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TMI Blog2015 (10) TMI 1005X X X X Extracts X X X X X X X X Extracts X X X X ..... income of the Appellant at Rs. 16,65,79,490 as against returned income of Rs. 12,61,73,755 computed by the Appellant. 3. The learned AO / Transfer Pricing Officer ("TPO") erred in making an addition of Rs. 2,14,03,620 and Rs. 1,90,02,115 to the total income of the Appellant on account of adjustment in the arm's length price with respect to the IT enabled services and software development services transaction respectively entered into by the Appellant with its associated enterprise. 4. The learned TPO and the learned AO have erred, in law and in facts, by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Rules, and conducting a fresh economic analysis for the determination of the ALP in connection with the impugned international transaction and holding that the Appellant's international transaction is not at arm's length. 5. The learned TPO and the learned AO have erred, in law and in facts, by determining the arm's length margin/ price using only FY 2009-10 data which was not entirely available to the Appellant at the time of complying with the transfer pricing documentation requirements. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnational transactions of the assessee. The ld. TPO requested for certain information/documents which were duly furnished by the assessee. Subsequently, the ld. TPO passed an order dated 16.01.2014 making certain adjustment to the ALP of the international transactions of the assessee. 6.1 The assessee operates in two segments i.e. software development segment and ITES segment. During the FY 2009-10, the assessee had following international transactions with Associated Enterprises (AEs) which were picked-up for scrutiny by the TPO :- S. No. Particulars Method Adopted PLI Total Value (Rs.) 1. Provision of software development services TNMM (Segmental) OP/TC 33,51,548/- 2. Provision of IT enabled services 40,02,92,121/- 6.2 In respect of the Assessee's impugned international transaction of provision of IT services and ITES, the transfer pricing analysis was undertaken in the following manner :- 6.3 The Assessee had undertaken analysis selecting the Transactional Net Margin Method ("TNMM") as the most appropriate method. In order to identify companies which are comparable to the Assessee, search was conducted on Prowess (a database compiled a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Ltd. 55.43 10. T C S E-Serve Ltd. 10. 65.27 Average 31.81 7. Accordingly, the arm's length price of the international transaction related to proviso of ITES is calculated as below :- Operating Cost (A) 32,03,40,125 Arm's Length Margin (%) 31.81% Margin (B) 10,19,00,194 Arm's Length Price (A+B) = C 42,22,40,319 Price charged by the assessee (D) 40,02,92,121 Proposed Adjustment 2,19,48,198 8. The comparables that shall be used in the Software Development Services are as under :- S.No. Company Name OP/OC (%) Adjusted OP/OC (%) 1. Akshay Software Technologies Ltd. -1.04 -0.42 2. Cat Technologies Ltd. 11.48 4.49 3. E-Infochips Bangalore Ltd. 72.69 65.99 4. Evoke Technologies Pvt. Ltd. 19.02 19.67 5. E-Zest Solutions Ltd. 18.66 16.36 6. Infinite Data SYstems Pvt. Ltd. 84.65 84.65 7. Infosys Ltd. 45.08 46.41 8. KulizaTech 18.85 17.66 9. Larsen & Toubro Infotech Ltd. 20.48 20.97 10. LGS Global Ltd. 12.79 8.36 11. Maveric Systems Ltd. 16.17 15.68 12. Mindtree Ltd. 16.62 15.46 13. Persistent Systems Ltd. 30.50 28.80 14. Sasken Communication Technology Ltd. 17.54 18.87 15. Tata El ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Infosys. The relevant extract contained in Page 15 of the annual report is produced below : During the, year SET Labs' IP Cell filed 31 patent applications in the United States Patent and Trademark Office (USPTO) and Indian PATENT Office. We now have an aggregate of 224 patent applications pending in India and the U.S. and the USPTO has granted nine patents. Page 27 of the annual report suggests that Infosys earns revenue from software products. 1.b Software products The revenue from software products grew 9.1% compared to 42% in the previous year. Of the software products revenue, 82.1% came from exports compared to 75.7% in the previous year. The company has incurred huge research and development expenditure and the same is evident from the page 58 of the annual report: 24 .2.6. Research and development expenditure Particulars Year ended March 31, 2010 2009 Capital 3 31 Revenue 435 237 The fixed assets schedule of the company suggests that it owns intangibles in the form of intellectual property rights. The same is contained on page 50 of the annual report: 3. FIXED ASSETS Image No. 1 Page 13 Also, the annual report indicates that "Infos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) e) Cordys R&D (India) Pvt. Ltd. ITA N. 1092/Hyd/2010 dated 3.1.2014 wherein the ITAT excluded Infosys Technologies as it is not functionally different but is a giant company in the field of software development services having considerable brand value and assumed all risks related to business. Further, appeal of Revenue against this order has been dismissed by the Hon'ble Andhra Pradesh High Court vide an Order dated 18.06.2014 in ITA No. 371/2014." 13. On the other hand the ld. DR relied on findings of DRP. 14. 