TaxTMI 
TaxTMI 
2022 (5) TMI 1676
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....ons with its AEs in respect of provision of software development services and BPO/ITeS with its AEs. The assessee's case was thus referred to the Ld. Transfer Pricing Officer ("TPO"). Vide order dated 29.10.2010 the Ld. TPO proposed an adjustment of Rs. 22,11,60,596/- in respect of BPO services/ ITeS segment and Rs. 19,08,53,709/- in respect of software development support services segment totalling to Rs. 41,20,14,305/-. Software support services segment 3. During the A.Y 2007-08, the assessee entered into international transactions related to software support services of Rs. 2,16,32,36,787/-. The assessee used transactional net margin method ("TNMM") and Operating Profit/Total Cost or Net Cost Plus ("OP/TC or "NCP") as the profit level indicator ("PLI"). The assessee arrived at a set of 55 comparables with an average weighted average margin of 14.64% using multiple year data. The assessee's own margin worked out at 14.94%. This is how the assessee demonstrated that its international transaction with its AE under this segment is in compliance with the transfer pricing regulations. 3.1 During the transfer pricing proceeding, the Ld. TPO after analysing the data bases, annu....
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.... 22 comparable companies in its transfer pricing document with an average weighted average margin 12.51%. The assessee's own margin worked out at 12.82% under this segment. This is how the assessee demonstrated that the international transaction with its AE under this segment is at ALP. 4.2 During transfer pricing proceedings, The Ld. TPO after the detailed search process, the accept/reject matrix of companies considered for analysis and application of filters, modified the search to arrive at the following final set of 25 comparable companies with arithmetical mean of 30.07% and ALP: S. No. Comparable NCP (%) unadjusted Single year 1. Datamatics Financial Services Ltd. (Seg.) 5.07% 2. Eclerx Services Ltd 89.33% 3. Informed Technologies India Ltd. 34.32% 4. Infosys B P O Ltd. 28.78% 5. Vishal Information Technologies Ltd. 51.19% 6. Asit C Mehta Financial Services Ltd. (Nucleus Netsoft and GIS (India) Limited 24.21% 7. Flextronics Software Systems Ltd. (Seg.) 8.62% 8. HCL Comnct Systems & Services Ltd. (Seg.) 44.99% 9. Mold-Tek Technologies Ltd. 113.49% 10. R.Systems International Ltd.....
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....ection 144C(5) of the Act did not consider the facts and merits of Appellant's objections to the proposed adjustments, and merely relied on the reasoning given by the Additional Commissioner of Income-tax, Transfer Pricing Officer - I (2) vide order under section 92CA(3) of the Act dated October 29, 2010 ("TP Order"). On the facts and in the circumstances of the case, the Ld. TPO and the Ld. AO have erred in proposing and the Hon'ble DRP has further erred in confirming the transfer pricing adjustment of Rs. 412,014,305 without due application of mind and without affording a reasonable opportunity of being heard in the matter to the Appellant on the following grounds: 1. Prima facie errors in the final assessment order issued by the Ld. AO With respect to the software development and BPO services, the Appellant wishes to submit that there are prima facie errors in the final assessment order issued by the Ld. AO. In this connection, we have reiterated below the relevant extracts from the rectification application filed before the Ld. AO on November 25, 2011: Quote ----------------------------- In your order, your goods elf has not ....
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....mparable companies. Accordingly, the fresh search conducted by the Ld. TPO is liable to be quashed. 2.4 By not appreciating the replies filed by the Appellant against the first show-cause notice (SCN1) dated July 22, 2010 and without appreciating the same, issued another show- cause notice (SCN2) dated August 24, 2010. In this regard, the Ld. TPO followed an unjustified approach by issuing two show-cause notices in a single assessment without providing appropriate responses against the replies filed by the Appellant in response to the first show-cause notice. Accordingly, the change in the approach followed by the Ld. TPO clearly demonstrates a biased state of mind. 2.5 By relying upon data of the comparables for financial year 2006-07 only for determination of the arm's length price, disregarding the multiple year data approach followed by the Appellant. Further, by relying upon updated data of the comparables which was not available to the Appellant at the time of maintenance of Transfer Pricing Documentation within the time-frame mentioned in Rule 10D(4) of the Income Tax Rules, 1962 ("the Rules"). 2.6 By misconstruing the risk profile of the Appel....
