9911796707
TMI Blog2015 (5) TMI 303X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee that the said concern is excludible from the final set of comparables CSA (India) Ltd. (ESS Segment) functionally different as pointed out by the assessee vis-à-vis the R s length price with regard to the international transactions of Provision of back office support services - Held that:- the present case that the activities undertaken by Infosys BPO Ltd. cannot be qualitatively compared with the activities being carried out by the assessee in its back office support services segment. Undoubtedly, Infosys BPO Ltd. owns significant intangibles and eminent brand value whereas in the case of the assessee before us there is no such situation. The turnover achieved by Infosys BPO Ltd. is many times higher in comparison to the assessee; the said concern is a giant in comparison to the assessee. In our view, the presence of the aforesaid factors justify assessee’s assertion that the said concern be excluded from the list of comparables. Cosmic Global Ltd. is liable to the excluded from the final set of comparables having regard to the difference in the business model brought out by the assessee. M/s Omega Healthcare Management Services Pvt. Ltd. in the absence of any adverse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s given by the Dispute Resolution Panel, Pune (in short 'the DRP') dated 31.12.2013. 2. In this appeal, the Grounds of Appeal raised by the assessee read as under: - "1. The Ld. Assessing Officer ('AO') pursuant to the directions of the Ld. Dispute Resolution Panel ('DRP') erred in rejecting the benchmarking approach adopted/contemporaneous documentation maintained by the appellant and thereby making a transfer pricing adjustment of ₹ 93,951,619 to the income of the appellant by holding that the international transaction, 2 pertaining to provision of Information Technology ('IT or software services') and IT enabled back office support services ("ITES Services or back office support services') to the associated enterprise ('AE'), are not at arm's length under the Income-tax Act, 1961 ('the Act'). 2. On the facts and in the circumstances of the case, the Ld. DRP/AO erred in modifying the benchmarking analysis, as conducted by the appellant using Transactional Net Margin Method ('TNMM') for benchmarking its international transactions pertaining to provision of IT and ITES services to the AE, and thereby modifying t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 of arm's length price of the international transactions entered by the assessee with its associated enterprises. 4. Briefly put, the relevant facts are that the appellant is a company incorporated under the provisions of the Companies Act, 1956 and is, interalia, engaged in the business of providing software solutions and back office operations exclusively to its associated enterprises abroad. For the assessment year under consideration, it filed a return of income declaring total income of ₹ 2,33,171/-, which was subject to a scrutiny assessment. The international transactions entered by the assessee with its associated enterprises related to Provision of software services and Provision of back office support services amounting to ₹ 45,26,17,038/- and ₹ 18.82.13.428/- respectively. On a reference made by the Assessing Officer, the Transfer Pricing Officer (TPO) passed an order u/s 92CA(3) of the Act dated 28.01.2013 determining the arm's length price of the aforesaid international transactions at a figure higher than their stated values by a sum of ₹ 9,39,51,619/-. After the Assessing Officer passed a draft assessment order u/s 143(3) r.w.s. 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and investor services, insurance, asset management and financial services through financial services company. PFG is not engaged in developing and selling software products and such like services i.e. software development services required to undertake its core business area of financial products and services are outsourced to the assessee company. The software development services rendered by the assessee comprised of application development and quality assurance services which have been categorized as Provision of software services and for the year under consideration, assessee has been remunerated for such services at ₹ 45,26,17,038/-. The second stream of 'international transactions' entered with the associated enterprises relate to the administrative support services provided by the assessee for various service divisions of PFG e.g. investor services division, health services division and individual life insurance, underwriting operations division, etc.. Such services has been categorized as Provision of back office support services for which assessee has been remunerated during the year under consideration at ₹ 18,82,13,428/-. 7. Both the aforesaid category of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0% 2. Akshay Software Technologies Ltd. 8.23% 3. F C S Software Solutions Ltd. 15.61% 4. L G S Global Ltd. 18.88% 5. Compucom Software Ltd. (Software Segment) 42.09% 6. Transworld Infotech Ltd. (Sterling International Enterprises Ltd.) 46.73% 7. KALS Information Systems Ltd. (Application Software Segment) 42.36% 8. ICSA (India) Ltd. (ESS Segment) 60.78% ARITHMETIC MEAN 32.79% 11. In this manner, by adopting the aforesaid final set of comparables, the TPO compared the assessee's PLI of 15.66% in the segment of Provision of software services with the arithmetic mean PLI of the comparables at 32.79% and accordingly computed an adjustment of ₹ 6,70,55,721/- which was required to be made to the stated value in order to determine the arm's length price of the transactions relating to the Provision of software services to the associated enterprises. 12. On this aspect, the Ld. Representative for the assessee has made three-fold arguments. Firstly, it is contended that the following concerns, namely, (i) Compucom Software Ltd. (Software Segment); (ii) Transworld Infotech Ltd. (Sterling International Enterprises Ltd.); (iii) KALS Information Systems Ltd. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the said concern was not comparable to an assessee which was engaged in Provision of only software development services. 