9911796707
TMI Blog2015 (7) TMI 125X X X X Extracts X X X X X X X X Extracts X X X X ..... .11.2014 is non-est, illegal and bad in law. 1.1 That the AO erred in passing the Order dated 14.11.2014 without waiting for the Transfer Pricing Officer ("TPO") to pass an order giving effect to the directions of the DRP on an erroneous assumption that the limitation for passing the final assessment order was elapsing. 1.2 That the AO erred in making an addition of Rs. 28,59,06,323/- to the income of the appellant in respect of international transaction of software development and maintenance services rendered by the Appellant to its parent company, viz., Fiserv Global Services Inc., USA. without appreciating that the DRP has allowed substantial relief to the Appellant in respect of the aforesaid issue. 2. Without prejudice to the aforesaid, the AO erred in assessing the total income of the Appellant at Rs. 28,74,75,770/- as against income of Rs. 15,69,443/- returned by the Appellant after making transfer pricing addition of Rs. 28,59,06,323/- in respect of international transaction of software development and maintenance services rendered by the Appellant to its parent company, viz., Fiserv Global Services Inc., USA. 3. That on facts and in circums ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost, without appreciating that such a filter is not decisive for tracing out service companies since there is no compulsion on companies to necessarily keep personnel on their rolls F. Rejecting companies with different financial year without assigning any cogent reasons for applying the said filter, 7. That the AO and DRP erred in confirming the action of the TPO in rejecting the comparable companies selected by the Appellant without providing any cogent and/or sufficient reasoning. 8. That the AO and DRP erred in confirming the action of the TPO in selecting the following companies which were not functionally comparable to the Appellant for the purposes of benchmarking the international transaction entered into by the Appellant: a) E-Infochips Bangalore Ltd. b) Infosys Ltd. c) Persistent Systems Ltd. 9. That the AO and DRP erred in confirming the action of the TPO in selecting E-Infochips Bangalore Ltd. as a comparable for benchmarking the international transaction entered into by the Appellant with its AE without appreciating that the said company had fluctuating margins over the years and that complete financial data of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payer company has entered into the following international transactions with its associated enterprises (AEs) Nature of transaction Value of international Software Development services 230,23,08,481 Recruitment expenses 2,66,52,931 5 The arm's length price of the international transactions representing software development services provided to the associated enterprises (AE) is determined by applying transactional net margin method (TNMM), which is stated to be the most appropriate method in the facts and circumstances of the case. The operating profit to total cost (OP/TC) ratio is taken as the profit level indicator (PLI) in the TNMM analysis. The PLI of the company is arrived at 14.64% on cost; whereas the average PLI of the comparables is arrived at 12.13% as per the analysis in the TP document. It is further seen that average Profit Level Indicator (PLI) was directed on the basis of 12 comparables selected by the tax payers. The mean margin of the comparables selected by the assessee as stated above was 12.13% and since the profit margin of the assessee was within +/= 5% range of the mean margin of the comparables, no transfer pricing adjustment was offered in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned counsel for the assessee submitted that all his contentions vis-à-vis grounds raised in the memo of appeal be confined to the exclusion of the following comparables from the list which was finally selected by the DRP: a) E-Infochips Bangalore Ltd. b) Infosys Ltd. c) Persistent Systems Ltd.; and treatment of foreign exchange fluctuation gain/loss as operating item 9 We have considered the rival submissions and perused the material on record. Taking up the each of the comparables contested and disputed by the appellant in this appeal. E-INFOCHIPS BANGALORE LTD. 10. The DRP repelled the objection of the assessee as under: "The taxpayer primarily wants this comparable to be excluded on account of Function not comparable Shift of focus from software services From the perusal of annual report it is seen that under software services the main activities are product lifecycle management, application development and Integration, enterprise IT consulting and implementation. It is also involved in turnkey product development, hardware & software design (board design, BSP, RTOS, Codecs/Stacks) sustenance engineering services, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO as comparable should be excluded from the list of final comparables for the purposes of transfer pricing analysis on the ground of functional differences as well as on the ground of insufficient information available in respect of the said entity in public domain. In order to support and substantiate his contention of functional dissimilarity, the learned counsel for the assessee has heavily relied on the contents of the website www.einfochip.com., the print out of relevant portion of which is placed on record before us. On the basis of the said contents, he has made an attempt to point out that M/s. E-Infochips Bangalore Ltd. is functionally different form the assessee company in as much as the said company is mainly into development of new products whereas the assessee company is mainly providing software development services. After having gone through the website www.einfochip.com., we however find that the same is in respect of the entire group of e-Infochips, of which M/s. E-Infochips Bangalore Ltd. is only a part. The functional profile given on the said website thus is that of the entire group and not just of the M/s. E-Infochips Bangalore Ltd. The content of the said we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the view that the matter should go back to the Assessing Officer/TPO for fresh consideration. This, in our opinion, will also take care of the grievance of the assessee relating to the lack of sufficient information in respect of M/s. E-Infochips Bangalore Ltd. available in the public domain in as much as the TPO can obtain such information in the form of relevant schedules of the Profit & Loss Account of the said entity as well as the segmental details, if any, directly from the said entity. We therefore, set aside the impugned order of the Assessing Officer as well as the direction given by the DRP on this issue and restore the matter to the file of the Assessing Officer/TPO for deciding the same afresh in the light of the observations already made by us, after giving the assessee proper and sufficient opportunity of being heard. Ground No.2 of the assessee's appeal is accordingly allowed for statistical purposes.." 