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TMI Blog2015 (8) TMI 656X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia from 1.4.2008 and consequent to such merger, the name of the assessee was changed to OSI Systems (P) Ltd. It is also pertinent to mention here that as per the order of merger of the Hon'ble Andhra Pradesh High Court, the companies had maintained separate books of accounts for financial year 2008-09. As could be seen from the materials on record, Rapiscan Systems (P) Ltd is engaged in the business of software services to its AEs in the field of security and inspection. Spacelabs Healthcare Solutions (P) Ltd provides software development services to its AEs in the field of medical equipment and services, whereas OSI Opto is providing purely Information Technology enabled services (ITeS) to its AEs by maintaining a help desk. For the A.Y under consideration, assessee filed its return of income on 30.09.2009 declaring nil income under the normal provisions and book profit of Rs. 15,61,69,200 u/s 115JB. During the assessment proceedings, AO noticing that assessee has entered into international transactions with its overseas AE made a reference to the Transfer Pricing Officer (TPO) u/s 92CA1) of the Act for determining ALP of the international transactions between assessee and the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has ultimately shortlisted eight companies as comparable with average profit margin of 16.45% on cost. Since the margin earned by the assessee is at 12.26% of operating cost, the price charged was found to be within arm's length. Though, TPO accepted TNMM as most appropriate method with OP/OC as PLI, however, he did not accept TP documentation of the assessee on the ITES segment by pointing out various defects and deficiencies. After rejecting the TP documentation, AO undertook a search himself in the databases which yielded 12 comparable companies with average arithmetic mean of 27.42%. The details of the companies selected by the TPO are as under: S.No Company Name Total Operating Income (Rs.) PBIT/Cost (%) 1 Accentia Tech 78,73,29,230 49.40 2 Acropetal Technologies Ltd (Seg.) 33,13,47,129 25.01 3 Aditya Birla Minacs Worldwide Ltd 231,56,52,000 0.53 4 Cosmic Global Ltd 7,76,39,593 48.20 5 Crossd domain 33,76,05,000 29.38 6 Eclerx Services Ltd 187,98,40,000 53.34 7 Infosys BPO Ltd 1082,30,21,283 16.90 8 Jeevan Scientific/Softech Technology Ltd 1,79,46,688 16.56 9 Microland Ltd 144,04,72,000 2.35 10 Microgenetic Systems Ltd 1,26,5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ult of which the arm's length operating revenue was determined by the TPO at Rs. 5,26,24,777 as against the actual operating cost of Rs. 7,07,71,770. The difference of Rs. 1,81,46,922 was treated as adjustment u/s 92CA. Thus the total TP adjustment made by TPO was to the tune of Rs. 2,85,89,750. In pursuance to the order passed by the TPO, AO proposed a draft assessment order incorporating the adjustments to the ALP recommended by the TPO. Being aggrieved of the draft assessment order, assessee raised objections before the DRP. The DRP rejected assessee's objections on TP adjustment while granting partial relief on the issue of 10A deductions and computation under MAT provisions. In pursuance to the directions of the DRP, the impugned assessment order has been passed by the AO. 11. Assessee has raised a number of grounds, totaling to 19, on various issues of transfer pricing adjustment as well as corporate matters. At the outset, ld AR submitted before us that Ground Nos. 1 to 5 are general in nature, hence not pressed. He also submitted that Ground Nos. 8 & 9 are academic in nature, hence would not like to press these grounds. In view of the above, Ground Nos. 1 to 5 and 8 and 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of CIT V/s. Agnity India Technologies Pvt. Ltd. (2013) 219 Taxman 26 (Del), wherein it was held that huge turnover companies like Infosys and Wipro cannot be considered as comparable to smaller companies like assessee. 16.1 Even though we are not in agreement with the contentions of the comparability on turnover ratio of assessee with this company on the ground that assessee's turnover is about Rs. 129.8 crores, which as against turnover of Rs. 1016 crores of the Infosys, ( which is only about 5 times) we are of the view that other contentions with regard to the brand value and brand building exercise, having huge asset base, can be considered to arrive at the conclusion that Infosys is functionally not similar to that of assessee. Infosys BPO stands on its own as an exclusive BPO of the Infosys Technologies and in earlier years, generally Infosys BPO is excluded in many of the cases. Considering these aspects, we are of the opinion that even though the profits of the Infosys BPO Ltd. is reasonable and no super profits are earned, just because of its big brand value, this company has to be excluded on the grounds of functional dissimilarity on FAR Analysis. Therefore, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te, service at Sl.No. (vi) of this Circular is 'Geographic Information System services and at Sl. No. (vii) is 'Human Resources Services.' No doubt, all these fifteen