TaxTMI 
TaxTMI 
2024 (10) TMI 765
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....rred by the appellant impugning the assessment of income of Alcatel Lucent Technologies India Pvt. Ltd. (hereafter ALTIPL) for the AY 2007-08. 3. The appellant preferred ITA No. 5554/Del/2011 impugning the assessment of income of Alcatel Development India Pvt. Ltd. (hereafter ADIPL) for the AY 2007-08. Both the aforementioned companies - ALTIPL and ADIPL have since merged with the appellant. 4. The controversy involved in these appeals relates to the enhancement of total income chargeable to tax on the basis of orders passed by the Transfer Pricing Officer (hereafter the TPO). ALTIPL and ADIPL [hereafter also referred to as the assessee(s)] adopted the Transactional Net Margin Method (hereafter TNMM) with the ratio of operating profit (OP) to costs as the Profit Level Indicator (PLI) for determining the arm's length price (ALP) in respect of transactions of the assessees with their associate enterprises (hereafter also referred to as AEs). The TPO rejected the Transfer Pricing Studies furnished by the assessees and determined the ALP on the basis of filters selected certain uncontrolled comparable entities for determining the PLI on arm's length basis. In the case of ALTIPL, the ....
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....llant/assessee with an Associated Enterprise? (ii) Whether the Tribunal misdirected itself both on facts and in law in not including the comparable Akshay Software Technologies Limited in determining the Arm's Length Price concerning the international transaction undertaken by the appellant/assessee with an Associated Enterprise? (iii) Whether the Tribunal misdirected itself on facts and in law in failing to adjudicate the contentions of the appellant/assessee with regard to the exclusion of the following comparable companies: Tata Elxsi Limited and Sasken Communication Technologies Limited?" QUESTION NO. (I) AVANI CINCOM TECHNOLOGIES LIMITED 14. According to the appellant, the TPO had erred in including Avani Cincom Technologies Ltd. (hereafter Avani) as a comparable for the purpose of determining the operating profit margin for determining the ALP adjustment. It is the appellant's case that Avani is not functionally comparable to ADIPL/ALTIPL. 15. ADIPL was originally incorporated as a private limited company on 03.03.1998. At the time of incorporation it was named as Alcatel Development Center Chennai Private Limited till the financial year 2002-03. ADIPL is a softwa....
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.... proposed its name as a comparable entity. The asseesees objected to the same on the ground that Avani's functional and risk profit was not similar to their profiles. The assessees claimed that Avani is a product company and owned products like DX change, Travel Solutions, Insurance Solution, Customer Appreciation and Relationship Management Application (CARMA), Content Management Systems etc. According to the assessees, Avani had not provided the details of its revenue and profit, segment wise. Therefore, on the basis of its annual reports, it was not possible to determine the quantum of revenue and its profit margin relating to the software development business to the exclusion of the revenues from products developed by the company. The appellant relied on the information that was available on the website of Avani. The relevant extract of the objections furnished by the appellant in respect of Avani, as set out in the order dated 26.10.2010 passed by the TPO under Section 92CA (3) of the Act, is reproduced below: "1. Avani Cimcon. Technologies Ltd ('Avani Technologies') In the Notice, your good self has proposed to include Avani Technologies as a comparable to the software de....
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....available in its annual report; and the response of Avani to the notice issued under Section 133 (6) of the Act. The relevant extract of the order dated 26.10.2010 passed by the TPO is set out below: "The company's main argument is that the company is into software products and segmental results are not available. In this regard, the taxpayer tried to rely upon the content available in the website. It is very pertinent to mention here that the TPO did not rely on the information available in websites as the information contained in the websites may not contain information relevant to the FY 2006-07 and may also contain many forward looking statements. Thus, the TPO relied only on the information / data available in the annual report combined with the information collected, if any, from the company. So, the TPO need not comment on what is available on the website of the company. In regard to software products, the company in its reply as under categorically stated that the company is a purely software development company. 2. Software Development Process: We are Pure Software Development Service provider and Software Description is attached as per Exhibit-3. 3. Descriptio....
