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TMI Blog2016 (8) TMI 1195X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the Hon’ble DRP has not considered the computation at all. On overall factual matrix of the issue, it is our considered opinion that both these issues required restoration to the file of the TPO for reconsideration and reexamination and it is ordered accordingly. X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Margin earned by the Appellant Arm's Length margin determined by TPO Adjustment proposed by the TPO (in INR Crores) CSD Services OP/TC 7.71% 26.72% 128.51 TSS OP/Operating Revenue (OR) 7.13% 19.49% 9.52 Total 138.03 5. In respect of CSD Services the TP adjustment proposed by the TPO amounted to ₹ 1,28,51,47,579/- . The TPO included 14 companies in the CSD Services Segment which are as per the following chart: S.No. Company Name OP/TC 1. Acropetal Technologies Limited (IT Segment) 36.69% 2. Akshay Software Technologies Limited 0.16% 3. E-Infochips Limited 56.44% 4. Infosys Limited 43.53% 5. Larsen & Toubro Infotech Limited 18.40% 6. Mindtree Limited (Segment) 10.74% 7. Persistent Systems and Solutions Ltd. (Merged) 22.12% 8. Persistent Systems Ltd. 23.08% 9. R S Software (India) Ltd. 16.20% 10. Sankhya Infotech Limited (Segmental) 26.20% 11. Sasken Communication Technologies Ltd. 24.36% 12. Tata Elxsi Lgtd. (Segment) 13.00% 13. Wipro Technologies Limited 54.42% 14. Zylog Systems Ltd. 28.74% AVERAGE 26.72% 6. The Hon'ble DRP directed the TPO to exclude Acropetal Technologies Ltd. and Wipro Technologies Ltd. fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s determined by the Appellant in the contemporaneous TP documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income Tax Rules, 1962 ("the Rules") as well as the fresh search results (submitted by the Appellant using current year data on a without prejudice basis); and in particular modifying/rejecting the quantitative filters applied by the Appellant for benchmarking the CSD services segment and TSS segment; 3.3 Disregarding multiple year/prior years' data as used by the Appellant in the contemporaneous TP documentation and holding that current year (i.e. FY 2010-11) data for comparable companies should be used despite the fact that the same was not necessarily available to the Appellant at the time of preparing its TP documentation for the CSD services segment and TSS segment; 3.4 Upholding the incorrect approach adopted by the ld. TPO of undertaking a fresh comparability analysis without providing any basis for additional/revised filters or by adopting economically and commercially inappropriate filters while determining the ALP for the Appellant's CSD services segment and TSS segment. 3.5 Incorrectly excluding certain companies that w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s own case in the immediate preceding year i.e. AY 2010-11; 3.11 rejecting Appellant's claim for a working capital and risk adjustment in the CSD services segment and TSS segment without providing any cogent basis and without giving any consideration to the fact that the claim for working capital adjustment had been allowed by the Hon'ble DRP in the Appellant's case in the immediate preceding year i.e. AY 2010- 11; 3.12 disregarding the claim made by the Appellant (on a without prejudice basis) requesting for a proportionate TP adjustment under the TSS segment; and 4. That on facts and in the circumstances of the case and in law, the Hon'ble DRP as well as the ld. TPO/AO have erred in disregarding judicial pronouncements in India in undertaking the aforementioned TP adjustments. 5. That on facts and in the circumstances of the case and in law, the directions issued by the Hon'ble DRP are flawed as they include certain prima-facie mistakes/errors apparent from record for which, the Appellant has filed a rectification application u/s 154 of the Act before the Hon'ble DRP and the same is pending adjudication. 6. That on facts and in the circumstances of the case and in law, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any of the above grounds of appeal either before or during the hearing before the Hon'ble Tribunal. Further, the aforesaid grounds are mutually exclusive and without prejudice to each other." 8. The ld. AR, at the outset submitted that ground no. 5 regarding rectification u/s 154 is no longer relevant as the assessee's rectification application has already been disposed of. Hence, this ground is dismissed as being infructuous. 9. The ld. AR submitted that in effect ground nos. 3.5, 3.6, 3.7, 3.10.1, 3.10.12, 3.11, 3.12 and 6 will be argued before the Bench. 