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TMI Blog2019 (4) TMI 289X X X X Extracts X X X X X X X X Extracts X X X X ..... ovision of software maintenance and support services amounting to Rs. 15,20,04,973/-. During the period relevant to present appeal, the assessee rendered the following software maintenance and support services to its group entities: Software maintenance and support services; Engineering activities - enhancement and customization of supporting platforms and applications, database cleanup and maintenance services, supporting application platforms within Kaplan businesses, bug fixing and maintenance; Quality assurance activities; Other IT services; 2.1 Pursuant to a reference made by the Assessing officer, the Transfer Pricing Officer (TPO) passed order dated 21.01.2014 under section 92CA of the Act. The TPO accepted the Functions Assets and Risk analysis (FAR) as described in the Transfer Pricing (TP) study filed by the assessee. There is no dispute between the parties that the most appropriate method is Transactional Net Margin Method (TNMM) and the Profit Level Indicator (PLI) is OP/TC. The assessee had selected 18 companies with an average margin of 10.04 % and had reported that its international transactions are at Arm's Length Price (ALP) considering its own margin at 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fied in clauses (a) to (d) of sub-section 92 C of the act. 3. The learned TPO/AO/DRP have erred in: a. Not accepting the use of multiyear data, as adopted by the appellant in its transfer pricing (TP) documentation and b. determining the arm's length margins/prices using data pertaining only to financial year 2009-10 which was not available to the appellant at the time of complying with the Indian TP documentation requirements 4. The learned TPO/AO/DRP have erred in rejecting certain comparable companies selected by the appellant by applying inappropriate comparability criteria such as: a. Turnover less than INR 5 crores b. export turnover less than 75% of operating revenues c. different accounting year and d. employee cost less than 25% of total cost 5. The learned TPO/AO/DRP have erred in erroneously rejecting the comparable companies selected by the appellant and adding certain companies to the final set of comparable companies on an ad hoc basis, thereby resorting to cherry picking of comparables to determine ALP. 6. The learned TPO/AO/DRP have erred in selecting certain companies (which are earning supernormal profits) as comparable to the appellant. 7. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ware Limited, the learned counsel submitted that the TPO himself had applied the related party transactions filter of 25%. Inviting our attention to pages 247 and 302 of the paper book it was submitted that the details of the related party transactions in case of Sonata as reported in the annual report were brought to notice of both the TPO and the Ld. DRP. As per the same, the related party transactions, as a percentage of sales, in the case of Sonata Software Limited was worked out at 55.95%. Our attention was invited to paragraph 9.5 of the Transfer Pricing Order and it was contended that the TPO committed serious error in considering data for only one of the related parties and, perhaps inadvertently, ignoring the related party transactions reported with other entities appearing on the very same page of the annual report for the purposes of applying the Related party transactions filter. Drawing our attention to page 173 of the paper book containing the annual reports of the comparable companies, it was pointed out that Sonata Software Limited reported related party transactions with several Associated Enterprises. It was submitted by the Ld. AR that the TPO inadvertently appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Annual Reports. It was submitted that income from software services was shown at Rs. 43,04,66,481/-. Further break up of income was shown to be contained in schedule 7 to the balance sheet on page 12 of the paper book containing the annual reports. It was pointed out by the Ld. AR that income from software services was Rs. 37,13,88,107/- (86%) and the balance income of Rs. 5,90,78,374/- (14%) was earned from consultancy charges. Our attention was further invited to note 16 on page 16 of the paper book containing annual reports wherein under the head 'segmental information' it is stated that "the company is primarily engaged in software development and IT enabled services which is considered the only reportable business segment.....". It was the contention of the Ld. Counsel that as the segmental profitability details were not available, this company is not comparable to Kaplan India Private limited. The Ld. Counsel further invited our attention to schedule 8 on page 12 of the paper book containing Annual reports of comparables, wherein technical subcontractors' cost is reported. It was the contention of the learned counsel that E Infochips Bangalore engages sub-contractors and, he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment year 10-11, more so dealing with Software development services segment deserve respectful consideration and cannot be lightly ignored unless factual differences or developments in law which have a bearing on the issue in dispute are pointed out. This is more so when in the present case, broad characterisation of international transactions as Software development services and application of TNMM as the most appropriate method is not disputed by both the parties. In such factual background decisions, excluding or including companies on basis of generic disqualifications like software product revenue being earned in case of certain companies and segmental data not being available or conclusion that a certain company fails identical filter in such decided case, deserve to be followed. We note that Para 13 to 15 of the order of the ITAT in Freescale Semiconductors (supra) also support the case of the assessee. The same are extracted here in below for a ready reference: "13. The Ld. AR has also objected against the inclusion of the Einfo chips Bangalore Ltd. Assessee has objected before the Ld. transfer pricing officer that this company is functionally not comparable, segmental ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elopment services and consultancy charges. In item No. 9 it is stated that the company is engaged in development and maintenance of computer software, production and sale of software. At page No. 652 while giving the segmental information, it was also maintained that the company is primarily engaged in software development and IT enabled services which is considered as the only one reportable segments and therefore there is no segmental information available with respect to the software development activities as well as IT enabled services. In view of this the above comparable is required to be excluded from the comparability analysis of the software development service segment of the assessee. Accordingly we direct the Ld. transfer pricing officer to exclude E info chips Bangalore Ltd." Therefore, in absence of any other information being brought on record by the TPO to support an alternate view and respectfully following decision of the coordinate bench in the case of Freescale Semiconductors India (P) Ltd (supra), we direct the TPO to exclude E Infochips Bangalore Ltd. from the final set of comparable companies. (iii) Infinite Data Systems Private Limited: The next compara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove. It is apparent that Infinite Data Systems Private Limited is engaged in a wide variety of services including software technical consultancy services etc. It is our considered opinion that these services cannot be compared with software development services provided by a captive service provider like the assessee in the absence of segmental information. FAR of Infinite Data Systems Private Limited is clearly different from that of the assessee. We also note that the assessee's case is covered in assessee's favour by the order of the Delhi Bench of the Tribunal in Freesscale Semiconductors India (P) Ltd. (supra). The relevant observations of the Bench are contained in Para 10 to 12 of the said order and the same are being reproduced here in under for a ready reference: "10. With respect to Infinite data systems private limited assessee objecting it on functional dissimilarity, services to single customer, abnormal supernormal profits, fluctuating trends and significant intangibles. The above objection of the assessee was rejected by the Ld. transfer pricing officer stating that assessee has not demonstrated how the services to a single customer is not comparable to it as asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded by the group company. It does not have any research and development activities whereas in the case of the comparable company it provides that services to Fujitsu services Ltd and also maintains and design and develop a software. In view of this this comparable company cannot be said to be in the same functions as it is performed by the assessee. In view of this we direct the Ld. transfer pricing officer/AO to exclude the above comparable company as its functions are quite different with the functions performed by the assessee." Respectfully following the decision of the coordinate bench in the case of Freescale Semiconductors India (P) Ltd (supra), we direct exclusion of Infinite Data Systems Private Limited from the final set of comparable companies. (iv) Infosys Ltd.: Lastly, the Ld. Counsel for the assessee contented that Infosys Limited is not comparable to the assessee company. By inviting our attention to page 73 of the paper book containing annual reports, it was argued that Infosys Limited earned Rs. 925 crores from sale of software products, with reference to page 74 it was submitted that Infosys Limited incurred huge amount of selling and marketing expenditure a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the above comparable as submitted before ld Transfer Pricing Officer. It was the contention of the assessee that it has a huge brand value, it has huge turnover, and its Finacle' Software is a leading product in banking industry. Therefore, it was submitted that it is functionally different and has significant R&D. The ld Transfer Pricing Officer and the ld Dispute Resolution Panel rejected the above contention. Before us, the ld AR submitted that this comparable should be excluded in view of the decision of Hon'ble Delhi High Court in case of CIT v. Agnity India Technologies Ltd.262 CTR 291. He further stated that this comparable has been excluded in the case of the assessee for AY 2007-08 by the coordinate bench. 17. The ld DR relied upon the orders of the lower authorities. The ld DR could not point out that why we should not follow the decision in the assessee's own case without there being any change pointed out, hence, we respectfully follow the decision of the coordinate bench in assessee's own case for AY 2007-08 and directs the ld Transfer Pricing Officer to exclude the above comparable." Therefore, respectfully following the decision of the coo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, transfer pricing adjustment to arm's length price of was compulsorily to be made irrespective of level and robustness of the comparable data. 4.2.1 In response, the learned DR invited our attention to Rule 10B (3) of the Income Tax Rules, 1962 and contended that risk adjustment, if any, can only be allowed in case of comparables and that no such adjustment would be permissible to the margin of the tested party. 4.2.2 Responding to this objection, the learned counsel invited our attention to a recent decision of the coordinate Bench "B", Bengaluru, in case of IKA India Pvt. Ltd (IT(TP) A No 2192/Bang/2017) wherein, at paragraph 31, the coordinate bench returned a categorical finding that "the regulations do not restrict or provide that adjustments cannot be made on the results of tested party. Therefore, keeping in mind the aforesaid objective the net profit margin of tested party drawn from its financials can be suitably adjusted to facilitate its comparison with other uncontrolled entities". 4.2.3 We have considered the rival contentions. The Ld. AR has fairly accepted that in the present case it is not necessary to give any directions on the issue of risk adjustment. We n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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