categories of products/services have been included under the major head of 'Information Technology Enabled Services' (ITES), but most of them are quite distinguishable from others. In our considered opinion, the fifteen broad categories set out in this Circular cannot per se be claimed as similar to each other. A cursory look at these products/services transpires that some of them are functionally quite different from each other. Further the level of investment required for providing such services is also not consistent. In our considered opinion, the mere fact that two services are placed under this category do not become automatically comparable. If a case providing one category of services under ITES is claimed as comparable with another in the category of service under ITES as per this circular, then it must be shown ex facie that it is broadly similar. Adverting to the facts of the instant case, we find that the services rendered by Genesys fall under clause (vi) with the heading 'Geographical Information Systems ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any is involved in diverse nature of services and there was no segmental data for diversified service port folio. Moreover this company can be considered as KPO and we are of the opinion that this company is not comparable to assessee's services. We therefore, direct the Assessing Officer/TPO to exclude this company. (4) Cosmic Global Ltd. 19. The main objection of assessee with reference to the inclusion of this company is with reference to outsourcing of its main activity. Even though this company is in assessee's TP study, it has raised objection before the TPO that this company's employee cost is less than 21.30% and most of the cost is with reference to the outsourcing charges or translation charges, and as such this is not a comparable company. The TPO, though considered these submissions, rejected the same, on the reason that this does not impact the profit margin of the company. Opposing the view taken by the TPO, it is submitted that this company cannot be selected as comparable, as similar issue was discussed by the coordinate Bench of the Tribunal(Delhi) in the case of Mercer Consulting (India) P. Ltd. (supra), vide paras 13.2 to 13.3 which read as under- "13.2. Now co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... analysis of the coordinate Bench of the Tribunal in the above referred case, in this case also we accept the contentions of assessee and direct the Assessing Officer/TPO to exclude this comparable for the same reasons. (5) Acropetal Technologies Ltd. (Seg.) 20. The objection of assessee with reference to this company is that the company is involved in engineering design services and high end services and has products in its inventory. It is also involved in R&D activity and developing sophisticated delivery system. It was further submitted that this company is not functionally comparable at segment level also, as engineering design services are high end services, as considered in other cases. It is further submitted that allocation of expenses between segments is not possible and depreciation was not allocated between the segments. There are extra-ordinary events which impact profit also, as can be seen from the Annual Reports. It is further submitted that this company is not selected in the list of comparables selected in the case of Mercer Consulting (India) Pvt. Ltd. and therefore, selection of the company by the TPO in this case, which is also in similar ITES services, is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... materially same, moreover, as the ld DR has not brought any contrary decision to our notice, therefore, respectfully following the aforesaid decision of Coordinate Bench, we exclude these comparables in ITES segment.. 16. In Ground No.11, assessee has objected to rejection of three comparables selected by it. However, at the time of hearing, ld AR restricted his submissions to only one of the comparable i.e. ALLSEC Technologies Ltd and submitted that rejection of other two companies are not pressed. In view of the aforesaid, we will consider assessee's objection with regard to rejection of Allsec Technologies as comparable. The ld AR submitted that the TPO has rejected this company by applying export revenue filter. The TPO observed that exports are only 19.57% of total revenue. The ld AR submitted that the conclusions drawn by the TPO is totally wrong as the export earnings of this company consist of 74.45% of its service revenue. Therefore, it satisfies the export revenue filter applied by the TPO. The ld DR on the other hand referring to the observations made by the TPO at Para 35 of his order argued that the company has made significant acquisitions during financial year 2008 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial results, we do not consider it expedient to interfere with the decisions of TPO/DRP. Accordingly, we uphold the rejection of the aforesaid comparable". 18. Considering the fact that this company was rejected because it has made acquisition during the relevant financial year, we do not consider it appropriate to accept this company as a comparable. This ground of the assessee is therefore, dismissed. 