10.5 Having regard to the above decision we also set-aside the orders of TPO/DRP for denova examination after providing reasonable opportunity to the taxpayer INFOSYS LTD.: 11. Before the TPO the assessee objected to the use of this comparabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenues from software development services." 11.1 The Ld counsel referred to following distinguishing parameters to submit that M/s. Infosys Ltd. is not comparable with the appellant: "Diversified business v. Software development service Turnover of Rs. 21,140 crores vs. Rs. 230.36 crores Significant intangibles of more than Rs. 1 lac crores vs. NIL Onsite (48.7) and offshore (51.3) vs. Only services from India Sales, advertisement and brand building expenses of over Rs. 75 crores vs. Nil R&D expenditure of Rs. 437 crores v. NIL." 11.2 He has referred to following decision: a) Aginity Technologies ITA No. 3856/D/2010 b) CIT v. Aginity Technologies 262 CTR 291 (Del) c) Atrenta (India) Pvt. Ltd. d) Toluna India Pvt. Ltd. vs. ACIT (formerly Greenfield Online (P) Ltd. 166 TTJ 128 (Del) 11.3 On the other hand the ld DR relied on findings of DRP. 11.4 We have considered rival submissions, perused the material on the record. In the case of Agnity Technologies, ITA No.3856/Del/2010, a coordinate Bench has held as under:- "It is argued that the case of the assessee is not comparable with Inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o higher profits. The facts of the appellant are akin and therefore, do not warrant any different conclusion. The appellant is also captive service provider to its AE and as such, M/s. Infosys Ltd. is not a valid comparable with the appellant. M/S PERSISTENT SYSTEMS LTD.: 12. The DRP repelled the objection of the assessee as under: "The taxpayer primarily wants this comparable to be excluded on account of Functionally Different Significant RPT>10% Significantly high turnover The taxpayer submitted that The company is involved in diversified activities like testing, professional services and customer support (Source page 76 of Annual Report March 2010) However, as per P-82/AR "Income The company is engaged in providing outsourced product development services to Independent Software Vendors (ISVs) and Enterprises. The company derives a significant portion of its revenues from export of software services and products." It can be seen from the above this company is engaged in software development services hence it is good comparable As mentioned above that in a service industry there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Dun and Bradstreet's analysis had held that turnover range of Rs. 1 crore to 200 crores is appropriate. The said proposition has followed by the earlier Benches of this Tribunal in the following cases: (i) M/s. Kodiak Networks (I) Pvt. Ltd v. ACIT - ITA No.1413/Bang/2010; (ii) M/s Genesis Microchip (I) Pvt. Ltd. DCIT - ITA NO.1254/Bang/2010; (iii) Electronic for Imaging India Pvt. Ltd - ITA NO.1171/Bang/2010; & (iv) M/s. Trilogy E-Business Software India Private Ltd. v. DCIT - ITA No.1054/Bang/2011 dated 23.11.2012. 3.3.1 In the case of M/s.Genisys Integrating Systems (India) Pvt. Ltd. v. DCIT (supra), relying on Dun and Bradstreet', has observed as under: "9. .............we find that the TPO himself has rejected the companies which are making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ores".. In view of the above said reasoning and the orders of the Benches of Bangalore Tribunal cited supra, the following 8 companies will have to be eliminated from the list of comparables selected by the TPO, namely: * Flextronics Software Systems Limited; * iGate Global Solutions Limited; * Mindtree Limited; * Persistent Systems Limited; * Sasken Communication Technologies Limited; * Tata Elxsi Limited; * Wipro Limited; & * Infosys Technologies Limited. It is ordered accordingly." 12.4 Following the aforesaid decision of the Tribunal and the judgment of Hon'ble High Court of Delhi in the case of CIT v. Aginity Technologies (supra) we hold that Persistent Systems Ltd. should not be regarded as a comparable. 13 The next issue relates to treatment of foreign exchange fluctuation gain/loss as operating item. During the course of hearing, the learned counsel submitted that the foreign exchange loss cannot be accepted for the purpose of calculation of the margin and in support, he relied upon the following decisions: a) SAP Labs India Pvt. Ltd. v. ACIT (2010) 6 ITR (Trib) 81 dated 30.08.2010 wherein ITAT held that foreign exchange fluctuations are an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction for import or export of goods is nothing, but inherent part of the price of import or the value of export. The Hon'ble Supreme Court in Sutlej Cotton Mills Ltd. VS. CIT 116 ITR 1 (SC) has held that : 'where profit or loss arises to an asssessee on account of appreciation or depreciation ITA Nos.4446 & 4447/Del/2007 in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business'. When we read the ratio of the case of Sutlej Cotton (SC)(supra) in juxtaposition to that of the Special Bench in case of Prakash I Shah (supra), there remains no doubt that forex gain or loss from a trading transaction is not only an item of revenue nature, but is, in fact, a part of the price of import or value of export transaction, as the case may be. Operating expense is ordinarily an expense that a business incurs as a result of performing its normal business operations. As the business of 'Assembly' done by the assessee under this segment is not poss ..... X X X X Extracts X X X X X X X X Extracts X X X X
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