TaxTMI 
TaxTMI 
2022 (7) TMI 1579
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.... B. Transfer Pricing 2. That on facts and in the circumstances of the case, the learned AO/ Assistant Commissioner of Income-tax (Transfer Pricing) - 1(1)(2), Bangalore (learned TPO), erred in making an upward adjustment to the transfer price of the Appellant's international transactions of INR 37,976,187 in respect of software development services, INR 411,198 in respect of data center services and INR 6,346,182 in respect of marketing support services. The learned DRP erred in further enhancing the adjustment in respect of Appellant's marketing support service segment to INR 10,339,660, and confirming the adjustments in respect of software development services and data center services segments at INR 35,111,149 and INR 411,198 respectively. 3. That on the facts and in the circumstances of the case, the learned Panel/ learned TPO erred in rejecting the segmental financial information as provided by the Appellant and reallocating the "other expenses" between the Software development services, Marketing and support services and Data center services segments on the basis of revenue by disregarding the documents/ information submitted by the Appellant before....
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....an 75% of the total sales. 6. Selecting comparable companies having significant onsite activities without appreciating the differences in the functionality of such companies vis-à-vis the Assessee. 7. Not providing adjustment for the differences in working capital of the Appellant and the comparable companies selected for each of the three segments. 8. Not providing suitable adjustment to account for differences in the risk profile of the Appellant vis- a-vis the comparable companies selected for each of the three segments. 9. That the learned Panel/ learned TPO erred in not considering certain expenses/income while computing the operating mark-up on cost of the comparable companies on the premise that these are not the routine operating costs, in doing so the learned Panel/ learned TPO failed to provide any cogent reason to substantiate their findings.. (Tax effect: INR 4,58,62,307) Grounds for software development services 10. On the fact and in the circumstances of the case and in law, with respect to adjustment to the transfer price of the software development services, the learned DRP/AO/ TPO erred in: ....
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....arned Panel (Tax Effect: INR 1,03-39,660) Grounds for data center services 14. On the fact and in the circumstances of the case and in law, with respect to adjustment to the transfer price of the data center services, the learned DRP/AO/ TPO erred in: 14.1. Re-characterising the transaction pertaining to provision of data center services as Information Technology enabled Services (ITeS') and rejected the comparability analysis undertaken by the Assessee in its TP documentation. 14.2. Without prejudice to the above ground 15.1, including the following companies even though they are functionally different from operational profile of the Appellant: a) Cross Domain Solutions Pvt. Ltd. b) AGS Health Pvt. Ltd. c) Infosys BPO Ltd. d) SPI Technologies India Pvt. Ltd e) Excel Infoways Ltd f) E-Care India Pvt. Ltd. 14.3. Without prejudice to the above ground 15.1, including the following company at entity level and not segmental level: a) BNR Udyog Ltd 14.4. Without prejudice to the above ground 15.1, excluding the following companies even though they are function....
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....O observed that, the assessee had international transaction exceeding Rs. 15 crores, and accordingly, referred the case to the transfer pricing officer to determine the arms length price. 3.3 On receipt of the reference, the Ld.TPO called for the economic details of the international transaction in form 3CEB. From the details filed, the Ld.TPO observed that assessee performed following functions for its associated enterprises. "2. FUNCTIONAL ANALYSIS OF THE TAXPAYER 2.1. Blue Coat India is the subsidiary of Blue Coat Systems BV, Netherlands, which in turn is a subsidiary of Blue Coat US. Pursuant to a Research and Development Services agreement ("SWD Agreement") effective April 1, 2013, executed between Blue Coat Switzer and Blue Coat India, Blue Coat India provides software development services in relation to Blue Coat Switzerland's products. Blue Coat India provides certain software services which include software architectural analysis and design, engineering design and documentation, programming, testing, debugging and product sustaining engineering. Blue Coat India develops and designs the software with characteristics specified by Bl....
