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TMI Blog2014 (11) TMI 849X X X X Extracts X X X X X X X X Extracts X X X X ..... iled to consider the factual aspects of the said submission – thus, the matter is remitted back to the AO for verification – Decided in favour of assessee. Software expenses disallowed – Expenses in the nature or reimbursements or not – Held that:- The AO noticed that the assessee had not deducted tax at source on payments made on software expenses which were claimed as revenue expenses - the software expenses were payments made by it to CSI and were reimbursements hence tax at source was not to be deducted - the absence of profit element in cross-charges as claimed by the Assessee was neither explained by assessee nor could it be independently verified and ascertained - as TDS has not been deducted on the revenue expenses claimed and therefore the amount is liable for disallowance u/s.40(a)(ia) - assessee could not point out any evidence filed before the lower authorities in this regard - Even before the Tribunal, no evidence has been filed to establish the claim of the assessee – Decided against assessee. Transfer pricing adjustment – Determination of ALP – International transaction of rendering software development services to AE – Held that:- The total foreign exchange ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 72 - ITAT BANGALORE] - the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s 133(6) of the Act - This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO - this company was developing software products and not purely or mainly software development service provider - KALS Information Systems Ltd. should not be regarded as a comparable. Inclusion of companies as comparables – Held that:- In case of Evoke Technologies Pvt. Ltd. and Maverick Systems Ltd., the export revenues during the previous year relevant to AY 2009-10 were less than 75% - However, these companies in the past had export revenues above 75% and therefore the TPO ought not to have been rejected as comparable and should have seen the average export revenues to the total operating revenues for the past three years - the relevant data to be considered is the data for the previous year relevant to AY 2009-10 - export sales was less than 75% of the total sales during the previous year relevant to A.Y. 2009-10 and on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C of the Act, after affording opportunity of being heard to the assessee – Decided in favour of assessee. - S.P. No.130/Bang/2014 AND IT(TP)A No.271/Bang/2014 - - - Dated:- 14-8-2014 - SHRI N.V. VASUDEVAN AND SHRI ABRAHAM GEORGE, JJ. For The Appellant : Shri Rajan Vora, C.A. For The Respondent : Shri C.H. Sundar Rao, CIT-I(DR) ORDER Per N.V. Vasudevan, Judicial Member IT(TP)A No.271/Bang/2014 is an appeal by the assessee against the order dated 31.1.2004 of the Dy. CIT, Circle 11(2), Bangalore passed u/s. 143(3) r.w.s. 144C of the Act. 2. The grounds A 1 to 3 raised by the assessee reads as follows:- A. Grounds of appeal relating to corporate tax matters 1. The learned AO has erred in law and in fact, by not considering the plea of the Appellant that communication expenses (in the nature of lease line charges and internet charges) should not be reduced from export turnover for the purpose of computing deduction under Section 10A and 10B of the Act, respectively/ 2. The learned AO has erred in law and in facts by disregarding the methodology adopted by Appellant in allocating the common/indirect costs among its various business segments. 3. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsist of the following Software Development Services Segment (consisting of the STPI and the SEZ units), Marketing Support Services Segment, Product Replacement Services Segment, Administrative and Other Support Services Segment. The direct costs/expenses relatable to the specific segment(s) and which are directly attributable to such segment(s) are accounted as costs/expenses relating to such specific segment(s). In relation to costs/expenses which cannot be directly identified with the segments are allocated on the basis of the head count of personnel employed in these segments (excluding the product replacement services segment as the entire operations of this segment have been outsourced), which according to the Assessee is a reasonable method of allocation. This method of apportionment has also been consistently adopted by the assessee on a year to year basis and such a manner of apportionment has also been accepted by the Assessing Officer previously after due application of mind during the course of assessment proceedings and passing of the order. 7. However, from AY 2008-09 onwards, the AO disregarded the methodology adopted by the assessee to allocate the common expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The software development would fall within the second category i.e. IT and communication cost and its employees who are involved in such IT and communication are considered for allocation of the expenditure. The AO, in the draft assessment order, has considered number of employees in STPI and SEZ division and has come to the conclusion that the assessee is not following head-count method for division of allocable expenses. Before giving a finding as to whether the assessee is following the head-count method for division of allocable expenses, we would like to examine whether the method adopted by the assessee is correct. Similar question had arisen before the Hon ble Delhi High Court in the case of M/s.EHTP India Pvt. Ltd. (cited supra) wherein apportionment of expenses between 10A and non-10A units was considered. In the said case also, the assessee was following allocation of common expenses on the head-count basis. After considering the facts of the said case, the Hon ble High Court held that the assessee s contention therein that in the service industry head-count method would be more proper is a plausible view though it could possibly be a debatable view. It was held that mer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count and remand the issue to his file for the limited purpose of verification of the number of employees and expenses allocated to such employees, as was done in the A.Y. 2008-09. 