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TMI Blog2013 (4) TMI 741X X X X Extracts X X X X X X X X Extracts X X X X ..... rketing and supporting Product Lifecycle Management (PLM) and Enterprise Content Management (ECM) software solutions and related services for their clients. The assessee company is engaged in providing Information Technology (IT) services and IT-Enabled services to its parent company i.e. PTC USA. In the IT-Enabled services segment, assessee undertakes designing and developing of software for PTC USA, which in turn is utilized by PTC USA to provide PLM software solutions to its clients. In the IT-Enabled services segment, the assessee is rendering support services (Call Centre services) to the global client-base of PTC USA. 4. In this background, the assessee entered into the following 'international transactions' with its Associate Enterprise (in short 'AE') i.e. PTC USA:- Sr. No. Nature of International Transaction Amount (Rs) 1. Provision of IT services 95,59,54,385 2. Provision of IT enabled services 5,75,65,117 5. In order to determine the income arising from such international transactions having regard to the ALP as per section 92(1) of the Act, the Assessing Officer made a reference to the Transfer Pricing Officer (TPO) u/s.92CA(1) of the Act. Before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... verage of three years data, whereas the TPO has utilised the data for the single year, i.e., relating to the financial year under consideration during which the impugned international transactions have been carried out. Secondly, the TPO has applied Related Party Transaction (RPT) filter in order to ascertain the comparable cases, which was hitherto not considered by the assessee during its Transfer Pricing study. Notably in the proceedings before the TPO, assessee had put forth that the cases having 10% or more related party transactions (i.e., RPTs) should be excluded. The TPO has, however, considered 25% of the appropriate base i.e. either sales or expenses, as the threshold limit for application of the RPT filter. Thirdly, the TPO rejected certain comparables selected by the assessee on the ground of functional dissimilarities and also loss making concerns. 8. The TPO accordingly passed an order u/s.92CA(3) of the Act dated 29.10.2010 determining an upward adjustment to the international transactions of Rs. 10,38,40,122/-. The Assessing Officer thereafter made a draft assessment order u/s.144C of the Act in the aforesaid light against which assessee preferred objections before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the set of comparables. The argument set up by the assessee is that though the said concerns may be functionally comparable, so however, the same stand to be excluded on the basis of the RPT filter of 25% which has been adopted by the TPO himself but has been wrongly applied to include the two companies. In this regard we find that in the Transfer Pricing study undertaken by the assessee it had not applied the filter of RPT for the purposes of eliminating cases having related party transactions. In the course of transfer pricing proceedings, the assessee on being asked, stated that the RPT filter be applied to exclude cases from the list of comparables where the RPT transactions exceed 10% of the total transactions. The TPO however, decided to identify the companies where the quantum of RPT is more than 25% calculated with reference to the appropriate base, and excluded the same for the purposes of comparability analysis. Notwithstanding the assessee's primary plea that the threshold limit of 25% adopted by the TPO was inappropriate, it has been submitted before us that even after applying the filter adopted by the TPO, the aforestated two concerns are liable to be excluded as they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he list of comparables for the purpose of comparability analysis. 14. Similarly, in the case of Compucom Software Ltd., the TPO has observed in para 6.3.19 of his order that the said concern has nil sales revenue from related parties against total sales of 23.82 crores, but has incurred RPT expenses of Rs. 6.65 crores against total expenses of 17.78 crores. The ratio of RPT to total transactions has been computed at 15.19% by the TPO. Again the TPO has adopted the denominator of Rs. 41.60 crores inclusive of total sales whereas the numerator is Rs. 6.65 crores, comprising of only RPT expenses and no RPT sales. Therefore, the denominator is to be corrected at Rs. 17.78 crores and the correct percentage of RPTs would be 37.40%, i.e., RPT expenses/total expenses. The RPTs being in excess of the 25% filter adopted by the TPO, the said concern in our view is also liable to be excluded from the list of comparables for the purpose of comparability analysis. 15. Before parting, we may also observe that the manner in which the RPT filter has been applied by the TPO in the year is inconsistent with his own approach in the A.Y. 2006-07. For this purpose, the appellant has referred to pages ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ware products which are developed by it, however, the said concern was not into trading of software products as there were no cost of purchases debited in the Profit & Loss Account. Though the TPO agreed that the quantum of revenue from sale of products was not available as per the financial statements of the said concern, but as the basic function of the said concern was software development, it was includible as it was functionally comparable to the assessee's segment of IT-Services. 18. Before us, apart from reiterating the points raised before the TPO and the DRP, the Ld. Counsel submitted that in the immediately preceeding assessment year of 2006-07, the said concern was evaluated by the assessee and was found functionally incomparable. For the said purpose, our reference has been invited to pages 421 to 542 of the Paper book, which is the copy of the Transfer Pricing study undertaken by the assessee for the A.Y. 2006-07, and in particular, attention was invited to page 454 where the accept reject matrix undertaken by the assessee reflected KALS Information Solutions Ltd. (Seg) as functionally incomparable. The Ld. Counsel pointed out that the aforesaid position has been acce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO. In this context, the relevant discussion by the TPO is contained in para 6.3.23 of the order and the Annual Financial Statements of the said concern have also been placed in the Paper Book at pages 246 to 327 of the Paper book. The TPO noticed that in the transfer pricing study undertaken by the assessee the said concern was excluded/rejected by applying the quantitative filter of Research and Development expenditure being in excess of 3% of sales. The TPO has not differed with the adoption of the quantitative filter for R&D expenses, so however, according to him the research and development