10. On ground no. 3.5 the ld. AR submitted that the assessee's contentions in respect of TP documentation comparable companies in the CSD Services Segment which were incorrectly rejected by the TPO are as under: 10.01 Allied Digital Services Ltd. - as per the TPO the said comparable fails the export filter. However, it is the assessee's contention that for the purpose of comparability, it is essential to consider the functional comparability rather than the customers geographical location. The ld. AR submitted that the use of the filter is objected to on the ground that whether the tax payer earns its revenue from the domes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P documentation Accept - Reject Matrix submitted by the assessee vide its submission dated 29/09/2014. It was further submitted that the financial details of the company were also not available in the public domain. The Ld. CIT DR relied on the order of the authorities below on this comparable. (ii) E-Infochips Ltd. - The ld. AR submitted that the TPO is of the view that the activities of this company are functionally similar to the assessee's CSD Services. However, E-Infochips is engaged in diversified services like IT Enabled Services, Development of Software Products and Solutions for Product Design and Development, Quality Assistance and Certification, reengineering, sustenance and volume production, Software Consulting and manufacturing EVM and VDB Electronic Board etc. The ld. AR further submitted that the schedule pertaining to the income statement of E-Infochips for AY 2011-12 shows that the company has a varied Revenue mix i.e. it earns revenue from Software Development, Hardware Maintenance and Information Technology Consultancy Services. It was further submitted that no segmental information was available in the annual report of the company as regards the revenue from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arable company. The Ld. CIT DR submitted that on the facts of the assessee's case the decision relied upon by the assessee in the case of Saxco India Pvt. Limited (supra) was not applicable as even in E-Infochips there is no product and the company primarily dealt in provision of services and hence, the company was a good comparable. (iii) Infosys Limited - the ld. AR submitted that the TPO has held that Infosys is an independent company and is expected to come up with software development ventures that it can market to independent clients which does not shake its classification as a software service provider. The Ld. AR submitted that Infosys is engaged in providing software consulting and products, application design, development, reengineering and maintenance, system integration, package evaluation and implementation and business process management etc. The Ld. AR also submitted that Infosys had a significant turnover of ₹ 25385 crores which was approximately 35 times the assessee's turnover of ₹ 728 crores. It was further submitted that Infosys developed/owns proprietary products like Finacle, Infosys Actice Desk, Infosys iProwe and Infosys mConnect and owns signi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The Ld. AR drew attention to the annual report of L&T, wherein it has been mentioned that it is the company's strategy to leverage on the well known L&T brand and create a market intangible of its own. For the proposition that non availability of segmental information in case of diversified operations renders a company not comparable, the ld. AR relied on the following decisions - Telcordia Technologies India P. Ltd. (ITA No. 7821/Mum/2011), Trilogy E-Business Software India Pvt. Ltd. vs. DCIT (ITA No. 1054/Bang/2011), Transwitch India P. Ltd. vs. DCIT [ITA No. 948/Bang/2011, TS-105-ITAT-2012(Bang)-TP], First Advantage Offshore Services Pvt. Ltd. (ITA No. 1252(Bang)/2010), CSR India (P) Ltd. vs. ITO [IT(TP)A (reference no. No. 1119/Bang/2011)], Intoto Software India Pvt. Limited, Hyderabad (ITA No. 233 of 2014). The Ld. CIT DR submitted that L&T also deals only in services and there were no products and the impact of acquisition on the margins is only miniscule and hence, the company cannot be rejected as a comparable. (v) Persistent Systems and Solutions Limited - The Ld. AR submitted that Persistent Systems and Solutions Limited is a wholly owned subsidiary of Persistent Syst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 50 crores. The Ld. AR submitted that since the company is engaged both in rendering software development services as well as sale of software products, in absence of segmental details, this company could not be selected as a comparable. The Ld. AR also submitted that this company has made significant acquisitions during the year thereby failing TPO's peculiar economic circumstances filter. The Ld. AR submitted that this company has been rejected on the ground that it earns income from software products and services and that no segmental data is available in the following cases - Saxo India Private Limited (ITA No. 6148/Del/2015), Ciena India Pvt. Ltd. (ITA No. 3324/Del/2013), Planet Online Pvt. Ltd. (ITA No. 464 and 608/Hyd./2014), 3D PLM Software Solutions Ltd. (ITA No. 1303/Bang/2012). The Ld. AR also relied on the decision of the Hon'ble High Court of Andhra Pradesh in the case of CIT II Hyderabad vs. Intoto Software India P. Ltd. (ITA No. 233 of 2014), wherein it has been held that software product companies owning intangibles could not be compared with the software development services provider. The Ld. AR also submitted that companies facing an extra ordinary event, having ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following cases - Colt Technology Services India Private Limited [(TS-774-ITAT-2012(Del)], Integrated Decisions & Systems India (Private) Limited [(TS-629-ITAT-2011(JPR)], NTT Data India Enterprise Application Services Private Limited [IT-293- ITAT-2013(HYD-TP), Adaptech India (Private) Limited (ITA No. 481/Hyd./2011), Sunquest Information Systems (TS-299-ITAT- 2015(Bang)-TP). For the proposition that non availability of segmental information in case of diversified operations renders a company