11. As far as ground No.A(3) referred to above is concerned, the factual details are as follows. Cisco Systems Inc., USA [ CSI for short] purchases software from third party vendors for use by the Cisco group on a global basis. The Assessee was also one such user of software purchased by CSI. CSI charges each of the group company charges depending upon the use of the software. Such charges collected are called inter-company charges. The inter-company charges so determined and cross charged to Cisco India by CSI depending on the usage of the software by the Assessee s employees for business purposes according to the Assessee were at actual cost with no profit element to CSI. According to the Assessee, the nature of payments made by Cisco India to CSI is therefore in the nature of reimbursements and there is no element of profit involved in such transactions. 12. The AO noticed that the assessee had not deducted tax at source on payments made on software expenses which were claimed as revenue expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... US [ CTI ]. Thus, Cisco India is engaged in Contract software development services, Product replacement services, Administrative and other support services and Management services to its AEs. The segmental financials for the F.Y. 2008-09 were as under:- Description Software Development Marketing Sales Services Product Replacement Services Admin Other Support Services Management Services Other Revenue 9654304981 5270847929 2463723146 1491900613 1250254745 54441247 Total Cost 8904581852 4213518148 2413930963 1374404584 1136594862 51245935 Operating Profit 749723129 1057329781 49792183 117496029 113659883 3195312 Mark up on Cost 8.42% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9. Mindtree Ltd. (seg) 7,93,22,79,326 5,74,06,73,058 5.52% 10. Larsen and Toubro Infotech 19,50,83,81,374 15,64,12,76,626 24.72% 11. Infosys Ltd. 2,02,64,00,00,000 1,39,17,00,00,000 45.61% Average mean 24.32% 17. The margins of the Assessee as computed by the TPO was 8.42%, which was not within the (+) or (-) 5% range of the arithmetic mean of the final set of comparable companies chosen by the TPO. The TPO therefore proceeded to determine the ALP of the international transaction by applying the arithmetic mean of the final list of comparable companies chosen by him. After allowing working capital adjustment, the TPO computed the ALP as follows:- Arm s Length Mean Margin on cost 24.32% Less: Working Capital Adjustment (Annex.C) - 0.41% Adjusted margin 24.73% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 890,42,73,643 1,75,11,868 8,90,42,73,643 1,75,11,868 888,67,61,775 1,78,20,078 888,42,73,643 1,75,11,868 Operating Cost ( OC ) 8,90,45,81,853 8,90,45,81,853 Operating Profit ( OP ) 74,97,23,128 1,12,86,46,313 OP/OC 8.42% 12.67% 20. The DRP, however, did not agree with the submissions made by the assessee and it held as follows:- .. However, the decision of the TPO to exclude foreign exchange gain/loss is correct for the reasons summarized below. All the decisions cited by the taxpayer pertain to the issue of whether foreign exchange gain/loss is an allowable expense or whether it forms part of sale. There is no dispute regarding whether exchange gain is business income of foreign exchange loss is business expenditure. The issue is whether the foreign exchange gain/loss forms part of profits realized from international transactions. The answer is no, as the foreign exchange gain/loss is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee that the total foreign exchange gain on account of realization of proceeds from debtors, taken to creditors, inter-company statements etc. was a sum of ₹ 179,01,08,756. Out of the above, the assessee on his own has excluded foreign exchange fluctuation on account of advances towards share capital charged to P L account and foreign exchange fluctuation in the matter of purchase of fixed assets charged to P L account. It is thus clear from the chart that a sum of ₹ 37,89,23,185 which was sought to be added as part of the operating income on rendering software development services is only on account of transactions of rendering software development services by the assessee to its AE and the foreign exchange fluctuation at the time of realization of the payment for rendering software development services. It is therefore clear that the foreign exchange fluctuation in question has to be treated as part of the operating income of software development services segment of the assessee and the operating profit to operating cost has to be determined accordingly. The DRP has refused to follow the decision of ITAT Bangalore Bench in the case of SAP Labs India Pvt. Ltd. (s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... followed the decision rendered by the Mumbai Bench of the Tribunal in the case of Wills Processing Services (I) P. Ltd., ITA No.4547/Mum/2012. In the aforesaid decisions, the Tribunal has taken the view that Bodhtree Consulting Ltd. is in the business of software products and was engaged in