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TMI Blog2016 (4) TMI 1211X X X X Extracts X X X X X X X X Extracts X X X X ..... Without prejudice to the above, the order issued by the AO is bad in law insofar as the fact that the AO did not issue to Societe Generale Global Solution Centre Private Limited ('the Appellant or 'the Company'), a show cause notice, as per proviso to section 92C(3) of the Income-tax Act, 1961 ['the Act']. b) The AO has erred in law in making a reference to the Transfer Pricing Officer ['TPO'],inter alia, since he has not recorded an opinion that any of the conditions in section 92C(3) of the Act, were satisfied in the instant case. 2. Determination of arm's length price a) The AO/TPO erred in determining a transfer pricing adjustment to software development ('IT') amounting to Rs. 39,863,492 and IT enabled Services (ITeS') amounting to Rs. 18,646,103 by substituting the arm's length price as determined by the Appellant. b) The AO/TPO erred in rejecting the value of international transaction as recorded in the books of accounts, as the arm's length price. 3. The fresh comparable search undertaken by the TPO is bad in law a) The TPO erred on facts and in law in conducting a fresh benchmarking analysis using non contemporan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ossly erred on facts in arbitrarily rejecting companies having IT and ITeS service revenue less than 75% of total operating revenue and inconsistently applying such filter, without considering the specific segmental results. i) The AO/TPO erred on facts in arbitrarily rejecting companies earning less than 25% of revenue from exports. j) The AO/TPO also erred on facts in arbitrarily rejecting companies based on their financial results without considering the comparability. k) The AO/TPO erred on facts and in law in considering a set of 'secret data', i.e. data 1which was not available in public domain, in arriving at a fresh set of companies using his power under section 133(6), which is grossly unjustified. l) The AO/TPO also erred on facts and in law in excluding the foreign exchange gain or loss while calculating the net margins of the comparable companies. m) The AO/TPO erred on facts in arbitrarily rejecting companies whose employee cost is less than 25% of their total sales for IT services. n) The AO/TPO erred on facts in arbitrarily rejecting companies whose onsite revenue is greater than 75% of their total export revenue for IT services. 5. Erroneous data used ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to grant all such relief arising from the above grounds and also all relief consequential thereto. b) The appellant craves leave to add to or alter, by deletion, substitution or otherwise, the above grounds of appeal, at any time before or during the hearing of the appeal. c) The appellant further prays that the adjustment in relation to Transfer Pricing matters made by the learned AO/TPO and upheld by the Hon'ble DRP be deleted. 2. Briefly, facts of the case are that the assessee is a company incorporated under the provisions of the Companies Act, 1956. It is a wholly owned subsidiary of M/s.Genefinance, Paris, which is in turn a subsidiary of Societe Generale, Paris. The assessee-company is engaged in providing IT and ITES services only to its AEs. Being a captive service centre providing contact services to its AEs, SG India assumes less than normal risks and all the significant business and entrepreneurial risks are borne by the overseas affiliates. 3. Return of income for the assessment year 2007-08 was filed on 30/10/2007 declaring a total income of Rs. 87,89,920/-. The assessee-company also reported the following international transactions with its Associated Enterprise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filters in software segment: ** Use of current year data only; ** Turnover filter i.e. excluding companies having income from software development services less than INR 1 crore. ** Software development services income less than 75% of total operating revenues were excluded ** Related party transactions greater than 25% of operating revenue. ** Export sales less than 25% of operating revenues were excluded; ** Diminishing revenues/ persistent operating loss for last 3 years were excluded; ** Employee cost less than 25% of sales were excluded; ** Companies whose onsite income greater than 75% of their operating revenue were excluded 5. The TPO rejected 45 of the comparables in respect of software development services selected by the assessee-company in the TP study and introduced 16 new companies by undertaking fresh TP study and finally selected the following comparables: The TPO computed average profit margin of the comparables in respect of software development services at 25.14% and after giving working capital adjustment of 1.76%, adjusted arithmetical mean of PLI was determined at 23.38%. On the above basis, the TPO computed the transfer pricing adjustment in respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Cost (Rs. 13,62,77,652/- + Reimbursement of expenses received of Rs. 54,21,397/-) Rs. 14,16,99,049/- Arms Length Margin 28.55% of the Operating Cost Arms Length Price (ALP) @128.55% of operating cost Rs. 18,21,54,128/- Arms Length Price @128.55% of operating cost Rs. 18,21,54,128/- Price shown in the International transactions (Rs. 15,80,86,628/- + Reimbursement of expenses received of Rs. 54,21,397/-) Rs. 16,35,08,025/- Shortfall being adjustment u/s 92CA Rs. 1,86,46,103/- The total summary of transfer pricing adjustment made u/s 92CA of the Act is as under: Segment Arms' length price Price shown in the books Adjustment Software Development Services Rs. 63,61,04,883/- Rs. 59,62,41,391/- Rs. 3,98,63,492 IT Enabled Services Rs. 18.21,54,128/- Rs. 16,35,08,025/- Rs. 1,86,46,103/- Rs. 5,85,09,595/- 6. The AO passed draft assessment order u/s 144C(3) 07/12/2010 incorporating the above adjustment and also addition of Rs. 1,29,69,191/- u/s 10A of the Act. The AO also held that the communication expenses be reduced from the export turnover for the purpose of computing the deduction u/s 10A of the IT Act, 1961. 