9911796707
TMI Blog2016 (5) TMI 1330X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee to its AEs. Accordingly, we direct the Assessing Officer/TPO to exclude this company from the list of comparables. Infosys Technology Ltd. - direct the Assessing Officer / TPO to exclude this company from the list of comparables. Thinksoft and FCS Software - Once these companies were considered for inclusion in the list of comparables and the assessee has not objected against the inclusion then even if the TPO decides to exclude these companies from the final set of comparables, the assessee would have been given an appropriate opportunity of hearing on the reasons and criteria on the basis of which the TPO proposed to exclude these companies. Sasken Communications Technologies Ltd. (Seg.) - we are of the view that the assessee has made out prima facie case of incorrect computation of margin of this company and therefore we set aside this issue to the record of the Assessing Officer/TPO to consider the objections of the assessee in respect of incorrect computation of margin. Working Capital Adjustment - we direct the Assessing Officer/TPO to give the working capital adjustment after considering the objections of the assessee as well as after exclusion of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2008-09) data for companies should be used for comparability. (d) Upholding the learned TPO's approach of using data as at the t im e of assessment proceedings. 4. That on the facts and in the circumstances of the case, the learned CIT (Appeals) erred in; (a) Arbitrarily arriving at a set of companies as comparable to the software development and Information Technology enabled services of the Appellant. (b) Arbitrarily including companies that fail the test of comparability analysis (c) Rejecting companies similar to the Appellant while performing the comparability analysis (d) Rejecting otherwise comparable companies merely on account of working capital adjustment. 5. The learned CIT (Appeals) has erred in upholding the error in computation of working capital adjustment and in limiting the working capital adjustment for software development segment and for IT enabled services segment while determining the arm's length price. 6. The learned CIT(Appeals) has erred in not providing appropriate adjustments towards the risk differential while determining the arm's length price. 7. The learned CIT (Appeals) erred in charging interest under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,471 20,32,35,777 6,75,43,142 Operating Profit 20,42,98,379 61,69,047 1,01,61,789 67,54,314 OP/OC 10% 10% 5% 10% 4. The assessee has reported international transactions as under : International Transactions (as mentioned in the 92CE Report) Description Amount Received (Rs.) Receipt for software development services 224,72,82,164 Receipt for IT Enabled Services 6,78,59,518 Receipt for Marketing Support Services. 21,33,97,566 Receipt for Technical Support Services. 7,42,97,456 As it is clear that there are four segments of international transactions however, the TPO accepted the international transactions in respect of marketing support services and technical support services at arm s length. The TPO proposed to determine the Arm s Length Price (ALP) in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sl.No. Name of the Comparable Margin 1. Kals Information Systems Ltd. 13.80 % 2. Akshay Software Technologies Ltd. 3. Bodhtree Consulting Ltd. 62.27% 4. R S Software (India) Ltd. 9.97% 5. Tata Elxsi Ltd. (Seg.) 20.28% 6. Sasken Communication Technologies Ltd. 27.91 % 7. Persistent Systems Ltd. 41.40 % 8. Zylog Systems Ltd. 7.81 % 9. Mindtree Ltd. (Seg.) 5.52 % 10. Larsen and Toubro Infotech 24.72% 11. Infosys Ltd. 45.61% Average Mean 24.32% Thus the TPO has arrived at 24.32% mean margin of the comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for A.Y. 2006-07 2009-10] (ii) Cisco Systems (India) Pvt. Ltd. [IT(TP)A No.271/Bang/2010, A.Y. 2009-10] (iii) Airbus India Operations Pvt. Ltd. [IT(TP)A No.35/Bang/2014, A.Y. 2009-10] 7.1.2 On the other hand, the learned Departmental Representative has submitted that it is assessee's own comparable company selected in the T.P. Analysis. Therefore, when the assessee found this company as functionally comparable at the time of T. P. Analsys then the assessee cannot be permitted to take different stand. She has further contended that the decision of the Tribunal in the case of M/s. Citrix Research Development India Pvt. Ltd. (supra) cannot be applied in the case of the assessee when the business profile of the company namely M/s. Citrix Research Development India Pvt. Ltd. (supra) is not similar to that of the assessee. Further in the said case, the Tribunal has noted that the assessee selected the comparable companies without looking into verticals / horizontals. In the case of the assessee, the assessee has not pointed out all these facts before the TPO and therefore the facts are required to be examined by considering the relevant material. 7.1.3 In a rejoind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... products and was engaged in providing open end to end web solutions software consultancy and design development of software using latest technology. The decision rendered by the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. (supra) is in relation to A.Y. 2008-09. It was affirmed by the learned counsel for the Assessee that the facts and circumstances in the present year also remains identical 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 . 