providing open end to end web solutions software consultancy and design development of software using latest technology. The decision rendered by the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. (supra) is in relation to A.Y. 2008-09. It was affirmed by the learned counsel for the Assessee that the facts and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY 08-09 as far as this comparable company is concerned. Following the aforesaid decision of the Mumbai Bench of the Tribunal, we hold that Bodhtree Consulting Ltd. cannot be regarded as a comparable. In this regards, the fact that the assessee had itself proposed this company as comparable, in our opinion, should not be the basis on which the said company should be retained as a comparable, when factually it is shown that the said company is a software pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eing a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk ; (iii) the company has generated several inventions and filed for many patents in India and USA ; (iv) the company has substantial revenues from software products and the break up of such revenues is not available ; (v) the company has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in AUTOLAY , a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded form the list of comparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nch Tribunal s decision of the ITAT in the case of Bindview India Private Limited Vs. DCI, ITA No. ITA No 1386/PN/1O wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows: 16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds. Based on all the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. (ii) Flextronics Software Systems Ltd. : The learned TPO has considered this company as a comparable based on 133(6) reply wherein this company reflected its software development services revenues to be more than 75% of the software products and services segment revenues. Flextronics has a hybrid revenue model and hence should be rejected as functionally different. Based on the information provided under Revenue recognition in its annual report, it can be inferred that the software services revenues are earned on a hybrid revenue model, and the same is not similar to the regular models adopted by other software service providers. The learned representative pleaded that a regular software services provider could not be compared to a company having such a unique revenue model, wherein the revenues of the company from software/product development services depends on the success of the products sold by its clients in the marketplace. Hence, it would be inappropriate to compare the business operations of the assessee with that of a company following hybrid business model comprising of royalty income as well as regular software services income, for which revenue break-up is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... six comparables and hence there remains only four companies as comparables, as listed below: 26.5. Following the aforesaid decision of the Tribunal, we hold that M/S.Tata Elxsi Ltd. should not be regarded as a comparable. 27. LIST OF COMPANIES WHICH WERE CHOSEN AS COMPARABLE BY THE ASSESSEE, BUT WHICH WERE REJECTED AS COMPARABLE BY THE TPO, WHICH THE ASSESSEE WANTS TO INCLUDE IN THE LIST OF COMPARABLE:- 27.1 Evoke Technologies Pvt. Ltd. 27.2 Maverick Systems Ltd. 27.3 Quintegra Solutions Ltd. 27.4 Goldstone Technologies Ltd. (A) The TPO rejected the aforesaid companies as not comparable for the reason that more than 75% of the revenues is not from exports. In this regard, at para 3.5 of the TPO s order, the TPO adopted a filter by which he excluded companies where the software development services revenue is less than 75% of the total operating revenues. On this basis, the aforesaid 4 comparables were excluded. The DRP confirmed the order of the TPO. The submission of the ld. counsel for the assessee before us was that in case of Evoke Technologies Pvt. Ltd. and Maverick Systems Ltd., admittedly, the export revenues during the previous year relevant to A.Y. 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see adopted data for 31.12.08 for including it in the list of comparables. It was, however, stressed that this case ought not to have been excluded on this count alone, when it was otherwise comparable. The ld. DR opposed this contention by placing reliance on certain decisions in which it has been held that if the data for the financial year of the comparable case similar to that of the tested party is not available, then, such case should be expunged from the list of comparables. 11.3. In order to appreciate the rival submissions on this issue, it would be apt to note the relevant part of sub-rule (4) of Rule 10B which is as under:- (4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. 11.4. On circumspection of the above part of this sub-rule, it comes to fore that the comparability of an uncontrolled transaction can be analysed with the data relating to the financial year in which the transaction has been entered into. As per this mandate, it is clear that if the tested party has March endin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... figures in such a manner that the data of the financial year in which the assessee has entered into an international transaction can be easily deduced, then there is no reason for excluding such an otherwise comparable case. 11.7. We find that R. Systems International Ltd. has been excluded by the TPO solely for the reason that its financial year is different without considering that the data for the financial year adopted by the assessee can be easily compiled from the audited statements of such company. We, therefore, set aside the impugned order on this issue and remit the matter to the TPO/AO for including the case of R. Systems International Ltd. in the list of comparables by working out the figures relevant to the financial year ending 31.3.09 from the audited accounts of R. Systems International Ltd. 27.7. Following the aforesaid decision of the Tribunal, we direct the TPO to cull out the financial results of these two comparable companies for the period relatable to the assessee s financial year and thereafter consider these two companies as comparables. We hold and direct accordingly. 