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 Infosys Technologies Ltd., the reason being that the latter is giant in the area of development of software and it assumes all risks, leading to higher profit. On the other han ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 and we direct it's exclusion from the comparables. M/S. WIPRO TECHNOLOGY SERVICES LIMTIED 17. As regards this comparable, the assessee had the following objections taken before the lower authorities :- " In this regard, the Assessee wishes to submit that Wipro should be rejected on the ground that there is insufficient financial information in the annual report to conclude on its comparability. As per the profit and loss account of FY 2009-10, 100% income is from 'Revenue' and no further break up is provided, as depicted in the extract of Page 5 below: Schedule 2010 2009 Income Revenue 3,993,928,222 3,643,586,896 Other Income 13 111,817,731 208,593,516 4,105,745,953 3,852,180,412 No revenue or segmental break up is available between software services and infrastructure support services and no information about the nature of business is available in the annual report. Further, the 'Balance Sheet Abstract and the Company's General Business Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prove to be good benchmarks, is discussed subsequently. An analysis of companies in the accept/reject matrix has also been done by this office with respect to the nature of function/operations. And the extract regarding the same point has also been stated on Page 7 of the show cause notice issued by your goodself : viii Companies that are affected by some peculiar economic circumstances: Companies that are affected by factors like persistent losses, declining sales, extraordinary Income or expense, mergers and acquisitions or other such factors which affect the operations of the company substantially should not be used as comparables as they will not prove to be good benchmarks. The relevant extracts from the annual report are enclosed as item 5 in the supporting booklet attached to the submission. Company should be rejected as it is earning super-profits The Assessee submits that Wipro Technology has posted an operating margin of more than 70% and under the circumstances when the software industry was facing recession. Hence Wipro Technology has earned super profits and such companies should be rejected while arriving at the ALP. The Assessee wishes to bring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra ordinary event took place in the preceding Financial Year i.e. FY 2008-09. However, we concur with the submissions advanced by Ld AR that the Director's Report and Notes to Account for this comparable are not available in public domain. Ld. DR has not been able to controvert this fact. Since sufficient information for this comparable is not available, we direct exclusion of this company as a comparable. CALIBER POINT BUSINESS SOLUTIONS LTD. & R SYSTEMS INTERNATIONAL LTD. 20. We find that the lower authorities have merely rejected these comparables on the ground that these companies have different financial year ending 31st December 2009. We find that this issue is no longer res integra. In the case of M/s. Mercer Consulting (India) Pvt. Ltd. in ITA No.966/Del/2014, ITAT by order dated 06.06.2014, dealt a similar issue as under :- "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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erve Private Limited in the ratio of one equity share in Accentia Technologies Ltd for every 1.6 equity shares held in Asscent Infoserve Private Limited. Pending completion of the relevant formalities of transfer of certain assets and liabilities acquired pursuant to the scheme, such assets and liabilities remain in the name of the erstwhile amalgamating companies. In view of the above amalgamation being effective the figures for the year ended 31st Mar, 2010 are inclusive of the figures relating to the amalgamating company and thus are not comparable with those of the previous year. 2. Conversion of Share warrants to Equity shares: The Company has issued 400000 Equity shares during the year at the rate of Rs. 135.99 per share including the share premium of Rs. 125.99 per share as part of conversion of share warrants. These shares would be entitled for the full dividend for the year, in accordance with the terms of the issue. The earnings per share has been calculated considering the pro-rata increase in the equity capital. Amount received Rs. 2,710,000 during the year 2007-08 towards 5hare warrants have been forfeited and adjusted in the capital reserve account. 3. The c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (AY 2008- 09) - para 99 * Insufficient Segmental Information: Broad range of ITES services comprising of processing, collections, customer care and payments in relation to the services offered by Citigroup to its corporate and retail clients; and IT services comprise of software testing, verification and validation of software at the time of implementation and data centre management activities. [Pg. 106 of Annual Report] No break-up of segmental details available in Annual Report [Pg.118 of Annual Report] - reliance placed on Carlyle India Advisors (supra) and Telechordia Technologies (supra)". 24. The TPO's observation is as under :- "As regards the functional profile, both these cases of TCS E Serve and TCS E serve International Ltd., are functionally similar to the case of the assessee as both are providing services in the IT enabled services segments. The relevant extracts from the respective annual reports are given as under :- TCS E-Serve International Ltd. As per P-39/AR:-''The Company is engaged in Business Process Outsourcing (transaction processing) services to the Banking &Financial Services Industry (BFSI) and Travel, Tourism and Hospitality (TTH) , which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness risks and returns and monitors its operations. Accordingly as required under Accounting Standard 17 "Segment Reporting" (AS- 17), the format of reporting primary segment information has been changed to Business Segments and secondary segment information has been changed to geography. The Company is engaged in Business Process Outsourcing (transaction processing) services to the Banking & Financial Services Industry (BFSI), which is considered as a single segment. Geographic segments of the Company are India, Americas, Europe and Others." 26. Moreover, the principal source of revenue of this comparable is only one i.e. transaction processing and other services of Rs. 1.35 crores credited in the P&L account (page 91 of the Annual Reports). The ld. AR has not been able to substantiate that the other services element is having a different nature or class vis-à-vis transaction processing receipt of this comparable. Contrary to this, the audited annual accounts, certify that both, these receipts are rank parri passu and have the same nature and function. Similar is the position with M/s. TCS E-serve International Ltd. so therefore we uphold the inclusion of these two ..... X X X X Extracts X X X X X X X X Extracts X X X X
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