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....2) read with Section 72 of the Act. Accordingly, the Ld. AO has erred on facts and in law in restricting set off of brought forward loss and unabsorbed depreciation under section 72 of the Act to the extent of profits and gains from business." 9. At the outset, the Ld. AR brought to our notice that the AE (i.e. Avon Corporation) of the assessee in the United States of America (USA) filed an application under Mutual Agreement Procedure ("MAP") with the Competent Authority of the US under Article 27 of the US-India Double Tax Convention. The settlement in the said case has been arrived at between the Competent Authority of USA and the Competent Authority of India vide order dated 21.12.2017 with respect to the adjustment on account of transfer pricing issues relating to the US transactions which is tabulated below :- S. No. Adjustments Amount (in Rs.) 1. Transfer Pricing adjustment- US transactions 383,008,498 2. Transfer Pricing adjustment - Non-US transactions (UK) 29,005,807 Total amount of adjustment 412,014,305 9.1 The Ld. AR submitted that the assessee has consented to the MAP resolution which has been intimated to the Ld. AO vide its lett....
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....ired to be eliminated. The OECD guidelines also support this view. In a competitive environment the price should include an element to reflect the different payment and receipt terms and compensate for the timing effect. Guidelines further say that making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables with an assumption that the difference should be reflected in profits. Though guidelines say that as a matter of routine such adjustment should not be made but also state that the same should be resorted to if it improves the comparability. The provisions contained in Rule 10B(3) also mandate adjustments wherever there are material differences in the situations of comparables and the taxpayer. The different benches of the ITATs have upheld such adjustment [Vedaris Technology ITAT (Del); Sony India [114ITD448(Del)J, Mentor Graphics, E Gain communication 2008-TIOL-282-ITAT-PUNE, Global Vantedge 2010-TOP;-24ITAT-DEL, TNT India P Ltd 201l-TII-39-ITAT-BANG-TP,etcj. Now that data is furnished, the AO/ TPO is therefore directed to verify the same and grant working capital adjustment based on t....
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....ters applied by TPO VMF Softech Limited Companies whose software development service revenue is less than 75% of the total operating revenue were excluded VMF earns 100% of its revenue from software development service Companies whose software development services revenue is less than INR 1 cr. VMF has revenue of INR 1.03 crores Companies who have less than 25% of the revenues as export sales were excluded. VMF has an export sales to sales ratio of 93.08% Companies whose employee cost to revenue is less than 25% of the revenues VMF has an employee cost ratio of 54.9% were excluded Companies who have more than 25% related party transactions of the operating revenues were excluded. No related party transactions Companies having different financial year VMF has financial year ending 31 March 2007 Companies whose onsite income is more than 75% of the export revenues were No onsite income excluded. 13.2 In support of the above contention, the Ld. AR relied on the decision of the Hon'ble Delhi ITAT in the case of Kaplan India Pvt. Ltd. (ITA No. 2907/Del/2014) wherein it was held as under :- "5.6 ...further rejected VMF Softech limi....
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.... and if objection is correct to exclude it as a comparable. 14.2 The contention of the assessee is that this company fails the 25% employee cost to sales filter applied by the Ld. TPO himself. This company seems to have outsourced its work. Employee cost to sales ratio of this company comes out to be 5.3% as tabulated below :- (pages 1-3 of the Annual Report Compendium) Particulars Amounts (in Rs.) Salary + Staff Welfare 2,935,065 Directors Salary 1,000,000 Revenue from Services 74,209,887 Employee cost to sales (%) 5.3% Whereas in assessee's case, the employee cost to sales ratio is more than 50% which is evident from the table below :- (page 708 of the Paper Book) Particulars Amounts (in INR) Personal expenses 1,100,717,818 Revenue from software development services 2,163,236,787 Employee cost to sales (%) 50.88% 14.3 In support of its contention, the Ld. AR relied on the decision of the Hon'ble Bangalore Tribunal in the case of Hewlett-Packard (India) GlobalSoft P Ltd. vs. DCIT (IT(TP)A No. 1031/Bang/2011) wherein the Hon'ble Tribunal held as under :- "23....Similarly, as regards Ishir Infotech Ltd. the Trib....
