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TMI Blog2015 (5) TMI 1129X X X X Extracts X X X X X X X X Extracts X X X X ..... he alternative. - IT(TP).A No. 1317/Bang/2010 - - - Dated:- 26-5-2015 - N. V. Vasudevan (Judicial Member) And Abraham P. George (Accountant Member) For the Appellant : K. R. Vasudevan, Advocate For the Respondent : C. H. Sundar Rao, CIT-I(DR) ORDER N. V. Vasudevan (Judicial Member) This appeal by the assessee is against the order dated 13.8.2010 of the Deputy Commissioner of Income Tax, Circle12(4), Bangalore passed u/s. 143(3) r.w.s. 144C of the Act. 2. The Assessee is a part of Tesco Group. Tesco Group runs a chain of retail stores in several countries in Europe and Asia. The Group is headquartered in UK, and its flagship company, Tesco Plc., is listed in Stock exchanges in UK. The core business of Tesco Group is in the UK. Tesco Group also has several stores in Hungary, Poland, the Czech Republic, the Slovak Republic, Thailand, South Korea, Taiwan, the Republic of Ireland and Malaysia. The Assessee has entered into an agreement with Tesco Stores to provide Business Process services, Information Technology Enabled Services (ITES) as well as Software Development Services (IT services). ITES rendered by the Assessee include customer services, stores he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement of expenses-Receivable ₹ 2,32,47,077/- Rent Deposit received ₹ 2,00,00,000/- TP ADJUSTMENT RELATING TO IT SERVICES (Software Development Services 4. Comparable companies ultimately selected by TPO and their arithmetic mean are given as Annexure-I to this order (Page 121 of TPO s order). The arithmetic mean of the 22 comparable companies chosen by the TPO was 20.48%. After allowing working capital adjustment of 1.87%, the adjusted arithmetic mean was arrived at by the TPO at 18.61%. The computation of the ALP by the TPO in this regard was as follows:- 20.6 Computation of Arms Length Price: The arithmetic mean of the Profit Level indicators is taken as the arms length margin. (Please see Annexure B For details of computation of PLI of the comparables). Based on this, the arms length price of the software development services rendered by you is computed as under: Arithmetic mean PLI 20.48% Less: Working capital Adjustment Annexure-C) 1.87% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was beyond 15% of its revenue and hence ought not to be included as a comparable. The Chart also gives the cases decided by various Benches of the ITAT where the comparable companies have been held to be not comparable with that of an Assessee providing IT Software development Services. We will proceed to consider the comparability of companies chosen by the TPO and listed in Annexure-I to this order . 7. The ld. counsel for the assessee brought to our notice that out of the 22 comparable companies chosen by the TPO, the following companies will have to be excluded as the turnover of these companies are more than ₹ 200 crores and cannot be compared with the Assessee whose turnover is less than ₹ 200 crores: (1) Flextronics Software Systems Ltd. (2) iGate Global Solutions Ltd. (3) Mindtree Ltd. (4) Persistent Systems Ltd. (5) Sasken Communication Technologies Ltd. (6) Infosys Technologies Ltd. 8. Our attention was drawn to the observations of the Tribunal in the case of Trilogy E-Business Software India Pvt.Ltd. (supra) (ITA No.1338/Bang/2010) for assessment year (07-08) on the application of turnover filter and it was submitted that the afores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the activities of the parties might affect the relative competitive positions of the buyer and seller and therefore comparability. 12. The ICAI TP Guidelines note on this aspect lay down in para 15.4 that a transaction entered into by a ₹ 1,000 crore company cannot be compared with the transaction entered into by a ₹ 10 crore company. The two most obvious reasons are the size of the two companies and the relative economies of scale under which they operate. The fact that they operate in the same market may not make them comparable enterprises. The relevant extract is as follows [on Rule 10B(3)]: Clause (i) lays down that if the differences are not material, the transactions would be comparable. These differences could either be with reference to the transaction or with reference to the enterprise. For instance, a transaction entered into by a ₹ 1,000 crore company cannot be compared with the transaction entered into by a ₹ 10 crore company. The two most obvious reasons are the size of the two companies and the relative economies of scale under which they operate. 13. It was further submitted that the TPO s range (Rs. 1 crore to infinity) ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be taken into consideration for the purpose of making TP study. 15. It was brought to our notice that the above proposition has also been followed by the Honourable Bangalore ITAT in the following cases: 1. M/s Kodiak Networks (India) Private Limited Vs. ACIT (ITA No.1413/Bang/2010) 2. M/s Genesis Microchip (I) Private Limited Vs. DCIT (ITA No.1254/Bang/20l0). 3. Electronic for Imaging India Private Limited (ITA No. 1171/Bang/2010). It was finally submitted that companies having turnover more than ₹ 200 crores ought to be rejected as not comparable with the Assessee. 16. The ld. DR, on the other hand pointed out that even the assessee in its own TP study has taken companies having turnover of more than ₹ 200 crores as comparables. In these circumstances, it was submitted by him that the assessee cannot have any grievance in this regard. 