9911796707
TMI Blog2018 (9) TMI 2133X X X X Extracts X X X X X X X X Extracts X X X X ..... a) Pvt. Ltd., was originally incorporated in India as Velio Communications India Pvt. Ltd. in October 2002 and was a subsidiary of Velio Communications international Inc., Cayman Islands, which was, in turn, a subsidiary of Velio Communications Inc., USA. Consequent to the acquisition of Velio Communications Inc., USA, by LSI Logic Corporation, California, the assessee changed its name to LSI Logic (India) Private Limited. Thereafter, the assessee was renamed as LSI Technologies India Private Limited. Consequent to. merger, with M/S. LSI Research (India) Pvt. Ltd., the assessee is known as LSI India Research & Development Pvt. Ltd. 4. IT(TP)A. No. 45/BANG/2014 : During the financial year 2008-09 relevant to the assessment year 2009-10, the assessee provided contract software development services to its Associated Enterprises. As per the provisions of Sec. 92 of the Income Tax Act, 1961 (Act), income from an international transaction has to determined having regard to the Arm's Length Price (ALP). The Transfer Pricing Officer (TPO) to whom the determination of ALP was referred by the Assessing Officer suggested an addition to the total income of the Assessee on account of deter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17 companies as comparable with that of the Assessee and arrived at Arithmetic mean of the profit margins of the 17 companies at 12.66%. Since the profit margin of the Assessee as computed by the Assessee was much more than the profit margin of the comparable companies, the Assessee claimed that the price charged by it in the International Transaction had to be regarded as at Arm's Length. 8. The TPO, to whom the question of determination of ALP was referred by the AO, accepted only two comparable companies chosen by the Assessee viz., Akshay Software Technologies Ltd. and RS Software (India) Pvt. Ltd. The TPO on his own search selected 9 more companies as comparable companies at arrived at arithmetic mean of profit margin of 11 companies and determined ALP and consequent addition to be made to the total income as follows:- Comparables selected by the TPO and their arithmetic mean: Sl. No. Comparables Selected by TPO NCP Margins as per TPO Order (%) (WC- Unadj) NCP Margins as per TPO Order (%) (WC Adj) 1 KALS Information Systems Ltd. 13.89 12.45 2 Akshay Software Technologies Ltd 8.11 8.62 3 Bodhtree Consulting Ltd. 62.27 60.76 4 RS Software (I) Ltd. 9.97 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. 6(a)]: (i) KALS Information Systems Ltd. (ii) Bodhtree Consulting Ltd. (iii) Tata Elxsi Ltd, (iv) Sasken Communication Technologies Ltd. (v) Persistent Systems Ltd. (vi) L & Infotech Ltd. (vii) Infosys Technologies Ltd. (4) That the DRP erred in upholding the TPO's action in applying the filter of Related Party Transactions > 25% of sales which is against the reasonable limit of 15% as held by the Hon'ble Tribunal in the case of 24/7 Customer Com Private Limited [Ground No. 6(g)]. 13. The first issue to be considered is regarding computation of OP/TC as done by the TPO/DRP. In its TP Study, the assessee had computed its net margin as 15.69%. The TPO, however, recomputed its margin by: (i) Not considering other income of Rs. 2,96,90,469/- on account of liabilities no longer required written back as part of the operating income; and (ii) Reversing the Assessee's action in reducing an amount Of Rs. 8,54,07,158/-, being foreign exchange gain, from its operating expenses i.e. by treating it as a non-operating item. 14. The margin of the assessee, as computed in its TP Study and as recomputed by the TPO, is as under:- Particulars As per the TP study ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d a copy of this Tribunal order and drawn our attention to Para No. 48 of this Tribunal order, At this juncture, it was pointed out by the bench that it has to be seen as to whether the gain is on the turnover of the present year of an earlier year. In reply, it was submitted that such details are riot readily available and therefore, the matter be restored back, to the file of AO for fresh decision with suitable directions. The" Id. DR of revenue also submitted that the matter may be restored back to the file of AO with suitable directions. 11. We have considered the rival submissions. We find that in Assessment Year 2006-07, the Tribunal order followed the tribunal order rendered in the case of Sap labs India Pvt. Ltd. as reported in ITA Nos. 398 & 418/Bang/2008 dated 30.08.2010 relevant Para of this Tribunal order have been reproduced by Tribunal in that order as per which it was held that foreign exchange gain is nothing but an integral part of the sales proceeds of an assessee carrying on export business. TO this extent, there is no quarrel but in our considered opinion, even after holding that the Foreign Exchange fluctuation gain is operating profit, it has to be seen as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eria for comparability is the effect of profit on account of differences. Rule 10B(3) reads thus; "(3) An uncontrolled transaction shall be comparable to an international transaction if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such' transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences." 18. The learned counsel for the Assessee therefore submitted that profit arising from comparable transaction will not be materially affected by adopting the foreign exchange gain as reflected in the accounts of the comparable companies because the terms of credit are almost identical in the line of business of SWD Services and ITES. The Id. counsel for the assessee, however, pointed out that the Hon'ble Delhi High Court in the case of Pr. CIT v. Ameriprise India (P.) Ltd. in IT Appeal No.206/2016, judgment dated 23-03-2016 has taken the following view:- "The ITAT has in the impugned order noted the fact tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore hold that the foreign exchange gain of Rs. 8,54,07,158/- ought to either be included in the assessee's operating income or reduced from its operating costs, as it has done in its TP study. 20. As far as the issue whether write back of the liabilities no longer required to the extent of Rs. 2,96,90,469 are also to be regarded as operating in nature, it is not in dispute that the liabilities written back as no longer required were all relating to operating expenses which had been treated as an operating item in the years they were expected to have been incurred. Therefore, the write back of such liabilities ought to also be considered as an operating item in computation of the operating margin of the Assessee. The learned counsel for the Assessee relied on the decisions of the ITAT Delhi Bench in the Case of Sony India (P.) Ltd. v. Dy. CIT 1 [2008] 114 ITD 448 (Delhi) at paras 106,1 to 107 at page 33], Bangalore Bench of ITAT in the case of Logica (P.) Ltd. v. Asstt. CIT [2013] 36 taxmann.com 374 (Bang.) at paras 7-11 at page 5] and CGI Information Systems and Management Consultants (P.) Ltd. v. Dy. CIT [TS-860-ITAT-2016 (Bang.)