9911796707
TMI Blog2017 (2) TMI 1438X X X X Extracts X X X X X X X X Extracts X X X X ..... re that for the a y 2009-2010, the assessee filed its return on 30 September 2009, declaring a taxable income of Rs. 391, 81, 690 under the normal provisions. On a reference to the TPO, the, TPO passed an order dated 8th January 2013 determining an adjustment of Rs. 5, 46, 76, 721 & Rs. 1, 15, 99, 315 in respect of the software development services & the CSS transactions, respectively. Thereafter, the AO has considered the ALP determined by the TPO and passed an order which resulted in an addition of Rs. 6, 62, 76, 036 to the total income of the assessee. The assessee challenged this order before the CIT (A), inter alia, on functional dissimilarity of comparables and on working capital adjustment on both segments but could not succeed. Aggrieved against the CIT (A) order, it filled this appeal with the following grounds : 04. Additional grounds : Subsequently, the assessee filed additional grouds as under : 04. The AR of the assessee submitted that there are two segments viz Software Services and ITEs or Customer Support Services having a turnover of Rs. 49.34 & 9.89 Crores, respectively, and the corresponding operative net margin is 12.91% & 15.69%. With regard to the fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the basis of functional dissimilarity we deal this issue company wise as under; 1) M/s Kals Information Systems Ltd., For exclusion of this company, reliance has been placed on the Tribunal order rendered in the case of M/s Onward technologies Ltd., Vs DCIT as reported in 26 ITR (Trib) 734(ITAT, Mum.). It was pointed out that copy of the judgment is available on pages 1 to 19 of the Case Law Compendium and our attention was drawn to para no.23 of this Tribunal order. Ld. DR of the revenue supported the order of the authorities below. 13. We have considered rival submissions. We find that in para-23 of this Tribunal order, cited by the ld.AR of the assessee i.e. in the case M/s Onward technologies Ltd., Vs DCIT (Supra), it is noted by the Tribunal that this company i.e. M/s Kals information Systems Ltd., functions in the field of consultancy, information provider and general insurance sector. In the present case, the assessee company is providing software development services to its AE who is engaged in business of software products as well as of optical net working equipment to telecommunication provider and therefore, it has to be accepted that there is functional dissimilari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2013. Following were the relevant observations of the Tribunal:- II. UNREASONABLE COMPARABILITY CRITERIA : The learned Chartered Accountant pleaded that out of the six comparables shortlisted above as comparables based on the turnover filter, the following two companies, namely (i) Tata Elxsi Ltd; and (ii) M/s. Flextronics Software Systems Ltd., deserve to be eliminated for the following reasons : (i) Tata Elxsi Ltd., : The company operates in the segments of software development services which comprises of embedded product design services, industrial design and engineering services and visual computing labs and system integration services segment. There is no sub-services break up/information provided in the annual report or the databases based on which the margin from software services activity only could be computed. The company has also in its response to the notice u/s.133(6) stated that it cannot be considered as comparable to any other software services company because of its complex nature. Hence, Tata Elxsi Ltd., is to be excluded from the list of comparables. (ii) Flextronics Software Systems Ltd. : The learned TPO has considered this company as a comparable based ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was read out by him as his submissions : "It is very pertinent to mention here that the company was considered by the taxpayer as a comparable for the preceding assessment year i.e., AY 2006-07. When the same was accepted by the TPO as a comparable, the same was not objected to it by the taxpayer. As the facts mentioned by the taxpayer are the same and these were there in the earlier FY 2005-06, there is no reason why the taxpayer is objecting to it. How the company is functionally similar in the earlier FY 2005-06 but the same is not functionally similar for the subsequent FY 2006-07 even when no facts have been changed from the preceding year. Thus the taxpayer is arguing against this comparable as the company was not considered as a comparable by the taxpayer for the present FY 2006-07." 21.We have heard the rival submissions and considered the facts and materials on record. After considering the submissions, we find that Tata Elxsi and Flextronics are functionally different from that of the assessee and hence they deserve to be deleted from the list of six comparables and hence there remains only four companies as comparables, as listed below:" 26.5. Following the afores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parable in the present case. Since the ld. DR of the revenue could not point out any difference in facts, by respectfully following this Tribunal order, we direct the AO/TPO for exclusion of this company from the final list of comparable. 