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....in choosing the comparables in that significant product diversity and functional diversity is allowed under TNMM. TPO also verified R&D expenses as a percentage of sale of the company in Prowess database. It was found that the company has no expenditure on R&D activity during the year. The TPO also went into the income and expenditure statement in Prowess, no expenditure on account of R&D or product development activity is debited in the profit and loss account. Hence this company can be considered as a functionally comparable company for comparability analysis." 22. The DRP vide its order dated 23.09.2011 in the case of ADIPL also rejected the assessee's objection in regard to inclusion of Avani, solely by referring to the reply furnished by Avani to the notice issued under Section 133 (6) of the Act. The relevant extract of the observations of the DRP in respect of the appellant's objections reads as under: "S.No. Name of the company Reasons given by TPO Assessee's Comments OP/TC (%) Comments ** ** ** ** ** ** 2. Avani Cimcon Technologies Ltd This company does not develop any product. Does not agree with TPO 50.29% Company in reply u/s 133 (6) stated that i....
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....cision was completely overlooked as is apparent from the plain reading of the orders dated 26.10.2010 and 28.10.2010 passed by the TPO in respect of ALTIPL and ADIPL respectively. The TPO had not accepted that Avani was functionally dissimilar to the appellant on the assumption that Avani is engaged in software development for its clients. In its order dated 26.10.2010 (in the case of ALTIPL), the TPO had referred to the profit and loss account of Avani and noted that it did not "indicate any presence of software products". It had noted that the income of Avani for the financial year ended 31.03.2007 was Rs. 3,64,27,306/- which included earnings from software exports in foreign currency of Rs. 3,54,77,523/-. Accordingly, the TPO had concluded that 97% income of Avani was from software development and not from sale of software products. 27. It is clear from the profit and loss account of Avani that its entire income from operations was Rs. 3,54,77,523/-(which included income from its software products). In addition to this income, Avani had also earned interest on deposit with banks amounting to Rs. 7,70,376/-; subsidy of Rs. 1,06,064/-; and, profit on sale of investment of Rs. 64,....
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....t is hosted at the customer's site and is sold as an annual license fees model, instead of transaction based fees / commissions model, DXchange is available on net and Java platforms. With CARMA one can create template-based multilingual campaigns with repeated periodic scheduling. These can be sent off in the form of Email, Print (PDF, Bulk print). It is backed up by an ergonomic and well-organized content management system and a full-fledged compliance workflow. It also adds web presence for individual campaigns by adding web-extensions to the campaigns. To sum-up and analyze the outcome of these campaigns there is a powerful comprehensive reporting and analytics module that provides immediate feedback to measure success and improve future marketing initiatives. Use of our solutions optimizes the effectiveness and cost-efficiency with which a company delivers critical messages to customers and prospects. These, reduces marketing costs, allows users to quickly and effectively identify and target most profitable customers and prospects; allows implementation of customers retention strategies, helps in building relationships and create linked business networks. Content Managem....
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....ily find places to stay, what to do, what activities are there, property-wise web pages, brochures, tickets and loads of information modules about the destination. It provides a complete travel experience to the users and allows them to navigate and book their entire travel package with the travel products available with for sell, like airlines, hotels, vehicles, restaurants and excursions. Having a continuously updated website is a mandatory requirement to survive and grow in the dynamic highly competitive environment of the travel industry. But at the same time keeping content continuously updated is expensive and time consuming. CMS not only facilitates content management, but also gives you independent and full control of your website right from the simple ones to the most complicated. Booking Engine Avani Cimcon Technologies offers a complete XML web services based booking engine for Hotels, Vehicles, Restaurants, Airlines and Excursions. It is easy to use, highly scalable and flexible. It can be easily integrated with the website/CMS. It can be integrated with multiple inventory systems through our middleware server DXchange. It can also access inventory of other vendor....
