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TMI Blog2012 (5) TMI 414X X X X Extracts X X X X X X X X Extracts X X X X ..... f the appellant. This fact is evidence from the directions given by DRP. The appellant prays that the direction given by the DRP and followed by the Assessing Officer is contrary to provisions of law and the additions made may be deleted. 3. On the facts and circumstances of the case the appellant has established beyond iota of doubt that the Trigent Software Inc. (AE) has not retained any margin in respect of the Software Development Work by the appellant in India. As regards the payment made to Trigent Software Inc. (AE) the appellant had established with proof and evidences that the amount paid is based on the arms length principle and is comparable to the other similar transaction. The DRP has not dealt with the issues which was raised before them. The appellant prays that the direction given by the DRP and followed by the Assessing Officer is contrary to provisions of law and the additions made may be deleted. 4. On the facts and circumstances of the case the appellant prays that on the similar facts in earlier assessment years the income tax department has accepted the claim of the appellant in no adjustments are made. This aspect has also not be con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between the Assessee and TSI to the Transfer Price Officer(TPO) viz., the transactions of providing software services to the US clients through TSI for which the assessee had received a sum of Rs. 15,44,99,316/-. The assessee in support of the price that it had paid to TSI filed a Transfer Pricing Report in Form 3CEB. The assessee had adopted the Comparable Uncontrolled Price Method (CUP). 4.1 The TPO was of the view that the comparables relied upon by the assessee were companies that were located in Denmark and Switzerland, besides two Bangalore based Indian Companies. The other comparable instance was of a company in Massachusetts (USA). According to the TPO geographical location would affect the price and, therefore, the comparables adopted by the assessee were not proper. The TPO, therefore, rejected the CUP method adopted by the assessee. The TPO also was of the view that the contractual differences have not been brought out and necessary factoring done by the assessee. The AO was of the further view that the Transfer Net Margin Method (TNMM) was the most appropriate method that could be adopted. 4.2 The TPO computed the operating margin of the assessee and found that the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ALP Value 16,30,46,028 Adjustment of Rs. 1,71,28,081.80 was proposed to be made considering the average margin earned by software companies as calculated above. 4.3 In reply to the query of the TPO the assessee pointed out that there was no margin to TSI in the transaction as the invoices raised by the assessee on TSI and the invoices raised by the TSI on the US clients are for identical consideration. The assessee also pointed out that there was no arrangement between the assessee and TSI whereby any element of revenue is distributed between the assessee and TSI. The assessee also pointed out that this business model was followed for the past 10 years and the Department in the transfer pricing proceedings as well as in the regular Income Tax proceedings has accepted the factual aspect and no addition has been made. Without prejudice the assessee submitted that TNMM method would not be the most appropriate method because the background of the companies compared with the assessee is not similar. In this regard the assessee also pointed out that the results of Infosys Technology Ltd., which is a leader in the industry cannot be compared with the assessee. The assessee als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance sector. So their margins are higher. b. Flextronics have design engineering, manufacturing etc. Also they have embedded software division. So their margins are higher. c. Sasken has its own IP and licensing In mult1media, 3G wireless besides the software development. So their margin is better than pure play software development. d. Accel Transmatics is embedded software for electronics. Trigent is not in that field. e. Megasoft has IP based products. f. Infosys a 9000 Crore company has different revenue and cost model. It was argued by the assessee that the samples taken by the TPO for comparison were not comparable with the business model and other factors of the assessee and it would not be proper to adopt TNMM model. 5. The TPO however was not satisfied with the explanation given by the assessee. He held that merely from the fact that the bills raised by the assessee on TSI and the bills raised by the TSI on the clients in USA are for the same amount, it cannot be accepted that the Transfer Pricing Provisions are not applicable. In this regard the TPO pointed out that the assessee paid to TSI a sum of Rs. 4, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1) of the Act dated 27/11/09. The assessee filed objections in Form No. 35A before the Dispute Resolution Panel II, (DRP) Mumbai to the draft order of the AO. The DRP vide its direction dated 19/8/2010 was of the view that the additions proposed to be made in the draft assessment order has to be upheld. Consequent to the same the AO passed the final order dated 1/9/2010 making an addition of Rs. 1,71,28,081/-. 