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....itted by the company, it is into software development services and qualifies employee cost filter applied by the TPO. Thus, is it considered as a comparable." 15.1 The Hon'ble DRP in its order dated 20.09.2011 observed that the assessee has objected to the inclusion of this company since it fails the filter of employee cost being more than 25% of total sales applied by the Ld. TPO. According to assessee its employee cost is 1.04%. The Hon'ble DRP thus directed the Ld. TPO to verify and if objection of the assesee is found to be correct then exclude this company as a comparable. 15.2 The Ld. AR for the assessee contended that this comparable does not satisfy the 25% employee cost to sales filter applied by the Ld. TPO himself. Employee cost to sales ratio of this company is 1.02% (page 5-7 of the Annual Report Compendium) Particulars Amounts (in Rs.) Staff Welfare 18,643,728 Income from sales & services 1,835,095,054 Employee cost to sales (%) 1.02% Whereas, in the case of the assessee the employee cost to sales ratio is more than 50% as demonstrated in para 14.2 above. 15.3 The Ld. AR placed reliance on the decision of the Delhi Tribunal in the c....
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....are development services..." 16.1 The Hon'ble DRP observed that the assessee has also objected to the inclusion of this company as it has a wages to sales ratio of 23.3% and fails TPO's own filter. The Hon'ble DRP thus directed the Ld. TPO to verify and if objection of the assessee is found to be correct then exclude this company as a comparable. 16.2 The Ld. AR for the assessee submitted that this company is functionally dissimilar as it is engaged in clinical research and manufacture of bio products. The Ld. AR submitted that there is no finding of the Hon'ble DRP on functional comparability of this company to that of the assessee which is the main contention of the assessee for exclusion of this comparable. The assessee pleaded for exclusion of this company before the Hon'ble DRP mainly on account of its functional dissimilarity which has not been taken into account by the Hon'ble DRP (page 377 of Paper Book). Facts on record shows that this company filed the copyright/patent for its drug design tool 'CELSUITE' which is used to provide research services for drug discovery, prediction modelling, design and development of drug molecules etc. It also developed a biomolecule t....
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....n submitted by the company, its consulting division is into software development services and its SWD segment qualifies all the filters applied by the TPO." 17.1 The Hon'ble DRP has not made any specific observation in respect of this comparable company selected by the Ld. TPO. 17.2 The Ld. AR submitted that assessee's contention in respect of this comparable is that though the Ld. TPO proposed this company to be considered at segmental level, he erred in considering the margin at entity level @ 60.23% (page 143 of the Paper book) instead of segmental OP/TC margin of consulting division which comes out to be 23.11% (page 239 of the Paper Book). Further, this company had an extraordinary event in the form of acquisition of Visual Software Technologies Limited and hence is not a suitable comparable company (page 20 of the Annual Report Compendium). Also, this company is functionally dissimilar to that of the assessee as Blue-Ally Division of this company deals in both product and services with focus to invent and mange products and applications for other product companies. However, the assessee is only engaged in provision of services and does not sell any software products. ....
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....ore Tribunal in the case of HCL EAI Services Ltd. vs. DCIT (IT(TP)A No. 1348/Bang/2011) wherein it has been held as under :- "Based on the information available in the company's website, which reveals that this company has developed a software product by name "DXchange", it was submitted that this company would have revenue from software product sales apart from rendering of software services and therefore is functionally different from the assessee. It was further submitted that the Mumbai Bench of the Tribunal to the decision in the case of Telecordia Technologies Pvt. Ltd. vs. ACIT-ITA 7821/Mum/2011 wherein the Tribunal accepted the assessee's contention that this company has revenue from software product and observed that in the absence of segmental details, Avani Cincom cannot be considered as comparable to the assessee who was rendering software development services only." [Emphasis supplied) 18.4 The Ld. DR relied upon the order of the Ld. AO/ TPO. 18.5 Thus, respectfully following the decision of the Hon'ble Bangalore Tribunal in HCL EAI Services Ltd. (supra) and in consideration of the functional dissimilarity of this company to that of the assessee, whic....
