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TMI Blog2016 (5) TMI 1364X X X X Extracts X X X X X X X X Extracts X X X X ..... s) Ltd., Mauritius. FIL India provides services to FIL Group of companies and is engaged in providing IT and IT enabled services related to Fidelity Group's business activities and was compensated on a cost plus mark up basis. 3. The assessee company had filed return of income declaring total income of Rs. 9,94,50,836/-. The AO noted that assessee had entered into following international transactions during the year: S. No. International Transaction Amount (In Rs.) 1 Revenue from Software Development Services 1,415,633,844 2 Revenue from IT enabled services 997,425,829 3 Recharge to Group Companies 15,586,679 4 Recharge from Group companies 155,891,869 4. He, therefore, made a reference u/s 92CA to TPO for determination of ALP for these transactions. 5. Ld TPO, after detailed analysis, directed for making following adjustments: (i) Software development services 209,228,000 (ii) IT enabled service 138,463,000 6. Thus, ld. TPO accepted the arm's length price ("ALP") as declared by assessee in regard to recharge to group companies ( Rs. 15,586,679/-) and recharge from Group companies (Rs. 155,891,869). 7. After ld. DRP's direction the AL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrent year (i.e. Financial Year 2009-10) 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; and 4.3. rejecting the economic and comparability analysis undertaken by the Assessee in its TP documentation/ fresh search and applying certain erroneous/ modified filters in determining the ALP; and 4-4. including high-profit making companies in the final comparables set for benchmarking a low risk captive unit such as the Appellant (disregarding judicial pronouncements on the issue) ; and 4.5. erroneously including certain functionally dissimilar companies that are not comparable to the Assessee in terms of functions performed, assets employed and risks assumed and excluding certain comparable companies on arbitrary/ frivolous grounds; and 4.6. arbitrarily including companies having high margin/ volatile operating profit margins in the final com parables' set for benchmarking a low risk captive unit such as the Assessee; and 4.7. ignoring the business/ commercial reality that since the Appellant is remunerated on a arm's length cost plus basis, i.e. it is com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OP/TC was taken as the profit level indicator in the TNMM analysis. 10. Ld. TPO noticed that in the TP study the assessee had arrived at a set of 16 companies with an average margin of 10% by using multiple year data. He noticed that assessee's own margin of this segment was worked out at 12.98%. Thus, the assessee had concluded that its international transaction in regard to software development services were at arm's length. 11. As regards software development service segment, ld. counsel pointed out that in the TP study there were 16 comparables. However, after fresh search was carried out as per the various filters adopted by TPO and margins were updates, 21 comparables were selected by assessee which are mentioned in para 4 of the show cause notice contained at pages 7 & 8 of TPO's order. He referred to page 9 of TPO's order and pointed out that ld. TPO rejected 14 comparables and accepted 7 comparables and further included 7 new comparables. Thus, in final analysis ld. TPO took 14 comparables which are given in para 4.3 of his order, the average margin of which was 28.43%. The same are reproduced hereunder: Sl. No. Name of the company OP/OC 1 Akshay Software Technolog ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . On the comparison of risk being undertaken by this comparable vis a vis assessee, ld. counsel pointed out that this comparable operates as full fledged risk taking entrepreneur whereas assessee being captive service provider does not take such risk. In support of various arguments noted above, ld. counsel has referred to annual report of this comparable contained in the paper book. 14. Ld. counsel relied on the decision of the ITAT in the case of Agnity India Technologies Pvt. Ltd. rendered in ITA no. 1204/Del/2011, wherein this comparable has been rejected. He also referred to the decision of Hon'ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. rendered in ITA no. 102/2015 for AY 2008-09 in support of the proposition that unless the comparable satisfies the test of functional comparability, the same cannot be taken as a comparable. 15. The second comparable disputed by ld. counsel is Wipro Technology Services Ltd. Ld. counsel pointed out that this comparable was rejected in TP study primarily on the ground of business restructuring/ extra-ordinary circumstances and abnormally high/ volatile profit margin. Ld. counsel referred to the annual report of this compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t clear from the annual report The turnover of this company is Rs. 400 crores as against Rs. 142 crores of assessee. Further, the brand ownership gives leverage to this comparable. Wipro brand was taken over by the company on merger whereas assessee does not have any brand or proprietary products. Offshore Revenue of Wipro is Rs. 3,88,46,35,089, which shows its extent of its offshore operations whereas assessee is 100% captive service provider and rendering services to its AEs. He further pointed out that no details are available in the annual report regarding related party transactions. Further, no segmental information is available in the annual report. 