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TMI Blog2019 (4) TMI 1310X X X X Extracts X X X X X X X X Extracts X X X X ..... ly 7 and balance it objected. Therefore, in our considered view, in the restricted atmosphere of selection of comparables, the %age should be 25% not 15%. The more we restrict, chances of loosing reasonable comparability. Therefore, we reject the contention of the assessee and exclusion of the said comparable by the assessee from the list of comparables, is hereby rejected. Exemption u/s 10B - scope of TP adjustment when assessee is eligible for exemption - shifting of profit - HELD THAT:- The decision making and shareholder appetite of expansion will not remain same for all the time or countries. Irrespective of profit making ability and exemption available in the country of operation, the actual profit making ability cannot be determined. Irrespective of situation, the transfer price of the global market and the corporates must be within the band of pricing. It cannot fluctuate. It can be determined or evaluated only by means of comparing pricing pattern of Indian market and global market. When it is found that it is within the band of prices adopted globally, no need of making any adjustment. It cannot be restricted based on the prevailing tax rate in other countries. As we said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6,24,167/-, by observing as under in his order 2.2 Assessee has entered into following international transactions, as per 3CEB report/TP document: AE Nature of transaction Amount (Rs. Wissen Infotech Inc Provision of software development services 15,99,99,548 2.3 The TPO noted that assessee has used Prowess and Capitaline data base in search for comparable companies in the TP documentation. After applying certain filters, the assessee has short-listed 3 companies to bench mark the software development services transaction with arithmetic mean PLI (OP/OC was computed at 11.03% as against its own PLI at 6.27%. Accordingly, the assessee stated that the international transactions are at arm's length. 2.4 As per the audited statement of accounts the financials of the assessee are as under: Description Amount (in Rs.) Operating revenue 16,01,99,802 Operating Cost 15,26,57,039 Operating profit 75,42,763 OP/OR (%) 4.71% OP/OC (%) 4.94% 2.5 The TPO arrived the arm's length margin at 26.20% and the arm's length price of international transactions was determined at ₹ 18,88,23,969/- and a sum of ₹ 2,86,24,167/- was treated as adjustment u/s 92CA(3) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... length margin of 24.11% after making Working capital adjustment of 1.39% and thereby making an adjustment of ₹ 2,75,04,986/-. 4. The AO erred in not giving full effect to the directions of Ld. DRP in respect of excluding the company Wipro Limited (Seg) as a comparable company in computation of operating margin of comparable companies, which resulted in increase of margin by 0.33% (i.e. 24.11% less 23.78%) and thereby making an excess adjustment of ₹ 5,03,127/- (i.e.Rs.2,75,04,986/- less ₹ 2,70,011,859/-). 5. The Ld. DRP/AO erred in not accepting assessee's contention of rejecting the following 8 Companies inter alia on the grounds of High Turnover, Functional Dis-similarity, ownership of intangible assets and non-availability of segmental information relating to software development in case of companies engaged in both software development and product development. 1. Avani Cimcon Technologies Ltd 2. Bodh tree Ltd 3 Celestial Biolabs Ltd 4. Infosys Technologies Ltd 5 GS Global Ltd 6 Persistent Systems Ltd 7 Quintegra Solutions Ltd 8 Softsol India Limited 6. The DRP/AO erred in confirming an adjustment when the appellant company was claimi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used the material on record. We find that the coordinate bench of this Tribunal in the case of United Online Software Development (India) (P) Ltd., by placing reliance on the judgement of jurisdictional tribunal in the case of Invensys Development Centre P Ltd. directed the AO/TPO to exclude the said company from the list of comparables while computing arm's length price. Following the said decision, we direct the AO to exclude the said company as comparable. 8. As regards Bodhtree Consulting Ltd., ld. AR submitted that this company cannot be a comparable to the assessee company as it is engaged in the business of software products and it also provides open end to end web solutions, software consultancy, design and development of software. It is functionally different from the assessee company and thus needs to be eliminated from the list of comparables. He relied on the following cases: 1. Cash Edge India (P) Ltd. Vs. ITO [2014] 151 ITD 717. 8.1 Ld. DR, on the other hand, submitted that there is significant employee cost and software development expenses and there are no intangibles indicating products. 8.2 Considered the rival submissions and perused the material on record. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 After analyzing the above submissions, we are of the view that the submissions on profile of the company, it is mentioned as "we also provide product engineering and enterprise services to fortune 500 firms". This also will be categorized as software services and cannot be categorized as software product. The auditor of this company submitted the letter before TPO, which was part of assessment proceedings. These submissions are made by ld. AR as additional evidence and we direct AO/TPO to analyse this comparable with the submissions of the assessee after giving them an opportunity of being heard. In case, this comparable is found to be into software products, it may be eliminated from the list of comparables. Respectfully following the said decision, we direct AO/TPO to analyse this comparable with the submissions of the assessee after giving them an opportunity of being heard. In case, this comparable is found to be into software products, it may be eliminated from the list of comparables. 9. As regards Celestial Biolabs Ltd., ld. AR submitted that this company cannot be a comparable to the assessee company as it is engaged in R&D activities and renders services to specific se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e several activities carried on by the assessee. On a compartmentalizing two profit making companies with several activities, we can compare the end result, unless they are into product or highly diversified or some activities which will modify the profit making ability of the organization. In this case, we do not see any reason to interfere with the selection process. Therefore, the objection of the assessee to exclude the said company is hereby rejected. 10. As regards Infosys Technologies Ltd, ld. AR submitted that this company cannot be a comparable case to the assessee company as it is to be rejected based on its size, huge turnover, brand value, scale of operation, owning of intangibles and diversified operations. He relied on the following cases: 1. Invensys Development Centre (P) Ltd. (supra) 2. Adaptec (India) P. Ltd. Vs. ACIT [2014] 44 Taxmann.com 236 (Hyd. Trib) 3. 3DPLM Software Solutions Ltd. Vs. DCIT (supra) 4. United Online Software Development (India) P. Ltd. (supra) 10.1 The ld. DR, on the other hand, in his written submissions stated as under: "10. With regard to Infosys Technologies Ltd, the issue of size, turnover, scale of operation, intangibles and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its size, turnover, brand value, scale of operation, diversified activities and owning of intangibles. As can be seen from the TP order, the turnovers of Infosys Technologies Limited during the year under consideration are ₹ 13,149 crores as against ₹ 42 crores of Assessee. Though it is a fact that Assessee in the TP documentation, has selected Infosys Technologies Ltd. as comparable but that cannot prevent Assessee from objecting to the aforesaid company being selected as comparable, if there are valid reasons for doing so. In this context, the contention of the learned AR that Assessee has selected Infosys Limited on the basis of three years financial data, whereas the TPO considered only the current year data also needs to be appreciated. Therefore, considering the enormity of turnover of the company as well as other relevant factors, the aforesaid company cannot be treated as comparable to Assessee in any manner. This view of ours is also in tune with the view expressed by different Benches of this Tribunal as stated below as well as that of the Hon'ble Delhi High Court in the case of CIT Vs. Agnity India Technologies Pvt. Ltd.,[2013] 85 CCH 146. a) M/s. Fours ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AO/TPO to exclude the aforesaid company from the list of comparables." Following the said decision, we direct the AO/TPO to exclude the said company as comparable from the list of comparables. 11. As regard LGS Global Ltd., the ld. AR submitted that this company cannot be a comparable company to the assessee company, as this company is engaged in rendering consultancy services, BPO, testing services and application maintenance outsourcing. The segmental data is not available for comparability analysis therefore the company is to be rejected from the final list of comparables. He relied on the following cases: 1. Cash Edge India (P) Ltd. (supra) 2. United Online Software Development (India) Ltd. (supra) 11.1 The ld. DR on the other hand, on the objections on LGS Global Ltd that segmental data is not available, submitted that the range of services (consultancy services, BPO, testing services and application maintenance) rendered by the said company are very similar to that of the assessee and the said company operates only in one segment and hence, the objection is not sustainable. 