13. No doubt, in so far in the case of M/s Infosys Tech.Ltd. is concerned, it was one among the many companies chosen by the assessee itself. However, in view of the special Bench decision in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... engaged in providing open and end-to-end web solution off shore data management, data warehousing, software consultancy, design and development of solution. Since there is no segmental details in the data provided by this company therefore it is not possible to ascertain whether the revenue earned by this company during the year is from one of these activities or some of these activities or all of these activities. As far as the net work storage and data management solutions are concerned, the assessee is also providing software solutions to its AEs group who are leaders in net work storage and data management solution. Therefore in the facts and circumstances of the case, we are of the view that in the absence of complete information and details of the financials, it is not possible to conclude that this company is engaged in the similar business activity as of the assessee or in a different activity. Accordingly, we set aside this issue of functional comparability of this company to the record of the Assessing Officer/TPO to examine the same by considering further information as may be called for under Section 133(6) and after affording an opportunity of hearing to the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ations of the Co-ordinate Bench with regard to M/s Tata Elxsi Ltd. as it appears at para-26.4 of the very same order is re-produced hereunder; 26.4 Tata Elxsi Ltd .:- As far as this company is concerned, it is not in dispute before us that in assessee s own case for the A.Y. 2007-08, this company was not regarded as a comparable in its software development services segment in ITA No.1076/Bang/2011, order dated 29.3.2013. Following were the relevant observations of the Tribunal:- II. UNREASONABLE COMPARABILITY CRITERIA : 19. The learned Chartered Accountant pleaded that out of the six comparables shortlisted above as comparables based on the turnover filter, the following two companies, namely (i) Tata Elxsi Ltd; and (ii) M/s. Flextronics Software Systems Ltd., deserve to be eliminated for the following reasons : (i) Tata Elxsi Ltd., : The company operates in the segments of software development services which comprises of embedded product design services, industrial design and engineering services and visual computing labs and system integration services segment. There is no sub-services break up/information provided in the annual report or the databas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issions and considered the facts and materials on record. After considering the submissions, we find that Tata Elxsi and Flextronics are functionally different from that of the assessee and hence they deserve to be deleted from the list of six comparables and hence there remains only four companies as comparables, as listed below: 26.5. Following the aforesaid decision of the Tribunal, we hold that M/S.Tata Elxsi Ltd. should not be regarded as a comparable . We find that the facts recorded and considered by the Tribunal are emerging from the Annual Report of this company and therefore this company cannot be considered as functionally comparable to that of software development services provided by the assessee to its AEs. Accordingly, we direct the Assessing Officer/TPO to exclude this company from the list of comparables. (iii) Infosys Technology Ltd . 9.1 The learned Authorised Representative of the assessee has submitted that this company is a market leader and having huge brand value. He has further submitted that this company is engaged in the R D and owns intangibles. He has submitted that the comparability of this company has been examined by this Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are service provider operating its business in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that :- (i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any intangible and hence does not have an additional advantage in the market. It is submitted that this decision is applicable to the assessee's case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee ; (ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856 (Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk ; (iii) the company has generated several inventions and filed for many patents in India and USA ; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of this Tribunal as well as the decision of the Hon'ble Delhi High Court in the case of Agnity India Technology Ltd. (supra), we direct the Assessing Officer / TPO to exclude this company from the list of comparables. 10. The assessee is also seeking the inclusion of the following companies. (i) Thinksoft (ii) FCS Software 11.1 The learned Authorised Representative of the assessee has submitted that the TPO has included these two companies in its show cause notice for inviting the objections from the assessee. However, without giving an opportunity of hearing the TPO finally excluded these two companies from the set of final comparables. He has pointed out that the TPO himself has selected these companies but excluded on the ground of abnormal working capital position. The learned Authorised Representative has submitted that when rules allow the working capital adjustment then this cannot be a reason for rejecting comparable company which was found functionally comparable with the assessee. 