TaxTMI 
TaxTMI 
2024 (10) TMI 765
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.... the Act. 2. ITA No. 5553/Del/2011 was preferred 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....
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....ength Price concerning the international transactions undertaken by the appellant/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 Alc....
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....ani is a software development and consulting company. A notice under Section 133 (6) of the Act was issued to Avani. Avani replied to the said notice and the TPO found that it qualified the filters as applicable and therefore 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 ....
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....essee company does not indulge in any R&D." 19. The TPO rejected the objections raised by the appellant regarding inclusion of Avani as a functionally comparable entity. 20. The TPO relied solely on the information as available on the website of Avani; information and data 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 rega....
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....s and services to organizations in different verticals like financial services, insurance solutions, etc. Simply because the company does not have any operations in the telecommunication space does not make it non comparable with the assessee. TNMM as a method allows broad product comparability and significant functional comparability. In fact among all the methods TNMM is the method which allows more liberty 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 unde....
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....n the assumption that Avani is not a product company but is engaged in software development for its clients / customers. He referred to the images taken from the website of Avani, which indicated to the contrary. 26. The learned counsel for the assessee also referred to the earlier decision of the Tribunal in Infogain India (P.) Ltd. v. Deputy Commissioner of Income Tax, Circle 11(1), New Delhi: [2020] 116 taxmann.com 386 (Delhi - Trib.). However, the said decision 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....
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....zations/Web Portals the ability to bundle XML requests to multiple suppliers in a single request, aggregate and consume XML or any form of online data from suppliers. For suppliers, DXchange enables them to expose their Inventory System /CRS as OTA compliant Web Services in a costs effective and secure manner giving them a wider reach. Additionally, it can support other standards with minimal customization. DXchange is available in three versions: Lite, Professional and Enterprise. It is platform Independent and can connect to heterogeneous systems. It 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 ....
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....s like blog, broadcast, forums, and other means of sharing information. CMS Travel Portal It is totally customizable solution for small to large enterprises/portals to launch their web sites as quickly and as cost efficiently as possible. An ideal implementation of this system would be the front-end system to a booking engine. The CMS can be used to update marketing content on a day-to-day or a weekly basis. CMS Destination Portal It is a templated solution which allows you to manage your destination content with rich media. It has built-in modules to display complete information about the destination allowing the users to have a more complete view of what destination is, what are the destination's values, easily 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....
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....ide data to consumers in accordance with the travel industry's ever-changing business requirements without any programming or code changes. This provides an ability to visually manage and control the flow of information flowing to the customer and the agility to insert complex pricing and markup strategies." 28. Avani's website clearly indicated that one of its products DXchange is available in three versions. The software is to be hosted on the customers' site and its revenue model is the annual licence fee model. Avani's Content Management System is also available in four separate versions. The TPO had disregarded the information available on the website of Avani on the assumption that Avani's response was to the contrary. The TPO had reasoned that the information available on the website may not be relevant to the financial year 2006-07 and may contain forward 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 no....
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....unts of this company, a copy of which is available on record, that albeit it is a pure software development service provider, but, is utilizing its own softwares in rendering such services. The Tribunal in Motorola Solutions India Pvt. Ltd., has held this company to be incomparable by accepting the assessee's contention that the high operating margins of this company were on account of difference in its asset base. It is further relevant to note that this company, apart from rendering software development services, is also engaged into the sale of software products and the accounts maintained by it are on entity level without there being any segregation for software development segment. As the TPO has considered the entity level figures of this company for making a comparison with the assessee company, such a course of action cannot be permitted because of the inclusion of profit from sale of software 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 ....
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.... the case of Telcordia Technologies India (P.) Ltd. (supra) also supports the plea of the assessee. Therefore, the plea of the assessee to reject this company as a comparable is accepted. Following the earlier orders of this Tribunal, the Assessing Officer/TPO is directed to exclude this company from the list of comparable for determining the ALR. 36. It is not denied that the Tribunal has also followed the same decision in other cases as well. 37. 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. However, it appears that the Tribunal has not considered the same. 38. It is also material to note that in Infogain India (P) Ltd. v. Deputy Commissioner of Income Tax, Circle 11(1), New Delhi (supra) the Tribunal had noted that the annual report of Avani shows that the company derives its revenue from both software development services 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 inclus....