27.8 CG-Vak Software Exports Ltd. (D) (i) As far as this company is concer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the light of the facts brought to our notice by the ld. counsel for the assessee. We hold and direct accordingly. 28. The ld. counsel for the assessee also submitted before us that the assessee had sought for risk adjustments, but the same has not been considered by the TPO. In this regard, our attention was drawn to the following submissions made before the revenue authorities:- 17.1 The Appellant functions under a limited risk environment with most of the risk being assumed by its AE. The Appellant bears lesser limited business risks than independent comparable companies due to the nature of its revenue model as it is guaranteed profits by way of a mark-up on costs incurred, in provision of the software development services. However, the independent companies have to bear the vagaries of the economic and business factors that are prevailing in the industry and thus could either incur losses or earn profits based on market conditions. 17.2 Rule l0B(l)(e)(iii) of the Rules provides that an adjustment should be made to the profit margin of independent comparable companies to take into account the differences in functions and risks. The OECD Transfer Pricing guidelines a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d comparables has been established nor is it possible to convert the difference in risk level, if there is any. into numbers. If there is any difference. for a moment academically speaking, it rests in the realm of quality and not quantity. There is no reliable method to convert the qualitative difference into quantitative difference and to make adjustment on account of risk level. As per the provisions of Rule 10B(3), if any adjustment should be made, it should be reasonably accurate to eliminate the material effects of such differences. But in case of risk adjustment, neither reasonably accurate adjustment can be made for want of method to do so nor has it been established that there is a material effect that is affecting the comparisons due to risk level. If the taxpayer is suggesting that there exists a difference in the risk level assumed by the tested party and uncontrolled comparables, it is academic in nature and not based on any study whose results has been validated. It is not out of place to reiterate that single customer risk is a huge risk which the uncontrolled comparables are not assuming. By having more customers, the risk is shared or spread. In other words, if one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 33. As far as these grounds are concerned, the factual aspects, as we have already seen, are that the assessee provides spares replacement services in relation to CSI products sold by affiliate in India. The assessee procures spare parts from CSI and supplies it to the channel partner/ customers in India. The product replacement services are provided through third party logistics services provider, who delivers the spare parts to customers/channel partners as and when required. The assessee is remunerated on a cost plus mark-up basis for provision of product replacement services. 34. In justification of the price it received, the assessee submitted as follows:- 4.2 Functions Buys spare parts from Cisco Keeps inventory Supplies to end customers at its own cost Ships back replacement to Cisco 4.3 Assets Employs own assets. The taxpayer keeps a huge inventory as shown below. Opening stock as on 01-04-2007 : ₹ 2,252,138,000/- Closing Stock as on 31-03-2008 : ₹ 1,14,89,47,000 The other assets employed include manpower costs. storage costs, logistics costs etc. 4.4 Risks The taxpayer is claimed to be a Contract service provider with a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th Eastern Carrying Corp Ltd. 2% 14. Overnite Express Ltd. 6% 15. P L Shipping Logistics Ltd. 4% 16. Patel Integrated Logistics Ltd. 4% 17. Roadways India Ltd. 1% 18. S E R Industries Ltd. -1% 19. Shreyas Relay Systems Ltd. 4% 20. Sical Logistics Ltd. 4% 21. Skyline Air Logistics Ltd. 31% 22. Southern Road Carriers Ltd. 2% 23. Speedy Multimodes Ltd. 37% 24. TM International Logistics Ltd. 10% 25. Deeksha Travels Pvt Ltd. 16% 26. DTDC Couriers Cargo Ltd. 6% 27. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Services segment of the taxpayer s international transactions. 