TaxTMI 
TaxTMI 
2020 (4) TMI 913
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.... circumstances of die case and in law, the learned Transfer Pricing Officer ("learned TPO) and consequently the learned AO on the directions of die Hon'ble Dispute Resolution Panel ("DRP") has erred in computing the arm's length price of international transaction and confirming the adjustment of Rs. 2,05,78,185 to the appellant's total income based on the provisions of Chapter X of the Act and therefore, to die extent of additions/disallowances made by die learned AO, die order of die learned AO is bad in law and needs to be annulled. 2. No motive to avoid tax avoid tax as it is a STPl Unit 2.1 On facts and in die circumstances of die case and in law, the appellant is a STPI unit registered widi die Software Technology Parks of India claiming tax holiday under section 10A of die Act, hence diere is no motive to avoid tax. 2.2 On facts and in the circumstances of die case and in law, appellant has no motive to avoid tax as it is an STPI Unit entided to Income-tax holiday under section IDA of die Act and therefore transfer pricing provisions under Chapter X of the Act ought not to be invoked. 3. Cherry picking of companies by the learned TPO and inappropriate ....
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....e development and services. The assessee filed its return of income for assessment year 2011-12 on 27-09-2011 declaring total income at Rs.1,08,180/-. The assessee also claimed deduction u/s 10A of Rs.1,56,66,131/- from Software Technology Park of India (STPI) unit. The assessee, while filing return of income, furnished report u/s 3CEB. In the report u/s 3CEB, the assessee reported international transaction about software development and support services to its associated enterprises (AE). Consequent upon reporting international transaction, the assessing officer made reference to transfer pricing officer (TPO), for computation of arm's length price (ALP). The TPO, while considering the ALP determined by assessee with regard to the international transaction with its two associate enterprises (AEs), noted that the assessee provided software development and support services fee, Varian Medical Service System International AG, and Varian Medical System Inc. USA of Rs.10.49 crores each. The assessee benchmarked its transaction by selecting transaction net margin method (TNMM) as most appropriate method. The assessee treated itself as tested party. The assessee claimed its profit level ....
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....aft assessment order. The draft assessment order was served upon the assessee on 12-03-2015. The assessee exercised its option for filing objection before Dispute Resolution Panel (DRP). The DRP, vide its direction dated 14-12-2015 directed to exclude e-Zest Solution and Sankya Infotech Ltd from the list of comparables and with regard to correctness of PLI (OP/OC) of comparables directed to take correct PLI of comparable. Accordingly, as per the direction of DRP the computation of arms lengths price adjustment was worked out at Rs. 2,05,78,185/- in the final assessment order dated 27.01.2016 passed under section 143(3) rws 144C(13). Aggrieved by the additions / adjustments on ALP with regard to the transaction with its AE, the assessee filed this appeal before us. 5. We have heard the submission of Ld.AR of the assessee and the Ld. DR for the revenue. The Ld.AR of the assessee submits that he has a very limited submission with regard to the exclusion of six comparables and inclusion of one comparable for final set of comparables. The Ld. AR for assessee submits that Infosys Ltd , Wipro Technology Services Ltd, e-Infochips Ltd, Zylog Systems Ltd, Sasken Communication Technologies L....
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.... delivery of technology, infrastructure services and application development and maintenance of service for a period of six years. This company is managing to earn more than the industry average and has a very difficult risk profile and, therefore, is not comparable with the assessee which is capital service provider. This comparable was excluded by Tribunal in following cases:- * Saxo India Private Ltd vs ACIT - ITA No.6148/Del/2015, * Pr.CIT Delhi vs Saxo India Private Ltd - ITA No.682/2016 C.M. Appl.3574-35746/2016 Delhi High Court, * Aithent Technologies Pvt. Ltd - ITA No.1286/Del/2017, * Mobileum (India) Pvt Ltd (Formerly known as Roamware India Pvt Ltd- IT(TP)A 945 & 2047Mum/2016, * Aithent Technologies Pvt. Ltd ITA No.1286/Del/2017 & ITA No.1020/Del/2017, * Mobileum (India) Pvt Ltd (Formerly known as Roamware India Pvt Ltd- IT(TP)A 945 & 2047Mum/2016, * St.Ericcson India Pvt Ltd vs ACIT,Cir.24(2) ITA 6247/Del/12015, * Aircom International India Pvt. Ltd vs Dy.CIT ITA No.222/Del/2015, * Ness Technologies (India) Private Ltd ITA No.696/Mum/2016 For exclusion of e-Inforchips Ltd 9. The Ld.AR for assessee submits that this company is engaged in manufacturing....
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....nfrastructure. This comparable owned IPs. Turnover of this company is Rs. 349 Crore, which more than 19 times of assessee's turnover which is only Rs. 20 Crore. It has high turnover comparable to assessee. This comparable was rejected by Tribunal and Delhi High Court in the following cases:- * Alcatel Lucent India Ltd vs DCIT ITANo. 6856/Del/2015 * Pr CIT vs Alcatel Lucent India Ltd ITA 515/2017 HIGH COURT OF DELHI * Aithent Technologies Pvt. Ltd - ITA No.1286/Del/2017 * ST.Ericcson India Pvt Ltd vs ACIT,Cir.24(2) ITA 6247/Del/12015 * Electronic Imaging India Pvt. Ltd vs DCIT - ITA No.1506/Bang/2016 For exclusion of Persistent Systems Ltd 12. The Ld.AR of the assessee submits that this comparable company has huge intangibles. It has made investment in intellectual property rights and providing software product. No segmental date is available in the annual report and having huge turnover. In support of his submission, the Ld.AR relied upon the following decisions:- * Saxo India Private Limited vs ACIT ITANo.6148/Del/2015 * Pr.CIT Delhi vs Saxo India Private Ltd - ITA No.682/2016 * C.M. Appl.3574-35746/2016 Delhi High Court * Alcatel Lucent India Ltd vs DCIT ITAN....