5. M/s Infosys Technologies Ltd., For exclusion of this company, reliance has been placed on the judgment of the Hon'ble Delhi High Court rendered in the case of M/s Aginity India Technologies Pvt.Ltd., in ITA No.1204/2011 dated 10-07-2013 and in particular, our attention was drawn to para-6 of the judgment as available inpage- 386 of the case law compendium and the same is reproduced hereunder:- "6. Learned counsel for the revenue has submitted that the Tribunal after recording the aforesaid table has not affirmed or given any finding on the differences. This is partly correct as the Tribunal has stated hat Infosys Technologies Ltd., should be exclude from the list of comparables for the reason latter was giant company in the area of development of software and it assumed all risks leading to higher profits, whereas the respondent assessee was a captive unit of the parent company and assumed only a limited risk. It has also stated that Infosy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned it as a comparable. However, the assessee submitted that this company has to be rejected for the reason that the margins are erroneously computed, took us through pages 282, 327& 328 of the paper book and furnished a working which shown the revised margin at 16.00%. Larsen & Toubro Infotech Ltd : The TPO held that this company is engaged in software development services, satisfies all the filters and retained it as a comparable. The sssessee submitted that this company has purchased Mutual fund units approx 170% of its revenue from operations and sold approx 169% of its revenue as found in page 1968 of paper book. It itself has categorised the closing balance under the current investments, showing intention to sell the said outstanding balance of securities as well as in page 1970. Though the activity of trading is not shown as a separate segment, the volume of the transactions clearly depict the intention of the company to trade in securities and earn profits in the said activity. Without prejudice to the above, it has to be rejected for the reason that the margins are erroneously computed and furnished a working which shown the revised margin at 16.96% and took us through p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned, the TPO rejected the same by applying the 25% employee cost filter. According to the TPO, usually software development services are high-end services performed by skilled and professional employees and hence the cost of rendering such high-end services is also high as they comprise of high salaries and better welfare facilities, compared to low-end services. Therefore, the filter of employee cost of more than 25% of turnover was considered by the TPO while choosing the comparable. (ii) The submission of the ld. counsel for the assessee was that in the case of assessee, this test is satisfied. In this regard, our attention was drawn to page 818 to 824 of the assessee's paperbook wherein annual report of this company has been provided. Attention was drawn to the fact that in the profit & loss account of the audited accounts, the cost of services has been shown as an expenditure and in Schedule 15 to the Notes to Accounts, it has been elaborated as follows:- Cost of services: Cost of Services - Overseas 2, 77, 32, 337 Cost of Services - Domestic 2, 58, 40, 435 Transcription charges 3, 97, 389 Web Designing Charges 1, 64, 602 Staff Welfare 11, 43, 144 Staff Training ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the submissions made to the leaned TPO, the Appellant has computed the adjustment for the risk difference of the Appellant vis-à-vis of the comparable companies by placing reliance on the methodology of risk adjustment as stated in the decision of the Hon'ble Bangalore Tribunal in case of Philips Software Centre Private Limited vs. Asst. Commissioner of Income Tax (119 TTJ 721) (2008 26S0T226) as below. Average prime lending rate during FY 2008-09 (A)¹ - 12.75 percent² Average bank rate during FY 2008-09 (B) - 6.00 percent³ Difference between the prime lending rate and bank rate C = (A - B) -6.75 percent Risk Adjustment (C) - 6.75 percent ¹ The rates have been considered as per the details as available in the Economic Survey analysis for 2008-09 ² Average Benchmark PLR for Public Sector banks was 12.25%- 12.75% ³The Average bank rate effective since April 30, 2003 has been 6% 17.4 Further, the Hon'ble Delhi Tribunal in the case of Sony India Pvt Ltd (315 ITR 150) has allowed 20% risk adjustment considering the fact that it may not be possible to quantify risk adjustments." 29. The limited request of the ld. counsel for the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntrolled comparables we are taking the filter of export sales >75%. Most of the exports of software services from India are primarily to EU & US and therefore in case of uncontrolled comparables also the risk level will he equated. So far as the methods suggested by taxpayers in this regard are concerned, they are statistical methods available in standard books of statistics and financial management. A careful study of these methods would show that in all of them a number of assumptions are made to draw the conclusions. Transfer pricing regulations in India is against any assumption in respect to any adjustment. In support, reference is made to Rule 10B discussed above which speaks of reasonably accurate adjustment. If accurate adjustment cannot he made, then alternative is no adjustment should be made. Therefore no risk adjustment is allowed. However TPO is not against adjustment if reasonable accurate adjustment can be made and there is a method to do so, as is evident in respect of working capital adjustment which the TPO has given, if it is possible. In the light of above discussion. no adjustment on account of risk is allowed to the taxpayer." 30. As can be seen from the afo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2015 Aditya Birla Minacs Worldwide Ltd : TPO held that it is functionally comparable, satisfies all the filters hence retained it as a comparable. Further, the assessee did not raise any objection when it is included. The assessee submitted that the margins are erroneously computed and furnished a working. Relied on Lam Research (India) P Ltd v DCIT in IT(TP)A.1437/Bang/2014 dt 30.4.2015. 