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TMI Blog2019 (10) TMI 1487X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer pricing analysis and adopted an entirely flawed approach to reach a conclusion that the Appellant is not compensated at arm's length for its Software Development Services Segment. 3. On the facts and in law, the Ld. TPO erred in not discharging his statutory onus to establish that any of the conditions specified in clause (a) to (d) of section 92C(3) of the Income Tax Act, 1961 ("Act") have been satisfied before disregarding the arm's length price determined by the Appellant and proceeding to determine the arm's length price himself. 4. On the facts and in law, the Hon'ble DRP and Ld. TPO/AO have erred in rejecting the economic analysis undertaken by the Appellant without proper justification and conducting a fresh search using arbitrary filters for identifying companies comparable to the Appellant. 5. On the facts and in law, the Ld. TPO / AO and Hon'ble DRP grossly erred in not accepting the comparable companies proposed by the Appellant, as the said comparable companies met the FAR (functions performed, assets employed and risk assumed) test stated under Rule 10B(2) of the Income Tax Rules, 1962 ("the Rules"). 6. On facts and in law, the Ld. AO/ TPO erred in vio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of training expenses does not fall within the meaning of FIS under Article 12 of the India-Singapore tax treaty. B. Other Grounds 15. On the facts and in the circumstances of the case, the Ld. AO erred in levying interest under section 234B and 234D of the Act. 16. On the facts and in law, the Ld. AO and the Hon'ble DRP erred on facts and in law in initiating penalty under section 271(1)(c) and 271AA of the Act. 3. G&D India was incorporated in 2001 as 100 percent subsidiary of G&D GmbH, with its corporate office located in Gurgaon. The company initially specialized in currency automation systems, later adding its business in the fields of telecommunications, electronic payment, transportation, health care and identification. G&D has enjoyed business relations with India since, the 1990s and sold the first banknote processing systems to India on 1997. G&D India holds significant market share in the currency automation equipment segment, the Reserve Bank of India (RBI) being one of its major customers. The company is also a provider of SIM cards for mobile communications, credit and debit cards for banks as well as cards for various government projects such as driving lic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 04 companies with an average margin of 0.14%. The assessee has used multiple year data. The assessee's own margin is worked out to be (6.78%) for Sim Card Distribution Segment. Based on the analysis, the assessee has concluded that its international transactions are at arm's length. Transfer pricing analysis by the TPO: 7. As per the audit report, the assessee operates in the following primary business segments: * Trading in bank note processing machines and related maintenance services * Trading in sim/smart cards * Software services 8. In the software development services segment, the TPO has used current year data and selected the following comparables. He has computed the PLI (OP/OC) at 22.92% and made an adjustment of Rs. 1,79,43,149/-. In the sim card assembly segment, the TPO has computed the PLI (NPM) at 0.03% and made an adjustment of Rs. 7,53,88,809/-. Sl. No. Company Long Name OP/OC 1 Acropetal Technologies Limited 36.69% 2 Akshay Software Technologies Ltd. 0.16% 3 Evoke Technologies Pvt Ltd 8.11% 4 E-infochips Limited 56.44% 5 e-Zest Solutions Limited 34.83% 6 Infosys Ltd 43.53% 7 Kireeti Soft Technologies Ltd. 3.63% 8 Lar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany excluding other income is Rs. 141,65,28,000/-. Thus, we observe that the comparable selected by the revenue fails their own filter choosen by the TPO on account of employee cost less than 25% of the total cost. Hence, we hereby direct that the asset comparable be excluded from the TPO study. E-infochips Limited: 14. The TPO held that this comparable passes all the filters. The ld. AR primarily argued that it fails the TPO's own filter of software revenues. We have gone through the filters taken up by the TPO. The TPO has applied filters so as to exclude companies whose revenues from software development services is less than 75% of the total operating revenues. The TPO held that this is an appropriate filter as this is the stage which determine the correct comparability. In respect of enterprises whose main source of income is from service segment, the companies whose income from software development services come to more than 75% of the operating revenues have only to be considered for the ALP study as other segment may not materially affect the financial results of the company. While disputing the contention of the assessee that filter