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TMI Blog2019 (11) TMI 1550X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction as per section 92B of the Act. In respect of the application of FIFO method on realization of outstanding receivables with advance received towards certain other transaction with AE, we agree with the Ld. AR s argument that primarily the advance received has to be adjusted against any advance received and thereafter, the interest has to be charged on the outstanding receivables. This methodology shall result in the exact outstanding invoices against which payment is not received. Accordingly, we remit the issue back to the file of Ld. TPO to consider the issue afresh in the light of the observations made by us hereinabove. X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the international transaction with its AE was at Arm's Length. 5. However, the Ld. TPO on his independent analysis of the international transaction of the assessee rejected the TP study of the assessee because the assessee had taken into consideration of 3 years data which is not in accordance with Rule 10B(4) of the IT Rules, 1962. Therefore, the Ld. TPO conducted a fresh search for the comparable companies by holding that the assessee's business as software development service provider. Thereafter, the Ld. TPO accepted the contention of the assessee that the most appropriate method is TNMM method and selected 12 comparable companies as follows:- Sl No. Company Name OP/OC 1 SQS INDIA BFSI LTD 22.25 2 MINDTREE LTD 21.64 3 R S SOFTWARE (INDIA) LTD 24.03 4 e-INFOCHIPS LTD 81.00 5 LARSEN & TURBO INFOTECH LTD 24.04 6 CIGNITI TECHNOLOGIES LTD 27.64 7 INFOSYS LTD 36.36 8 PERSISTENT SYSRTEMS LTD 36.06 9 INFOBEANS TECHNOLOGIES LTD 42.08 10 THIRDWARE SOLUTIONS LTD 50.51 11 TECH MAHINDRA (Seg) 23.82 12 TATA ELXSI LTD (Seg) 22.29 AVERAGE 34.31 6. The Ld. TPO based on the above 12 comparable companies computed the Arm's Length margin at 34.31% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (b) M/s. E-Infochips Limited is functionally dissimilar because it is engaged in Information technology services (IT), Information Enabled services(ITES), Software products and physical product-based, company and the segmental details are not disclosed in the annual report. (c) M/s. E-Infochips Limited had earned super-profit and it was also involved in R & D Activities and derives benefits from such activities. (d) The Ld. Members of the DRP had erred by holding that the comparable is mainly a software service provider company because only to the extent of 2.5% of the turnover pertains to sale of products and the rest of the turnover was attributable towards service provided when the fact remains that the company was involved in various other nature of activities. (ii) M/s. Thirdware Solutions Limited: (a) The Company is a product-based company and functionally dissimilar. During the previous year the company had revenue from sale of products and there was no revenue from sale of services. (b) The company has various sources of revenue such as receipts from training and subscription, sale of licenses. The company has also incurred marketing expenses such as commission p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isclosed in the Annual Report are - Telecom & Wireless, Life-sciences & Health care, and Infrastructure & systems. (g) However, the company has not reported segmental details in the Annual Report. (h) For the above-stated reasons, the company is functionally different that of the assessee company because the assessee company does not have all these features. 8. The Ld. DR on the other hand, relied on the orders of the Ld. Revenue Authorities. 9. We have heard the rival submissions and carefully perused the materials on record. From the paper book furnished by the assessee as well as the arguments advanced by the Ld.AR, we find merit in his contention because of the following reasons:- (i) E-Infochips Limited:- (a) As per the annual report of M/s. E-Infochips Limited for the period 1/4/2013 to 31/3/2014 (Page No.98 of the paper book-VolumeII) it is evident that the company is primarily engaged in software development, IT Enables Services and product-based company. Further, no segmental details are available in the Annual Report. While as the assessee's company's only activity is Captive Software Development Services. Extraction from page-98 of PB-II "The compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany is receiving revenue from various streams and none of them were pertaining to software development services. As apparent from page 237 of PB-II, the company has received Revenue from training and subscription amounting to ₹ 59.32 lakhs and sale of licenses ₹ 7.98 lakhs. The assessee company is only engaged in ITES. Extraction from page no.237 of PB-II: (c) It is also apparent from page no. 217 of PB-II that the company has not disclosed segmental details between software development services and products. The relevant portion is extracted hereinbelow for reference:- "34) Segment Reporting The company's cooperation comprises of software development, implementation and support services. Primary segmental reporting is based on geographical areas viz., Domestic = India (Products & Services) and International = Rest of the world (Exports-software services). In primary segment, revenue and all expenses, which relates to a particular geographical segment, are reported. Fixed Assets, Current Assets, Loans and Advances, Current Liabilities and provisions are classified based on specific geographical segment's business. The company maintains separate books of acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Report Page No.276 of the PB-II it is apparent that the assessee has also been engaged in sale of goods along with rendering of services because the turnover is reported on export of goods / services calculated on