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....ftware and Exports Limited. The Ground No. 16 raised by the assessee is with regard to the comparable chosen by the assessee but rejected by the ld TPO in respect of CG-VAL Software and Exports Limited. The ld. TPO rejected this comparable stating that it is engaged into medical transcriptions which is different from the assessee and hence not functionally comparable. The ld. AR argued that the company is engaged in the business of software services and also into medical transcription and that for the purpose of comparability, the assessee had only used the date for software segment of the said company. He referred to the relevant pages in the annual report of the said company in support of his contentions and pleaded that the same be included in the list of comparables while computing the arm's length margin. We find that in Asst Year 2010-11 in assessee's own case, the ld TPO had accepted the said company as functionally comparable but had finally rejected on the ground that it was incurring persistent losses during the said time*. It was also pleaded at that time that if the forex gain is treated as part of operating revenue, then the said company's operating margin ....
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....is tribunal. Accordingly, the Ground No. 16 raised by the assessee is allowed for statistical purposes." (* under line by us) 14. Considering the decision of tribunal that this comparable is not consistent loss making as it had made profit in the relevant assessment year, hence, we direct the TPO/AO to include this comparable in the final set of comparable. 15. Infosys Ltd. This comparable company was accepted as a comparable by TPO. As we have noted of the learned AR of the assessee submit that this comparable could not be regarded as a good comparable because it has substantial R&D intangible patents, tremendous brand value attached to image. It is a great company and high turnover which is around 1200 times of sales of assessee. The TPO rejected the contention of assessee by taking with it turnover is a favourite tool used by assessee for rejection of comparable, which is not tenable as high turnover may not impact the profitability of company. Similarly DRP also took the view that turnover does not have an impact on the margin of the company. Further, creation of brand value is not on account of marketing expenses but because of superior service provided by the company an....
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....lf accepted the fact that the said concern is engaged in software products. Apart therefrom, it is quite well understood that Infosys has a brand image which is quite incomparable to the assessee before us, which is wholly acting as a captive service provider for its associated enterprises. In this view of the matter, it is quite evident that the said concern cannot be compared to an assessee who is undertaking pure software development services as a captive service provider. 9.4 At the time of hearing, Ld. Representative for the assessee had also pointed out that the said concern was excluded by the DRP itself in the case of the assessee for the earlier assessment year of 2010-11 on account of its functional profile being different, against which the Department has not preferred any appeal to the Tribunal. It is therefore, contended that in the absence of any change in facts, the DRP ought to have rejected the said concern in this year too. 9.5 In our considered opinion, qualitatively speaking, the activities undertaken by M/s.E-Infochips Limited are not comparable to the pure software development services undertaken by the assessee as a captive service provider to its assoc....
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....rival submissions and perusing the relevant material on record, we find that the Annual report of this company is available in the paper book with its Profit and loss account at page 1025. Schedule of Income indicates its operating revenue from software development, hardware maintenance, information technology, consultancy etc. Revenue from hardware maintenance stands at Rs. 3.92 crore, which has been considered by the Transfer Pricing Officer himself as sale of products. Such sale of products constitutes 15% of total revenue. There is no segmental information available as regards the revenue from sale of products and revenue from software development segment. As the assessee is simply engaged in rendering software development services and there is no sale of any software products, this company, in our considered opinion, ceases to be comparable. It is obvious that from the common pool of income from both the streams of software products and software services, one cannot deduce the revenue from software services and no one knows the impact of revenue from Products on the overall kitty of profit, which may be significant. Since no segmental data of this company is available indicati....
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.... figures for the purposes of making comparison. Since such entity level figures contain revenue from both software services and software products, as against the assessee only providing software services, we are disinclined to treat this company as comparable. The assessee's contention is accepted on this issue "(vii) Wipro Technology Services Ltd. 16.1 The assessee objected to the inclusion of this company in the list of comparables by arguing that apart from this company being functionally different and the availability of insufficient segmental information, there were also significant related party transactions. The TPO did not accept the assessee's contention of the related party transactions and proceeded to include it in the final set of comparables. 16.2 We have heard the rival submissions. Page 57 of the TPO's order is reproduction of the assessee's contention about the related party transactions as under :- "Wipro Technology Services Limited (formerly Citi Technology Services Limited) ('the Company') was incorporated on 15 September, 2004. The entire share capital of the Company was held by Citicorp Banking Corporation, a company incorpo....
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....he enterprises other than the associated enterprises. Section 92B(2) provides that: 'A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise'. On going through the prescription of sub-section (2) of section 92B, it is clearly borne out that a transaction with a non-AE shall be deemed to be a transaction entered into between two AEs if there exists a prior agreement in relation to the relevant transaction between the third person and the AE or the terms of the relevant transaction are determined in substance between the third person and the AE. When we consider section 92B(2) in combination with Rule 10A(a), it follows that the transaction between non-AEs shall be construed as a transaction between two AEs, if there exists a prior agreement in relation to the releva....