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....rd looking statements but Avani's response to the notice under Section 133 (6) of the Act was unambiguous. 29. Avani in its response to the notice under Section 133 (6) of the Act had stated that it was a "Pure Software Development Service Provider". However, this statement cannot be construed to mean that Avani does not sell software products developed by it. The point is not whether Avani is a software development company but whether it develops customised software for each of its companies on sells/licences software, products, developed by it, to its customers. 30. The response of Avani to the notice under Section 133 (6) of the Act is not available on record. However, the relevant extract of the same has been quoted in the order dated 26.10.2010. 31. It is also clear that no specific explanation was sought from Avani regarding the products mentioned on its website. The TPO proceeded only on the basis that the same may not be relevant without ascertaining whether the products as mentioned by Avani on its website were, in fact, sold /licensed during the financial year 2006-07. 32. The DRP also proceeded on the same basis without specifically addressing the appellant's objecti....
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....ware products into the overall profitability of this company. Neither separate profits are available, nor there is any measure provided for segregating profit on sale of software products from the overall profit of this company for finding out a comparable segment similar with that of the assessee company. As the profits of the software development portion cannot be ascertained, we hold that it cannot be considered as comparable on entity level. We, therefore, order for the exclusion of this company from the final set of comparables." 55. Respectfully following the same, we direct the Assessing Officer/TPO for exclusion of this company from the final set of comparables." 34. As is apparent from the above, in its decision in Infogain India (P) Ltd. v. Deputy Commissioner of Income Tax, Circle 11(1), New Delhi (supra), the Tribunal had referred to its earlier decision in Global Logic India (P.) Ltd. v. Asstt. CIT: [2015] 56 taxmann.com 159/69 SOT 57 (URO) (Delhi - Trib.) as well. 35. In Softbrands India (P) Ltd. v. Deputy Commissioner of Income-tax, Circle 12(3), Bangalore: [2016] 73 taxmann.com 231 (Bangalore-Trib.) as well, the Tribunal had accepted similar contention as advanc....
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....ices and sale of software products. In view of the above, the TPO and the Tribunal, have erred in not excluding the Avani as a comparable entity for the purpose of determining the ALP. ISHIR INFOTECH LTD. 39. The assessees objected to the inclusion of Ishir Infotech Ltd. (hereafter Ishir) as a comparable entity on two grounds. First, that it had failed the employee cost filter. The TPO issued a notice under Section 133 (6) of the Act to the said company and based on the information received in response thereto, had determined that it not only qualified the 25% employee cost filter but other filters as well. The relevant extract of the TPO's order dated 26.10.2010 is set out below: "14.4.12 Ishir Infotech Ltd The company was not finding place in the accept/ reject matrix of the taxpayer. But, the company's data was available in the Capitaline database. Based on the data available in Capitaline database, the company failed 25% employee cost filter. Like all other cases, the companies which failed employee cost filter were also examined further. However, as the annual report and other information were not available for the FY 2006-07, notice U/s 133 (6) was issued to the com....
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....tted before the ROC, the databases upload the data. Hence the assessee can very well adhere to the Rule of contemporaneous data as prescribed by the Rules. The argument of the assessee may hold good in the earlier years of Transfer Pricing audit conducted by the assessee, since in the earlier years in many instances data was not available for the current year in the case of most of the comparables. Over the years the databases also have been more regular in uploading the data so that financial statements of all listed companies and some of the unlisted companies are available to the general public (people associated with the stock exchanges who use the data frequently and assessee's and TPO's who do TP audit). 47. The company provides application development, software development, product development, software testing etc. According to the web site of the assessee 48. Our software development and outsourcing services offer complete product life cycle solutions as an extension to our clients engineering team. We accelerate the creation of software products, reduce product marketing time and assist in making schedules more predictable. Considering these functions this com....