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....at this company, i.e. e-Zest Solutions Ltd. be omitted from the set of comparables for the period under consideration in the case on hand. The AO/TPO is accordingly directed." [Emphasis supplied) 19.4 The Ld. DR relied on the order of the Ld. TPO. 19.5 On careful consideration of the submissions of the assessee, material on records as well as the decision of the Hon'ble Bangalore Bench in Hewlett-Packard (India) GlobalSoft P. Ltd. (supra), we direct the Ld. AO/ TPO to exclude this company from the final set of comparables. Infosys Technologies Limited 20. The Ld. TPO has included this company on the grounds of functional similarity and qualification of all the filters applied by him. The relevant extract of the TPO's order is reproduced below :- "12.11 The Annual Report is available for FY 2006-07. As per the AR, it is into software development services and qualifies all the filters applied by the TPO. Thus, it is considered as a comparable. The taxpayer has not offered any comments." 20.1 The Hon'ble DRP has not made any specific observation in respect of this comparable company. 20.2 The Ld. AR submitted that Infosys Technologies Limited is a huge gi....
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....re available on consolidated basis but the same were not available on standalone basis. Thus, the company was asked information u/s 133(6) to submit segmental details. As the segmental details are available for software development segment on standalone basis, the same is considered as a comparable..." 21.1 The Hon'ble DRP has not made any specific observation in respect of this comparable company. 21.2 The contention of the assessee is that this company is functionally dissimilar as it owns significant intangibles which is evident from the fact that it has filed more than 13 patents across product engineering, enterprise business and quality and 11 patents in pipeline; that it has invested 8.5% of revenue towards R&D expenses; and that it has incurred selling expenses which constitutes 3.12% of the total revenue. Also, there is a vast difference in scale of operations as compared to that of the assessee which is evident from the fact that its revenue is 64 times of the revenue earned by the assessee (page 44-46 of the Annual Report compendium). On the other hand, the assessee company acts as rather simpler software support service provider to its AEs; does not perform any R&....
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....egmental details for both are available and that it qualifies all filters applied by him. The relevant extract of the Ld. TPO's order is reproduced below :- "12.13 The company is into software development and training. As per the information submitted by the company, in response to 133 (6) notice, it is into two segments i) software development services and ii) training. The segmental details are also submitted. It qualifies all filters applied by the TPO...The software product constitutes only 3% of its revenues and training constitutes only 8.56% of its revenues for FY 2006-07... Hence, it is proposed as a comparable." 22.1 The Hon'ble DRP has not given any specific observation/ finding in respect of this comparable. 22.2 The assessee's contention is that the Ld. TPO considered the applications software segment for TNMM analysis. The application software segment comprises of sale of software products and services. Hence, the same cannot be considered as segmental information only for software services (pages 48 to 50 of the Annual Report Compendium). The Ld. AR further submitted that this company is engaged in sale of software products namely Virtual Insure and La ....
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.... software, industrial designing/engineering as well (page 55,56 of the Annual Report Compendium). Further, this company holds inventory based on which it can be concluded that it is also engaged in software products (page 58 of the Annual Report Compendium). It has incurred expenditure towards cost of goods sold which is 14% of total cost of the company based on which it can be concluded that the company is engaged in trading activities apart from providing services. The assessee however does not hold any inventory nor does any trade activities and not engaged in any hardware designing activities as in the case of this company. 23.3 In support thereof, the Ld. AR relied on the decision of the Hon'ble Tribunal in the case of Kaplan India Private Limited (ITA No. 2907/DEL/2014). The finding of the Hon'ble Tribunal is reproduced below :- "Coordinate benches have come to the conclusion that the activities carried out under software development segment by Tata Elxsi are not simply software development services but are complex in nature. The IPR in the form of software researched and developed were used as a tool for further development of software yielding higher margins. It....