19. In Ground No.12, assessee has challenged the decision of the TPO in not aggregating the software services transactions of the assessee for determining the ALP. The ld AR submitted before us that after the merger of Spacelabs with the assessee company, assessee has considered the revenue earned from software development services as a whole while computing its margin. It was submitted before us that while the margin of Rapiscan Systems Ltd is shown at 57.27%, that of Spacelabs is at 11.35%. Therefore, if both Spacelabs and Rapiscan are taken together the combined profit margin will come to 30.14%, which is more than the margin of comparable companies selected in software segment by the TPO at 27.23%. The ld AR submitted since the company after merger is having one segment as fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) iGate Global Solutions Ltd d) Infosys Technologies Ltd e) Kals Information Systems Ltd and f) Tata Elxsi Ltd. 22. The ld AR submitted before us that while Comp-U-Learn Tech India Ltd, iGate Global Solutions Ltd, Kals Information Systems Ltd and Tata Elxsi Ltd cannot be considered as comparable to the assessee, as they are functionally different, Infosys Ltd under no circumstances can be a comparable to the assessee not only because of its size and diversified activities, but also because of premium pricing, ownership over significant intangibles. The ld AR submitted that these companies have been rejected as comparables by different Benches of the Tribunal including the Hyderabad Benches, in a number of cases for the same A.Y, In support of his contentions, he relied upon the following decisions: i) Planet Online Pvt. Ltd vs. CIT (ITA No.464/Hyd/2014) ii) M/s.Kenexa Technologies Pvt Ltd vs. DCIT (ITA No.243/Hyd/2014) iii) Lam Research (India) Pvt. Ltd vs. DCIT (ITA (TP) No.1437/Bang/2014 dated 30.04.2015 23. The ld DR on the other hand supported the order of the TPO and the DRP. 24. We have considered the submissions of the parties and perused the materials on record. As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ical 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 product company and not a software development services company. 26.2 Infosys Ltd.:- As far as this company is concerned, it is not in dispute before us that this company has been considered to be functionally different from a company providing simple software development services, as this company owns significant intangibles and has huge revenues from software products. In this regard, we find that the Bangalore Bench of the Tribunal in the case of M/s. TDPLM Software Solutions Ltd. v. DCIT, ITA No.1303/Bang/2012, by order dated 28.11.2013 with regard to this comparable has held as follows:- "11.0 Infosys Technologies Ltd. 11.1 This was a comparable selected by the TPO. Befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve pleaded that, this company i.e. Infosys Technologies Ltd., be excluded from 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 include this company in the list of comparable companies. 11.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee as brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy EBusiness Software India Pvt. Ltd. (supra) for Assessment Year 2007-08 is applicable to this year also. We are inclined to concur with the argument put forth by the assessee that Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. 47. We have given a careful consideration to the submission made on behalf of the Assessee. We find that 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. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 available. He finally submitted that this was a good reason to exclude this company also from the list of comparables. 20. On the other hand, the learned DR supported the order of the lower authorities regarding the inclusion of Tata Elxsi and Flextronics Software Systems Ltd., in the list of comparables. He reiterated the contents of Para 14.2.25 of the TPO's order. He also read out the following portion from the TPO's order : "Thus as stated above by the company, the following facts emerge : 1. The company's software development and services segment constitutes three sub-segments i) product design services; ii) engineering design services and iii) visual computing labs. 2. The product design services sub-segment is into embedded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port) in ITES call centre and BPO services (page 11 of Annual Report). It was further submitted that schedule XIII of the Annual Report shows software development expenditure at only 25% of the total expenditure. The TPO extracted the 133(6) notice and held that the company has nil onsite revenue and satisfied all the filters applied by the TPO. We are of the opinion that some more analysis has to be done and we direct the TPO to look into the financial statement of the company and also provide an opportunity to the assessee to submit relevant details to substantiate its claim that Comp-U-Learn Tech India Ltd. is not a comparable company." 26. Therefore, following the view expressed by the Coordinate Bench as above, we remit this issue relating to comparability of this company to the AO/TPO with similar directions. 