11.2 On the other hand, the learned Departmental Representative has submitted that when the TPO himself has carried out a search and in the process of selecting the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of incorrect computation of margin. 13.1 The next grievance is regarding Working Capital Adjustment. The learned Authorised Representative of the assessee has submitted that the TPO though given a detailed working of working capital adjustment, however, it has restricted the working capital adjustment to 1.70% instead of the actual computation worked out by the TPO in the Annexure C of the order. He has thus contended that the working capital adjustment cannot be restricted artificially and the TPO may be directed to give an appropriate working capital adjustment as per the computation in Annexure C. In support of his contention, he has relied upon the decision of the Tribunal in the case of M/s. Citrix Research Development India Pvt. Ltd. (supra). 13.2 On the other hand, the learned Departmental Representative has submitted that the TPO has given a detailed working to arrive at the working capital adjustment and therefore when the TPO has considered the working capital adjustment then in the absence of any contrary working provided by the assessee, the assessee cannot question the working capital granted by the TPO. 13.3 We have heard the rival submissions as well as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. Accentia Technologies Ltd. 46.40 6. Informed Technologies India Ltd. 22.61 7. Cosmic Global Ltd. 40.61 8. Eclerx Services Ltd. 57.46 Average PLI 25.03 Thus, the TPO has computed the average PLI at 25.03% and after giving restricted working capital adjustment at 0.91% the adjusted mean margin arrived at 24.12%. Accordingly, the TPO proposed an upward adjustment of ₹ 87,10,695 under Section 92CA of the Act. The assessee challenged the action of the Assessing Officer/TPO before the CIT (Appeals) but could not succeed. 15. Before us, the learned Authorised Representative submitted that the assessee is seeking exclusion of the following 3 companies : (i) Accentia Technologies Limited. (ii) Cosmic Global Limited. (iii) Eclerx Services Limited. (i) Accentia Technologies Limited . 16.1 The learned Authorised Representative of the assessee has submitted that during the year under consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms Inc. and Denmed Inc. is mentioned. Our attention was also drawn to the decision of the Hyderabad ITAT Bench in the case of Capital IQ Information Systems India Pvt. Ltd. v. DCIT [ 2013] 32 Taxman.com 21 (Hyd. Trib). In the aforesaid decision, the Hyderabad Bench of the Tribunal had to deal with a case of determination of ALP in the case of an assessee who was providing ITES business support services for the A.Y. 2007- 08. The TPO had considered Accentia Technologies Ltd. as a comparable. The DRP however held that the said company cannot be compared as a comparable owing to extra ordinary events that took place during the previous year. The Tribunal upheld the order of the DRP observing as follows:- I. Accentia Technologies Ltd. 10. It is the submission of the assessee that this company cannot be treated as a comparable because of uncomparable financial results arising out of amalgamation in the company. In this regard, the assessee has relied upon the order of the DRP for the assessment year 2008-09 in assessee's own case. It is seen that the DRP while considering similar objection placed by the assessee in the case of another company, viz. Mold Tek Technologies Ltd., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mited. The following Notes to accounts appear in the Annual Report :- (B) NOTES TO ACCOUNTS 1. Amalgamation of Asscent Infoserve Private Limited with the Company. Pursuant to the scheme of amalgamation of the erstwhile Asscent Infoserve Private Limited (subsidiary of the company) with the company as approved by the shareholder in the court convened meeting held on the 25th day of April, 2009 and subsequently sanctioned by the honorable high court of Judicature at Mumbai vide order dt 21st August 2009 and Honorable high court of Karnataka at Bangalore vide order dt 6th February 2010, the assets and liabilities of the erstwhile company was transferred and vested in the company with effect from 1st Apr, 2008 and the scheme has been given effect to in the accounts of the year. It appears to us that the decision rendered by the Tribunal in the case of Symphony Marketing Solutions would be applicable in the present assessment year also. Accordingly, Accentia Technology Ltd is directed to be excluded from the list of comparables. We find that the fact of merger and acquisition has not been disputed by the revenue and it has been reported by this company in the Annual Report ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee has referred to the Annual report of this company and submitted that that out of the total revenue of ₹ 7,37,02,584/-, this company has earned revenue from translation charges to the tune of ₹ 6,99,35,756/-. Therefore, substantial part of the revenue has been earned from the activity of translation. The learned AR of the assessee has further pointed out that even otherwise this company is outsourcing the work of translation as it is evident from the profit and loss account