld. DRP. The Ld. DRP directed the Ld. TPO to reconsider the issue after examining the documents filed by the assessee. This fact is evident from para 15.3 of the directions of the Ld. DRP. We find that the Ld. AO/TPO passed the order without adhering to the said binding directions of the DRP by stating that the same evidence was furnished before the Ld. TPO in the original proceedings and that no new fact or evidence has been brought on record by the assessee. 20.3. At the outset, we find that the Ld. TPO had not referred to any of the prescribed methods in section 92C of the Act to determine the ALP of international transaction in respect of import of fixed assets to be at Rs. Nil. The Ld. TPO is bound to follow any of the prescribed six methods as the most appropriate method for benchmarking the international transactions of the assessee. Withou....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d that the Ld. TPO is not permitted to recharacterize actual transaction of accounts receivable from AEs into loan given to AE so as to impute notional interest income. Further, assessee argued that working capital adjustment has been given by the TPO for the outstanding receivable from AE. Hence, the interest costs which is sought to be imputed gets subsumed in the working capital adjustment itself. Hence, there is no need for separate imputation of interest on outstanding receivables. Reliance was placed on the decision of the Hon'ble Jurisdictional High Court in the case of Pr. CIT vs. Kusum Healthcare Pvt. Ltd. in ITA No.765/2016 dated 25.04.2017 reported in 398 ITR 66. 21.3. The ld AR before us filed an application before us in terms of Rule 29 of the Income Tax Appellate Tribunal Rules, 1963 furnishing the following details:- a. Details in respect of realization of invoices raised during the year by the assessee in the business support services segment; b. Details in respect of realization of invoices outstanding as on 01.04.2009 from the AEs; and c. Details of amounts payable to the AEs as on 31.03.2010. 21.4. The ld AR prayed for admission o....