9911796707
Advanced Search 
TMI Blog2016 (1) TMI 598X X X X Extracts X X X X X X X X Extracts X X X X ..... d consequently the Order is non-est, illegal and bad in law. 2. That the AO and Transfer Pricing Officer ("TPO") erred in finalizing the assessment without giving effect to the directions of the DRP in gross violation of the provisions of Section 144C(13) of the Act by not allowing working capital adjustment as directed to be allowed by the DRP. 3. That the AO and TPO erred in alleging that the Appellant did not provide the reliable data even after numerous follow-ups, ignoring the following facts: (i) Letter dated 5.12.2014 filed with the TPO for recomputing the Transfer pricing adjustment in accordance with Directions of DRP; (ii) In any event, in term of section 144C(13) of the Act, the AO has to pass an order giving effect to the findings of the DRP without providing any opportunity to the Assessee. (iii) Without prejudice, the directions issued by the DRP are in respect of the comparables chosen by the TPO, therefore there was no burden on the Appellant to file any details before the TPO. 4. That on facts and circumstances of the case and in law, the AO erred in assessing the total income of the Appellant at Rs. 1,18,99,028/- as against NIL income returned by the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecting companies whose export revenues are less than 75% of the operating revenues without appreciating that the said filter has no effect on comparability analysis; e) Rejecting companies where related party transactions exceeds 25% of sales without appreciating that companies with any related party transactions should have been excluded or else companies with RPT of more than 10-15% to sales should have been excluded; f) Rejecting companies with employee cost less than 25% of total cost for the period under consideration; g) Rejecting companies with diminishing revenue/ persistent losses in complete contradiction of the filter of single year data applied by the TPO himself; h) Rejecting companies with different financial year ending without appreciating that the said filter would produce defective comparables; i) Rejecting R&D filter used by the Taxpayer. 10. 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 sufficient reasoning. 11. That the AO and DRP erred in confirming the action of the TPO in not excluding Wipro Technology Services Ltd. from the list of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch initiation." 3. During the relevant assessment year, the assessee rendered software development and business support services to its AE viz. CashEdge Inc., USA. For this it was compensated based on the terms of the Professional Services Agreement dated 31.12.2003 entered between both the entities on cost plus basis. As per the transfer pricing (TP) document furnished for the AY 2010-11, the taxpayer company has entered into the following international transaction with its associated enterprises (AEs): S. NO. International Transaction Amount (in INR) 1 Rendering software development services 13,10,68,578 4. 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 assessee is arrived at 11.16% on cost; whereas the average PLI of the comparables is arrived at 6.90% as per the analysis in the TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6/- under MAT after making a transfer pricing addition of Rs. 1,18,93,468/- which has been computed as under:- Particulars Amount Operating cost 11,63,61,750 ALP @ 22.86% 14,29,62,046 Price Received 13,10,68,578 105% of price received 13,76,22,007 Adjustment u/s 92CA 1,18,93,468 9. During the course of hearing, the learned counsel for the assessee Shri Jolly submitted that since the Order passed by the TPO after directions were issued by the DRP was not in conformity with the directions of the DRP (insofar as allowance of working capital adjustment and furnishing the annual report of Wipro Technology Services Ltd.), the subsequent proceedings are without jurisdiction. However, he submitted that he does not wish to press the ground in this appeal, but the issue may be kept open to be taken up in an appropriate matter. Accordingly, this ground is dismissed as not pressed but the question of law is left open. 10. Without prejudice, the Counsel for assessee submitted that all his contentions vis-à-vis other grounds raised in the memo of appeal be confined to following issues: (a) Exclusion of the following comparables from the list which was finally selec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Antenna System, Management Tools, Cloud Relay(tm), Firefighting Kit etc. Diversified business v. Software development services Turnover of Rs. 504 crores as compared to Rs. 13 crores of the Assessee Domestic sale of Rs. 30 cores as compared to NIL of the Assessee The Hon'ble ITAT in the case of the Assessee's group company (Fiserv India Ltd.) vide Order dated 26.06.2015 in ITA No.6737/Del/2014 for AY 2010-11 has excluded the said comparable since it is engaged in diversified business activities." The counsel for the assessee has contended that Persistent Systems Ltd. is functionally different from the assessee as the company is into software development services as well as software products unlike the assessee who is a captive service provider. Moreover, no segmental details are available in the annual report. It can be thus derived that the prices may have been influenced. 15. The Ld. Sr. DR, on the other hand, contended that the assessee also assists its parent company in development of products ultimately sold by the parent company and, therefore, the business of the assessee is similar to the business of Persistent Systems. 16. We have considered the rival submissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o its AEs, similar to the activity done by the assessee, respectfully following the precedents, we order for the exclusion of this company from the list of comparables." Similarly, in the case of assessee's group company, viz., Fiserv India Pvt. Ltd. for AY 2010-11, which company is also in the business of software development services, a co-ordinate Bench of the Delhi Tribunal in ITA No.6737/Del/2014 deleted Persistent from the list of comparables. 