27. As far as iGate Global Solutions Ltd is concerned, it is seen that while considering assessee's objections against selection of this company, the Coordinate Bench in case of Planet Online Pvt Ltd (Supra) held as under: "10.8 As far as I-Gate Global Solutions Ltd. is concerned, it is the contention of ld. AR that the company is having huge turnover of more than Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... leging that complete information in respect of employee cost and other related costs are not available. If that is the case, then we do not understand how the TPO can state that the company fails the employee cost filter. In view of the aforesaid, we consider it appropriate to remit the comparability of the aforesaid company to the AO/TPO for considering afresh after due opportunity of being heard to the assessee. The TPO must consider all facts and materials brought on record by the assessee while deciding the issue. As far as Quintegra Solutions Ltd is concerned, the ld AR submitted that the TPO has rejected this company on the allegation that it fails the revenue export filter of 75%. The ld AR referring to the financials of this company submitted that the forex earning of the company is 92% of the revenue earned, hence it satisfies more than 75% export revenue filter adopted by the TPO. The ld DR on the other hand submitted that the TPO's observations on this issue being just and proper is to be accepted. 31. We have considered the submissions of the parties and perused the material on record. It is seen from record that while the TPO rejected this company alleging that the fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit or would not be taken into consideration for computing the same. We can therefore make a general observation that all business enterprises are making and writing back liabilities as a normal incident of operating business. Therefore on facts we do not see any justification for excluding provisions written back in the profit and loss account as not forming part of the operating profit of the taxpayer. Accordingly claim of the taxpayer is accepted. 107. The next item relates to balances written back. In our considered opinion, finding given in respect of provisions written back is equally applicable to balances written back more particularly when ld. CIT(A) has not given any separate finding and the Transfer Pricing Officer has said nothing specifically on this item. The balances written back should also be treated as part of operating profit. We direct accordingly. " 42. We are of the view that in the instant case bad debts and provision for bad and doubtful debts are part of the operating expenses and we direct the TPO to re-compute the margins of comparable companies by including bad debts and provision for bad and doubtful debts as operating expenses for the purpose of comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing reasons were given by the TPO: i) The equipments sold by the taxpayer were highend, branded and technologically advanced equipments whereas the comparable companies were functioning on a much lower technological platform. ii) The difference in marketing efforts among the comparables as well as with the tax payer distort the gross margins as these margins also include the marketing effort which was inbuilt in the sale price. iii) The levels of inventory and the cost involved in keeping the inventories had to be adjusted which may not be possible based on the information available in the public domain. iv) The tax payer as a reseller possessed valuable marketing intangibles, The resale price margin in the uncontrolled transaction may underestimate the profit to which the reseller in the controlled transaction was entitled, unless the comparable uncontrolled transaction involve the same reseller or a reseller with similarly valuable marketing intangibles. v) The tax payer had the exclusive right to resell the medical equipments in India whereas most of the comparable companies were resellers without exclusivity. Thus making adjustments for these differences becomes difficult ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mattel Toys (I) Pvt. Ltd ITA No.2476/Mum/2008 viii) Nokia India Pvt. Ltd. ITA Nos. 242 & 178 and CO No.77/Del/2010 ix) Star Diamond Group NV vs. DCIT ITA No.3923/Mum/2008 x) Tektronix India Pvt Ltd . ITA No.1334/Bang/2010 xi) Tupperware India Pvt Ltd ITA No.2140 & 1323/Del/2012 42. The ld DR on the other hand submitted before us that assessee having accepted the rejection of resale price method in A.Y 2008-09, it cannot again press for acceptance of RPM as most appropriate method. In rejoinder, the ld AR submitted that in A.Y 2008-09 as the assessee was not having any income and there was only brought forward losses to be set off having no effect on revenue or taxability, assessee accepted rejection of RPM by not carrying on litigation any further. However, that cannot prevent the assessee from objecting to adoption of TNNM in the impugned A.Y. The ld AR submitted that both TPO as well as the DRP have rejected RPM only with general observation without properly appreciating the facts. 