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.... and d) Recovery of restructuring costs." 3.4 The Ld.TPO noted that the following were the international transactions undertaken by the assessee. Particulars Amt (Recd) Method Software Development Services 8,96,18,197 TNMM Marketing Support Services 13,66,10,710 TNMM Data Center Services 55,21,397 TNMM Recovery of Restructuring costs 1,90,28,483 CUP Total 25,07,78,787 3.5 The Ld.TPO observed that assessee had computed its margin under the 3 segments as under: Particulars Software Development Services Marketing Support Services Data Center Services Total Operating and Other Expenses 37,47,298 4,31,67,861 18,08,058 4,87,23,217 Operating Profit (A)-(B) 1,16,89,330 1,24,19,157 5,01,945 2,46,10,432 Operating Profit / Total Cost 15.00% 10.00% 10.00% 3.6 Following are the details of the comparables selected by the assessee under the two segments: SWD Segment Sl.No. Name of the Company Wt. Avg (%) 1. New-Age Bizsoft Solutions Pvt. Ltd. -1.03% 2. Akshay Software Technologies Ltd. 3.34% 3. Helios & Matheson IT (B....
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....as selected more appropriate filter as discussed below. 7 Companies with net worth less than zero implying companies which have eroded their net worth and hence are not comparable were rejected. This is an appropriate filter. 8 Companies with ratio of the sum of advertising marketing and distribution expenses to sales less than 3% were selected, thereby resulting in identification of comparables that do not have ownership of marketing intangibles This is an inappropriate filter 9 Software Development companies clearing the quantitative criteria were analysed the qualitatively to select functionally comparable companies. A subjective filter. To be seen on a case to case basis. 10 Segments having data for at least one out of the three financial years under consideration This is an inappropriate filter. The TPO has selected more appropriate filter as discussed below. 11 Segments classified under the service industry This is an appropriate filter. 12 Companies that had average sales of less than 1 INR crore were eliminated. This is an appropriate filter. 13 Software Development segments of companies clearing the quantitative c....
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....ctionally comparable companies. This is an appropriate filter. 8 Segments having data for at least one out of the three financial years under consideration This is an inappropriate filter. The TPO has selected more appropriate filter as discussed below. 9 Segments classified under the service industry This is an appropriate filter. 3.8 The Ld.TPO treated the foreign exchange gains / loss as operating in nature and computed the margins of assessee under the 3 segments as under: Particulars Software Development Services Marketing Support Services Data Center Services Total Operating Profit (A)-(B) -1,05,57,970 1,59,61,802 7,08,470 61,12,302 Operating Profit / Total Cost -10.54% 13.23% 14.72% 3.9 The Ld.TPO selected the following comparables for SWD and ITES as under: SWD Sl.No. Company Name Financial Year wise OP/OC (%) 2014-15 2013-14 2012-13 Average 1 Kals Information Systems Ltd 5.77 16.94 13.51 11.88 2 E-Zest Solutions Ltd 12.59 15.8o Fails Export Filter 14.05 3 CG-VAK Software & Exports Ltd. 19.87 13.81 22.07 18.50 4 T....
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....96,18,197 Shortfall being adjustment ALP-OR 3,79,76,187 ITeS SEGMENT Particulars Formula Amount Taxpayers operating revenue OR 55,21,397 Taxpayers operating cost OC 48,12,927 Taxpayers operating profit OP 7,08,470 Taxpayers PLI PLI=OP/OC 14.72% 35th Percentile Margin of 18.81% Adjustment Required (if PLI< 35th Percentile) Yes Median Margin of comparable set M 23.27% Arm's Length Price ALP=(1+M)* OC 59,32,895 Price Received OR 55,21,397 Shortfall being adjustment ALP-OR 4,11,498 3.11 The Ld.TPO subsequently observed that, the assessee applied TNMM as the most appropriate method for marketing support service segment and computed its margin at 10%. Assessee selected the comparables that had the weighted median margins at 7.33% by using OP/OC as PLI. Sl. No Name of the Company Wt. Avg (%) 1 Fusion Events Pvt. Ltd. 6.81% 2 Majestic Research Services & Solutions Ltd. 9.16% 3 MCI Management India Pvt. Ltd. 5.49% 4 Showhouse Event Management Pvt Ltd 7.37% 5 Netscribes India Pvt. Ltd. 8.61% 6 Competent....
