9911796707
TMI Blog2015 (5) TMI 352X X X X Extracts X X X X X X X X Extracts X X X X ..... ices to its overseas group companies. The assessee reported certain international transactions. The Assessing Officer (AO) referred the international transactions to the Transfer Pricing Officer (TPO) for determination of their Arm's Length Price (ALP). The first dispute is qua the international transaction of `Provision of software development services' also referred to as `Provision of contract R&D services' with transacted value of Rs. 1,35,29,54,809/-. The assessee applied the Transactional Net Margin Method (TNMM) as the most appropriate method with the Profit level indicator (PLI) of Operating Profit to Total Cost (OP/TC) to explain that it was at ALP. The assessee declared profit margin under this segment at 13%. In order to demonstrate that the services were provided at arm's length price, it chose 20 companies as comparables with their average PLI at 14.4%. The TPO rejected 15 out of such 20 companies and added two new companies to make a final tally of comparable companies at 7, with their average OP/TC at 25.89%. Following is the final list of comparable companies chosen by the TPO with their respective profit margins:- Sl.No. Name of the Company Margins 1. Akshay S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unication networks and followed by telecommunications service providers across the globe. The Group specializes in transitioning legacy communications networks to be converged, next generation architecture capable of delivering a mix of high band width services. The assessee is engaged in design, development and maintenance of software, which essentially includes the activities, namely, Software development services; Procurement, research and technology; Development of design; After-sales activity; and Accounting/administration. The assessee provides contractual software development services to its group company alone. These services include maintenance and updation activities. The assessee is compensated by its USA Associated enterprise (AE) with aggregate of direct and indirect costs incurred by it in performing the services to Ciena, USA plus suitable mark-up to be decided on agreed basis from time to time. For the year under consideration, the assessee was allowed a mark-up of 13%. As per the Agreement entered into between the assessee and Ciena, USA, there is a Confidentiality clause by which all information communicated to one party by the other can be used only for the purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing services to its AE alone without acquiring any intellectual property rights in the work done by it in the development of software. The Hon'ble Delhi High Court in CIT vs. Agnity India Technologies (P) Ltd. (2013) 219 Taxmann 26 (Del) considered the giantness of Infosys Ltd., in terms of risk profile, nature of services, number of employees, ownership of branded products and brand related profits, etc. in comparison with such factors prevailing in the case of Agnity India Technologies Pvt. Ltd., being, a captive unit providing software development services without having any IP rights in the work done by it. After making comparison of various factors as enumerated above, the Hon'ble Delhi High Court held Infosys Ltd. to be incomparable with Agnity India Technologies Pvt. Ltd. The facts of the instant case are more or less similar inasmuch as the extant assessee is also a captive service provider with a limited number of employees at its disposal and also not owning any branded products but, rendering only offshore services with no expenditure on R&D etc. When we consider all the above factors in a holistic manner, there remains absolutely no doubt in our mind that Infosys Techno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted that Bodhtree Consulting Ltd. cannot be considered as comparable because of a different model of revenue recognition. He invited our attention towards the Annual report of this company, in which it has been specifically reported that revenue from software development is recognized based on software developed and billed to clients. He submitted that the costs incurred by this company in respect of the projects pending completion at the end of the year are booked at the time of incurring, but, the income is recognized on the raising of bills in subsequent year, thereby distorting the figure of operating profit for a particular year. In contrast to that, the ld. AR submitted that the assessee was recognizing revenue from software development side by side without waiting for the completion of the project. 9.5. Under the mercantile system of accounting, income is recognized at the time of its accrual and the expenses become deductible when liability to pay is incurred. The dates of actual payment of expenses or receipt of income become insignificant. This is also called `Matching concept', as per which income is recognized with the incurring of expenses. To put it simply, if inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or expenses in the year of incurring but considering income only on the conclusion of the project in the subsequent year sounded a little awkward, we attempted to find out the amount of capitalized expenses in respect of incomplete projects at the end of the year. Apparently, we could not find out any such capitalized value of work-in-progress in the balance sheet of the company on standalone basis. We directed the ld. DR to examine the Annual report of this company and point out the amount of expenses capitalized in respect of incomplete work at the end of the year. On the next date of hearing, the ld. DR failed to specifically point out any amount of such capitalized expenses with the opening or closing balance. This prima facie shows that the expenses incurred in respect of incomplete projects of software development at the end of the year, but billed in the subsequent year, were, in fact, treated as expenses for the current year alone. In the same manner, expenses incurred in the preceding year for the contracts of software development remaining incomplete at the end of the year, also must have been included in the expenses of the last year alone, but, the income getting