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TMI Blog2019 (2) TMI 2022X X X X Extracts X X X X X X X X Extracts X X X X ..... l reporting given at page 526 of the paper book (Annual Report) is concerned, it shows that the company s operations predominantly relate to providing systems integration and software development services in the information technology field. So, all these facts go to prove that Tata Elxsi is functionally dissimilar vis- -vis the taxpayer being engaged in the development of specialized/niche product, hence ordered to be excluded being not a valid comparable. E-INFOCHIPS BANGALORE LTD. (E-INFOCHIPS) - We are of the considered view that E-Infochips being a product and semiconductor engineering services having 500 products for key verticals like aerospace and defence, security and surveillance, etc., having huge intangibles which increases its brand value and its segmental financials are not available, is not a suitable comparable vis- -vis the taxpayer, hence ordered to be excluded. INFINITE DATA SYSTEMS PVT. LTD. (INFINITE) - We are of the considered view that Infinite is functionally dissimilar vis- -vis taxpayer having been into providing solutions that encompass technical consulting, design and development of software maintenance, systems integration, implementation, testing and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 on the grounds inter alia that :- "Transfer Pricing 1. On the facts and in law, the learned Transfer Pricing Officer (hereinafter referred to as 'Ld. TPO'), the learned Assessing Officer (hereinafter referred to as 'Ld. AO') and the Hon'ble Dispute Resolution Panel ('DRP') have erred in making an adjustment of ₹ 64,734,446 to the value of international transactions pertaining to provision of software development services by the Appellant under Section 92CA(3) of the Income-Tax Act, 1961 ('the Act'). 2. On the facts and in law, the Ld. TPO, the Ld. AO and the Hon'ble DRP erred in violating the provisions of Rule 10B(2) by selecting certain alleged comparable companies without considering the differences in the functions performed, assets employed and risks assumed by the Appellant vis-a-vis these companies, thereby resorting to cherry picking of comparables. 3. On the facts and in law, the Ld. TPO, the Ld. AO and the Hon'ble DRP erred in violating the provisions of Rule 10B(2) by alleging E-Infochips Bangalore Ltd. as a comparable to the Appellant. 4. On facts and in law, the Ld. TPO, the Ld. AO and the Hon'ble DRP er ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st on overdue receivables from its AEs. 15. On facts and in law, the Ld. TPO, the Ld. AO and the Hon'ble DRP erred in grossly misinterpreting the requirement of 'contemporaneous' data in the Rule 10B(4) by necessarily using current year data (i.e. financial year 2009-10), thereby breaching the principles of natural justice and impossibility of performance. 16. On facts and in law, the Ld. TPO, the Ld. AO and the Hon'ble DRP erred in law and on the facts in not allowing appropriate adjustments under 10B(1)(e)(iii) and Rule 10B(3) to III account for differences in risk profile of the comparables vis-a-vis the Appellant. 17. On facts and in law, the Ld. AO/ Ld. TPO erred in not granting the benefit of reduction/ variation of 5 percent from the arithmetic mean while determining the arm's length price to the Appellant as per the proviso to section 92C(2) of the Act. 18. On facts and in law, the Ld. AO / Ld. TPO and the Hon'ble DRP has erred in proposing to initiate penalty proceedings under Section 271 (1) (c) of the Act. Corporate Tax 19. That on facts and in law the Ld. AO and Hon'ble DRP has erred in not considering the Appellant's plea fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce to the order passed by the TPO/DRP, AO framed the assessment u/s 143 (3) read with section 144 of the Act at an income of ₹ 21,41,72,020/- by making addition on account of transfer pricing adjustment of ₹ 8,83,67,496/- and by making addition of ₹ 135/- and ₹ 9,336/- on account of find & penalty and business expenditure respectively. 7. Feeling aggrieved, the taxpayer has come up before the Tribunal by way of filing the present appeal. 8. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case. Our ground-wise findings are as under. 9. Undisputedly, the TNMM with OP/OC as MAM applied by the taxpayer has not been disputed by the TPO. It is also not in dispute that the TPO has also not disputed the functional profile and margin of the taxpayer of 15.03% for software development services. Ld. TPO on the basis of its TP analysis in order to determine the transfer pricing adjustment of international transactions entered into by the taxpayer with its AEs, chosen 19 comparables having average o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, available at page 388 of the paper book (Annual Reports), shows that the income of Persistent is from sale of software services and products to the tune of ₹ 5196.91 millions as on 31.03.2009 and ₹ 5044.13 as on 31.03.2010 with no segmental financials. 