36. The DRP confirmed the order of the TPO. At the time of hearing, it was brought to our notice that in the case of assessee for the A.Y. 2006-07, similar issue regarding determination of ALP in respect of product replacement services segment had come up for consideration in ITA No.1410/Bang/2010 and the Tribunal, in its order dated 30.8.2011, has held as follows:- 7.1. Having heard both the parties and having considered the rival contentions, we find that the determination of ALP of the international transaction between the assessee and the AE in USA as regards the product replacement service is before us. It is not in dispute that the international transaction with the associated enterprises has to be scrutinized to verify, if the same is at ALP. The dispute before us is with regard to the method of computing the ALP and also the comparables selected by the TPO. We, therefore, first proceed to decide the correct method of computing the ALP. 7.2 In the case before us, two different methods are adopted TNMM by the assessee and RPM by the TPO. Which is the most appropriate method for arriving at the ALP is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to fix the re-sale price and also is free to choose the customers to whom he would sell the goods. Likewise, in the case of distribution also the re-sale price can be fixed by the distributor and seller has no influence whatsoever in fixing such a resale price. However, in the case before us, though the assessee is becoming the owner of the goods imported, but, by virtue of the product replacement services agreement, he has no right to fix the resale price or to choose the customer to whom the products are to be sold. It is clear from the agreement that the assessee purchases the spare parts to be sold to its associated enterprise only and for doing so, it earned 1% of mark up on the value of the products and the cost of importing the goods. Thus, it can be seen that the assessee is only a custodian of the goods imported till they are delivered to the client or customer of its parent company on its directions. Therefore, the assessee cannot be held to be a trader or distributor of the goods. When the assessee cannot be held to be a trader or distributor of the spare parts, it is clear that the resale price method is not applicable for arriving at the ALP of the international transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actors are to be considered while selecting the comparables, but the TPO has not considered these aspects before rejecting the comparables selected by the assessee. As regards the comparables selected by the TPO, as rightly pointed out by the counsel for the assessee, three of these comparables except Iris Computers are involved in trading and manufacturing activities and the segmental break up is not given. Further, the assets employed and the risk undertaken by these companies are also higher than the assessee. Therefore, we are in agreement with the learned counsel for the assessee that these companies have to be rejected as the comparables. The only comparable which can be accepted is Iris Computers and is to be accepted and the gross profit as pointed out by the learned counsel for the assessee should also reconsidered by the TPO. Holding thus, we remit the issue back to the TPO/AO with a direction to recompute the ALP by adopting the proper comparables and also by using the TNMM method for arriving at the ALP. He shall also consider the issue of allowing the benefit of 5% range as provided under the erstwhile proviso to sec.92C(2) of the Act in the light of the judicial prece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1136594862 Operating Profit 117496029 113659883 Mark up on Cost 8.55% 10.00% 39. The TPO, however, did not agree with the TP analysis carried out by the assessee. He firstly held that it was necessary to distinguish management functions from advisory functions while choosing comparable companies. According to him Management services belong to a separate group of services and cannot be clubbed with advisory functions. He found that the Assessee in its TP study had considered comparable companies the underlying nature which has been treated as a common point was either advisory in nature, software services or marketing services. According to the TPO the above functions rendered were clearly distinguishable from the management services provided by the assessee. The TPO therefore rejected the comparable companies chosen by the Assessee. He thereafter held that from the FAR analysis given by the taxpayer management and the administrative support services belong to one group of services and therefore have to be clubbed together as belonging to one group. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his regard, the Assessee submitted that it had considered companies engaged in array of support services to benchmark its administrative support services transaction. In relation to management services transaction, the Assessee had considered companies engaged in consulting, analytics and advisory services for the purpose of benchmarking this transaction. Accordingly, the Assessee submitted that the observation of the TPO that comparables selected by the Assessee for both administrative support services and management services transaction are more in the nature of marketing support services was inappropriate and the documentation maintained by the Assessee should be accepted. 42. The TPO however rejected the TP analysis carried out by the Assessee holding that under the provisions of Sec. 92C(3)(C) read with Sec. 92CA of the Act the TPO may determine the arm s length price on the basis of such material or information or document available with him, if on the basis of material or information or documents in the possession of TPO, he is of the opinion that the information or data used in computation of the arms length price is not reliable or correct. The following further defects ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. Best Mulyankan Consultants Ltd. 9.45 7. Kshitij Investment Advisory Co. Ltd. 20.44 8. Kitco Ltd. 0.61 9. Future Capital Investment Advisors Ltd. 26.03 ARITHMETIC MEAN MARGIN 24.11 45. The TPO computed the ALP as follows:- 8. Computation of ALP In view of the above discussion, it is concluded that the information as well as the data used in computation of the arms length price is not reliable and correct. Thus the provisions of Sec. 92C(3)(c) are invoked and the TP document is proposed to be rejected. The TPO proceeds to determine arm s length price of the international transactions entered into by you Administrative Services as under. 