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TMI Blog2017 (7) TMI 995X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to be nil because it is a tax neutral transaction and revenue is dependent upon the cost incurred (which includes depreciation). Thus the value as recorded in the books of account is to be upheld and deletion of addition made by disallowing or reducing the amount of depreciation on the assets purchased from AE is not sustainable. Not only this, TPO for FY 2010-11 and FY 2007-08 has upheld that the price charged for import of capital equipment complies with the arm’s length standard and the assessee has brought on record the order of TPO for FY 2010-11 and FY 2007-08 holding that the price charged for import of capital equipment complies with the arm’s length standard which is available as Appendix 2 and Appendix 3 annexed with the synopsis. So, in these circumstances, we hereby delete the addition on this account made by disallowing or reducing the amount of depreciation on the assets purchased from the AE - ITA No.783/Del./2015 - - - Dated:- 22-3-2017 - SHRI R.S. SYAL, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER For The ASSESSEE : Shri Himanshu Shekhar Sinha, Advocate Mohd. Fahad Khalid Ms. Reetika Garg, CAs For The REVENUE : Shri Peeyush Jain, CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... marketing support services by: 5.1 Rejecting the comparable companies selected by the Appellant in its Transfer Pricing documentation; 5.2. Accepting companies, which are not comparable to the Appellant in terms of functions, assets and risks; 5.3. Erroneously ignoring comparable companies, obtained by way of a fresh search, provided by the Appellant as a response to the show cause notice; and 5.4 Not granting an economic adjustment for the risk mitigated environment in which the Appellant operates. 6. The Ld. AO/Ld. TPO/ Ld. DRP erred on facts and in law in determining the arm's length price of import of capital equipment by the Appellant from its Associated Enterprises ('AEs') at NIL by: 6.1. Not appreciating that the international transaction of import of capital equipment being inextricably linked with the primary activity of captive software development services should be benchmarked by using Transactional Net Margin Method on an aggregate basis; 6.2. Not appreciating that the Appellant is a cost plus entity and the depreciation of INR 8,64,69,321 (as per the Companies Act, 1956) on such capital equipment had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tual software development and marketing software services. During the year under assessment, the assessee entered into the international transactions detailed in Form 3CEB as under :- Sr.No. Nature of Transaction Arm s length price as per taxpayer (i) Software service Rs.1,51,39,91,308 (ii) Market Support service ₹ 4,67,48,181 (iii) Purchase of capital goods ₹ 57,30,63,268 3. Assessee company by using Transactional Net Margin Method (TNMM) as the most appropriate method with OP/OC as Profit Level Indicator (PLI) for both of its segment, namely, software development services segment and market support services segment. Assessee chosen 12 companies as comparable having average OP/OC of 14.08% for benchmarking software development segment transactions and chosen 18 comparables with the average OP/OC of 6.98% for benchmarking market support services transaction. 4. However, TPO by rejecting the filters applied by assessee company for its TP study re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g aggrieved, the assessee has filed the appeal against the order passed by the AO/TPO/DRP. 9. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case. GROUNDS NO.1 2 10. Grounds Nos.1 2 are general in nature, hence need no specific adjudication. GROUNDS NO.3, 4.1, 4.2, 5.1 5.4 11. Ld. AR for the assessee has not pressed the aforesaid grounds, hence determined against the assessee. GROUNDS NO.4 4.3 12. The assessee company challenged the upward adjustment of arm s length price of assessee s international transaction qua provision of software development services made by the AO/TPO/DRP by accepting incomparable companies. The final set of comparables considered by the TPO for benchmarking the international transactions are tabulated as under :- Sr.No. Name of the company OP/OC 1. Akshay Software Technologies Ltd. -1.07% 2. E-Infochips B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arable on ground of functional dissimilarity; segmental information not available; fluctuating trend; abnormal super normal profit and significant intangible and relied upon decision rendered by coordinate Bench of ITAT, Delhi in case of Headstrong Services (India) Pvt. Ltd. in ITA No.714/Del/2015 order dated 18.03.2016. 15. However, ld. TPO brushed aside the objections by referring to the annual report. TPO observed that many companies treat IT and ITES as one industry and report them as one segment even though they are not performing any ITE services. TPO also referred to page 54 of the annual report, which is now available at pages 3225 3242 of the Paper Book Vol.III-A, showing the income from software services at ₹ 7,43,04,66,481/-. TPO further held that consultation charges constitute a substantial 14% of the total revenue for the FY 2009-10 which is part of the software development services only and in these circumstances, segmental financials are not required and retained the same as a valid comparable. 16. First of all, ld. AR for the assessee opposed the inclusion of this company as comparable on ground of functional dissimilarity vis- -vis assessee comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erall segment frustrates the comparability. We are currently dealing with the international transaction of Provision of Software Development services and the international transaction of ITES is separate which has also been benchmarked distinctly. In our considered opinion, e-Infochips Bangalore Ltd. having a pool of both software developments and ITES segments into the overall segment designated as Software development , cannot be considered as comparable on entity level with the international transaction of Software development of the assessee. We, therefore, order for the exclusion of this company from the list of comparables. 