expenditure incurred by the said concern for the F.Y. 2006-07 is 6,71,86,184/- which is 2.02% of the total turnover of the concern and therefore, it is within the threshold of the quantitative filter of 3% of sales adopted by the assessee, and accordingly he included the said concern in the list of comparables. The TPO also disagreed with the contention of the assessee raised before him that the said concern was functionally dissimilar. The TPO has noticed by referring to the Annual Report for the F.Y. 2006-07 that it has two distinct segments, namely (i) software services and embedded solu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cludes the products and projects related to power sector segment, when factually no R&D expenses have been incurred for the latter segment. Therefore, without going into the merits of the assessee's other plea that the said concern is functionally dissimilar, we do not find any justification for inclusion of the said concern considering that R&D expenses are above the filter of 3% adopted for the purposes of the comparability analysis. Thus on this aspect the assessee succeeds. 23. The next point made by the assessee is with regard to inclusion of Transworld Infotech Ltd., appearing at item (10) in the Tabulation in para 10, as a comparable case. The TPO, as per his discussion in para 6.3.22 of the order, has included the said concern in the list of comparables on the ground that it was functionally similar to the assessee's IT-services segment. The short point made by the assessee before us is to the effect that the said concern was not includible because the assessee's financial period is from 1.4.2006 to 31.3.2007, whereas the relevant data of the said concern which has been considered is for the period 1.7.2006 to 30.06.2007. It was therefore pointed out that since the data of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % of the total transactions, and for the reasons advanced regarding the exclusion of FCS Software Solutions Ltd (in the IT-services segment dealt with in earlier paragraphs), the said concern is not includible. In para 6.9.12 of the order of the TPO, the ratio of RPTs to total transactions has been computed at 24.05%, and as it was below the threshold of 25% adopted by the TPO, the same has been included in the list of comparables. The assessee has referred to page 892 of Paper Book, wherein the relevant details have been placed. In terms of the same, the RPT sales and RPT expenses are Rs. 501.43 crores and Rs. 87.78 crores respectively as against total sales and total costs of Rs. 989.88 crores and Rs. 853.19 crores respectively. In this context, the ratio of RPTs to total transactions has been calculated at 31.97% i.e. (Rs.87.78 crores plus Rs. 501.43 crores) divided by (Rs.989.88 crores plus Rs. 853.19 crores). As per the aforesaid calculation, ostensibly the said concern's RPTs exceed the threshold filter of 25% and the same is thus excludible. However, we find that the TPO in para 6.9.12 of the order has computed the ratio of RPTs to total transactions at 24.05%, but the relev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the IT-Enabled services segment of the assessee and for that reason, the said concern has been included as a comparable for the purposes of comparability analysis. In this connection, the plea set up by the assessee is that the said concern is engaged in not only IT-Enabled services, but also in providing quality products and in the creation of animated films and books. It has also been ascertained by referring to the Annual Report of the said concern that it is engaged in providing agency services by way of outsourcing the services to third party vendors and acting as an intermediary between the final customer and the vendor. The assessee furnished detailed submissions in this regard before the lower authorities, copies of which have been placed in the Paper Book at pages 420.8 to 420.31. By referring to the written submissions, it is also sought to be pointed out that the intermediary functions performed by the said concern can be compared to that of a distributor which takes title to service/product for resale to the customers. The aforesaid assertion is sought to be substantiated by the details of payments made by the said concern for data entry and vendor payments, personnel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d objection taken by the assessee was that the said concern has earned extraordinarily high profit margin in this year of 77.31% as against margins of 49.64% and 53.66% for the preceding and succeeding years respectively. The TPO has justified the inclusion of the said concern in the list of comparables primarily on the ground that the activities carried out by the said concern are in the field of IT-Enabled services, which is comparable to the assessee. 34. In our considered opinion, the arguments set up by the assessee have not been appreciated by the lower authorities in its proper perspective. The assessee had pointed out that its IT-Enabled Services segment involves providing of back office services pertaining to the support to be provided to the customers of PTC USA. It was explained by the assessee that such queries are received through telephones, e-mails or the internet depending on the channel preferred by the customer and are attended to by the assessee in accordance with the instructions provided from time to time by PTC USA. On the contrary, the Annual Report of the Vishesh Infotech Ltd., placed at page 752 - 796 of the Paper Book, it is revealed that the IT-Enabled s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions canvassed to support the exclusion of the said concern from the list of comparables. The assessee has not justified as to in what manner the profits are influenced by the inclusion of rental/business centre charges. The TPO has dealt with the plea set up by the assessee which is not found to be lacking and, therefore, we are inclined to upheld the action of the TPO in including the set concern in the said of comparables for carrying out the comparable analysis of the IT-Enabled services segment. 38. Another aspect raised by the assessee is with regard to M/s.Galaxy Commercial Ltd., which has not been considered as comparable by the TPO with regard to the IT-Enabled services segment of the assessee. The plea of the assessee is that the said concern is principally engaged in the provision of back office processing services and is, therefore, liable to be included in the list of comparables. The TPO in para 6.9.2. of the order, has not accepted the plea of the assessee on the ground that the said concern is not only engaged in BPO services, but also derives income from rental and transportation and in the absence of the availability of segmental results, it could not be conside ..... X X X X Extracts X X X X X X X X Extracts X X X X
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