7. Bei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subsequently in two decisions viz (i) Autodesk India Pvt. Ltd. vs. DCIT (TS 62 ITAT 2013) and Yodlee Infotech Pvt. Ltd. vs. ITO (TS 63 ITAT 2013) had not followed the decision of the Mumbai Tribunal in the case of Capgemini India (P) Ltd.(supra) and remitted the issue back to the file of the AO for fresh adjudication with respect to functional dissimilarity. It is not clear from material on record whether the segmental information is available in respect of each divisions of the company. Accordingly, following the decision of the co-ordinate bench in the abovementioned cases, we remit the issue to the file of the AO for fresh evaluation of the company with respect to functional aspects. ii. Avani Cimcon Technologies Ltd: It is the contention of the assessee-company that this company cannot be compared with that the assessee-company, as it is engaged in the business of software products. This was excluded from the list of comparables by the co-ordinate bench in the case of LSI Research (India) P.Ltd.LSI (supra) following the decision of the Mumbai Tribunal in the case of Telecordia Technologies Pvt. Ltd. vs. ACIT. The Tribunal in the case of LSI Research (India) P.Ltd. (supra) acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Capital I-Q Information Systems (India) (P) Ltd. The ld.DR had not brought any evidence on record controverting the above submissions. Te Hon'ble High Court of Delhi in the case of Rampgreen Solutions Ltd. vs. CIT in ITA No.102/2015 dated10/8/2015 "31. In the present case, the Tribunal noted that Vishal and eClerx were both engaged in rendering ITeS. The Tribunal held that, "once a service falls under the category of ITeS, then there is no sub-classification of segment". Thus, according to the Tribunal, no differentiation could be made between the entities rendering ITeS. We find it difficult to accept this view as it is contrary to the fundamental rationale of determining ALP by comparing controlled transactions/entities with similar uncontrolled transactions/entities. ITeS encompasses a wide spectrum of services that use Information Technology based delivery. Such services could includerendering highly technical services by qualified technical personnel, involving advanced skills and knowledge, such as engineering, design and support. While, on the other end of the spectrum ITeS would also include voice-based call centers that render routine customer support for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... functions performed in the international transactions with uncontrolled transactions to attain relatively equal degree of comparability. 34. We have reservations as to the Tribunal's aforesaid view in Maersk Global Centers (India) Pvt. Ltd. (supra). As indicated above, the expression 'BPO' and 'KPO' are, plainly, understood in the sense that whereas, BPO does not necessarily involve advanced skills and knowledge; KPO, on the other hand, would involve employment of advanced skills and knowledgefor providing services. Thus, the expression 'KPO' in common parlance is used to indicate an ITeS provider providing a completely different nature of service than any other BPO service provider. A KPO service provider would also be functionally different from other BPO service providers, inasmuch as the responsibilities undertaken, the activities performed, the quality of resources employed would be materially different. In the circumstances, we are unable to agree that broadly ITeS sector can be used for selecting comparables without making a conscious selection as to the quality and nature of the content of services. Rule 10B(2)(a) of the Income Tax Rules, 1962 mandates that the comparabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithin the statutory framework to ensure a fair ALP. 37. Applying the aforesaid principles to the facts of the present case, it is once again clear that both Vishal and eClerx could not be taken as comparables for determining the ALP. Vishal and eClerx, both are into KPO Services. In Maersk Global Centers (India) Pvt. Ltd. (supra), the Special Bench of the Tribunal had noted that eClerx is engaged in data analytics, data processing services, pricing analytics, bundling optimization, content operation, sales and marketing support, product data management, revenue management. In addition, eClerx also offered financial services such as real-time capital markets, middle and backoffice support, portfolio risk management services and various critical data management services. Clearly, the aforesaid services are not comparable with the services rendered by the Assessee. Further, the functions undertaken (i.e. the activities performed) are also not comparable with the Assessee. In our view, the Tribunal erred in holding that the functions performed by the Assessee were broadly similar to that of eClerx or Vishal. The operating margin of eClerx, thus, could not be included to arrive at an A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ] * Tranwitch India Pvt Ltd. Vs. DCIT (TS 105 ITAT 2013 (Bang) TP)(AY 2007-08)] * Mercedes Benz R&D India Pvt.Ltd. vs. DCIT[TS 108 ITAT 2013(Bang) TP])AY 2007-08); Following the decisions cited supra, we hold that this company cannot be considered as comparable company which is engaged in providing software development services. Therefore, we direct the TPO/AO to exclude this company from the list of comparable. vii) Infosys Technologies Ltd.: This company was excluded from list of comparables by this Hon'ble Tribunal in the case of LSI Research (India) P. Ltd (supra) which is engaged in software development services on the ground of functional dissimilarities. The Hon'ble Tribunal observed that Infosys Technologies Ltd., owns significant intangibles and has huge revenue from software products. It further observed that the break-up of revenue from software services and software products were not available. In the circumstances, the company was held to be not comparable with Software Development Services Company. Similar observations have been made by coordinate benches in the following cases: * Bearing Point