17. Further a perusal of page 484 (PB-2) Annual Report of Persistent reveals that it is not only engaged in the business of software development services but also manufacture and sale of software products and owns significant intangibles and that segmental data for services and products is not available and the ld DR, could not controvert this fact, so we concur with the order of co-ordinate bench of the Tribunal, and we direct exclusion of Persistent Systems Ltd. from the list of comparables . ZYLOG SYSTEMS LTD. (ZYLOG) 18. The case of the assessee is that Zylog is not only engaged in software services but also software and hardware products and the revenue of the company is also derived from licensing of software products. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO in its Order has taken operating revenues of Zylog at Rs. 783.52. The basis for arriving at revenue of Rs. 783.52 crores and operating expenses of Rs. 658.08 crores is however not spelt out in the order by the TPO. During the course of hearing also the Ld. DR could not provide any basis for arriving at revenue of Rs. 783.52 crores and operating expenses of Rs. 658.08 crores. 23. In view of the aforesaid, we deem it proper to set-aside the issue of inclusion/exclusion of Zylog back to the file of the TPO for reconsideration. Needless to mention, the TPO shall decide on this aspect after allowing the assessee adequate opportunity of being heard. However, we make it clear that unless audited segmental data for the software development services segment of Zylog is available, which satisfies all filters applied by the TPO, the said company cannot be treated as comparable on an entity level. WIPRO TECHNOLOGY SERVICES (WTS) 24. The case of the assessee is that WTS should be excluded from the list of comparable since complete annual report of the company is not available in public domain; it has been deleted as such in the case of Agnity India Technologies for the same AY 2010- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofar as both the assessees are into software development services. In that view of the matter, Wipro Technologies Services Ltd. has to be excluded from the list of comparables. Without prejudice, it is submitted that before 20.01.2009, the Company was part of the Citi group and rendered services to various entities of the Citi group worldwide. With effect from 21.01.2009, the Company was acquired by Wipro Ltd. As part of the acquisition by Wipro, it was also agreed that the Company will be provided business of at least USD 500 million over a period of 6 years by the Citi group. This pre-arrangement between Citi group and Wipro would make the subsequent rendition of services by the Company to the Citi group as deemed international transaction under section 92B(2) of the IT Act and accordingly, this income should be included in the RPT threshold, thereby making the Company as an unviable comparable. In terms of Section 92B (2) of the Act, rendition of service by an enterprise (WTS) to a non-associated enterprise (Citi Group in the present case) as part of an understanding between the associated enterprise (Wipro) and the non-associated enterprise (Citi Group) is treated as a de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparables. Without prejudice, the Counsel also submitted that in the case of Agnity India Technologies, which is in the same line of business, viz., software development services, a co-ordinate Bench of the Tribunal has deleted the said comparable on the ground of functional dissimilarity. 27. The Ld. DR, on the other hand, relied upon the orders of the lower authorities and submitted that WTS is a good comparable. 28. We have considered the rival submissions and perused the material on record. The arguments of the ld. AR that only on account of super normal profit this comparable should be excluded is not tenable in the light of the Hon'ble jurisdictional High Court decision in the case of ChrysCapital Investment Advisors (India) Pvt. Ltd in ITA 417/2014 judgment dated 27.04.2015. However, we must, at the outset, record certain facts which are undisputed. Firstly, WTS did not feature in the accept/reject matrix applied by the TPO. However, it was included in the final set of comparable. The TPO, at page 37 of his Order, has stated that Wipro Ltd. is WTS which appeared in the accept reject matrix. However, the TPO has failed to appreciate that Wipro Ltd. is not WTS, the latter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t been able to controvert this fact. Since sufficient information for this comparable is not available, we direct exclusion of this company as a comparable as we have done in the case of Avaya India (P) Ltd. vs. Addl.CIT, Range 2, New Delhi in ITA No.5528/Del./2011 for AY 2007-08 order dated 18.09.2015. FOREIGN EXCHANGE GAIN/LOSS 29. 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 gain/loss cannot be excluded for the purpose of calculation of the margin and in support, he relied upon the Order dated 26.06.015 passed in ITA NO.6737/Del/2015 in the case of assessee's group company viz., Fiserv India Pvt. Ltd. 30. Having considered the rival submissions, we find that the issue is no longer res-integra and stands concluded by the decision of the Coordinate Bench in the case of Westfalia Separator India Pvt. Ltd. vs. ACIT ITA No. 4446/D/02 for Assessment year 2003-04 wherein it has been held as under: "We have heard the rival submissions and perused the relevant material on record. The forex gain or loss is the difference between the price at which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been rejected in the aforesaid order of the coordinate bench wherein it was held as under: "4.8. The ld. AR relied on Rule 10T(j) to contend that loss arising on account of foreign currency fluctuations cannot be included in the operating expense. We are not persuaded to give any mileage to the ld. AR on this count for the simple reason that Rule 10T is a part of Safe harbor rules notified on 18.09.2013 which are not applicable to the assessment year under consideration." 31. To the same effect is the decision of the Co-ordinate Bench in Fiserv India Pvt. Ltd. - Order dated 26.06.015 passed in ITA No.6737/Del/2015 32. In light of the above, we direct the AO/TPO to treat the foreign exchange gain/loss as an operating item. As such, the ground raised by the assessee is allowed. ADDITION OF TRANSFER PRICING ADJUSTMENT TO MAT 33. The final issue for consideration is challenge raised by the assessee to the action of the AO in adding back transfer pricing adjustment of Rs. 1,18,93,468/- to income assessed under Section 115JB (MAT). 34. In this regard, the learned counsel for the assessee submitted that the AO has added the transfer pricing adjustment of Rs. 1,18,93,468/- to the ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