of this company that an amount of ₹ 3,00,25,326/- has been paid on account of translation charges. Thus, learned AR of the assessee has submitted that this company cannot be considered as functionally comparable with the assessee for the purpose of determining the ALP. In support of his contention, he has relied upon the decision of the co-ordinate bench of this Tribunal in the case of Lam Research (India) Pvt. Ltd. vs. DCIT in ITA No.1437/Bang/2014 dated 30/4/2015. i) On the other hand, learned Departmental Representative has submitted that the comparability of this company has been examined by the TPO as well as by the DRP. The TPO has rejected the objections raised by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 coming to the factual matrix of this case, we find from the material on record that outsourcing charges of this case constitute 57.31% of the total operating costs. This does not appear to us to be a valid reason for eliminating this case from the list of comparables. On going through the Annual accounts of Cosmic Global Limited, a copy of which has been placed on record, we find that its total revenue from operations are at ₹ 7.37 crore divided into three segments, namely, Medical transcription and consultancy services at ₹ 9.90 lacs, Translation charges at ₹ 6.99 crore and Accounts BPO at ₹ 27.76 lac. The Id. AR has made out a case that outsourcing activity carried out by this company constitutes 57% of total expenses. The reason for which we are not agreeable with the Id. AR is that we have to examine the revenue of this case only from Accounts BPO segment and not on the entity level, being also from Medical transcription and Translation charges. When we are examining the results of this compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ude this company from the list of comparables. As regards the objection of the D.R. that this company was part of the T.P. Study, we are of the view that once this company is found to be functionally not comparable then the inclusion of the same by the assessee in the T.P. Analysis would not preclude the assessee from taking the objection of functional dis-similarity as held by the Special Bench in the case of CIT Vs. Quark Systems P. Ltd. [2010] 38 SOT 307 (Chd.) (SB). which has been upheld by the Hon'ble Punjab Haryana High Court in 62 DTR 182. Accordingly, we do not accept the objection raised by the learned D.R. (iii) Eclerx Services 18.1 The learned Authorised Representative of the assessee has submitted that this company is engaged in the high-end niche knowledge process outsourcing services consisting of data analytics and data processing services. It provides complete end-to-end solution to the clients by combining people, process the engineering and automation. Thus this company is dis-similar to the assessee as it engaged in the business of capital market, manufacture, retail, travel, etc. He has pointed out that the functional comparability of this compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... including analytic services and data process solutions to its global clients. The service provided by Eclerx Services Ltd., is in various areas including capital market and therefore, the services are in the nature of consultancy and end to end support through trade centre including trade confirmation, settlement, transaction, maintenance and analytic and reporting. Thus it is apparent from the nature of the activity of this company that it is not providing a simple service of data processing but it is engaged in the activity of providing high-end services involving decision making analysis which requires thought process and evaluation of various facts and factors. Functional comparability of this company with that of simple BPO s service providing company has been examined by the Special Bench in the case of Maersk Global Services (supra) in paras.82 83 as under : 82. In so far as M/s eClerx Services Limited is concerned, the relevant information is available in the form of annual report for financial year 2007-08 placed at page 166 to 183 of the paper book. A perusal of the same shows that the said company provides data analytics and data process solutions to some of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n by the AO/TPO as per the direction of the DRP. Thus it is clear that the Special Bench found that this company is not comparable with BPO company which are engaged only in low end services of data processing. Accordingly, we direct the AO/TPO to exclude Eclerx Services Ltd. from the list of comparables for the purposes of determining ALP. Thus it is clear from the finding of the Tribunal that the functional comparability of this company has been examined by the Special Bench in the case of Maersk Global Services reported in 147 ITD 83 and it was found that this company is mainly engaged in providing high end services involving specialized knowledge and automation expertise in the field and therefore the same cannot be compared with a low end service provider company. Following the earlier decisions of this Tribunal, we direct the Assessing Officer/TPO to exclude this company from the list of comparables. 19.1 Next grievance is regarding Working Capital Adjustment. The learned Authorised Representative has submitted that the TPO has restricted the working capital adjustment to 0.09% instead of actual working capital adjustment as worked out by the TPO. 19.2 An ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