not comparable, the ld. AR relied on the following decisions - Telcordia Technologies India P. Ltd. (ITA No. 7821/Mum/2011), Trilogy E-Business Software India Pvt. Ltd. vs. DCIT (ITA No. 1054/Bang/2011), Transwitch India P. Ltd. vs. DCIT [ITA No. 948/Bang/2011, TS-105-ITAT-2012(Bang)-TP], First Advantage Offshore Services Pvt. Ltd. (ITA No. 1252(Bang)/2010), CSR India (P) Ltd. vs. ITO [IT(TP)A (reference no. No. 1119/Bang/2011)], Intoto Software India Pvt. Limited, Hyderabad (ITA No. 233 of 2014). The Ld. CIT DR submitted that the assessee cannot be given the liberty to pick and choose case laws and reliance should be placed on annual reports rather than judicial precedents where the annual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jects with a focus on software development, solutions and mobile technologies. It was further submitted that this company's products and solutions segment covers the license fee for particular customized solutions provided together with the necessary integration work carried out. The Ld. AR further submitted that this segment typically carries superior profit margin on account of level of innovation, design work, customization, etc. Thus, it is abundantly clear that Zylog has in -house developed intangibles thereby rendering its business model completely different from that of the assessee. The Ld. AR further pointed out to the annual report and submitted that the same shows consolidated revenues and expenses of software services and products. The Ld. AR further submitted that significant intangible is owned by the company as would be evident from the fixed asset schedule as appearing in the annual report. It was also submitted that the company had made acquisitions during the year as would be evident from the annual report. The Ld. AR further submitted that this company has significant R&D activities and also a significant AMP expenditure of 5.28%. The Ld. AR pointed out to the fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the issue of claim for risk adjustment, the Ld. AR submitted that the claim had been made both before the TPO as well as the Hon'ble DRP. However, both have denied the assessee's claim. The Ld. AR further submitted that while estimating the return for uncontrolled company, there is a need to give an appropriate adjustment pertaining to market/systematic risk faced. Uncontrolled comparable companies operate under uncontrolled conditions bearing certain risks during the course of its operations. Therefore, such comparable uncontrolled companies earn a risk premium which is not earned by a captive software development provider similar to the assessee which is a risk averse and, therefore, the profits of the captive unit would be less than risk taking companies and hence, an adjustment in this regard is required. The Ld. AR placed reliance on Motorola Solutions India P. Limited in ITA No. 5637/Del/2011, Intellinet Technologies India P. Limited in ITA No. 1237/Bang/2010 and Bearing Point Business Consulting Pvt. Limited in ITA No. 1124/Bang/2011 in support of assessee's claim for risk adjustment. 10.2.1 The Ld. CIT DR submitted that the assessee has failed to justify its claim for wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that Kirloskar was selected as a comparable by the Hon'ble DRP in AY 2010-11. The Ld. AR also raised his objections to two comparables which were selected by the TPO but are not being accepted by the assessee. The arguments of the Ld. AR were as under: (i) Water and Power Consultancy Services Limited (WAPCOS) - the Ld. AR submitted that the TPO has held that under the application of TNMM as the most appropriate method, the difference in functional profile gets evened out and as such the company can be considered as a comparable. The Ld. AR submitted that this company is functionally dissimilar as it is engaged in rendering consultancy services in Water Resources, Power and Infrastructure and includes preliminary investigations, feasibility studies, field studies, engineering design, drawings and tendering process, project management operations and maintenance and institutional/human resource development. The Ld. AR also submitted WAPCOS is a Government of India undertaking with an abnormally high margin of 30.55%. The Ld. AR submitted that WAPCOS has been rejected as a comparable in the following cases - Nortel Networks India Pvt. Ltd. vs. ACIT (ITA No. 4765/Del/2011 & 427/Del ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also needs to be allowed for the TSS segment. The Ld. AR relied on the decision of the Hon'ble Bombay High Court in Fire Stone International (TS-401-HC-2015(Bom.)-TP), wherein the Hon'ble Bombay High Court has deleted the TP adjustment by holding that the same should be calculated only on International Transactions and not on the entire turnover. The Ld. AR also relied on the following decisions in this regard - T Two International P. Ltd. and Tara Jewels Exports P. Ltd. and Tara Ultimo P. Ltd. (ITA No. 5644, 5645 & 5646/Mum/2008) (AY 2004-05), IL Jin Electronics India P. Ld. Vs. ACIT (36 SOT 227), SMCC Construction India Ltd. vs. ACIT [2011] 44 SOT 63 (Del.), ACIT vs. Super Diamonds [2012] 53 SOT 243 (Mum.) and DCIT Vs. Twinkle Diamonds [2012] 53 SOT 243 (Mum.). 10.4.1 The Ld. CIT DR placed reliance on the TPO's order. 