recogn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s which were dissimilar to the software development. He rejected this company, inter alia, on the ground of its failing the export turnover filter. The assessee is aggrieved against the expulsion of this company from the final set. 11.2. After considering the rival submissions and perusing the relevant material on record, we find from the Annual report of this company, which is available in the paper book, that it has only one segment. There is a mention on page 38 of the Annual report that : 'In the previous year the company was engaged in the business of software development and services comprising both on-site and offshore operations. During the current year, the company added two more divisions: Media Division and IPTB Division'. When we consider the functional profile of the assessee company under the software development segment, we find Goldstone Technologies Ltd. to be nowhere close to it. This company is also engaged in providing services comprising on-site and offshore operations. Apart from that, it added two more new divisions during the current year, being, Media Division and IPTB Division. By no standard this company on entity level can be considered as comparable wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... several tribunal decisions in which risk adjustment has been denied to the assessee. At the same time, the ld. AR has also drawn our attention towards some of the tribunal decisions, in which such an adjustment has been allowed. In fact, there cannot be a general rule of allowing or not allowing risk adjustment. Risk is nothing but a possible adverse perception in the given circumstances, which may or may not finally fructify. Generally, risks and rewards go side by side. Higher the risk, more the profit; and vice versa. Level of risk depends on the facts and circumstances of each case. Where the assessee succeeds in ably demonstrating that the comparables finally selected bore relatively more risk than it, then there should be no denial of the risk adjustment. If, however, the assessee fails in specifically pointing out the extra risks undertaken by the comparables, then, of course, there cannot be any question of granting risk adjustment. Under the transfer pricing regime, onus is always on the assessee to show the reasons for claiming any separate adjustment by pointing out the differences between it and the comparables. Risk adjustment can be allowed provided the assessee place ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .1. Ground nos. 5 and 8 are in respect of international transaction of `Purchase of capital goods'. The factual matrix apropos this issue is that the assessee reported an international transaction of 'Purchase of fixed assets' with transacted value of Rs. 33,50,51,611/-. The TPO required the assessee to submit book value of the goods so imported in the books of AE along with the details of costing methodology applied. The assessee was also called upon to file copy of invoices along with the market price of the same or similar goods at the time of purchase. The assessee submitted vide its reply dated 3.1.2013 that it operates on a cost plus basis wherein it recharges all its operating costs including depreciation to its AE along with a mark up. However, the specific information called for by the TPO, was not submitted. In the absence of such details, the TPO computed the ALP of this international transaction at Nil. As regards the adjustment u/s 92CA, the TPO required the AO to calculate proper depreciation on fixed assets as per the provisions of the Act. The DRP directed the assessee to submit item-wise particulars for the claim made by it with all the documents/evidence/proof sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts of the instant case, we find that the assessee applied TNMM as the most appropriate method for showing that this international transaction was at ALP. The TPO held that the correct method to be applied was CUP and as such the assessee was called upon to give uncontrolled comparable instances of the purchase of similar assets, which the assessee failed to do. This led the TPO to treat the ALP of this international transaction at Nil. Normally, if the assessee fails to give any comparable instance, then it becomes the duty of the TPO to search some comparable uncontrolled instances at his own and accordingly determine the ALP of the international transaction. In our view, both the assessee as well the TPO went wrong by not doing what was required to be done by them. 15.4. Once the ALP of an international transaction of purchase of fixed assets is determined, then the difference between the transacted value and the ALP does not directly lead to the transfer pricing adjustment. At this juncture, it is pertinent to note the language of section 92(1) which provides that any income arising from an international transaction shall be computed having regard to the arm's lengt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ying on of the business. But in order to be eligible for processing two or more transactions jointly for determining their ALP, it is essential that they should be closely linked. If two transactions are not closely linked, then they cannot be considered jointly. Considering the above case of a manufacturer or a trader, it cannot be held that the transaction of purchase of fixed assets is closely linked with the purchase of raw material or sale of finished goods etc. In such a scenario, it becomes important to examine the transaction of purchase of fixed assets independent of other transactions. 15.6. However, the above rule of scrutinizing international transaction of purchase of fixed asset as independent of all other transactions is not universal. It has its own exceptions as well. The instant case is a glaring example of exception to the above rule. It is so for the reason that the assessee is getting remuneration from its AE at costs incurred plus a particular mark-up. The cost base includes not only direct but all the indirect costs. The amount of depreciation allowance on fixed assets, including those purchased from AE, is also compensated with the same mark-up. Thus we can ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