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....ed u/s 133 (6) clears the employee filter." 43. The question whether the business model is different and therefore Ishir would not be an appropriate comparable uncontrolled entity has not been considered by the Tribunal. As noted above, the decision in the case of Infogain India (P) Ltd. v. Deputy Commissioner of Income Tax, Circle 11(1), New Delhi (supra) was cited before the Tribunal but the same has not been alluded to by the Tribunal, as well. 44. In view of the above, the impugned order insofar as it rejects the appellant's challenge to inclusion of Ishir as a comparable entity, is erroneous. In view of the above question no. (i) is answered in favour of the appellant and against the Revenue. QUESTION NO.(II) 45. The next question to be addressed is whether the Tribunal had misdirected itself in not directing inclusion of M/s Akshay Software Technologies Ltd. (hereafter Akshay) as a comparable uncontrolled entity for determining the ALP. 46. It is the asseessee's case that Akshay is compliant with all the filters chosen by the TPO and the decision to exclude the same from consideration was unjustified. The TPO found that Akshay has more than 75% of its revenue from onsite....
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.... c) There is a substantial rate difference between the ON SITE and OFFSHORE projects/ contracts. As per the industry reports (source: Annual report of Mphasis BFL FY 2004-05) in the year 2004-05 average rate per man hour in the case of offshore projects was US$18, whereas the same was considerably higher in the case of ONSITE projects at about US$66 per man hour. The profit margins also accordingly vary significantly; the offshore projects have much higher margins. The reasons for the same lie in the fact that while in the case of OFFSHORE projects most of the costs are incurred in India; an ONSITE project has to be carried out abroad significantly increasing the employee cost and other costs. The Indian companies have therefore been slowly moving towards the OFFSHORE work more and more." 47. The Tribunal rejected the appellant's claim for including Akshay as a comparable entity on the ground that Akshay did not meet the revenue filter or the export turnover filter. The appellant states that the same is factually incorrect as Akshay does comply with the revenue filter as well as the export filer. This is because its export turnover to total sales was 79.23%, which was in exces....
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....s against each of such companies in comparable chart filed on 13.01.2021 by email and relied upon during the course of hearing on 22nd March 2021 (Copy of comparable chart filed on 13.01.2021 is enclosed as Annexure B). Applicant also submitted written submission by email on 31.03.2021, as directed by Hon'ble Members at the time of hearing (Written submission filed by email on 31.03.2021 is enclosed as Annexure C) However, in the order, the Hon'ble Tribunal has inadvertently not adjudicated upon exclusion of two comparables, i.e. Tata Elxsi Limited ("Tata Elxsi") and Sasken Communication Technologies Limited ("Sasken") on account of functional dissimilarity. 6.2. Applicant's contentions for exclusion of Tata and Sasken are provided in the ensuing paragraphs for ready reference a. Detailed contentions against inclusion of Tata Elxsi Applicant made submissions against inclusion of Tata Elxsi during the course of hearing and also filed contentions as part of written submission (Annexure C) and comparable chart (Annexure B): * * Functionally non-comparable to the Applicant: Applicant highlighted functional dissimilarity and drew attention to relevant pages of audited financi....
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....s highlighted that the company was engaged in diverse services including complex IC design, hardware design, board support packages and modem solutions, silicon platform services, handset technology services. network and test lab services etc. * Owns significant intangibles: Applicant highlighted significant intangibles in comparable chart as part or Applicant's contention. Kindly refer SI. No. 22 of Annexure B wherein Pg. 985 of Annual Report compilation is also highlighted. Kindly refer Pages 126-127 or appeal set wherein this aspect has been highlighted as part or DRP objections. * Extraordinary year of operations: Applicant highlighted acquisition of 100% stake in Integrated Softech Solutions Pvt. Ltd. and the said company was merged into Sasken. The second acquisition was that of Botnia Hightech and its subsidiaries based in Finland in written submission (Pg. 8 of Annexure C) by highlighting 917 of Annual Report Paperbook, in comparable chart (SI. No. 22 of Annexure B), and also as part of DRP objections (Pg. 127 of Appeal set) * Reliance on judicial precedents: The Applicant has placed reliance on the decisions of lnfogain India Pvt. Ltd. (ITA No. 5870/Del/2011) (Kindly....