8.1 Methodology: TNMM as selected by you. 8.2 Profit Level Indicator: The TPO has also considered the same PLI as adopted by you in respect of Administrative Services. The Profit before interest and tax is considered for computing the operating margins. But, the income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istent approach by considering the transaction to be at arm s length in the case of CSS BV India BO while an upward adjustment has been made in the case of Cisco India for the same transaction. (2) The Assessee also provided similar services in the nature of administration support services to Cisco Systems Capital (India) Private Limited (referred to as Cisco Capital ) as well, during the FY 2008-09. For a similar transaction, the Assessing officer has not considered the same to be excessive or unreasonable as per the provisions of section 40A(2)(b) of the Act and allowed the same in the books of Cisco Capital India. Accordingly, the TPO also ought to have regarded the transaction pertaining to provision of administrative by Assessee to CSS BV India BO to be at arm s length. (3) CSS BV India BO being a branch office of a foreign company, is also taxed at a corporate income tax rate of 40% (excluding surcharge and cess). Whereas, Cisco India being a domestic company, is taxed at a corporate income tax rate of 30% (excluding surcharge and cess). Accordingly, if the TPO is considering the receipt of administrative support services not to be at arm s length in Assessee s h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was pointed out that the assessee rendered services to another group company CISCO Systems Capital (I) Pvt. Ltd. The said company was covered by the provisions of section 40A(2)(b) of the Act, but the AO did not make any disallowance of the payments made to the assessed tax, invoking the provisions of section 40A(2)(a) of the Act. In our view, the above facts cannot be the basis to come to the conclusion that the payments made to the assessee for administration support services and marketing support services by its AE is at arm s length. In view of the provisions of section 92 of the Act, any transaction with AE has to pass the arm s length price test, therefore, the above contentions raised by the assessee are rejected as not relevant. 52. We are also of the view that the approach adopted by the TPO of combining the Administrative Support services and management/marketing services and making a comparison of the combined results has to be upheld as both the segments were inter connected. With regard to the comparability criteria adopted by the TPO, we have gone through the order of the TPO and also the nature of services rendered by the comparables chosen by the assessee. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ejected as not comparable by the TPO. 53.8 Empire Industries Ltd.: This company has operations in manufacturing division, trading and indenting division, educational programmes division and others. This company in our view is not comparable considering the functions performed which is altogether different from that of the Assessee. 53.9 Glodyne Technoserve Ltd.: This company is engaged in technology, infrastructure management services and application software service in India and overseas. The assessee has taken the results of technology infrastructure management services for the purpose of comparability. This company, in our view, is functionally similar with that of the assessee and has to be accepted as comparable. 53.10 Khaitan (India) Ltd.: This company is engaged in marketing of electrical equipments and therefore cannot be regarded as comparable with that of the assessee. 53.11 PAE Ltd.: This company is in the business of distribution of lead acid storage batteries to provide power storage in power back-up systems. This company cannot be regarded as a comparable. 53.12 Salora International Ltd.: The Infocom Division of this company was selected for the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In our view, it cannot be regarded as a comparable as the nature of services performed and the industry are entirely different. 53.21 Mindtree Ltd.: This company is in the business of consultancy and R D services to customers post-production. In our view, this company cannot be regarded as a comparable, considering the fact that the assessee renders consultancy services to its AE. 53.22 PSI Data Systems Ltd.: This company is a part of Aditya Birla group, providing end to end IT services, product engineering and business assurance solutions to the banking, financial services, insurance, telecommunication, etc., rightly regarded as functionally not comparable, as the area of operations are different. 53.23 SIP Technologies Exports Ltd.: This company provides software development services, maintenance, etc., cannot be regarded as a comparable with that of the assessee. 53.24 Synetairos Technologies Ltd.: This company is engaged in obtaining and executing development projects for development and maintenance of computer software and to provide systems and services in automation, computerization and related activities. In our view, this company cannot be regarded as compar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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