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TMI Blog2017 (2) TMI 1438X X X X Extracts X X X X X X X X Extracts X X X X ..... 2009- 10. 02. Magma Design Automation India Private Limited, the assessee, is a subsidiary of Magma Design Automation Inc, USA during a y 2009- 10, engaged in providing software development -services, customer support services ("CSS") and sales support services to its Associated Enterprises for which it is remunerated on a cost plus basis. It operates from 3 units, Bangalore (STP unit claiming deduction u/s10(A), Noida (SW unit claiming deduction u/s 10A) and Mumbai (non STP unit). 03. The facts, in brief, relevant to this appeal are that for the a y 2009-2010, the assessee filed its return on 30 September 2009, declaring a taxable income of ₹ 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 ₹ 5, 46, 76, 721 & ₹ 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 ₹ 6, 62, 76, 036 to the total income of the assessee. The assessee challenged this order before the CIT (A), inter alia, on fun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of the Co. PLI %age Basis for seeking exclusion. 1. M/s Kals Information Systems Ltd., 13.89 Functional Dissimilarity 2. M/s Bodhtree Consulting Ltd., 62.27 " 3. M/ Tata Elxsi Ltd., 20.28 " 4. M/s Persistent systems Ltd., 41.40 " 5. M/s Infosys Tech. Ltd., 45.61 " In addition to this, the assessee has also requested in the chart for consideration of correct operating margin in the case of M/s Sasken Communication Tech Ltd., and M/s Larsen & Toubro infotech Ltd. 12. Regarding the first aspect i.e. exclusion of some comparables 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, cite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the same Tribunal order rendered in the case of M/s Cisco Systems (Ind.) Pvt.Ltd., (Supra) and our attention was drawn to para- 26.4 to 26.5 of the order available on pages 103 to 105 of the case law compendium. For the sake of ready reference these paras are reproduced hereunder; "26.4 Tata Elxsi Ltd.:- As far as this company is concerned, it is not in dispute before us that in assessee's own case for the A.Y. 2007-08, this company was not regarded as a comparable in its software development services segment in ITA No.1076/Bang/2011, order dated 29.3.2013. 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 integra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices sub-segment is into embedded software development. Thus this segment is into software development services. 3. The contribution of the embedded services segment is to the tune of ₹ 230 crores in the total segment revenue of ₹ 263 crores. Even if we consider the other two sub-segments pertain to IT enabled services, the 87.45% (›75%) of the segment's revenues is from software development services. 4. This segment qualifies all the filters applied by the TPO." Regarding Flextronics Software Systems, the following extract from page 143 of TPO's order 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 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO". The ld. DR of the revenue supported the orders of the authorities below. 16. We have considered the rival submissions. We find that in this case, the Tribunal has followed another Tribunal order rendered in the case of M/s Yodlee Infotech Ltd., Vs ITO in IT(TP)A No.108(Bang)/2014. The relevant portion of that Tribunal order is reproduced above and as per the same, this company i.e. M/s Persistent Systems Ltd., was in product designing services and into software product development. Since the present assessee company is only providing software development services to the AE, this company cannot be considered as a comparable 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 inp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee regarding adoption of correct operating profit of two companies i.e. M/s Sasken Communication and M/s Larsen & Toubro Ltd., because the same is of academic interest only." Following the above order, we direct the TPO /AO to exclude the above 5 comparables on functional dissimilarity. 06. The next issue is seeking correction in the margin computation of two comparables viz Sasken Communications Services Ltd & Larson and Toubro Infotech Ltd. In this regard, the gist of the AR's submissions is extracted as under : Sasken Communication Technologies Ltd : The TPO held that it is functionally comparable, satisfies all the filters and retained 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 op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should be held as a comparable. Placed reliance on the decision in Cisco systems India P Ltd in IT(TP)A.27/Bang/2014 dt 14.8.2014. Quintegra Solutions Ltd : The TPO held that this company fails export turnover filter which is less than 75%. The assessee submitted that its export earnings is 95%, functionally similar and qualified all the filters applied by the TPO and hence it should be held as a comparable. Placed reliance on the decision in Cisco systems India P Ltd in IT(TP)A.27/Bang/2014 dt 14.8.2014. The relevant portion of the order is extracted as under : " 27.8 CG-Vak Software & Exports Ltd. (D) (i) As far as this company is concerned, 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 asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conditions. 