08. The assessee also placed reliance on its own case for a y 2007-08 in ITA No.1214/Bang/2011 dt 29.8.2016. For the above two issues, it placed reliance on Lam Research (India) P Ltd v DCIT in IT(TP)A.1437/Bang/2014 for ay 2009-10 dt 30.4.2015 and Maersk Global Centres India P. Ltd v. ACIT in ITA.7466/Mum/2012 for ay 2008-09, Capital IQ Information Systems India P. Ltd v ACIT, Hyderabad, for ay 2009-10 in ITA no 124/Hyd/2014 dt.07.03.2014 etc 09. We have heard the rival submissions, gone through relevant ;orders, Charts, annual reports and material in the paper books. In its own case for a y 2007-08, this Tribunal in ITA No.1214/Bang/2011 dt 29.8.2016 for ay 2007-08, inter alia, excluded M/s Eclerx Services Ltd., M/s Infosys BPO Ltd., M/s Accentia Technologies Ltd., (Seg.) & M/s Informed Tec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red the profit margin of M/s. Aditya Birla Minacs Worldwide Ltd., at 23.86%, against 0.53% given in the table above. There is an obvious contradiction which has to be resolved. We are therefore of the opinion that profit margin needs to be correctly worked out and the matter requires a fresh look by the AO / TPO. Though Aditya Birla Minacs Worldwide Ltd., is a good comparable, the profit margin needs to be correctly worked out after considering the submissions made by assessee in this behalf. Ordered accordingly. 31. With regard to M/s. Microland Ltd., assessee had submitted before CIT (A) that it was having two segments, namely, ITES and Infrastructure Management segment. Assessee has also given a working for its ITES segment, as under : Particulars Amount Total operating income (A) Rs. 29, 64, 34, 150.00 Operating expenditure (B) Rs. 36, 55, 62.144.95 Operating profit (A-B) (Rs. 6, 91, 27, 994.95) Operating profit margin (C/B*100) -18.91% We are of the opinion that the issue raised by assessee has to be looked into by the AO/TPO. While holding that Microland Ltd., is a proper comparable, we are of the opinion that only the results of the segment relatable to ITES ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Cosmic Global Ltd. 19. The main objection of assessee with reference to the inclusion of this company is with reference to outsourcing of its main activity. Even though this company is in assessee's TP study, it has raised objection before the TPO that this company's employee cost is less than 21.30% and most of the cost is with reference to the outsourcing charges or translation charges, and as such this is not a comparable company. The TPO, though considered these submissions, rejected the same, on the reason that this does not impact the profit margin of the company. Opposing the view taken by the TPO, it is submitted that this company cannot be selected as comparable, asM/s. Capital IQ Information systems (India ) Pvt. Ltd., Hyderabad similar issue was discussed by the coordinate Bench of the Tribunal(Delhi) in the case of Mercer Consulting (India) P. Ltd. (supra), vide paras 13.2 to 13.3 which read as under- "13.2. Now coming to the factual matrix of this case, we find from the material on record that outsourcing charges of this case constitute 57.31% of the total operating costs. This does not appear to us to be a valid reason for eliminating this case from the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct that Cosmic Global Ltd., also be excluded from the list of comparables. 35. With respect to Eclerx Services Ltd., Hyderabad bench of ITAT in the case of Capital IQ Information Systems (India) P. Ltd., in para 18 of its order, had held as under : Eclerx Services Ltd. 18. The objection of assessee to this comparable is that this company is functionally dissimilar. It is in the business of consultancy and advisory service and provides only analytical data. It is also involved in quality monitoring. It is the stand of the assessee that this company offers solutions that include data analytics, operations management, audits and reconciliation and therefore has to be classified as high end KPO. In support of the stand of the assessee, extracts from the annual report of this company have been pointed out. Therefore, the functions of the above company are dissimilar to assessee, which is a captive service provider. On the principles laid down by the Hon'ble Special Bench of the ITAT (Mumbai) in the case of Maersk Global Centres (India) Pvt. Ltd. V/s. ACIT (ITA No.7466/Mum/2012 for assessment M/s. Capital IQ Information systems (India ) Pvt. Ltd., Hyderabad year 2008-09 dated 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n a y 2007-08, this Tribunal rejected it as a comparable in ITA No.1214/Bang/2011 and the assessee relied on the case laws of : Logica P. Ltd IT(TP)A No 1621/Bang/ 2014 dt 18.03.2016 for ay 2009-10[TS -187 - ITAT -2016 (Bang)TP)] and Avineon India P. Ltd [TS-23-ITAT-2016(Hyd)-TP] Informed Technologies India Ltd : The TPO held that this company is functionally comparable, satisfies all the filters hence retained it as a comparable. Further, the assessee did not raise any objection for exclusion of it. The assessee submitted that it has to be rejected for the following reasons : 1. Referring to the business centre charges in page 3026 of paper book, the company has several other sources of income as equivalent to the revenue from operations. Earning of such huge stature of income apparently requires the utilization of resources, may it be in employee form or of investment form. However, the segmental breakup of the same is not available. Hence the profits from each source of such incomes need to be bifurcated to adopt such margins. 2 The company has purchased Mutual fund units approx 165% of its revenue. - The company itself has categorised the closing balance under the Curre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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