10.5 On the corporate tax grounds 1, 2 and 3 the Ld. AR submitted that in the draft assessment order the liquidated damages were disallowed on the ground that they were in the nature of penalty/fine. He drew attention to page 16 of the order of the Hon'ble DRP for AY 2011-12 that the Hon'ble DRP following its earlier decision for AY 2010-11 had directed the AO to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... effect to the directions of the Hon'ble DRP. We direct the TPO to give effect to the directions of the Hon'ble DRP in this regard and exclude this comparable. (ii) E-Infochips Ltd. - The ld. AR has submitted that E-Infochips is engaged in diversified services like IT Enabled Services, Development of Software Products and Solutions for Product Design and Development, Quality Assistance and Certification, reengineering, sustenance and volume production, Software Consulting and manufacturing EVM and VDB Electronic Board etc and is functionally dissimilar. The ld. AR has relied on the decision rendered by the ITAT Delhi Bench in Saxo India Private Limited (ITA No. 6148/Del/2015), wherein the ITAT Delhi Bench has held that E-Infochips is to be rejected as a comparable on the ground that it earns income from software products and services and no segmental data is available. We do find from the FAR analysis that assessee company is functionally dissimilar to E- Infochips and hence finding support from the decision rendered by the ITAT Delhi Bench in Saxo India Private Limited (ITA No. 6148/Del/2015), we direct the TPO to exclude this comparable. (iii) Infosys Limited -The Ld. AR has su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lved in CSD activities and is hence functionally different. It is seen that apart from functional dissimilarity, this company also own intangibles which is not so in the case of the assessee. Relying on the decision of the Hon'ble High Court of Andhra Pradesh in the case of CIT II Hyderabad vs. Intoto Software India P. Ltd. (ITA No. 233 of 2014), wherein it has been held that software product companies owning intangibles could not be compared with the software development services provider, we direct the TPO to exclude this company from the final set of comparables. (vi) Persistent Systems Limited The Ld. AR has submitted that this company is engaged into diversified services including intellectual property led software solutions and software products focusing on cloud computing, business intelligence and analytics etc and is hence functionally dissimilar. The company also owns significant intangibles. A perusal of the profit and loss account of the company that the company had revenue streams from software services and products. It is seen that the revenues and expenses have been shown in a consolidated manner and no segmented disclosure has been made. It is also seen that that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [(TS-774-ITAT- 2012(Del)], Integrated Decisions & Systems India (Private) Limited [(TS-629-ITAT-2011(JPR)], NTT Data India Enterprise Application Services Private Limited [IT-293- ITAT-2013(HYD-TP), Adaptech India (Private) Limited (ITA No. 481/Hyd./2011), Sunquest Information Systems (TS-299- ITAT-2015(Bang)-TP). Further, non availability of segmental information in case of diversified operations renders a company not comparable, has been held in the following decisions - Telcordia Technologies India P. Ltd. (ITA No. 7821/Mum/2011), Trilogy E-Business Software India Pvt. Ltd. vs. DCIT (ITA No. 1054/Bang/2011), Transwitch India P. Ltd. vs. DCIT [ITA No. 948/Bang/2011, TS-105-ITAT- 2012(Bang)-TP], First Advantage Offshore Services Pvt. Ltd. (ITA No. 1252(Bang)/2010), CSR India (P) Ltd. vs. ITO [IT(TP)A (reference no. No. 1119/Bang/2011)], Intoto Software India Pvt. Limited, Hyderabad (ITA No. 233 of 2014). Respectfully following these judicial precedents, we direct the TPO to exclude this company from the final set of comparables. (viii) Sasken Communication Technologies Limited -It is seen that this company is a provider of telecommunication software services and solutions to net ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly adjudicated on these two comparables. It will be appropriate if these two comparables are also considered by the TPO and accordingly, these two comparables are also remitted to the file of the TPO for adjudication. 11.3 As far as the assessee's ground for working capital adjustment and risk adjustment is concerned, it is seen that the assessee has submitted a claim based on a computation which is based at page 393 of the Paper Book. It is also a fact on record that the Hon'ble DRP has allowed the assessee's claim for working capital adjustment in assessee's own case in AY 2010-11. The Ld. CIT DR also agreed to the preposition that the issue may be restored to the file of the TPO for re-examination. On the issue of risk adjustment it was the Ld. AR submission that the issue may be restored for obtaining expert assistance. The Ld. AR also referred to the Capital Asset Pricing Method (CAPM) Computation submitted before the Hon'ble DRP and submitted that the Hon'ble DRP has not considered the computation at all. On overall factual matrix of the issue, it is our considered opinion that both these issues required restoration to the file of the TPO for reconsideration and reexaminati ..... X X X X Extracts X X X X X X X X Extracts X X X X
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