18. He further pointed out that this comparable has abnormally high margin/ volatile profit margins of 72.48% as per correct computation and 68.84% as per TP order. He pointed out that the profitability earned by this company is 73.77%, 52.55% and 80.81% from FY 2009-10 to FY 2011-12 respectively. Thus, FY 2009-10 was an abnormal FY. Further, this company is a full fledged risk taking entrepreneur whereas assessee operates as minimal risks as it is a captive service provider rendering services to Fidelity Group companies. 19. Ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that assessee has specifically taken ground no. 4.1 wherein it has contested the modification/ rejection of the filters applied by assessee and ld. TPO's action in applying additional/ revised filters. He submitted that assessee has not conceded this ground but in order to avoid detailed hearing has not seriously contested the ground. He submitted that assessee is not per se disputing the contentions of lower revenue authorities that turnover per se cannot be a relevant factor for accepting/ rejecting the comparable. But when it becomes part of other dissimilarity, which he has demonstrated with reference to the three comparables noted above, then it assumes significance. Ld. counsel pointed out that assessee has relied on the decision in the case of Equant Solutions India Pvt. Ltd. (supra) and no distinction has been shown in the profile of assessee vis a vis Equant Solutions India Pvt. Ltd. (supra) Therefore, the decision is fully applicable to the facts of the case. 25. We have considered the submissions of both the parties and have perused the record of the case. There is no dispute as regards the applicability of TNM method and the PLI being OP/TC. All the three comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit indicators due to variation of operating expenses or viceversa. This potentiality has reference to variation in operational expenses including AMP expenses. The other factors include tax- payers competitive position in the form of price and margins and in some cases, it may be difficult to eliminate or compute the effect of these factors. These difficulties in applying or accepting the TNM Method arise when there is complexity of functions and each party to the transaction(s) makes valuable unique contribution. Reliability of the TNM Method is sufficiently certain where one of the parties makes all contribution involved in the controlled transaction. This is the position even as per the Revenue's case in the present set of appeals. Revenue has asserted that the Indian subsidiaries, i.e. the assessees are mere dummies which implement, promote and incur AMP expenses for building brand value of the foreign AE. Value addition for the Indian AE is not pleaded or argued. Selection of the TNM Method where adopted by the assessee remains unchallenged by the TPOI Assessing Officer. (Emphasis supplied by us) 28. Therefore, we are in agreement with the submissions advanced by ld. co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... functionally different because it renders outsourced product development services and developed product as paxpro, ChemLMS etc. He further contended that segmental information of sale of software services and sale of product are not available and therefore it should be excluded. He relied on the decision of 3DPLM Software solutions Limited V 42 tamann.com 333 ( bang.) and Yadlee Infotech Pvt limited TS- 465-ITAT 2014 ( bang.) b. Ld. DR Relied on the order of AO and submitted that AO has given sufficient reason for selection of this comparable. c. We have perused the arguments on the same. Firstly on perusal of the balance sheet of this comparable it is noted that that this company has not provided segmental information for sale of services and sale of products of software's. Further It is seen from the details on record that this company i.e. Persistent Systems Ltd., is engaged in product development and product design services while the assessee is engaged in contract software development services. We find that, as submitted by the assessee, the segmental details are also not available separately. Therefore, following the principle enunciated in the decision of the Mumbai Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee as regards Wipro Technology Services Pvt. Ltd. that the agreement between Wipro and Citi Group had bearing on the pricing. It is true that after the merger of Citi Technology Services Ltd. with Wipro the existence of the Citi Technology Services Ltd. was no more there but the pricing agreed by earlier agreement between Wipro and Citi Group remained operational. The brand of Wipro continued even after acquisition. Therefore, in view of the provision of section 90B(2), the pricing got affected by the agreement and this factor on standalone basis was sufficient enough to reject this comparable from the list of comparables. We, accordingly, direct for exclusion of Wipro Technology Services Pvt. Ltd. and Persistent Systems Ltd. following the decision in the case of Equant Solutions India Pvt. Ltd. (supra) and also for the reasons given above. 