-TP]-TP at paras 9 and 10 at pages 17-21] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 441-442 of the paperbook respectively] that the employee cost incurred by CG Vak is not separately disclosed in its financial statements, and that, instead, CG Vak includes the said sum under the heads 'Cost of Services - Domestic' and 'Cost of Services - International', with the result that the total cost incurred by the company on its employees is not available in the public domain. It is the plea of the learned counsel for the Assessee before us that in the absence of such information, it is not possible to accurately determine the percentage of the company's employee cost to its total revenue and, thus, it was submitted that there is no basis on which the said company could have been said to have failed the filter applied by the TPO. It was submitted that if CG Vak's entire employee costs for FY 2008-09 are properly considered, it would then pass the employee cost filter applied by the TPO. Thus, it is submitted that CG Vak is comparable to the Appellant in all respects and, but for its rejection on the above ground, it passed all the filters applied by the TPO. The Assessee has also placed reliance on the decision of this Hon'ble Tribunal in Autodes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... panies. (ii) KALS Information Systems Ltd.- The Assessee seeks rejection of KALS Information Systems Limited ('KALS' for short) on the ground that its business operations are functionally dissimilar to that of the Assessee in as much as this company is engaged in development of software products/product engineering and training services apart from provision of software services. However, no segmental details are available. As per its website, it is clearly engaged in providing software services and products such as Virtual Insure and La Vision. The learned counsel for the Assessee has also placed reliance on the decisions of this Hon'ble Tribunal in Autodesk India (P.) Ltd. (supra) (paras 6.1-6.3 at pages 11-13) and Infinera India (P.) Ltd. v. ITO [2016] 72 taxmann.com 68 (Bang. - Trib.) (paras 12-14 at page 6) wherein this Hon'ble Tribunal directed exclusion of the said company in the cases of other assessees who are engaged in performing identical functions as that of the Assessee and those decisions were rendered for AY 2009-10. The learned DR however brought to our notice the observations of the TPO for inclusion of this company as comparable. The TPO has ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessees similar to the Assessee. The company has a significantly high turnover of Rs. 20,264 crores, and is not at all comparable to the operations of the Assessee. The learned counsel for the Assessee has placed reliance on the decision of this Hon'ble Tribunal in Infinera India (P.) Ltd. (supra) (paras 16.1 and 17 at pages 8-9) wherein this Hon'ble Tribunal directed exclusion of the said company. Respectfully following the precedent on the issue rendered in relation to same AY 2009-10, we direct exclusion of this company from the list of comparable companies. (v) L&T Infotech Ltd. - The learned counsel for the Assessee submitted that this company is not functionally comparable to the Assessee because it is engaged in application development, application outsourcing, architecture services, business process services, SAP services, data warehousing SAP, infrastructure management services etc. During the financial year 2008-09, the company had launched new service lines which are in the nature of both IT and IT enabled services as can be seen from page 3 of its annual report. The company has also taken measures with regard to branding its trademark and logo. The company i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e development service provider and provides services to its AEs based on requirement analysis and directions provided by the AEs. The Assessee does not undertake development or sale of software products and in turn does not own intangible assets. The said company is also being consistently excluded from the list of comparables in the case of other assessees similar to the Appellant. Reliance is placed on the decision of this Hon'ble Tribunal in Infinera India (P.) Ltd. (supra) (paras (4) and 16 at page 8). Respectfully following the precedent on the issue rendered in relation to same AY 2009-10, we direct exclusion of this company from the list of comparable companies. (vii) Sasken Communication Technologies Ltd. - The learned counsel for the Assessee submitted that this company is engaged in high-end software products and services that are not similar to the services rendered by the Assessee. It develops and owns several patents and earns returns on the same while the Assessee neither develops nor owns any patents. Moreover, the company incurs significant expenditure on research and development activities and hardware. However, the Asses see is a captive software developme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 4.02.2013 was passed by the AO after incorporating the aforesaid Transfer Pricing ('TP' for short) adjustment made by the TPO. The assessee filed its objections before the Dispute Resolution Panel ('the DRP' for short), which, vide its directions dated 28.11.2013, largely upheld the draft assessment order. Thereafter, the AO incorporated the said TP adjustment of Rs. 9,80,94,723/- in the final assessment order dated 28.11.2013. 29. Aggrieved by the final assessment order dated 28.11.2013, the assessee is in appeal before the Tribunal. At the time of hearing it was agreed by the parties that the issues pressed for adjudication in this appeal by the Assessee are identical to the appeal IT(TP)A.No.45/Bang/2014 except for variation in the figures of OP/TC and considering foreign exchange fluctuation as operating in nature and not considering provisions written back as in the nature of part of operating income of the Assessee, The comparables chosen and the manner of determination of ALP by TPO and the DRP are pari materia the same as in the case of IT(TP)A No.45/Bang/2014. For the reasons given in the aforesaid order in paragraphs 4 to 27, we direct the TPO to co ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