11.2 Considered the rival submissions and perused the material on record. We find that the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relating to services only for comparing the companies Ws. Kals Information Systems, Avani Cincon, LGS GLobal Ltd. and Bodhtree Consulting Systems as the consolidated results of these companies cannot be compared with the assessee, as assessee is admittedly into service providing activities. It is further directed that if segmental results of the above companies relating to similar services as being provided by assessee are not available, then these companies will have to be excluded as comparables as held in various judicial pronouncements relied upon by Ld. A.R . 8.2 In view of the above and also ld. AR submitted that the revenue in FY 2007-08 is three times higher than the revenue of FY 2006-07. We direct the AO to apply the turnover filter and exclude the companies whose turnover are more than 200 crores. Since, we do not have segmental report, we direct AO to determine the service and product details from this company and if in case it is found that it is into product, this company will have to be excluded from the list of comparables." Following the said decision, we direct AO to determine the service and product details from this company and if in case it is found that it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed from the set of comparables for the year under consideration. It is ordered accordingly. 9.2 Ld. AR also relied on the decision in the case of Cash Edge India Pvt. Ltd., ITA No. 5848/D/12 AY 2008-09. 9.3 Ld. DR relied on the orders of revenue authorities. 9.4 Respectfully following the said decision, we direct the AO/TPO to exclude the said company as comparable from the list of comparables. Following the said decision, we direct the AO/TPO to exclude the said company from the list of comparables. 13. As regards Quintegra Solutions Ltd., the ld. AR of the assessee submitted that this company cannot be a comparable, as it is engaged in product engineering services and is not purely a software development service provider. This company is also engaged in proprietary software products and R&D activities. Hence, this company may be excluded from the list of comparables. He relied on the following cases: 1. 3DPLM Software Solutions Ltd. Vs. DCIT (supra) 2. United Online Software Development (India) P. Ltd. (supra) 13.1 The ld. DR submitted that the assessee argues that it is a company offering product engineering services and having proprietary software products as well a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a software service provider." 10.2 Respectfully following the said decision, we direct the AO/TPO to exclude the said company as comparable from the list of comparables." Following the said decision, we direct the AO/TPO to exclude the said company from the list of comparables. 14. As regards the Softsol India Ltd., the ld. AR submitted that this company cannot be a comparable case to assessee company because RPT is over 15% in this case, i.e. 18.3%. He relied on the following case: 1. United Online Software Development (India) P. Ltd. (supra) 14.1 The ld. DR submitted that the assessee seeks exclusion of the said company as it fails RPT filter at 15%. He submitted that the standard RPT filter is applied at 25% and the assessee cannot seek selective application of this filter in case of one comparable. 14.2 Considered the rival submissions and perused the material on record. We find that the coordinate bench of this Tribunal in the case of United Online Software Development (India) (P) Ltd. directed to exclude the said company by observing as under: "11. Softsol India Ltd. 11.1 Objecting to the said company as comparable, the ld. AR relied on the decision of coordinate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation the price charged by the assessee for its international transaction is found to be within the arms length then no adjustment is required to be made. 16. As regards ground No. 6 regarding exemption u/s 10B, the assessee stated as under: "21.0 Appellant Company is enjoying benefit u/s 10B and therefore it is incorrect to make a transfer pricing adjustment. Moreover the tax rate in the country where our AE is situated i.e., USA is higher than the Indian tax rate, and accordingly, establishment of tax avoidance or manipulation of prices or establishment of shifting of profits is not possible. Since the tax rates in USA are higher than those compared in India there would not be any incentive to transfer the profits to higher tax chargeable region. 