17. We have considered the rival submissions. The provisions of the Act and the Rules that are relevant for deciding the issue have to be first seen. Sec.92. of the Act provides that any income arising from an international transaction shall be computed having regard to the arm s length price. Sec.92-B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that- (a) the price charged or paid in an international transaction has not been determined in accordance with sub-sections (1) and (2); or (b) any information and document relating to an international transaction have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made in this behalf; or (c) the information or data used in computation of the arm s length price is not reliable or correct; or (d) the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D, the Assessing Officer may proceed to determine the arm s length price in relation to the said international transaction in accordance with sub-sections (1) and (2), on the basis of such material or information or document available with him: 18. Rule 10B of the IT Rules, 1962 prescribes rules for Determination of arm s length price under section 92C:- 10B. (1) Fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. (4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into : Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oresaid companies from the list of comparable. 11. Improper selection of comparables: It was submitted by the learned counsel for the Assessee that the following 2 companies are not functionally comparable with that of the Assessee. a) KALS Information Systems Limited b) Accel Transmission Limited. In this regard our attention was drawn to the decision of the Hon ble ITAT Bangalore Bench in the case of Trilogy E-Business Software India Pvt.Ltd. (supra) wherein these companies were held to be not functionally comparable with that of a pure software developer like the Assessee. 12. The following were the relevant observations of the Tribunal on the aforesaid comparable companies in the case of Trilogy E-Business Software India Pvt.Ltd.(supra) , which was followed by the ITAT Bangalore Bench in the case of 3DPLM Software Solutions Ltd. IT (TP)A.No.1109/Bang/2010 for AY 2006-07 order dated 10.5.2013: (d) KALS Information Systems Ltd. 46. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is company is not comparable. (e) Accel Transmatic Ltd. 48. With regard to this company, the complaint of the assessee is that this company is not a pure software development service company. It is further submitted that in a Mumbai Tribunal Decision of Capgemini India (F) Ltd v Ad. CIT 12 Taxman.com 51, the DRP accepted the contention of the assessee that Accel Transmatic should be rejected as comparable. The relevant observations of DRP as extracted by the ITAT in its order are as follows: In regard to Accel Transmatics Ltd. the assessee submitted the company profile and its annual report for financial year 2005-06 from which the DRP noted that the business activities of the company were as under. (i) Transmatic system - design, development and manufacture of multi function kiosks Queue management system, ticket vending system (ii) Ushus Technologies - offshore development centre for embedded software, net work system, imaging technologies, outsourced product development (iii) Accel IT Academy (the net stop for engineers)- training services in hardware and networking, enterprise system management, embedded system, VLSI designs, CAD/CAM/BP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ztech Software Ltd.) and in view of the decision of the Tribunal in the case of 24 X 7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010, followed by this Tribunal in the case of Logica Private Ltd. (supra) wherein it was held that where the RPT exceeds 15%, such companies should not be taken as comparable companies. Following the said decision, we hold that said companies referred to above be excluded from the list of comparable companies while working out the ALP. 15. As far as Megasoft Ltd., a comparable chosen by the TPO is concerned, this Tribunal in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) followed in the case of 3DPLM Software Solutions Ltd., (supra) had held that only segmental data should be taken for the purpose of comparison. Following are the relevant observations of the Tribunal:- 37. The next plea of the Assessee is that if at all this company is considered as a comparable then the segmental margin of 23.11% (which is the margin for software service segment) alone should be considered for comparability. On the above submission, we find that the TPO considered the segmental margin (Software service segment) in the case of Geometric, Kals Inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y accurate adjustments can be made to eliminate the material effects of such differences. 38. Neither the TPO nor the DRP have noticed that there is bound to be a difference between the Assessee and Megasoft and the profit arising to the Megasoft as a result of the existence of the software product segment and no finding has been given that reasonably accurate adjustments can be made to eliminate the material effects of such differences. For this reason, we are inclined to hold that the profit margin of 23.11% which is the margin of the software service segment be taken for comparability. In view of the above conclusion, we do not wish to go into the question as to whether less than 25% of the revenues of the comparable are from software products and therefore the comparable satisfied TPO s filter of more than 75% of revenues from software development services. 