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....y the TPO." 40. It is also relevant to refer to the TPO's order dated 28.10.2010 in the case of ADIPL. The relevant extract of the said order rejecting the appellant's contention to not include Ishir as a comparable entity is reproduced below: "45. Ishir Infotech Ltd.: The arguments put-forth by the assessee are data contemporaneously not available and functionally not comparable. Regarding contemporaneous availability of data, already the TPO has given detailed submission. 46. The argument that the use of contemporaneous data should be resorted to is correct. The specified date itself is the due date of filing of return of income. The databases would have uploaded all the audited financial statements of the companies within 31st October every year. The AGM has to be held within 6 months of closing of the financial year. Within 30 days of holding the AGM, the audited financial statements have to be filed before ROC. It is based on the audited financial statements submitted 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 go....
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....ther vendors/service providers. The DRP and the Tribunal erred in brushing aside this vital difference by observing that outsourcing was common in ITeS industry and the same would not have a bearing on profitability. Plainly, a business model where services are rendered by employing own employees and using one's own infrastructure would have a different cost structure as compared to a business model where services are outsourced. There was no material for the Tribunal to conclude that the outsourcing of services by Vishal would have no bearing on the profitability of the said entity." 42. The impugned order does not clearly address the challenge raised by the appellant. The Tribunal accepted the contention that Ishir is a comparable entity as it does not fail the employee cost filter as per the annual report. The relevant extract of the impugned decision is as under: "Ishir Infotech Ltd. 24. The assessee contended that the comparable fails the employee cost filter as per annual report. However, the information provided u/s 133 (6) clears the employee filter." 43. The question whether the business model is different and therefore Ishir would not be an app....
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....ied onsite revenue filter wherein the companies whose onsite revenues exceed 75% of export revenues are rejected as comparable. The TPO proposed to apply this filter in the show cause notice. In response, the taxpayer objected to this filter on the ground that the information of the off shore and on site income is not available in the public domain. The assessee has also objected to this filter on the ground that the software industry is a mix of onsite and offshore entities. The assessee claims that onsite work is part and parcel of the software industry and this distinction should not be made. As discussed under the head "industry overview of software services sector", the business dynamics of onsite and offshore varies a lot. For the sake of clarity, the relevant portion of "industry overview of software services sector" is summarized as under:- a) The Indian software sector provides both on-site and offshore services. b) The Indian vendors have succeeded in raising the share of offshore revenue from 44% in 2000-0l to 64% in 2003-04 and to 71 % in 2004-05. c) There is a substantial rate difference between the ON SITE and OFFSHORE projects/ con....
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....ed to inclusion of Tata Elxsi Limited (hereafter Tata) and Sasken Communication Technologies Limited (hereafter Sasken) as comparable entities. According to appellant, its challenge to the inclusion of the said companies as comparable entities has not been adjudicated by the Tribunal. The appellant had also filed miscellaneous applications before the Tribunal praying that its challenge to inclusion of the said companies as comparable entities be adjudicated. It is relevant to refer to the appellant's challenge to inclusion of the said companies as set out in the miscellaneous applications filed by the appellant before the Tribunal. Paragraph 6 of both the applications (which are similarly worded) filed by the assessee is relevant and is set out below: "6. Non adjudication of the following grounds of appeal raised by the applicant: 6.1. Ground of appeal no. 1.9: including certain companies that are not comparable to Applicant in terms of functions performed, assets employed and risk assumed: During the course of hearing, the Applicant contested exclusion of comparables and submitted detailed contentions against each of such companies in comparable chart fi....
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....ed in creation of IP. • Reliance on judicial precedents: The Applicant has placed reliance on the decisions of Infogain India Pvt. Ltd. (ITA No. 5870/ Del/2011) (Kindly refer page 23-25, para 34-36) and Magma Design Automation India Pvt. Ltd (ITA No. 1214/Bang/2011) (Kindly refer page 12) which have been mention in SI. No. 24 of the comparable chart (Annexure B) and also highlighted in written submission filed on 31.03.2021 (Annexure C): The Hon'ble Tribunal while passing the order inadvertently did not adjudicate upon inclusion/exclusion of Tata Elxsi in the final set of comparable companies. To this extent there appears to be a mistake apparent from record which deserves to be corrected. b. Detailed contentions against inclusion of Sasken Communication Technologies Limited Applicant made submissions against inclusion of Sasken Communication Technologies Ltd. during course of hearing and also filed contentions as part of written submission (Annexure C) and comparable chart (Annexure B): * Functionally different: Applicant highlighted functional dissimilarity in comparable chart as part of Applicant's contention. (Kindly refer SI....