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....6,187 2 ITeS segment 4,11,498 3 MSS Segment 63,46,182 Total adjustment u/s 92CA 4,47,33,867 3.14 On receipt of the transfer pricing order under 92CA, the Ld.AO passed the draft assessment order on 05/12/2018 by making further additions along with the adjustment proposed u/s. 92CA, being disallowance on account of addition made to fixed assets Rs.6,20,971/-. 3.15 Against the draft assessment order, the assessee filed objections before the DRP. DRP upheld the adjustment proposed by the Ld.TPO. 3.16 On receipt of the DRP directions, the Ld.AO passed the impugned order by incorporating the additions proposed in the draft assessment order. 3.17 Aggrieved by the order of Ld.AO, the assessee filed the present appeal before this Tribunal. 4. At the outset, the Ld.AR submitted that Ground nos. 1 & 2 are general in nature. 5. Ground nos. 5 & 6 are not pressed. 6. Ground no. 7 - Assessee is seeking working capital adjustment in this ground. 7. Ground nos. 8-10 are general in nature and therefore not pressed. 8. Ground no. 10 entirely is not pressed and is only seeking to argue the additional ground no. 17. 9. Ground no. 12 is also not pres....
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....,28,483/- as operating in nature, and recomputed the PLI of the various segments. We have perused the TP order, we note that there is no specific discussion on this issue. In the circumstances, we consider it appropriate to direct the TPO, not to treat the above restructuring cost as operating cost, if he had given such treatment in the computation of PLI. Accordingly, the PLI may be recomputed, if need be. This objection is accordingly disposed." 13.5 We note that the directions of the DRP has not been followed by the Ld.TPO. The Ld.TPO is directed to pass the order in consonance with the directions of the DRP as per the sub clause (13) to section 144C of the Act. We therefore direct the Ld.TPO/Assessing Officer to consider this issue in accordance with the directions of DRP. Accordingly this ground raised by the assessee stands allowed for statistical purposes. 14. The assessee in additional ground no. 17 and 12.1 is seeking exclusion of certain comparables on turnover filter as well as dissimilarity in functions. 15. Before we undertake the comparability analysis it is sinequa non to understand the FAR of the assessee under SWD and MSS. SWD Functions Blue Co....
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....e Coat Switzerland and hence does not bear any risk on account of any liability arising in terms of product or technology. It does not bear warranty costs or risks relating to contract enforceability or any other similar risks, since it renders its software development services for captive utilization by Blue Coat Switzerland and its role is only to develop certain software for the ultimate product(s) of Blue Coat Switzerland. Blue Coat Switzerland contracts with the customers and bears the product liability risk for the sale of its products / licenses to the customers. Technology Risk: This risk arises if the market in which the company operates in is sensitive to introduction of new products and technologies. Hence, business units may face loss of potential revenues due to inefficiencies arising from obsolete infrastructure and tools as well as obsolescence of processes. Blue Coat India does not bear any risk in this regard because it operates as a captive service provider, and is remunerated on the basis of costs incurred by it plus an agreed mark-up. Blue Coat Switzerland being the entrepreneur bears the risks with respect to the technology obsolescence or int....
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....e in a market. etc. Blue Coat India does not have direct exposure to market risk as it renders marketing support services to facilitate Blue Coat Group's sales in India. Further the compensation model of Blue Coat India ensures a return for its services as it is compensated on a cost plus pre-determined mark-up basis and is compensated for the services provided, irrespective of the success or failure of its activities or the volume and product mix of sales. Since Blue Coat Switzerland's revenues depend on the market for networking hardware and software, Blue Coat Switzerland bears market risk within their respective territories. Contract Risk: This risk arises if the contracting entity is unable to fulfil the terms of contract entered into with third party. Blue Coat India does not take part in negotiations with the prospective Indian clients and thus bears no contract risk. All negotiations and terms of sale of the products and services are carried out independently by Blue Coat Switzerland with prospective Indian clients. Further, the sales contracts are entered into with the customers by Blue Coat Switzerland directly or through channel partners. Produc....
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....at India in its local currency it takes the risk associated with the exchange rate fluctuations. Warranty and liability risk: Risks associated with product/service failures including non-performance to generally accepted or regulatory standards. This could result in product recalls and possible injuries to end- users. Blue Coat India does not take any warranty or Service liability risks as it does not carry out any sales activity on its own account and thus does not contract with third party customers also. Blue Coat Switzerland contracts with customers for sale of Blue Coat US products and thus bears ultimate responsibility for any warranty and product liability risk incurred for sales of Blue Coat US's products. Characterisation Based on the functional profile, assets utilised and the risks borne, as documented in the above analysis, for transfer pricing purposes, it is possible to characterise Blue Coat India as a captive contract service provider providing software development services, being a contract service provider, Blue Coat India is risk insulated for the provision of software development services. With regard to marketing support services, Blue Coat I....
