TaxTMI 
TaxTMI 
2023 (12) TMI 20
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....als)-21 (the Learned CIT (A)) have erred in determining the arm's length mark-up for provision of software support, development and related services at 26.21% and consequently making an addition of Rs. 2,21,07.342/- to the total income of the Appellant as an adjustment to the arm's length price under Section 92CA of the Act. The Appellant prays that the aforesaid adjustment be deleted. 2. On the facts and circumstances of the case and in law, the Hon'ble CIT(A) erred in upholding the decision of the Learned AO in: 2.1 Rejecting the Transfer Pricing (TP) documentation prepared by the Appellant as required under the provisions of the Act and the Income-tax Rules, 1962 (the Rules): 2.2 Rejecting the methodical search process and comparability analysis carried out by the Appellant in the TP documentation without providing any cogent reasons, 2.3 Arbitrarily including companies in the comparability analysis which are functionally different from the Appellant. Further the Learned ACY's approach is erred on account of following grounds: 2.3.1 Adhoc selection/rejection of comparables based on incorrect interpretation of ....
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....related services; and (c) reimbursement of expenses; and (d) recovery of expenses. The grounds raised in the present appeal pertain to the transfer pricing adjustment made in relation to the provision of software support, development and related services by the Appellant to its Associated Enterprises (AEs). 3.1. During the assessment proceedings, the Assessing Officer noted that in the transfer pricing documentation as maintained by the Appellant, for the international transaction pertaining to provision of software support, development and related services were aggregated together and benchmarked using the Transactional Net Margin Method (TNMM) as the most appropriate method with Net Operating Profit on Cost (for short 'NCP') as the Profit Level Indicator (PLI). As per the search carried out by the Appellant for comparable companies that perform a similar function and carried a risk profile similar to that of the Appellant, arm's length NCP was 6.65%, as against Appellant's NCP of 9.99 percent. Thus, before the Assessing Officer it was contended by the Appellant the international transaction pertaining to provision of software support, development and related services w....
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....of the hearing and the submission filed before CIT(A) forming part of the paper-book. Per Contra, Learned Departmental Representative relied upon supported the Transfer Pricing Adjustment and relied upon the order passed by the Assessing Officer and the CIT(A). 4.1. We note that in paragraph 5.1 of the Assessment Order, the Assessing Officer has tabulated the objections/submissions of the Appellant submitted vide letter dated 20/03/2013. Similarly, in perusal of the order passed by the CIT(A) we note that in paragraph 4.4 of the order impugned, the CIT(A) has recorded the summary of submission made by the Appellant on selection of comparables, the comments received from the Assessing Officer and the conclusion drawn by the CIT(A). We have also taken the same into consideration along with the Appellant's contentions as summarized in the chart submitted and the arguments advanced by both the sides. 5. The Appellant has sought exclusion of 11 comparables on the ground that the same are large turnover companies having turnover much higher in comparison to that of the Appellant which stood at INR 14.98 Crores during the relevant previous year. In support, the Learned Authorised Re....
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....ents between Appellants and its Associates. It is further submitted that assessee is remunerated on a cost + 10% mark up. According to the A.R., Ld. Assessing Officer has not properly appreciated the fact of comparable cases relied upon the appellant where profit margin is only of 6.65% whereas appellant has shown OP @ 9.9% on TNMM method. Assessing Officer had not refer the case to the TPO and has made adjustment on the basis of 21 comparable cases. The written submission of the appellant against the additional comparable selected by the Assessing Officer is as under:- S. No. Name of the Company Reasons given by the AO Summary of Appellant's Arguments 1 - 5 xx xx Xx 6 I-Gate Solutions Limited The company has only one segment namely software development Engaged in a single segment of information technology and IT enabled operations offshore outsourcing solutions and services to large and medium-sized organizations using an offshore/onsite model. Segmental information not available, Page 48 of the Annual Report for the FY 2009- 10 states that the company is engaged in three distinct activities, but for the purpose of reporting the financials, t....
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....t relating to software development and services includes embedded product design services, industrial design and engineering (IDE) as well as animation and visual effects. Company has also invested in in-house R&D to enable creation of Intellectual Property and technology expertise in areas such as multimedia, networking, WIMAX, Mobile TV, semiconductors and storage. The ratio of intangibles to total gross fixed assets is 16 percent. The ratio of intangibles to total gross fixed assets is 16 percent. High margin 13 xx xx Xx 14 Wipro Limited The primary source of income is from IT services The Company is operating under three segments during the year, namely, Global IT services and products, (comprising of IT services and products and BPO services segment). However, the IT services segment selected by the Ld AO also includes BPO services, research services for hardware design. The company owns significant brand intangible that has contributed to the immense growth of the company. Further, it may be pertinent to note that Wipro has been rejected by the Ld Commissioner of Income Tax (Appeals)- 15 on the ground tha....