21.1 This view has been upheld by the Mumbai Bench of the Tribunal in the case of Indo American Jewellery 41 SOT 1, the Hon'ble Tribunal held "We also find merit in the submission of the learned counsel for the assessee that since the tax rates were higher in USA compared with those of India, therefore, there would not be any incentive to transfer the profits to higher tax chargeable regions especially when the company enjoys ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade as per provisions contained in Chapter X of the Act. Similarly in the case of "Philip Software", 119 TTJ 721 (Bang.), it was held that since the basic intention behind introducing the TP provisions in the Act is to prevent Shifting of profits outside India, and the assessee was claiming benefit u/s 10A of the Act, the TP provisions ought not to be applied to the assessee. "5.1 We have heard the rival contentions and we proceed to adjudicate on the issues in the sequence which has been argued by the rival parties before us. The learned counsel for the assessee has argued that the tax payable by it in India is lower than the tax rate applicable to its associated enterprise in the Netherlands. Since the assessee is availing the benefit under section 10A of the Act, one cannot take a simplistic view on the matter of tax avoidance. In this connection the learned Departmental Representative has drawn reference to the proviso to section 92C(4). Relying on OECD guidelines, the DR has mentioned that the consideration of transfer pricing should not be confused with the consideration of problems of tax avoidance, even though transfer pricing policies may be used for such pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch shifting of profits at the hands of the assessee company and there could have been no reason for a majority stakeholder in India {the assessee} to over pay even a single paisa to the minority stakeholder in Japan {Stanley}. The TPO fell in error in ignoring the position that it is if and only if it stands proved that there was manipulation of prices to avoid taxes in India, that the transfer pricing provisions of the Act can be invoked. Now, obviously, once the shareholding of Stanley was only to the extent of 19.51%, the assessee company would not have avoided taxes by shifting profits to Stanley. That transfer pricing regulations in India have been brought on the statute book with the intent of preserving tax base in India and preventing tax evasion through manipulation of pricing of inter company transactions, is also evident from CBDT Circular No.14/2001, providing the Explanatory Notes on provisions relating to direct taxes with respect to Finance Act, 2001. As per this Circular {also brought to the notice of the Assessing Officer by the assessee by way of its submissions dated 20.12.2006, copy at APB 189-218, relevant portion at page 194, para 3.1):- "The profits de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... establish that there was no shifting of profit. The adjustments to ALP are not subject to exemption u/s 10B. Besides, as per the TP law in India, intentions need not be established and the ALP needs to be worked out as per the methods specified by CBDT as per the provisions in the IT Act, 1961 and the IT Rules. 16.2 Considered the rival submissions and perused the material on record. The respective coordinate bench of ITAT has opined that when favourable exemption is available to the assessee in India, assessee may not shift the profit to other countries. This is general criteria that multinational companies will plan their business activities to retain maximum profit in the country in which less tax payment is there. But it is not the only criteria for decision making. The decision making and shareholder appetite of expansion will not remain same for all the time or countries. Irrespective of profit making ability and exemption available in the country of operation, the actual profit making ability cannot be determined. Irrespective of situation, the transfer price of the global market and the corporates must be within the band of pricing. It cannot fluctuate. It can be determine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o as to enable the employees to escape/reduce their tax liability; and (c) of the difficulty in the valuation of the benefits. 2.2 In India, prior to assessment year 1998-99, some perquisites/fringe benefits were included in salary in terms of section 17 and accordingly taxed under section 15 of the Income-tax Act in the hands of the employee and a large number of fringe benefits were taxed by the employer-based disallowance method where the quantum of the disallowance was estimated on a presumptive basis. In practice, taxation of fringe benefits by the employer-based disallowance method resulted in large-scale litigation on account of ambiguity in defining the tax base. Therefore, the taxation of fringe benefits by the employer-based disallowance method was withdrawn by the Finance Act, 1997. However, the withdrawal of the provisions relating to taxation of fringe benefits by the employer-based disallowance method resulted in significant erosion of the tax base. The Finance Act, 2005 has introduced a new levy, namely, the FBT as a surrogate tax on employer, with the objective of resolving the problems enumerated in para 2.1 above, expanding the tax base and maintaining equit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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