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.... that Ld.AO/TPO has applied filter of more than Rs.1 crore, but did not put an upper limit to the filter. This Tribunal in case of Genesis Integrating Systems India Pvt Ltd vs DCIT reported in (2012) 53 SOT 159 and various other decisions have held that, companies having turnover in excess of Rs.200 crores cannot be compared with companies having turnover less than Rs.200 crore. This preposition has been accepted by Hon'ble Bombay High Court in case of CIT vs Pentair Water Pvt.Ltd., by order dated 16/09/2015 in ITA No. 18/2015. Hon'ble Court upheld rejection of companies having turnover holding that turnover is a relevant factor in considering comparability of companies. 39. Objection raised by Ld.CIT.DR has been dealt with by this Tribunal in case of Autodesk India Pvt.Ltd. vs DCIT in (2018) 96 taxmann.com 263 for assessment year 2005-06. This Tribunal reviewed gamut of case laws to consider, whether companies having turnover more than Rs.200 crores should be regarded as comparable with a company having turnover less than 200 crore. This Tribunal held as under: "17.7 We have considered the rival submissions. The substantial question of law (Question No.1 ....
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....Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India (P.) Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co-ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon'ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon'ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us ITA No.2573/Bang/2019 cannot be the basis to hold that high t....
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.... This Tribunal observed that, the said company was having multiple segments and cannot be compared with a captive service provider. The relevant observation of this Tribunal in the case of Zynga Game Network India (P.) Ltd. (supra), are as follows:- "43. We have perused submissions advanced by both sides in light of records placed before us. It is observed that the annual report of this company categorises the diversify services provided by this company under software development segment. We also note that this company is basically into application development for web and mobile and provides customised services to its offshore clients comprising. Entire revenue received by this comparable ease under one single segment of sale of software. This company also owns software licenses. 44. In our considered opinion this comparable cannot be considered to be functioning in 100% risk mitigated environment and is a full-fledged enterprise. Such a comparable cannot be compared with a captive service provider like assessee. Accordingly we direct this comparable to be excluded from finalist." 17.3 The assessee therein was a captive service provider to its AE for a....
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....s onsite and offshore model. It is also contended that the said company has also income from power generation. It was stated that bifurcation of revenue from both software and power generation services is not provided in the annual report. The Ld.AR also had contended that the said company fails RPT filter. The Ld.AR had took us through the abridged balance sheet of Aspire Systems (I.) Pvt.Ltd., to contend that the said company is not merely into the software development services, but has multifarious activities and cannot be compared to the assessee. 19.2 The Ld.DR supported the findings of the TPO/DRP. 19.3 We have heard rival submissions and perused the material on record. 19.4 On perusal of the annual report of Aspire Systems (I.) Pvt. Ltd., it is seen that the said company is an outsourced technology service company. It is also stated that, there is income from power generation. Since the profit and loss account of the assessee company is not enclosed, we are not in a position to examine the observation of the DRP that, this comparable is a pure software development service provider. Therefore, in the facts of the instant case, we deem it appropriate to restore the is....
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....ed to take into account the differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction]; (f)...... (2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely :- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective par....
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....stain the market. 21.1.3 We find that "Killick" is engaged in acting as agent for various foreign principals for sale of dredgers, dredging equipment, steerable rudder propellers, maritime and aviation lighting, acoustic communication equipment etc. and sales services. Apart from this, the company is involved in exports of micro switches, engineering items, acoustics items & headsets. It is engaged in the business of marine equipment like specialized propulsion systems, marine engines, industrial & marine gear boxes, ballast water treatment system, special purpose sea going vessels, industrial & marine exhaust system, ship lighting & navigation lighting systems, dredges and dredge equipment, ship building presses, rescue boats and specialized davits, reverse osmosis water systems and special acoustic communication equipment for defence. "Killick" provides after sales services for the equipment's supplied by its principals. 21.1.4 Whereas, the assessee is involved in corporate services and market research & business development. The corporate service includes assisting the day-to-day management of the organization (e.g. finance, human resources, information systems etc.). ....