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....ce profit this company, irrespective being company be considered for reviewing as to whether profit shown prefixed is genuine one or not. Of course profit margin of Infosys technology cannot be compare with because that company has also developed proprietary products which is given license basis. However, KALS Information similar business activities like development of software support services, data management and services. Similarly, LGS also engaged in technology enabled services which dependent upon product Systems be compared extent as this company is also engaged in support services software products. Of course Softsol India Ltd. is having business of sale of software, hence to some extent, the case not comparable, but the fact that this company has also earned income for providing related services, hence same cannot be ignored to review that profit margin such business cannot be as low shown by the appellant. Similar is fact the case of Tata Elxi Ltd. and Thirdware Solutions Ltd. Both these companies are also doing software related services. The case of Wipro Ltd. may be slightly different but one cannot afford ignore that profit such line of business cannot be low shown by ....
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.... results were not available. Therefore, Persistent Systems Limited should be excluded from the list of comparables. We note that similar objections were raised by the Appellant before CIT(A). Therefore, taking a view consistent with the view taken in the above decision by the Tribunal, we conclude that the reasons stated hereinabove, Persistent Systems Limited cannot be taken as a comparable and therefore, the same is excluded from the final set of comparables. iGate Global Solutions Ltd., Tata Elxsi Ltd, and LGS Global Limited 5.5. As regards, iGate Global Solutions Ltd., Tata Elxsi Ltd, and LGS Global Limited we note that the CIT(A) has not dealt with the objections raised by the Appellant while the Assessing Officer had included the same given the reasoning that the primary source of income is from software development. Therefore, we deem it appropriate to remand the issue of exclusion of the aforesaid comparable back to the file of the Assessing Officer. Mindtree Limited, R Systems Ltd., Sasken Technologies Ltd., Sonata Software Limited & Aricent Technology 5.6. As regards, balance 5 comparables (namely Mindtree Limited, R Systems Ltd., Sasken Technologies Ltd., Son....
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....as, vide order dated 30/09/2016 passed in ITA No. 1685/Mum/2013 pertaining to Assessment Year 2009-10, held as under: "17. We have considered the submissions of the parties and perused the material available on record. The primary and fundamental reason for which the assessee seeks exclusion of this companies it is involved in product development and segmental details are not available. In the notes to the financial statement under Schedule-18, it has been stated that the company derives its revenue from software services and software products, whereas, on a perusal of the Profit & Loss account for financial year 2008-09, we do not find any segmental details of the revenue earned from software services and software products. Thus, in absence of segmental details of the revenue earned, the company cannot be treated as comparable to the assessee. For these reasons also, the Co-ordinate Bench of the Tribunal in the decisions cited by the learned Authorised Representative have rejected this company as a comparable. As these decisions are for the very same assessment year and the learned Departmental Representative has not brought to our notice any material difference in factua....
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....ng for each of the activities. We have further noted that for the reason that the aforesaid company is involved in product development the Tribunal in the decisions relied upon by the learned Authorised Representative has excluded this company as a comparable. As these decisions of the Tribunal are for the very same assessment year, respectfully following the consistent view of the Tribunal in case of other assessees, we exclude this company as a comparable." 6.5. On perusal of the financial statements of the relevant previous year (placed at page 431 to 501 of the paper-book) we find that there is no change in the segmental reporting made by this company for the relevant previous year the company is stated to be operational in only one segment namely software development, which involves providing open and end-to-end web solutions, Off-shore Data Management, Data Warehousing, software consultancy, design and development of solutions, using the latest technologies. Concurring with the reasoning given by the Tribunal for excluding this company as a comparable in the case of the Appellant for the Assessment Year 2009-10, we direct the Assessing Officer to exclude Bodhtree Consultin....
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....ers, this company was engaged in providing on-site services which made it functionally different. The TPO observed that on-site development expenses were less than 50% of total expenses and hence, it was not a significant factor. He, therefore, proceeded to include it in the list of comparables. The DRP directed the TPO to take only the IT service segment of this company as comparable. The assessee is aggrieved by this direction of the DRP incorporated in the final assessment order. 12. Having heard both the sides and gone through the relevant material on record, we find that the Annual report of this company is available at page 353 onwards of the paper book. Information regarding segmental reporting has been given at pages 376 and 377 of the paper book. There are only three segments, namely, (a) Engineering Design Services, (b) Information Technology Services and (c) Health care. Pursuant to the direction of the DRP, the TPO has included only Information Technology Services segment in the final set of comparables. Directors' report of this company records that "the company is uniquely placed with readymade Software products to cater to the needs of Hospitals and Healthca....
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....d. 6.10. On perusal of the 28th Annual Report 2009-10 of Softsol India Limited (placed at page 1046 to 1116 of the paper-book), we find that in Note 1 forming part of Notes to Financial Statements the nature of business of this company is recorded as under: "Note: 1-Nature of Business SoftSol Resources, Inc. (the "Company" or "SRI") was incorporated in the state of California on January 11, 1993. It is a provider of E- commerce, network technology, internet infrastructure and other special technology areas. Its IT services include application development, system integration, IT consulting and staffing, IT project management, domestic and offshore outsourcing. SoftSol has diverse client-based ranging from large customers to small high-tech start-up companies. The Company's vision is to create a global enterprise by taking a leading role in the revolution in Information Technology to provide highly competent and innovative software solutions." 6.11. Further, on perusal of consolidated Profit & Loss Account, we find that entire income has been recorded under the head software exports and no bifurcation or details of the same have been provided. It is stated....