Business Consulting P.Ltd. vs. DCIT [TS 758 ITAT 2012(Bang) TP(AY ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ACIT [TS 325 ITAT 2012(Mum)] observed that this company was predominantly engaged in the product development rather than service provider. Thus it was considered to be functionally dissimilar to a pure software service provider company. Similar observation has been made in the following decisions: * CSR Pvt. Ltd. vs. ITO [TS 68 ITAT 2013(Bang) TP(AY 2007-08] * LG Soft India Pvt. Ltd. vs. DCIT [TS 64 ITAT 2013(Bang) TP(AY 2007-08] * Transwitch India Pvt. Ltd. vs. DCIT [TS 105 ITAT 2013(Bang) TP); * Mercedes Benz R&D India Pvt.Ltd. vs. DCIT[TS 108 ITAT 2013(Bang) TP])AY 2007-08); * Logica Pvt. Ltd. vs. ACIT (TS 131 ITAT 2013(Bang) TP) * Virtusa (India) Pvt. Ltd. vs. DCIT [TS 253 ITAT 2013 (Hyd) TP(AY 2007-08] Following the decisions cited supra, we hold that this company cannot be considered as comparable company which is engaged in providing software development services. Therefore, we direct the TPO/AO to exclude this company from the list of comparable. x) Persistent Systems Ltd. : This company was excluded from the list of comparable by this Tribunal in the case of LSI Research (India) P. Ltd (supra) which is engaged in software service provider on the ground of fun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the company. It was also observed that it was into the purchase & sale of software licenses. Thus, ITAT held that it cannot be a comparable to a company which is engaged in software development. This decision was in relation to assessment year 2004-05, whereas, in the present case, we are concerned with assessment year 2007- 08. It is not clear from material on record whether similar circumstances were present for the assessment year 2007-08. In the circumstances, we have no option but to remit the issue to the file of the TPO/AO for fresh evaluation of this company on the above lines. xiii) Wipro Ltd.: This company was excluded from the list of comparables by this Tribunal in the case of LSI Research (India) P. Ltd (supra) which is engaged in software service provider on the ground of functional dissimilarities. The Hon'ble Tribunal further observed that this company owns intellectual property in the form of registered patents etc. On this ground, this company was not considered as comparable. Now, it is settled proposition of law that a company owing intangibles cannot be compared to low risk captive service provider which does not own any intangibles. Following the same re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the Hon'ble Tribunal that the turnover was also not a criteria prescribed under rule 10B for selection of comparables. We are also of the considered opinion that the turnover cannot be relevant criteria in a service sector where fixed overheads are nominal and the cost of service is in direct proportion to the services rendered. Following this reasoning we hold that the above companies cannot be excluded from the list of comparables. ITeS segment: 11. The TPO rejected 15 companies out of 55 comparables selected by the assessee-company. Further, the TPO undertook the fresh benchmarking analysis and introduced 20 additional comparables. Out of the above, the assessee-company contends that Accurate Data Converts Ltd., was included by the TPO for the first time without affording reasonable opportunity to the assessee-company. Further, assessee-company also seeking exclusion of the following companies on functional dissimilarities: i. Bodhtree Consulting Ltd. ii. Eclerx Services Ltd. iii. Infosys BPO Ltd. iv. Mold-Tech Technologies Ltd., and v. Wipro Ltd. Placing reliance on the decision of the Tribunal in the case of First Advantage Offshore Services Pvt.Ltd. vs. DCIT in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which are competitively important or form an integral part of a company's value chain. It thus requires advanced analytical and technical skills as well as a high degree of specialist expertise. The KPO services include all kinds of research and information gathering. Thus it can be seen that even though both BPO and KPO are offering information technology based services, the skill and expertise and may be even the tools required are different which may result in different economic results of both the segments. Thus, in such circumstances, we are of the opinion that they cannot be compared with each other and have to be excluded from the list of comparables. " The Hon'ble Delhi High Court in the case of Rampgreen Solutions Ltd. (supra) held that KPO company cannot be compared with BPO company extracted supra. The learned DR has not controverted that these companies are KPO companies. In the result, we hold that these companies cannot be considered as comparables following the ratio laid down in the cases cited supra. Infosys BPO Ltd. and Wipro Ltd. 13. This Tribunal excluded these companies from the list of comparables in the case of Symphony Marketing Solutions India Pvt. Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 80HHC, the export profit is to be derived from the total business income of the assessee, whereas in Section 10-A, the export profit is to be derived from the total business of the undertaking. Even in the case of business of an undertaking, it may include export business and domestic business, in other words, export turnover and domestic turnover. The export turnover would be a component or part of a denominator, the other component being the domestic turnover. In other words, to the extent of export turnover, there would be a commonality between the numerator and the denominator of the formula. In view of the commonality, the understanding should also be the same. In other words if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover. The components of the export turnover in the numerator & the denominator cannot be different. Therefore, though there is no definition of the term 'term turnover' in Section 10-A, there is nothing in the said Section to mandate that, w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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