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....ng service in the nature of payroll processing, HR record maintenance, accounts reconciliation etc. Further, unlike assessee this company uses design tools like CAD/CAM, Stadd Pro and engages high skilled engineers. It also has a low employee cost to sales ratio of 7.59% as against the assessee which has significantly high employee cost of about 46%. (pages 61-64 of the Annual Report Compendium). 25.2 In support thereof, the assessee relied on the decision of the Special Bench of the Hon'ble Tribunal in the case of Maersk Global Centre (India) Private Limited (ITA No. 7466/MUM/2012) wherein it has been held as under:- "81. In so far as the case of Mold-Tek Technologies Ltd. is concerned, it is observed from the annual report of the said company for the financial year 2007-08 placed at page 139 to 151 of the paper book that the said company was pioneer in structural engineering KPO services and its entire business comprised of providing only structural engineering services to various clients. Further information of Mold-Tek Technologies Ltd. available on their Website is furnished in the form of printout at page 158 to 165 of the paper book and a perusal of the same show....
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....he contention of the assessee is that this company outsources its services to third party vendors which constitutes 64% of the total expenses. The employee cost to sales ratio is merely 2.30%. This company holds inventory which is 13.33% of total sales indicative of the fact that it is also engaged in trading of products (page 65-70 of the Annual Report Compendium). As far as the assessee is concerned, the assessee does not outsource any of its activities instead AEs outsource their functions to the assessee. Being a BPO service provider the employees cost is quite significant in assessee's case which constitutes around 46% in the year under consideration. The assessee also does not hold any inventory as it is not into trading activities. 26.2 The Ld. AR placed reliance on the decision of Mumbai Tribunal in the case of ACIT vs. Maersk Global Services Centre (India) P. Ltd. (ITA No. 3774/MUM/2011 - CO111/MUM/2011) wherein the Hon'ble Tribunal held as under:- "Insofar as the cases of Tulsyan Technologies Limited and Vishal Information Technologies Limited are concerned, it is noticed from their annual accounts that these companies outsourced a considerable portion of thei....
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....t in the form of acquisition took place in this company in the year under consideration, the other facts on record which clearly establishes the functionally dissimilarity between this company and the assessee and respectfully following the decision of the Hon'ble Bangalore Tribunal we hold this company to be not a suitable comparable company. Accordingly, we direct the Ld. TPO/ AO to exclude this company from the list of comparables. Eclerx Services Ltd. 28. The Ld. TPO selected this company on the ground that it qualifies all the filters applied by him. The Ld. TPO's finding in para 14.11 of his order is reproduced below :- "14.11 Annual report is available for the FY 2006-07. 133(6) notice was issued to the company. As per the information submitted by the company, it qualifies all the filters applied by the TPO. Thus, the same is considered as a comparable." 28.1 The Ld. AR for the assessee submitted that this company is functionally dissimilar to that of the assessee for the reason that it outsources its services to third party vendors which constitutes around 18.83% of the total expense (page 84-85 of the Annual Report Compendium); that it is engaged in KPO/ ....
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....gaged in rendering services such as accounts, reconciliation, payroll services etc. to its AEs ; does not have any IPR/brand name to leverage on and also does not perform any sales and marketing functions as in case of this company. 29.2 The Ld. AR submitted that in the case of NTT Data Global Delivery Services Ltd. vs. ITO (ITA No. 5339/Del/2011), the Hon'ble Delhi Tribunal directed this company to be excluded from the list of comparables by holding as under :- "5.8.2. We have perused the submissions advanced by both the sides in the light of the records placed before us. From TP study placed at page 539-638 of the paper book, it is observed that this company has huge turnovers, owns IPR and brand value on products and provides services to vast clientele. Under such circumstances this company cannot be accepted to be a fit comparable in case of Assessee who is a captive service provider providing services only to its group concerns. 5.8.3. Accordingly, we direct this company to be excluded from the list of comparables." [Emphasis supplied] 29.3 Considering the functional distinction brought out by the Ld. AR between this company and the assessee and resp....
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....f final comparables. Iservices India Private Limited 31. The Ld. TPO selected this company by recording the following finding in para 14.18 of his order reproduced below :- "14.18 The Annual Report was not available for FY 2006-07, RPT information was not available. Thus notice 133(6) notice was issued to the company. As per the reply received by the company and the annual report submitted, it is seen that the company is into IT enabled services and qualifies all filters applied by the TPO." 31.1 The Ld. AR for the pleaded for exclusion of this company on the ground of functional dissimilarly owing to the fact that this company is engaged in rendering high end diversified services like web hosting, email services, spam filtering, domain names and DNS hosting services which is clearly not done by the assessee company. He also submitted that this company has a different business model which involves payment of commission on sales to other parties though the nature of such payments is not clear from the information/records available in public domain. (page 9596 of the Annual Report Compendium). 31.2 The Ld. AR submitted that in the case of DCIT vs. M/s. Everest Bu....