19. Following the decision rendered by the coordinate Bench in Headstrong Services (India) Pvt. Ltd. (supra) and the fact that since E-Infochips Bangalore Ltd. is having pool of both software development and ITE services segment and both the segments are designated as software development segment, the same cannot be taken as a valid comparable on entity level vis- -vis international transaction of software development services of assessee company. 20. In Fiserv India Private Ltd. (supra), the coordinate Bench of ITAT, Delhi also orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded products and brand related profits and having turnover of 135 times of the assessee, it cannot be a suitable comparable for benchmarking the international transaction of assessee company because assessee company is a captive service provider rendering services of its AE alone without having any intangible in the development of software having limited number of employees and not having any branded product. 24. Assessee company is also operating at minimum risk as the services are being provided to its AE and there is a huge difference in the revenue earned by the comparable company vis- -vis assessee company. So, by following the decision rendered by coordinate Bench of the Tribunal in assessee s own case for AYs 2008-09 and 2009-10, we hereby order to exclude this comparable from the final set of comparables for benchmarking the international transaction. PERSISTENT SYSTEMS LIMITED 25. Assessee sought to exclude this company as a comparable on the grounds inter alia that it is functionally not comparable and that this company is having different business model as it drives its income from sale of software services and its products and that this comparable company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Fiserv India Private Limited (supra). 30. TPO rejected the objections raised by assessee by observing that the software development, implementation and support services are various sub-segments of software development services only and has also brushed aside the objection of assessee that it is only sale of licence by observing that out of total sale of ₹ 67.57 crores, the sale of licence is of ₹ 1.51 crores which is only 2.2% of the total sales. 31. Keeping in view the fact that this company is into diversified services like sale of licences, software services, development of software products, etc. qua which segmental financials are not available and the fact that this company is having related party transactions exceeding 50% of the revenue, this company cannot be a suitable comparable for benchmarking the international transaction. Moreover, coordinate Bench in Fiserv India Private Limited (supra) while examining the comparability of this company with Fiserv India Private Limited (supra) and a similarly placed software development company also ordered to exclude the same by taking into consideration all the aforesaid facts. We are o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oviding technology infrastructure services, testing services, package implementation having more than 82,000 employees. It has its own R D centre. It incurred around 11% of net sales as expenditure on research and development. None of the above factors match with the assessee company. Respectfully following the above precedents, we hold that this company is not comparable. 10.3. There is another reason for holding this company as incomparable. It can be seen that there was a merger of Wipro Infrastructure Engineering Ltd., Wipro Healthcare IT Ltd., Quantech Global Services Ltd., with this company during the year in question. This merger was approved by the Hon ble Karnataka High Court and the Hon ble AP High Court during the financial year 2007-08. The Mumbai Bench of the Tribunal in Petro Arandite (P) Ltd. Vs. DCIT (2013) 154 TTJ (Mum) 176 has held that a company cannot be considered as comparable because of financial results distorted due to mergers and demergers, etc. Similar view has been taken by the Delhi Bench of the Tribunal in the case of Toluna India Pvt. Ltd. (supra). As there were amalgamations in Wipro Ltd. during the financial year in question, this fact also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the computation submitted by the assessee to work out the margin of the comparable company but the TPO has failed to do so. Since the factual position as to the operating profit margin of Quintegra Solutions Limited (supra) is not in dispute, the TPO is directed to rectify the margin qua Quintegra Solutions Limited (supra) for benchmarking the international transaction. So, additional ground no.4.5 is determined in favour of the assessee. COMPANIES SOUGHT TO BE EXCLUDED AS COMPARABLES FROM THE FINAL SET OF COMPARABLES FOR BENCHMARKING THE ASSESSEE S INTERNATIONAL TRANSACTION QUA MARKETING SUPPORT SERVICES APTICO LIMITED 39. Assessee sought to exclude this company as a comparable on ground of functional dissimilarity being engaged in complex and diversifying technical consultancy services and contended that this company is already ordered to be excluded from the final set of comparables for benchmarking the international transactions in assessee s own case in ITA No.3324/Del/2013 (supra) for AY 2008-09. However, TPO preferred to retain this company as a comparable by overruling the objections raised by the assessee. 