33. As regards Infosys Technologies Ltd. we find considerable force in the submission of ld. counsel for the assessee as noted earlier, that though turnover per se cannot be the basis for rejection of a comparable, but when it becomes part of other similar like brand, ownership, R&D expenses, offshore revenue, AMP spent etc. as noted ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of individual investors of Fidelity group. 39. In regard to the IT enabled services, rendered by assessee, the PLI of the company was arrived at 14.98% on cost in the TP study whereas the average PLI of the comparables was arrived at 13% by taking into account 15 comparables. Thus, assessee's claim was that international transaction was at arm's length. 40. After the fresh search was conducted during the course of T.P. proceedings, assessee provided in total 20 comparables, which have been listed in para 9 of ld. TPO's order at page 12. Out of this 16 were rejected by TPO and following 4 comparables were accepted: - Cosmic Global Ltd. - Infosys BPO Ltd. - Jindal Intellicom Ltd. - Microland Ltd. 41. Ld. TPO further added 5 comparables which were as under: - Accentia Technology Ltd. - E4e Healthcare Business Services Pvt. Ltd. - Fortune Infotech Ltd. - TCS E-Serve Ltd. - TCS E-Serve International Ltd. 42. Total margin of these 9 comparables was computed at 30.58%. 43. Ld. DRP confirmed the TPO's action in regard to following comparables: - TCS E-Serve Ltd. - TCS E-Serve International Ltd. - Infosys BPO Ltd. - Accentia Technology Ltd. 44. The first comparable dispu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during the year there is abnormally high margin/ volatile profit margins earned by this company which is 60.49% as per correct computation. He pointed out that profitability earned by this company in FY 2007-08 was 24.50%; FY 2008-09 45.94%; FY 2009-10 60.49%. Ld. counsel relied on the decision of ITAT in the case of Equant Solutions India Pvt. Ltd. (supra). 52. Ld. DRP while considering the assessee's objection has pointed out that this company is primarily in ITes field which is evident from various extracts reproduced in DRP's direction from the annual report. Ld. DRP further considered the assessee's objection on taking over of this company by the TCS group and referring to page 13 of annual report observed that the company was taken over by the TCS in the preceding year and not during the relevant year under consideration. 53. As regards the objection raised by the assessee of the exhorbitant growth in the revenue, ld. DRP demonstrated with reference to the data contained in the annual report that the company was doing even better before the taking over by the TCS group and the growth had in fact slowed down after the takeover. 54. As regards the assessee's objection that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocessing, collections, customer care and payments in relation to the services by Citigroup to its corporate and retail clients. Technical services involve software testing, verification and validation of software at the time of implementation and data centre management activities. Segmental details for income from transactions processing services are not available in annual report. 58. Ld. counsel pointed out that other dissimilarities which have been referred with reference to TCS-e-serve, are also in this comparable. He, therefore, submitted that this comparable should be excluded. He relied on the order of the ITAT in the cases of Equant Solutions India Pvt. Ltd. (supra) and Bechtel India Pvt. Ltd. (ITA no. 1478/Del/2015). 59. We have heard both the parties. We find that the functions performed by this comparable are almost similar to that of TCS-e-Serve Ltd. and since this company is also rendering technical services and segmental details for income from transaction processing service are not available, therefore, we direct for exclusion of this comparable, as has been done in the case of Equant Solutions India Pvt. Ltd. (supra) and Bechtel India Pvt. Ltd. (supra). 60. As re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be found out as to whether export turnover is 75% of total income or not. Further, selling and marketing spend is 7% of revenue, which is not present in assessee's case. This company operates as a fullfledged risk taking entrepreneur whereas assessee is at minimal basiss. He relied on the Tribunal's decision in the cases of Equant Solutions India Pvt. Ltd. (supra) and Bechtel India Pvt. Ltd. (supra). 64. Ld. DRP has accepted the TPO's contention, inter alia, observing on the issue of brand ownership that creation of brand value is not on account of marketing expenses but because of superior services. Ld. DRP has observed that this service is given by employing better process and employees, therefore, the cost are higher on account of the same and most of the extra profits on account of brand value are set off because of the cost of this higher service. 65. We are unable to agree with these findings of ld. DRP because it is not demonstrated as to what is the actual basis for these findings. The findings are purely on the basis of ld. DRP's assumptions. As we have observed earlier, accepting ld. counsel's plea that mere high turnover cannot be the basis for accepting or rejecti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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