7. Aggrieved by the aforesaid order of the A.O the assessee has preferred the present appeal before the Tribunal. 8. We have heard the submissions of the learned counsel for the assessee and the learned D.R. The learned counsel for the assessee at the outset drew our attention to the application of the assessee for admission of additional evidence. The documents sought to be filed as additional evidence before the Tribunal are compilation of information available in the public domain viz., the turnover operating profit to total cost of certain companies which were considered as comparable uncontrolled instances by the TPO for making the impugned adjustment while arriving at the ALP of the international transaction between the assessee and TSI and consequently the addition m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etc. IT Services has plain/vanilla coding services. Tringent has expert coders/programmer but do not have domain experts. Tringent gets its domain knowledge from the client and develops the application based on it. 3. Since iGate has specialized knowledge in various industries, its rates will be higher and has better margins. Since Tringent does not specialize in any domain, and offers vanilla services, there is heavy competition and as a result the margins are low. 4. Revenue of 527+ Cr. It is 25 times the size of Trigent. Not comparable to Tringent due to its size. Reasons for not comparing OP to TC of Tringent with -Infosys Infosys Tringent 1. Revenue : Rs. 9,028 Cr. Revenue : Rs. 20.35 Cr. Op. Profit: Rs. 2,989 Cr. Profit : 2.07 Cr. Op to TC : 40.38% Op to TC : 11.3% (IT Services + Staffing) Op. Profit to Revenue : 33.1% Revenue to Op Profit : 10.2% 2. Has large Enterprise model with expertise in Trigent has IT Services and Staffing division. a. Expertise in various domains can fetch higher sales rate and thus better margins. a. IT Services has plain/vanilla coding services. Tringent has expert coders/programmer but do not have domain experts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Services has plain/vanilla coding services. Tringent has expert coders/programmer but do not have domain experts. Tringent gets its domain knowledge from the client and develops the application based on it. 3. Their specialization extends to Media Planning, IT Infrastructure Management & Trade Promotion Analytics. Tringent has plain Vanilla coding services in Java, Net C++ etc. 4. Revenue of 449 Cr. It is 22 times the size of Tringent. Not comparable to Tringent due to its size. Reasons for not comparing OP to TC of Tringent with- Persistent Systems Ltd. Persistent Tringent 1. Revenue : Rs. 209.18 cr. Revenue : Rs. 20.35 Cr. Op. Profit: Rs. 60.71 Cr. Profit : 2.07 Cr. Op to TC : 24.67% Op to TC : 11.3% (IT Services + Staffing) Op Profit to Revenue : 29.0% Revenue to Op. Profit: 10.2% 2. Persistent has its own product - PaxPro Brand Asset Lifecycle Management Solutions. A product solution carries a premium margin. Since people know the domain, the rates are high compared to vanilla service and people requirement is low, reducing the cost. Tringent IT Services and Staffing division. 3. Persistent deals in third party products and gives specialized service for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... domain experts. Tringent gets its domain knowledge from the client and develops the application based on it. Since Tringent does not specialize in any domain, and offers vanilla services, there is heavy competition and as a result the margins are low. 3. Revenue : 79.42 Cr. This is 3.9 times Tringent's revenue. Not comparable to Tringent due to its size. Reasons for not comparing OP to TC of Tringent with- Sasken Communications Ltd. Sasken Tringent 1. Revenue : Rs. 240.03 Cr. Revenue : Rs. 20.35 Cr. Op. Profit: Rs. Cr. Profit : 2.07 Cr. Op to TC : 13.90% Op to TC : 11.3% (IT Services + Staffing) 2. Sasken powers the Semiconductor industry with Services and also works with them as partners in combining the wide range of Sasken mobile phone software IP with the Semiconductor manufactures' silicon platforms to deliver handset manufactures total solutions. This being specialized knowledge, carries premium rate. IT Services has plain/vanilla coding services. Tringent has expert coders/programmer but do not have domain experts. Tringent gets its domain knowledge from the client and develops the application based on it. 3. Sasken Inc is a leading provider of embedded multim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oarding The company offers customizable products in these area. Since Tringent does not specialize in any domain, and offers vanilla services, there is heavy competition and as a result the margins are low. 3. Since the company has domain expertise and products, the margins are better. 