16. In view of the aforesaid decision of the Tribunal, segmental margins in so far as it relates to providing software services by Megasoft alone should be taken for the purpose of comparison. 17. As far as Tata Elxsi Ltd., a comparable chosen by the TPO is concerned, it was held in the case of 3DPLM Software So ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ronics Software Systems Ltd. (Seg.) 14.54 Average 24.00 21. The computation done by the TPO with RPT and other details are given as Annexure-II to this order which is at page-217 of the TPO s order. The TPO finally passed an order u/s. 92CA of the Act and on the basis of the comparables set out above, arrived at arithmetic mean of 24.00%. After factoring the working capital adjustment of 2.06%, the adjusted arithmetic mean was determined at 21.94%. the computation of the ALP by the TPO in this regard was as follows:- 39.5 Computation of Arms Length Price: The arithmetic mean of the Profit Level indicators is taken as the arms length margin. (Please see Annexure E For details of computation of PLI of the comparables). Based on this, the arms length price of the software development services rendered by you is computed as under: Arithmetic mean PLI 24.00% Less: Working capital Adjustment(Annexure-F) 2.06% Adj.Arithmetic mean PLI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the relevant observations of the Tribunal. 8. The first objection is with reference to selection of comparable data by the TPO with reference to the following five companies- (a) Vishal Information Technologies Ltd. (b) Goldstone Infratech Ltd. (c) Datamatic Financial Services Ltd.(seg) (d) Maple e-Solutions Ltd. (e) Nucleus Netsoft GIS(India) Ltd. (now known as (Asit C. Mehta Financial Services Ltd.) Vishal Information Technologies Ltd . 9. The assessee s objection with reference to inclusion of this comparable is on the reason that the company is functionally different, also does not satisfy the filters such as employee cost and on-site revenue filter. It was submitted that employee cost forms a major portion of the total cost of BPO services and in the assessee s case employee cost is 62% of the total cost, whereas in the selected company the employee cost is less than 2%, which indicates that most of the work was outsourced and the outsourcing cost was at 88.64% of the operating cost. It was further submitted that the ITAT Bangalore in the case of First Advantage Off-shore Services (ITA No.1252/Bang/2010) has directed to use employee turnover filter in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rival contentions, we are of the opinion that the business model of the above company is different from that of the assessee. In this case, the foreign exchange revenue is less than 1% of the total turnover. Therefore, it fails the filter provided by the Assessing Officer, on the basis of the foreign exchange earnings. Further, the Revenue from BPO is failing over a period of three years. This issue was considered by the coordinate Bench (Mumbai Bench) of the Tribunal in the case of Stream International Services Ltd.(supra) wherein it was considered as under- 14. The inclusion of second case objected to by the Id. AR is that of Goldstone Infratech Limited (Seg) (earlier known as Goldstone Teleservices Limited). Here it is relevant to note that the TPO, inter alia, applied filter of Companies with export revenues more than 25% of the revenues . Annual accounts of Goldstone Teleservices Limited indicate total revenue of the company at ₹ 30.89 crore from three segments, viz., Telecommunication at ₹ 13.63 crore, BPO at ₹ 5.02 crore and Insulator at ₹ 12.23 crore. The break up of such revenue of Goldstone Teleservices Limited has been provided at page 236 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osition, the learned Departmental Representative contended that the major transaction of ₹ 99.14 lakh of Datamatics Financial Services Limited with Datamatics Limited was towards Reimbursement of expenses . Since the reimbursement of expenses does not include any profit element, the Id. DR urged that the same be excluded. He stated that once this transaction is excluded, the other transaction of ₹ 14.31 lakh are less than 25% of the total transaction with related parties. 13. We do not find any force in the contention advanced by the learned Departmental Representative for the exclusion of transactions with Datamatics Limited towards Reimbursement of expenses from the overall transactions entered into by Datamatics Financial Services Ltd. with its AEs. Section 92F(v) defines transaction in the context of transfer pricing provisions to include an arrangement, understanding or action in concert whether or not it is formal or in writing or whether or not it is intended to be enforceable by legal proceeding. There is no reference to any transaction having necessarily including profit element or mark-up so as to fall within the definition of transaction under Chapt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered the rival sub missions. We agree with the objections of the assessee. In the case of Stream International Services P. Ltd. (supra), it is held with reference to this company as under : 18. We are unable to uphold the contention raised by the learned Departmental Representative. It is apparent from two orders passed - one by the Delhi Bench and the other by the Hyderabad Bench of the Tribunal - that the case of Maple eSolutions Limited has been directed to be excluded from