15. On the other hand, the Ld. Departmental Representative appearing for the Revenue has primarily relied upon the stand of the TPO as contained in para 10 of the impugned order. As per the TPO, the application software segment of the said concern was also undertaking software development services and therefore it was liable to be included as a comparable. 16. We have carefully considered the rival submissions. We find that the point made out by the assessee for exclusion of KALS Information Systems Ltd. (Application Software Segment) is on a sound footing inasmuch as the said concern is functionally distinct from the activities of Provision of software services rendered by the assessee. Ostensibly, for the very same assessment year in the case of PTC Software (India) Private Limited (supra), the Pune Bench of the Tribunal found that the said concern was functionally different from a concern which was undertaking pure software development services. The relevant discussion in the order of the Tribunal dated 31.10.2014 (supra) is as under :- "27. The assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices segment of PTC Software (India) Pvt. Ltd. (supra) was engaged in rendering software development services which did not include development of any software products as was being done by KALS Information Systems Ltd. (Application Software Segment). Ostensibly, in the case of the appellant also in the course of rendering of Provision of software services to the associated enterprises, there is no development of software products, which is different from the situation in the case of KALS Information Systems Ltd. (Application Software Segment); and, therefore following the aforesaid precedents, the said concern is liable to excluded from the final set of comparables. Moreover, we have also perused the orders passed by the TPO u/s 92CA(3) for assessment year 2007-08 (supra) as also for assessment year 2010-11 (supra) wherein the plea of the assessee for exclusion of KALS Information Systems Ltd. (Application Software Segment) has been accepted. For all the aforesaid reasons, we uphold the plea of the assessee for exclusion of KALS Information Systems Ltd. (Application Software Segment) from the final set of comparables. We direct accordingly. 18. The second point made out by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices to the associated enterprises. 20. The Ld. CIT-DR has primarily referred to the discussion made by the TPO in para 10(7) of the impugned order to say that the said concern was having two distinct segments as per its Annual Report, and the segment considered for the comparability analysis by the TPO was software services segment which did not include product development activity. Therefore, the segment considered for comparability analysis is similar in function to assessee's activity of Provision of software services to its associated enterprises. 21. We have carefully considered the rival submissions. Firstly, we may refer to the decision of the Pune Bench of the Tribunal in the case of PTC Software (India) Pvt. Ltd. dated 30.04.2013 (supra) wherein the inclusion of ICSA (India) Ltd. (ESS Segment) in the final set of comparables was in dispute. In the case of PTC Software (India) Pvt. Ltd. (supra) assessee had made out a case that the Research and Development (R&D) expenditure incurred by the said concern was in excess of the quantitative filter of R&D expenses applied during the Transfer Pricing proceedings. This aspect of the matter was upheld by the Tribunal and therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparables stands accepted, a copy of the said order is placed at pages 637 to 668 of the Paper Book. Furthermore, the Ld. Representative for the assessee at the time of hearing furnished a detailed Tabulation containing the Accept-Reject matrix undertaken by the assessee in its Transfer Pricing Study for assessment year 2010-11 wherein the said concern was excluded on the grounds of functional dissimilarity. Ostensibly, such a stand of the assessee has been accepted by the TPO in assessment year 2010-11. In this background of the matter, in our view, we find merit in the assessee's plea for exclusion of the said concern from the final set of comparables in the present year too. We hold so. 22. The next point made out by the assessee is for exclusion of Compucom Software Ltd. (Software Segment) from the final set of comparables. In this context, the plea of the assessee is that the said concern is not only engaged in rendering software development services but also sale of software products, end-to-end mobile solutions, IT infrastructure services, etc. and in support a reference has been made to pages 162 to 213 of the Paper Book wherein is placed a copy of the Annual Report pertai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e TNM Method requires broad functional similarities, and a concern can be said to be functionally comparable with the tested party if it is engaged in similar activity. However, in the present case, it is required to be appreciated that M/s Compucom Software Ltd. (Software Segment) is engaged in a wide spectrum of activities noted earlier and its customer profile includes Government bodies, etc. whereas the assessee is a captive software service provider rendering pure software development services to its associated enterprises as per the specifications provided. It has also been pointed out by the assessee that the software services segment of Compucom Software Ltd. is, inter-alia, engaged in development of software products also which is qualitative different from what is being undertaken by the assessee. Therefore, in the absence of any credible discussion emerging from the order of the lower authorities as to in what manner the functional profile of the said concern in the software segment is similar to assessee's tested activity, we are inclined to uphold assessee's plea that the software segment of Compucom Software Ltd. is not comparable to assessee's segment of Provision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... where comparable to assessee's activities since assessee does not render such services and rather it is providing software development services on the basis of the specifications provided by the associated enterprises. In our considered opinion, the aforesaid functional difference pointed out by the assessee vis-à-vis the R&D services segment of the said concern are germane and relevant to decide about the inclusion of the said concern for the comparability analysis. Therefore, we direct the lower authorities to exclude the margins relatable to the R&D services segment of the said concern and consider only the margin relatable to the IT services segment alone to benchmark assessee's activity of Provision of software services to its associated enterprises. Thus, on this aspect also assessee succeeds. 