17. Persistent has already been rejected by the coordinate Bench of the Tribunal in taxpayer's own case for AY 2008-09, available at pages 63 to 79 of the paper book, on ground of non-availability of segmental data. So, we are of the considered view that Persistent is not a valid comparable, hence ordered to be excluded. TATA ELXSI LTD. (TATA ELXSI) 18. Tata Elxsi is again taxpayer's own comparable which the taxpayer has sought to be excluded on ground of functional dissimilarity. Perusal of annual report, available at pages 482, 483, 484 & 485 of the paper book, goes to prove that business units of "Tata Elxsi" consist of Product Design Services (PDS) to provide full service embedded software, hardware and system design programmes for a variety of technology products. PDS has core domain and technology expertise in VLSI design, embedded software, multimedia, networking and wireless communications; Industrial Desig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to the Financial Statements from the year ending March 31, 2010, available at page 526 of the paper book. So far as segmental reporting given at page 526 of the paper book (Annual Report) is concerned, it shows that the company's operations predominantly relate to providing systems integration and software development services in the information technology field. So, all these facts go to prove that Tata Elxsi is functionally dissimilar vis-à-vis the taxpayer being engaged in the development of specialized/niche product, hence ordered to be excluded being not a valid comparable. E-INFOCHIPS BANGALORE LTD. (E-INFOCHIPS) 23. This is TPO's comparable which the taxpayer has sought to exclude on grounds of functional dissimilarity, it being engaged in product and semi-conductor engineering services; its segmental information is not available; it has abnormal deviation in profit margin indicating significant difference in risk profile which is unlike a software development company. 24. Perusal of page 18 of the annual report shows that EInfochip is primarily engaged in software development and IT Enabled Services (ITES) which is considered as the only reportable business seg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reover, from Schedule III, depicting fixed assets, available at page 39 of the annual report, shows that the comparable company has huge intangibles which increases the brand value of the comparable company." 28. So, in view of what has been discussed above, we are of the considered view that E-Infochips being a product and semiconductor engineering services having 500 products for key verticals like aerospace and defence, security and surveillance, etc., having huge intangibles which increases its brand value and its segmental financials are not available, is not a suitable comparable vis-à-vis the taxpayer, hence ordered to be excluded. INFINITE DATA SYSTEMS PVT. LTD. (INFINITE) 29. The taxpayer sought to exclude Infinite on grounds of functional dissimilarity that it drives revenue from technical support and infrastructure services; that it has abnormally high margin having exceptional growth in business operation over the last four years i.e. 908% in sales over the previous year; that "Infinite" signed an agreement (Built, Operate and Transfer mode) with Fujitsu Services Limited to set up Global Delivery Centers in India to provide offshore delivery capabilities to F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upra) with Sun Life India Service Centre (P.) Ltd. which is a routine software development and service provider and held to be not a suitable comparable as it is a full-fledged IT consulting organisation and provides services in the nature of technical consulting, design and development of software, maintenance, system irrigation, implementation, testing and infrastructure management services. So, in view of the matter, we are of the considered view that Infinite is not a suitable comparable vis-à-vis assessee company, hence ordered to be excluded." 32. So, in view of what has been discussed above, we are of the considered view that Infinite is functionally dissimilar vis-à-vis taxpayer having been into providing solutions that encompass technical consulting, design and development of software maintenance, systems integration, implementation, testing and infrastructure management services. Furthermore, Infinite has entered into Build, Operate and Transfer (BOT) agreement with Fujitsu Services Limited to set up global delivery centers in India to provide offshore capabilities to Fujitsu and Fujitsu's associated companies. It has also shown exceptional growth in busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payer on account of overdue receivables from its AE by applying the ad hoc interest rate of 14.88%. It is the case of the taxpayer that as per para 5.7 of the Agreement, interest, if any, is to be charged on receivables which has been followed in the earlier years and subsequent years. So, TPO/AO is directed to compute the interest, if any, following the rule of consistency, in view of para 5.7 of the Agreement by taking into account the findings returned in earlier years and subsequent years. So, this issue is remanded back to TPO/AO to decide afresh after providing an opportunity of being heard to the taxpayer. CORPORATE TAX GROUND NO.19 37. AO/DRP had disallowed severance cost of ₹ 6,67,62,386/- incurred by the taxpayer during the financial year 2008-09 also. Identical issue has undisputedly been set aside to AO by the coordinate Bench of the Tribunal qua AY 2008-09by returning following findings :- "11. We have heard both the parties and perused all the relevant documents. It is pertinent to note that the assessee company made payment of the severance cost during the Financial Year 2008-09. However, as per the letter dated 06.03.2009 produced by the Assessee it was ..... X X X X Extracts X X X X X X X X Extracts X X X X
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