17.2 Rule 10B(1)(e)(iii) of the Rules provides that an adjustment should be made to the profit margin of independent comparable companies to take into account the differences in functions and risks. The OECD Transfer Pricing guidelines also recognize adjustments to be made to account for differences between controlled and uncontrolled situations that would significantly affect the price charged or return required by independent enterprises. Accordingly, controlled and uncontrolled transactions are comparable only when adjustments with respect to significant differences between them in terms of risks assumed is made. 17.3 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 percent&sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d comparables are not assuming. By having more customers, the risk is shared or spread. In other words, if one customer goes out of business still there are others which will sustain the business of the tested party. But in case of the taxpayer there being only one client, the entire risk is concentrated on one client, and therefore. if the client is out of business the taxpayer will also be out of business. Earlier the argument given about the country risk was that EU & US are having better credit rating as compared to India. This argument is no longer valid as their credit rating is also on a downward trend. and moreover in case of uncontrolled 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as comparables. In this regard, the gist of AR's submissions are as under: Microland Ltd : The TPO held that this company is functionally comparable, satisfies all the filters and hence retained it as a comparable. The assessee submitted that it is engaged in IT Infrastructure Management services and ITeS services. The TPO has considered KPO services such IT Infrastructure management as well, while computing the margins. However, only ITeS operations has to be considered. Further, it 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 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 L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the details tabulated hereunder- Sl. Company Name Operating Revenue PBIT/ Cost% 1. Accentia Technologies Limited 78.73 49.40 2. Acropetal Technologies Ltd. (Seg.) 33.13 25.01 3. Aditya Birla Minacs Worldwide Ltd 231.57 0.53 4. Cosmic Global Ltd. 7.76 48.20 5. Crossdomain 33.76 29.38 6. Eclerx Services Ltd. 187.98 53.44 7. Infosys BPO Ltd. 101.62 16.90 8. Jeevan Softech Technology Ltd. 1.79 16.56 9. Microland Limited 144.05 2.35 10. Microgenetic Systems Ltd. 1.27 10.11 11. R.Systems International Ltd.(Seg.) 26.55 5.77 12. Genesys International Ltd. 83.18 71.50 The TPO has here considered 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. Micro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing (India) P. Ltd. (supra), which indicates that the TPO therein has excluded it at the outset. In view of this, we direct the Assessing Officer/TPO to exclude this comparable, from the list of comparables selected. 33. Capital IQ Information Systems (India) P. Ltd., was also into ITES and the decision given was also for the very same assessment year. Therefore, we are of the opinion that Accentia Technologies has to be excluded from the list of comparables. Ordered accordingly. 34. With respect to Cosmic Global Ltd., Hyderabad bench of ITAT in the case of Capital IQ Information Systems (India) P. Ltd., in para 19 of its order, had held as under : 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d held that a captive unit cannot be compared with a giant case and thus excluded CG-VAK with turnover from Accounts BPO segment at ₹ 86.10 lacs. As the segmental revenue of BPO segment of Cosmic Global Limited at ₹ 27.76 lac is still on much lower side, the reasons given above would fully apply to hold Cosmic Global Limited as incomparable. This case is, therefore, directed to be excluded from the list of comparables." In view of the detailed analysis of the coordinate Bench of the Tribunal in the above referred case, in this case also we accept the contentions of assessee and direct the Assessing Officer/TPO to exclude this comparable for the same reasons. Accordingly, we direct 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 qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osys is a giant company with different risk profile and nature of services, has brand value and owns IPs. 2. Global company - provides global delivery through 11 delivery locations (5 in India and 6 internationally) which sufficiently hints that the company fails onsite services filter, although the actual onsite revenue information is not available. 3. Brand building activity and the company incurs significant Marketing Expenses - 5.88% of sales. 4. Extraordinary events during the year - Amalgamation & re-organisation of various companies. 5 Rewards and recognition obtained by Infosys. 6 Significant brand value leading to the increase in revenue and brand profits. In the assessee's case in 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 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O and the CIT (A) rejected this company without giving any reason. The assessee stated that it is engaged in provision of EPublishing including Typesetting, composition, Artwork, proof editing management, XML conversion services servicing to publishers of books and journals. As the above services are in the nature of ITeS, accordingly the company should be accepted as comparable. We heard the rival submissions and gone through relevant material. We deem it fit to remit these issues to the TPO/AO for a fresh re-adjudication. While doing so, the assessee shall have to be given due opportunity to present its case. 12. The next issue is that the assessee is seeking risk adjustments. In this regard, our attention was drawn to the decision of ; this Tribunal in case of Philips Software Centre Private Limited vs. Asst. Commissioner of Income Tax (119 TTJ 721) (2008 26 S0T 226), the Hon'ble Delhi Tribunal in the case of Sony India Pvt Ltd (315 ITR 150) wherein it has allowed 20% risk adjustment considering the fact that it may not be possible to quantify risk adjustments etc. We heard the rival submissions and considered this tribunal decisions in various cases including the above cite ..... X X X X Extracts X X X X X X X X Extracts X X X X
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