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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 ..... d 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 and we direct it’s exclusion from the comparables. M/S. WIPRO TECHNOLOGY SERVICES LIMTIED - We concur with the finding of DRP while repelling the objection regarding extra-ordinary event taking place for this comparable, but for a different reason, i.e. the relevant extra 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. - We direct the TPO to re-examine these comparables by reworking their margins as on 31st March 2010 as aforestated in the order in the case of M/s. Mercer Consulting (India) Pvt. Ltd. [2014 (10) TMI 467 - THE ITAT DELHI] ITES SEGMENT - ACCENTIA TECHNOLOG ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led 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. 6. The learned TPO and the learned AO have erred, in law and in facts, by accepting / rejecting companies based on unreasonable comparability criteria. 7. The learned TPO and the learned AO have erred, in law and facts, by not making suitable adjustments to account for differences in the working capital position of the Appellant visa- v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents 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 and managed by The Centre for Monitoring Indian Economy) and Capitaline (a database compi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 21.38 5. I-gate Global Ltd. 24.09 6. Infosys B P O Ltd. 30.17 7. Jindal Intellicom Ltd. 14.95 8. Omega Healthcare 13.11 9. T C S E-Serve International 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total cost Rs.29,02,24,261 Arm s Length price at a margin of 28.05% Rs.37,16,60,657 Price received Rs.33,51,58,550 Proposed adjustment u/s 92CA Rs.3,65,02,107 10. The TPO s bench-marking approach has been principally upheld by the DRP barring exclusion of few comparables in the original set adopted by the TPO, post- DRP order following TP adjustment has been recalculated by TPO by order dated 18.12.2014 as under :- S.No. Nature of International Transaction Adjustment u/s 92CA (Rs.) 1. Provision of IT Enabled services 2,14,03,620 2. Provision of Software Development services 1,90,02,115 Total 4,04,05,735 11. Before us, as regards software development segment, Ld. AR objected only to the factum of M/s. Infosys M/s. Wipro being included in the final set of comparables adopted by the TPO. He also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Infosys brand is one of the most important intangible assets owned by the company. Page 15 of the annual report supports the statements: Branding : We believe that the Infosys brand is one of the most important intangible assets that we own. During this fiscal year, we have been appreciated by the following bodies as a recognition of how we operate and conduct business : Ranked as the most admired company in India according to the Wall Street Journal survey Ranked among the 50 most respected companies in the world by Reputation Institute s Global Reputation Pulse 2009 Ranked among the top 25 companies in Business Week s InfoTech 100 Ranked among the top 25 companies in the world for developing leaders by Fortune / Hewitt Ranked as the best company to work for in India by Business Today s ninth survey of Best Companies to Work For . From the above it is evident that Infosys is functionally not comparabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 hand, the assessee is a captive unit of its parent company in the USA and it assumes only limited Currency risk. Having considered these points, we are of the view that the case of aforesaid Infosys and the assessee are not comparable at all as seen from the financial data etc. of the two companies mentioned earlier in this order. Therefore, we are of the view that this case is required to be excluded 15. The aforesaid order was upheld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 4,105,745,95 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8. Select companies based on an analysis of the nature of operations undertaken by each of the companies. The rationale for excluding 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, 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 extra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uired 100% holding of City Technology Services Ltd. This is typically a share holder activity using the resources of reserves or surplus. Therefore, this cannot be taken as affecting the functions performed by the assessee resulting into affecting its profitability. Therefore, DRP rejects the arguments of the assessee and justifies the action of the TPO. We concur with the finding of DRP while repelling the objection regarding extra-ordinary event taking place for this comparable, but for a different reason, i.e. the relevant extra 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 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of accounts of the company as per pooling of interest method as prescribed by AS14 notified under Companies auditing standards 2006. The resultant Goodwill as specified in the scheme of amalgamation has been incorporated in the books of the accounts of the company and same will be amortized over the period of 10 years . The financial results of the company for the year ended 31st March, 2010 are inclusive of the figures of the amalgamating company. 11,88,313 equity shares (8.84% of the Company's increased share capital) have been issued to the shareholders of the Asscent Infoserve 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 previo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. DCIT (ITA No.7367/Mum/2012) (AY 2008-09) - Para 12, pg. 9 and Telechordia Technologies India P. Ltd. vs. ACIT (ITA No.7821/Mum/2011) (AY 2007-08) - Pg.17. 3. TCS E-Serve Limited ('TCS Limited') Why TCS Limited should be rejected? Exceptional year of Operation - First full-year of operation since its acquisition by TCS [Pg. 13 of Annual Report], a company with a huge brand name; more than two- fold increase in PBT vis-avis preceding year [Pg. 92 of Annual Report]. Earning Super-normal profits due to exceptional year of operation - reliance placed on Maersk Global Service Centres (India) Private Limited vs. ACIT (ITA No.7466/Mum/2012) (SB) (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 Repor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vision of ITES using TNMM. 25. We have carefully considered the contention raised by both the parties and perused the material on record. We find that the argument of super normal profit and exceptional year of operations, is not a valid ground in the light of decision in ChrysCapital (supra). As regards the objection in respect to insufficient segmental information is concerned, we find no merit in the same. On a perusal of the annual report of TCS E-serve Ltd., it is observed that the company is engaged in BPO activities under a single segment. Note 8 at page 117 of Annual accounts state as under :- 8. Segment information Consequent to reorganisation of its global organisation with the objective of making industry Practice its focal point for performance evaluation and internal1inancial reporting and decision making, the Company has reviewed and revised the manner in which it views the business 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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