40. This comparable company was examined ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the annual report of this comparable company, it becomes apparently clear that this company is engaged in pay roll processing services and has considered itself as an outsourcing service provider and as such, is not functionally comparable. So, in these circumstances, we order to exclude this comparable from the set of comparables for benchmarking the international transaction. TSR DARASHAW LIMITED 44. Assessee sought to exclude this company from the final set of comparables on the grounds inter alia that on ground of functional dissimilarity that this company is into share registry, transfer services, depository services, record management share register services and corporate fixed deposit management, which are not identical to the marketing support services being rendered by the assessee and relied upon Trend Micro India Private Ltd. vs. DCIT in ITA No.1585/Del/2015 order dated 20.11.2015 , available at pages 35 to 59 of the compilation of case laws, and LG Chemical India Pvt. Ltd. (supra), TPO again by overruling the objections raised by the assessee company retained this company as a comparable. 45. Coordinate Bench of the Tribunal examined this company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or electronic records and also into Payroll and Trust Fund Activity and is handling Payroll and Retirement Funds, it has no functional comparability with the assessee company to be a suitable comparable. So, we order to exclude this company as a valid comparable. CYBER MEDIA INDIA ONLINE LTD. 47. Assessee sought to exclude this company as comparable for benchmarking the international transactions qua marketing support services on the grounds inter alia that this company is functionally incomparable; this company is providing high end services entailing higher risk and is having significant intangibles i.e. trademark and websites contributing up to 14.55% of its total net block. 48. However, TPO retained this company as a comparable on the ground that under TNMM method comparability of financials is required to be seen rather than fixing on product/service comparability as in other methods for benchmarking international transactions. 49. Perusal of the annual report, available at pages 3540 to 3559 of Paper Book Vol. IV of the Paper Book, shows that the company is operating as information technology information website generating revenue by selling of online media s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipment to the tune of ₹ 57,30,63,268/- from its AE during the year under assessment, the detail of which is tabulated as under :- Particulars Total amount capitalized for import of capital equipment As per Companies Act As per Income Tax Rules New equipment 32,23,16,507 5,09,04,398 14,57,25,592 Used equipment 25,41,03,286 3,55,64,922 11,00,18,090 Total 57,64,19,793 8,64,69,321 25,57,43,681 54. Ld. AR for the assessee contended that these equipments were imported from its AE in order to help assessee to develop software. However, the TPO held that the arm s length price of the equipment should be nil. 55. The ld. AR for the assessee further contended that the coordinate Bench of Tribunal in assessee s own case for FY 2009- 10, copy of which is available at page 279 to 311 of the Paper Book, on identical facts held the issue in favour of the assessee. For facility of reference, operative part o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned, then the difference between the transacted value and the ALP does not directly lead to the transfer pricing adjustment. At this juncture, it is pertinent to note the language of section 92(1) which provides that any income arising from an international transaction shall be computed having regard to the arm's length price. It does not say that the total income is to be computed in accordance with the ALP. It is rightly so because the international transactions which have no direct bearing on the total income, cannot give rise to addition on account of difference between their transacted value and ALP. Since the transaction of purchase of fixed assets is a capital transaction, this, in itself, does not affect the total income of the assessee. It is only the off-shoot of such transaction in the capital field, being depreciation allowance on such ALP of the transaction, which affects the total income. To illustrate, if a fixed asset is purchased by an enterprise from its AE for a sum of ₹ 100 and rate of depreciation on such asset is 10%, then the enterprise will charge depreciation amounting to ₹ 10 in its Profit and Loss account. If the ALP of such transaction is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exception to the above rule. It is so for the reason that the assessee is getting remuneration from its AE at costs incurred plus a particular mark-up. The cost base includes not only direct but all the indirect costs. The amount of depreciation allowance on fixed assets, including those purchased from AE, is also compensated with the same mark-up. Thus we can say that depreciation allowance and remuneration to the assessee on such depreciation are inseparable transactions. The income in the shape of remuneration to this extent directly depends upon the amount of deprecation allowance. When the assessee is getting mark-up of 13%, the amount of deprecation at ₹ 10 in our above hypothetical example will fetch remuneration of ₹ 11.30. If the amount of depreciation is reduced to Nil, the amount of income to that extent will also be Nil, because the mark-up can be applied only if there is depreciation cost to the assessee. In other words, the transactions of depreciation on one hand and the resultant revenue on the other, go hand in hand. In such a case, where the income is directly based on the costs incurred including depreciation, then these two transactions become clos ..... X X X X Extracts X X X X X X X X Extracts X X X X
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