29. Apart from the aforesaid, there is no other plea raised by the assessee with regard to the determination of arm's length price of international transactions relating to Provision of software services to the associated enterprises. Therefore, we direct the Assessing Officer to re-compute the arm's length price of international transaction of Provision of software serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the rival submissions. In the case of Agnity India Technologies Pvt. Ltd. (supra), the Hon'ble High Court noted that M/s Infosys Technologies Ltd. was a concern with a turnover of ₹ 9028 crores whereas the assessee before it i.e. Agnity India Technologies Pvt. Ltd. was having a turnover of ₹ 16.09 crores. The Hon'ble High Court also noted the difference in spending on advertisement, sales promotion and Research & Development by Infosys Technology Ltd. and Agnity India Technologies Pvt. Ltd.. Whereas Infosys Technologies Ltd. was spending substantial sums on advertisement, sales, promotions, brand, building and R&D activity, and Agnity India Technologies Pvt. Ltd.'s spending on such activities was NIL. Agnity India Technologies Pvt. Ltd. was a captive service provider for its associated enterprises, which was not the case of Infosys Technologies Ltd.. Under these circumstances, the Hon'ble Delhi High Court approved the decision of the Tribunal which held that Infosys Technologies Ltd. could not be compared with M/s Agnity India Technologies Pvt. Ltd. having regard to the financial data, etc. of the two concerns. Considering the aforesaid parity of reasoning, it has to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bench of the Tribunal noted that a concern which was outsourcing most of its work could not be construed to be a good comparable with an assessee who was carrying out the work by itself. To the similar effect is also the decision of the Bangalore Bench of the Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. vs. DCIT vide ITA No.227/Bang/2010 dated 09.11.2012. The decision of the Pune Bench of the Tribunal in the case of PTC Software (India) Pvt. Ltd. dated 30.04.2013 (supra) is also to the similar effect. Therefore, in our considered opinion, having regard to the difference in the business model brought out by the assessee, M/s Cosmic Global Services Ltd. is liable to the excluded from the final set of comparables. We hold so. 38. With regard to rendering of back office support services segment, assessee has also submitted that (i) Omega Healthcare Management Services Pvt. Ltd.; (ii) In House Productions Ltd.; and, (iii) Galaxy Commercial Ltd. (BPO Segment) have been wrongly excluded by the TPO from the final set of comparables. 39. With respect to the M/s Omega Healthcare Management Services Pvt. Ltd., we find that the TPO excluded the said concern on the ground that the info ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsfer Pricing proceedings. 42. The next point made out by the assessee is for inclusion of M/s In House Productions Ltd. (Healthcare Division) in the final set of comparables. The TPO rejected the said concern on the ground that the Notes to Accounts in the Annual Report of the said concern revealed that a fire had destroyed a major portion of the account books. Therefore, according to the TPO, the integrity of the financial data reflected in the Annual Accounts was in question. The same stand has been reiterated by the Ld. CIT-DR before us in order to justify the exclusion of the said concern from the final set of comparables. 43. On the other hand, the Ld. Representative for the assessee vehemently pointed out that the Auditor's Report of the said concern does not reveal any adverse finding or qualification with regard to the unreliability of the financial data. It was therefore contended that the TPO has misdirected himself in questioning the integrity of the financial data reflected in the Annual Report of the said concern. 44. We have carefully considered the rival submissions. Having regard to the discussion in the order of the TPO, we find that the only reason advanced by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over more than one year is required to be evaluated. For the said purpose, we deem it fit and proper to restore the matter back to the file of the TPO, who shall examine the financial results of the said concern for two years prior and subsequent to the assessment year under consideration so as to formulate a belief as to whether or not it is a consistently loss-making concern. If the Assessing Officer/TPO comes to conclude, having regard to the aforesaid trend analysis that it is a consistently loss-making unit then the same is liable to be excluded otherwise the said concern cannot be excluded merely because in the year under consideration it has suffered a loss. For the aforesaid purpose, we deem it fit and proper to restore the matter back to the file of the TPO, who shall allow a reasonable opportunity the assessee of being heard and thereafter pass an order afresh as per law on this aspect. 48. With regard to the determination of arm's length price in relation to the Provision of back office support services, no other argument has been set-up before us and therefore we direct the Assessing Officer/TPO to re-compute the arm's length price in relation to the internatio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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