FOB basis. (b) The company also has MODVAT deposits and sales tax deposit. (c) Therefore, the company is functionally dissimilar to the assessee company. (d) For reference the relevant portion of the Annual Report enclosed in paper book-II, page no.276 is extracted hereinbelow: Note-27 EARNINGS IN FOREIGN EXCHANGE a. Export of goods / services calculated on F.O.B basis 329,659883 216,854,891 Total 329,659883 216,854,891 LONG TERM LOANS & ADVANCES Security Deposit - Secured considered Good Telephone Deposit 9,400 Other Deposit 9,153 3,500 Custom Deposit 10,000 10,000 Deposit with MPPKVVCL 140,850 73,150 Sales Tax Deposit (Kotak FDR) 10,000 - Deposit (M-VAT) 25,000 25,000 M.P.S.E.D.C. Ltd 10,121,460 - Total 10,325,863 121,050 11.1. Since, the company is functionally dissimilar it cannot be compared with the assessee company for the purpose of TP adjustment. (iv) M/s. Infosys Limited: (a) From the profitability reported ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been recognized as an expense during the years ended March 31, 2014 and March 31, 2013 respectively." Extraction from Page 357 of PB-II 2.26 Merger of Infosys Consulting India Limited The Honorable High Court of Karnataka sanctioned the scheme of amalgamation of Infosys Consulting India Limited (ICIL) with Infosys Limited with an effective date of August 23, 2013 and an appointed date of January 12, 2012 ICIL was a whollyowned subsidiary of Infosys Limited and was engaged in software-related consultancy services. The merger of ICIL into Infosys Limited has been accounted for under pooling of interest method referred to in Accounting Standard 14. Accounting for Amalgamation (AS-14). All the assets and liabilities of ICIL on an after the appointed date and prior to the effective date have been transferred to Infosys Limited on a going concern basis. As ICIL was a wholly-owned subsidiary of Infosys Limited, no shares have been allotted to the shareholders upon the scheme becoming effective. 11.2. However, in the case of the assessee company there are no such events leading to super profits. (b) The company has a bumper turnover of ₹ 42,531 Crs which cannot be compar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed 79 patterns in its name as pointed by the Ld. AR and apparent from the PB-II, page No.304 and 311. Extraction from Page 304 of PB-II "Our research and development efforts focus on the twin goals of improving productivity and quality of our services, alongside working towards technology driven innovation and differentiation that will deliver greater value to our clients. At Infosys Labs, Service innovation is being achieved through enhanced automation, optimization, prevention and effective collaboration among described teams. Infosys Labs has established a set of service innovation groups focused on enhancing quality and productivity of six dominant Infosys services-Business Process Outsourcing; Infrastructure Management Services; Independent Validation Services; Application Development and Maintenance including Large Deals; Consulting and Systems Integration; and Modernization. These groups work on service platforms with a focus on automation, optimization, consolidation, and on enhancing the effectiveness of contextual collaboration for distributed teams. Under its Client Innovation umbrella, Infosys Labs has established six Centres of Excellence (CoE), namely Moderni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces and products 44,341 100.0 36,765 100.0 Software development expenses 26,738 60.3 21,662 58.9 Gross profit 17,603 39.7 15,103 41.1 Selling and marketing expenses 2,390 5.4 1,870 5.1 General and administration expenses 2,686 6.0 2,218 6.0 5.076 11.4 4,088 11.1 Operating profit before depreciation 12,527 28.3 11,015 30.0 While as in the case of the assessee company no such expenses have been incurred as it is catering only to its parent company. 12. Considering the above-mentioned factors, we are of the considered view that M/s. Infosys Limited is not a comparable company with respect to the assessee company for TP Adjustments. (v) M/s. Persistent Systems Ltd:- (a) It is evident from Page No. 533 of PB-II that the company is mainly engaged in three areas such as products (IP Business), platforms (Solutions Integration) and services (Product Engineering) and is also selling its branded products. Extraction from Page 533 of PB-II "Business overview Your company specializes in building computer software products. Your company's business is organized with a focus on the following three areas: Products (IP Business), Platforms ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and is charged against the total income. (i) Un allocated item Un allocated items include general corporate income and expense items which are not allocated to any business segment. Segregation of assets, liabilities, depreciation and other non-cash expenses into various reportable segments have not been presented except for trade receivables as these items are used interchangeably between segments and the company is of the view that it is not practical to reasonable allocate these items to individual segments and an adhoc allocation will not be meaningful." 13. From the above, it is evident that M/s. Persistent Systems Ltd is functionally dissimilar to the assessee company, it also has intangibles unlike the assessee company and further segmental data are not available. Hence, M/s. Persistent Systems Ltd cannot be treated as a comparable company with the assessee company for the purpose of TP adjustments. 14. Thus, the final list of comparable companies after excluding functionally dissimilar companies would be as follows:- Sl No. Name of the company OP / OC 1 Tata Elxsi Ltd (Seg) 22.29% 2 Mindtree Ltd 21.64% 3 R S Software (India) Ltd 24.03% 4 Larsen & Tur ..... X X X X Extracts X X X X X X X X Extracts X X X X
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