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....to 31-03-2007. As per the data submitted, the ITeS segment qualifies all the filters applied by the TPO. Thus, the ITeS segment is considered as a comparable." 32.1 The assessee has contended for exclusion of this company on the ground that this company is engaged in provision of high end KPO services comprising of data centre management services, end user computing services, networking services, remote data infrastructure management services viz-a-viz. simple BPO services provided by the assessee to its AEs under the ITeS segment. Further, the Ld. AR submitted that this company owns intangible constituting 3.83% of total revenue as against the assessee who does not own or employ any intangible assets for the provision of the BPO services. (page 98-99 of the Annual Report Compendium) 32.2 The Ld. AR placed reliance on the decision of the Hon'ble Delhi Tribunal in ICC India Pvt. Ltd. vs. DCIT (ITA No. 25/Del/2012) wherein the Hon'ble Tribunal held as under:- "(V) HCL Comnet Ltd. (Seg) The Assessee has objected to the inclusion of this company on the ground that the company is into remote IT infrastructure management services, data centre management and user c....
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....102 of the Annual Report Compendium). The Ld. AR further submitted that this company hived of expenses to different entities which has resulted in an improved net profit for the year which stood at Rs. 244.98 lakhs compared to the net profit of Rs. 3.70 lakhs for the previous year. The Ld. AR submitted that this peculiar economic circumstance has been taken into account by the Hon'ble Bangalore Tribunal in AOL Online India Private Limited vs. DCIT (IT(TP)A No. 1036/Bang/2011) as under :- "Functionally not comparable - provides open and end to end web solutions, software consultancy, design and development of solutions which cannot be compared to a BPO company (refer Management Discussion Analysis on 133(6) and considered the data cleansing segment to be in the nature of IT enabled services. The company provides data cleansing services to those companies for which they have developed the software (as per reply u/s. 133(6). Thus, the two segments are inextricably linked to each other since data cleansing also includes an element of software development in the upgradation process. Further the TPO had selected this company as comparable for the IT Segment in the Appellant'....
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....arison of the profitability of the Appellant. 2. Functionally not comparable - Voice - Outbound, Voice - Inbound data 3. Peculiar economic circumstances - Merger with Triton 4. Extraordinary growth - more than 64% growth in sales over previous year. 23. Triton Corp Ltd. 1. Unreliable financials - The business reputation of Rastogi group, owning Maple E Solutions and Triton Corporation was under serious indictment. In view of a question mark on the reputation of the owner for earlier years, it would be unsafe to take their results for comparison of the profitability of the Appellant. 2. Functionally not comparable - Trading of IT Peripherals, providing of call centre services and support services; Absence of segmental information. ......Since the facts are similar and assessee's business is also similar and TPO has selected the same comparables, we are of the opinion that the said comparables listed above cannot be considered as suitable for inclusion in the list for TP analysis. AO/TPO is directed to exclude the above comparables." [Emphasis supplied] 34.3 Upon careful consideration of the facts on record establis....
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....grounds of significantly higher turnover, abnormal margins, presence of intellectual property, diversified business, brand value and turnover and relied upon Calibrated Health Systems Ltd. (supra), available at pages 853 to 862 of the paper book. 40. Coordinate Bench of ITAT, Delhi examined the comparability of WIPRO with Calibrated Health Systems Ltd., engaged in providing ITES services to its foreign entity as in the case of Assessee and ordered its exclusion on the ground that this is a giant entity with marked differences as regards risk profile, nature of services, ownership of IP rights, expenditure on R&D, etc. So, following the decision rendered by coordinate bench as well as the fact that the assessee company is a captive service provider taking minimum risk having no intangibles cannot be compared with WIPRO which is having diversified business, ownership of significant intangibles and huge expenditure on R&D etc. So, we hereby order to exclude this company from the final list of comparables." [Emphasis supplied] 35.3 In view of the vast difference in the operations/ functions of this company and that of the assessee and placing reliance on the Delhi Tribun....