43. We have considered the submissions of the parties and perused the materials on record. There is no dispute as far as the factual aspect is concerned. It is a fact on record that assessee pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... very well hold that why a particular method can be applied for getting proper determination of ALP or the assessee can demonstrate a particular method to justify its ALP. Thus, even if the assessee had adopted TNMM as the MAM in the TP report, then also it is not precluded from raising the contentions/objections before the TPO or the appellate Courts that such a method was not an appropriate method and is not resulting into proper determination of ALP and some other method should be resorted. The ultimate aim of the TP is to examine whether the price or the margin rising from an international transaction with the related party is at ALP or not. The determination of approximate ALP is the key factor for which the MAM is to be followed. Therefore, if at any stage of the proceedings, it is found that by adopting one of the prescribed methods other than chosen earlier, the most appropriate ALP can be determined, the assessment authorities as well as the appellate Courts should take into consideration such a plea before them provided, it is demonstrated as to how a change in the method will produce better or more appropriate ALP on the facts of the case. Accordingly, we reject the cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e sold to unrelated parties, RPM is the most appropriate method. In the case before us, there is no dispute to the fact that the assessee buys products from its AEs and sells to unrelated parties without any further processing." (iii) In the case of Danisco (India) Pvt.Ltd. vs. ACIT, Circle 10(1), New Delhi (ITA no.5291/Del/2010), it is held as follows: "22. Considering the above submissions we find that the assessee established in 1998 as a 100% subsidiary of Danisco A/S Denmark. Danisco India is engaged in the business of manufacturing and trading of food additives. The manufacturing business in respect of food flavours and the trading business is for products for falling under the category of food ingredients. The main grievances of the assessee against the order of the Ld.TPO upheld by the Ld.DRP are regarding their approach in the manner in which transfer pricing adjustment has been made, the approach adopted by the Ld.TPO in granting 17 comparable companies denying the economic adjustment claim made by the assessee, regarding computation of margins of the assessee, non consideration of supplementary transaction and denial of adequate opportunity of being heard to the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions whereby the assessee imports equipment from its AE and resells them without any value addition to the Indian customers. In similar circumstances, Mumbia Bench of the Tribunal in the case of L'Oreal India Pvt.Ltd. (supra) has taken the view that the RPM would be the most appropriate method for determining the ALP. The Mumbai Bench of Tribunal in this regard, has referred to the OECD guidelines wherein a view has been expressed that RPM would be the best method when a resale takes place without any value addition to a product. In the present case, the assessee buys products from the AE and sells it without any value addition to the Indian customers. In such circumstances, we are of the view that the ratio laid down by the Mumbai Bench of the Tribunal in the case of L 'Oreal India Pvt. Ltd. (supra) would be squarely applicable to the facts of the assessee's case. In that event, the GP as a percentage of sales arrived at by the TPO in Annexure to the TPO's order insofar as trading activity of comparables identified by the TPO at 12.90%. The GP as a percentage of sales of the assessee is at 35.6% which is much above the percentage of comparables identified by the TPO. In su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , assessee's appeal is partly allowed for statistical purposes. ITA No.542/Hyd/2014 50. The only ground raised by the Department is as under: "2. On the facts and circumstances of the case, whether the direction of the DRP to exclude communication and insurance expenses from total turnover particularly in absence of definition of the term total turnover under the provisions of section 10A/ 10B of the Act". 51. We have considered the submissions of the parties and perused the materials on record. This issue is no more res integra in view of a number of judgments of different High Court and different Benches of the Tribunal including the Special Bench holding that expenses relating to communication charges & insurance if excluded from export turnover, they have to be excluded from total turnover while computing exemptions u/s 10A/10B of the Act. In this context, a reference can be made to the decision of the Hon'ble Bombay High Court in the case of CIT Vs. Gem Plus Jewellery India Ltd and the decision of the ITAT Chennai Special Bench in the case of Income Tax Officer vs. Sak Soft India Ltd (121 TTJ 865). In view of the settled position of law, we do not see any reason to interfe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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