5. Revenue : 188+ Cr. It is 9 times the size of Trigent Not comparable to Tringent due to its size. Reasons for not comparing OP to TC of Tringent with- Accel Transmatic Ltd. Accel Tringent 1. As per Trigent Calculations As per Trigent Calculations 1a. Revenue : Rs. 35.04 Cr. Revenue : Rs. 20.35 Cr. Op. Profit: Rs. 10.94 Cr. Profit : 2.07 Cr. Op to TC : 45.04% Op to TC : 11.3% (IT Services + Staffing) Op Profit to Revenue : 31.22% Revenue to Op Profit: 10.2% 1b. As per TP Officer As per TP Officer Revenue : Rs. 8.02 Cr. Revenue : Rs. 20.35 Op. Profit ; Rs. Profit : Rs. 2.07 Op to TC : 44.07% OP to TC : 10.16%(IT Service+Staffing) Op. Profit to Revenue: Op Profit to Revenue: 2. Has three division. a. Technologies division: Operates in high end software domains like embedded software, multimedia communications, networks, image processing and p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... EM customers and provides services to support customer end -to-end supply chain requirements. Flextronics also provides services in manufacturing, logistics, procurement, design, engineering and ODM services across a wide range of products and customer segments. IT Services has plain/vanilla coding services. Tringent has expert coders/programmer but do not have domain experts. Tringent gets its domain knowledge from the client and develops the application based on it. 3. Worldwide electronics design, fabrication, assembly, and test company. Services include printed circuit board, metal and plastics fabrication. Not comparable as Trigent does not manufacture or sell electronic fabrications. 4. Revenue of 595 Cr. It is 9 times the size of Trigent Not comparable to Tringent due to its size. 9. According to the assessee, it is a small public limited company and cannot be compared with the above companies whose turnover is large. According to the assessee the above companies should be excluded for the purpose of comparison, due to the nature of activity and business model etc. it was the prayer of the learned counsel for the assessee that since these details are available in publi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international 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. (2) For the purposes of sub-rule (1), the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CB (P.) Ltd. v. Asstt. CIT [2009] 121 ITD 131/30 SOT 95 had an occasion to deal with a case where TNMM method was adopted by taking the overall operating profits of an assessee with the overall operating profits of certain other companies. The Tribunal on such approach held as follows: "75. In our understanding, the international transaction or an aggregate of similar international transactions, have to be evaluated, on a stand-alone basis and then compared with similar analysis undertaken on independent transactions. Comparison of the operating profits of the assessee-company as a whole, with the overall operating profits of certain other companies, without any adjustments, in our considered opinion, would not satisfy the requirements of evaluating an international transaction under TNMM, for the purpose of arriving at the arm's length price. In this case, the assessee has taken all the activities of the company as one unit and on an analysis of its profit & loss account, arrived at an overall operating profit margin of 27 per cent. This is compared with the chart of overall operating profit margins of identified comparable companies, which is summarized in Table 5 of the report. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hould be precluded from looking into such data. 14. The question whether the overall profitability of the comparable companies can be taken as the yardstick is again a matter which will depend on the functions performed by the comparable companies and to what extent they are similar to that of the assessee. Though as laid down in the decisions referred to above overall profitability cannot be taken as a yardstick but if transactions or set of transactions undertaken by the assessee and the comparable companies are substantially the same, there can be no objection to applying the overall profitability. However proper adjustments have to be made to the margin arrived at by the AO for any differences at transaction level between the transaction of the assessee and that of the comparable companies. 15. We are of the view that the determination of ALP has not been done in the present case in accordance with the law. The data filed by the assessee before us also requires consideration by the TPO. We are therefore of the view that it would be appropriate to set aside the impugned order and direct the AO to consider the objections raised by the assessee before us in accordance with law a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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