the list of comparables. As the assessment year under consideration is 2006-2007 and the Delhi Bench of the Tribunal has also considered the same assessment year while directing the exclusion of the case of Maple e Solutions Limited from the list of comparables, we are unable to accept the contention of the Id. DR in this regard. It is more so because no contrary view has been brought by the Ld. DR to our notice. Respectfully following the precedents, we direct the exclusion of this case from the final list of comparables. Since the DRP in assessee s own case for assessment year 2007-08 also considered and excluded this company, we uphold the assessee s objection in this regard and direct the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Google India Pvt. Ltd. Vs. DCIT ITA No.1368/Bang/2010 (AY 06-07) order dated 19.10.2012 . 26. We have considered the submission of the learned counsel for the Assessee. We find that in the case of Google India Pvt.Ltd. (supra), this Tribunal in the case of TP adjustment in IT enabled services segment of an Assessee for AY 06-07 considered the comparability of the company M/s.Apex Knowledge Solution Pvt.Ltd. in the IT Enabled Services segment. The tribunal in para-16 of its order held that the said company is not functional comparable as it provides services such as E-publishing knowledge based services etc. In view of the above, we direct the TPO to exclude the aforesaid company also from the final list of comparable companies for the purpose of determining the ALP. 27. The learned counsel for the Assessee submitted that after excluding the aforesaid 6 companies from the list of comparable and if the (-) (+) 5% adjustment under proviso to Sec.92C is considered than the Assessee s margin would be held to be at Arm s Length. The AO/TPO is accordingly directed to work out the profits margins after excluding the aforesaid companies and determine the ALP. 28. In ground No.36 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hus the reimbursement of expenses were added to the revenues and costs in the above ratio i.e. ₹ 1,56,87,128/- in the software development segment and ₹ 75,59,948 in the ITES segment for comparability analysis under TNMM. 30. Before DRP, the Assessee submitted that the reimbursement of expense received are nothing but expenses incurred on behalf of related parties for administrative convenience. The Assessee pointed out that during the previous year, it had paid expat tax for the employees deputed by Tesco Stores Limited, UK (parent company) to work as part of various projects conducted by the assessee. The assessee also paid a certain amount as interest for the delay in the payment of Tax Deducted at Source (TDS). All these expenses were cross charged by the assessee to Tesco Stores Limited, UK who reimbursed the same at cost, without any mark up. The details of expat tax and interest paid on delay in the payment of TDS were also provided as given below:- Expat Tax Details for the financial year 2005-2006 Sl. No. Name of the Expat Tax (Rs) Interest (Rs) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to the service supplier. The above has been explained by means of an example: For example, in many cases, the services provided through intra-group arrangements are administrative or ancillary in nature, and the participants would only have been prepared to centralize the activity if they could share in the cost savings. Cost may represent an arm s length charge in such situations. 164. Determining whether a mark-up is appropriate and, where applicable, the quantum of the mark-up, requires careful consideration of factors such as: - the nature of the activity; - the significance of the activity to the group; - the relative efficiency of the service supplier; and - any advantage that the activity creates for the group. For example, the relative efficiency of arm s length service suppliers may not be comparable to the intra-group services where the intra-group services ore offered as a convenience to the group and not as an ordinary and recurrent activity. 165. As discussed in paragraph 7.36 of the OECD Guidelines, it is important to distinguish between the situation of a taxpayer who renders services for the other members of a group; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arm s length party. In such cases, it would not be appropriate to determine an arm s length charge by referring to a mark-up on the cost of the services acquired from an arm s length party. We therefore hold that the reimbursement of expenses be excluded from the revenues and costs in the ratio i.e. ₹ 1,56,87,128/- in the software development segment and ₹ 75,59,948 in the ITES segment for comparability analysis under TNMM as was done by the TPO and direct the TPO to compute the ALP after such exclusion. Ground No.36 is accordingly allowed. 37. Assessee in the ground No.38 of grounds of appeal before the Tribunal has also projected its grievance regarding the action of the learned Assessing Officer and the Dispute Resolution Panel in excluding while computing deduction u/s.10A of the Act telecommunication charges and insurance expenses of and expenses incurred in foreign current from the export turnover. It is the plea of the Assessee that at all times during the relevant previous year, it was engaged in development of computer software and not in rendering any technical services. Without prejudice to its contention that the aforesaid sums should not be excluded fro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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