should be 50% instead of 75%, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd products was available. We find that cloud computing has been the major source of revenue of this company, hence, functionally not comparable. In the assessee's own case for the assessment year 2008-09, this comparable has been excluded by the Co-ordinate Bench of the Tribunal relying on the decision of Sunguard Solutions India Pvt. Ltd. in ITA No. 1487/Bang./2012. Hence, keeping in view the decision of the earlier year, we direct that this comparable may be excluded from the list of comparables. Infosys Ltd.: 18. It was argued by the ld. AR that this comparable is functionally different as it is providing end to end solutions, technical consultancy, design development, re-engineering along with software products. He also argued that owing to the scale of operation and risk undertaken and owing to lack of segmental data this cannot be taken as a comparable. In the assessee's own case for the assessment year 2008-09, this comparable has been excluded by the Co-ordinate Bench of the Tribunal relying on the decision of Nokia Siemens Networks India Pvt. Ltd. Vs ACIT in ITA No. 333/Del/2013. Hence, keeping in view the decision of the earlier year, we direct that this comparable ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bove difficulties in analyzing the data and considering the reasons given by DRP in the case of M/s. Sumtotal Systems India Pvt. Ltd., (supra), we are of the opinion that L&T Infotech Ltd., cannot be selected as a comparable company. AO/TPO is directed to exclude the same from the list of comparables." 20. We find that the submissions of the ld. AR cannot be accepted as the assessee and the comparable, and the study of the TPO involves determination of ALP on software development services. In the software development services, the overseas revenues do involve the similar functions. The assessee is also in the software development segment so as the comparable. Increase in turnover cannot entitle to exclude the comparable. The revenues have shown to be from the IT services. The case laws supported by the assessee are not applicable to the facts of this case. 93.56% of revenue is coming from the export of software development only. Functionally Infosys is on a different format whereas L&T is similar. Keeping in view, the judgment of Hon'ble Supreme Court in the case of Morgan Stanley and Company Inc. [292 ITR 416] regarding the functions and comparability thereof, we hold that this c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if it is shown that this has resulted in material dissimilarity and has affected its margins. This is particularly true in the ITES/software filed where mergers and acquisitions are the norm rather than an exception. Such mergers and acquisitions do not often result in a substantial change in the company's functional profile. We rely on the decision of the Co-ordinate Bench of ITAT in Willis Processing Services (I) Pvt. Ltd. Vs DCIT 2013-TII-47-ITAT-Mum-TP wherein it was observed as under: "18.3 We are also of the view that if extra ordinary events like merger and de-merger or amalgamation took place during the financial year relevant to the Assessment Year under consideration, and because of the merger/de-merger the company became functionally different then the said company should be excluded from the comparables. However, if the merger of the two functionally similar companies took place then the even of merger itself cannot be taken a factor for exclusion of the said comparable. Accordingly, we direct the AO/TPO to verify this fact and accordingly decide the comparability of this company namely Accentia Technologies Ltd." 24. The comparable is a provider of Tele-communicati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value of 'Wipro' does help this comparable. Hence, we direct TPO to exclude this comparable, it is ordered accordingly." 26. Hence, we hereby direct that this may be excluded from the TP study. R Systems Ltd.: 27. The assessee sought to include this company arguing that audited quarterly results are available in the public domain and different year financial data can be used for comparison. We hold that Rule 10B(4) requires that the data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction had been entered into. The comparability of an uncontrolled transaction can be analyzed only with the "data relating to the financial year" in which the international transaction has been entered into. As the assessee follows the accounting year ending 31st March, the comparables must also have the data relating to the financial year ending 31st March. Since, this data is not available, such companies cannot be accepted as comparables. Vama Industries Ltd.: 28. It was argued that this comparable may be included owing to availability of segme ..... X X X X Extracts X X X X X X X X Extracts X X X X
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