IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES: `I-1', NEW DELHI
BEFORE SHRI G.D.AGRAWAL, VICE PRESIDENT AND
SMT. BEENA A PILLAI, JUDICIAL MEMBER
ITA No. 1565/Del/2015
AY: 2010-11
Contata Solutions Pvt.Ltd. vs. ITO, Ward 6(3), Room
A-16/9, Vasant Vihar No.376A
New Delhi 110 057 Central Revenue Building
I.P.Estate
PAN:AABCC8222C New Delhi 110 002
(Appellant) (Respondent)
Assessee by : Shri Atul Ninawat, C.A.
Department by : Sh. Sandeep Kr. Mishra, Sr.D.R.
Date of Hearing : 18/12/2018
Date of Pronouncement : 15/01/2019
ORDER
PER BEENA A PILLAI, JUDICIAL MEMBER
Present appeal has been filed by assessee against final
assessment order dated 31/03/10 passed by Ld. ITO Ward 6 (3),
New Delhi under section 143 (3) read with 140 4C of the act, on
following grounds of appeal:
1. The order of the Learned Assessing Officer is bad in
law and on the facts and circumstances of the case.
2. The Ld. Transfer Pricing Officer/ Ld. Assessing
Officer has erred on facts and circumstances of the
case in determining the arm's length adjustment to
ITA No. 1565/Del/2015 A.Y.2010-11
Contata Solutions Pvt.Ltd.
the appellant's international transaction from
associated enterprises and thereby resulting in the
enhancement of returned income of the Appellant
company by Rs. 52,25,570/-.
3. The Ld. Assessing Officer has completely ignored the
facts in the submissions made before him and
proceeded to make transfer pricing adjustment on the
basis of TPO's order.
4. The Ld. Transfer Pricing Officer has erred in facts
and in law to reject, based on his subjective grounds
and presumptions, the economic analysis conducted
by the appellant for determination of the arm's length
price.
5. The Ld. Transfer Pricing Officer has erred on facts
and circumstances of the case in rejecting the
appropriate filters as applied by the appellant and
further modifying the filters arbitrarily without proper
appreciation of the facts, law and commercial reality.
6. The Ld. Transfer Pricing Officer has erred in laws
and facts of the case by rejecting the comparables
submitted in a fresh and comprehensive study
conducted by the appellant for ascertaining arm's
lengths price.
7. The Ld. Transfer Pricing Officer has erred on facts
and circumstances of the case by considering
companies having very high turnover as
comparables.
8. The Ld. Transfer Pricing Officer has erred on facts
and circumstances of the case by erroneously
computing related party transactions of companies
selected by him
9. The Ld. Transfer Pricing Officer has erred in laws
and facts of the case by ignoring Functions,
Assets and Risk Profile of companies selected by
Ld.TPO comparables and that of Appellant.
10. The Ld. Transfer Pricing Officer has erred in laws
and facts of the case by ignoring the differences
between risk profile of Appellant and companies
selected by him as comparables and denying
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Contata Solutions Pvt.Ltd.
adjustment on account of such differences in risk
profiles.
11. The Ld. Transfer Pricing Officer has erred in laws and
facts of the case by ignoring the differences between
working capital requirements of Appellant and
companies selected by him as comparables and
denying adjustment on account of such differences in
working capital requirements
12. The above grounds are without prejudice to each
other.
13. The appellant may be allowed to
add/amend/withdraw any grounds at the time of
hearing."
2. Brief facts of the case are as under:
Assessee filed its return of income on 12/10/10 declaring total
income of Rs.4,57,361/-. Case was selected for scrutiny and notice
under section 143 (2) was issued to assessee. In response to
statutory notices, representative of assessee appeared before Ld.AO
is and filed details as called for. Ld.AO during assessment
proceedings observed that assessee had undertaken international
transaction with its associated enterprises. A reference was
accordingly made to transfer pricing officer.
2.1 Ld.TPO upon receipt of reference, called for various details
from assessee. He observed that assessee was incorporated on
27/05/02 and was engaged in business of computer software
development, data processing, value addition services, content
development and solution provider. It was observed that assessee
was engaged in providing services exclusively to its subsidiary
company; `Intertech' for software development, and that it will not
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Contata Solutions Pvt.Ltd.
accept any other assignment from any other source without
permission of Intertech. Ld.TPO further observed that assessee had
competencies in following areas like Microsoft technologies; open
source and Java technologies; software quality assurance and
testing; business process management tools; Microsoft SharePoint.
It was also observed that international transaction entered into by
assessee was shown as under:
S.No. Nature of service Arms length price as
per assessee
1. Rendering of software Rs.9,38,16,056/-.
development services
2.2 Ld.TPO observed that assessee has selected TNMM as most
appropriate method to benchmark international transaction by
using OP/OC as PLI. The PLI of assessee accordingly was computed
at 15.82% on cost. Assessee selected following 4 comparables with
an average margin at 11.11%, and thus, it was contended that
transaction was at arm's length.
S.No. Comparables OP/OC Average
OP/OC
KALS Inf. Systems 16.40%
1. 14.19%
KALS Inf. Systems 11.98%
Space Computers 5.95% 5.95%
2.
Space Computers 2.34% 0.02%
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3. Zylog Sys -2.31%
Laser Soft Infosystems 14.56%
Ltd.
4. 24.29%
Laser Soft Infosystems 34.02%
Ltd.
Average 11.11%
2.3 Ld. TPO rejected 3 comparables, by using various filters and
selected a set of following 11 comparables including one from
assessee's set with an average margin of 20.33%.
S.No. Comparables OP/OC (margin)
1. Evoke Technologies Pvt. Ltd. 18.56%
2. L & T Infotech Ltd. 19.06%
3. Mindtree Ltd. (Segment) 13.92%
4. Sasken Communication 17.54%
Technologies Ltd.
5. Persistent Systems Limited 29.02%
6. Sonata Software 35.87%
7. Thinksoft Global Sesrvices Ltd. 17.35%
8. Zylog Systems Limited 25.07%
9. Sankhya Infotech 18.11%
10. C T I L Ltd 18.11%
11. Cat Technologies Ltd. 11.07%
Average 20.33%
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2.4 He thus computed adjustment of Rs.86,71,096/- to
international transaction.
2.5 Against draft order passed by Ld.TPO, assessee raised
objections before DRP, who upheld proposed adjustment. Based
upon order passed by DRP, Ld.AO passed impugned final
assessment order, against which assessee is in appeal before us.
Only issue raised by assessee is in respect of comparables and
filters arbitrarily used by Ld.TPO to accept/reject final list of
comparables selected in transfer pricing order.
3. Assessee before us alleged for exclusion of following
comparables:
1. Evoke Technologies Pvt. Ltd.,
2. L&T Infotech Ltd.,
3. Sasken Communication Technologies Ltd.,
4. Persistent Systems Ltd.,
5. Think Soft Global Services Ltd.,
4. Comparables alleged by assessee for inclusion are as under:
1. Cibermate Infotech Ltd.,
2. Melstar Information Technologies Ltd.,
3. Objectone Information Systems Ltd.,
5. Before adverting to compatibility analysis, it is sine qua non to
ascertain functions performed by assessee, assets employed and
risks assumed in respect of international transaction undertaken.
Functions:
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6. Assessee undertakes research and development in
manufacture of products. The research and development activities
relates to various technologies, market scenario is, competitors
activities, recent developments in information technology is,
prospective clients etc and for itself and Intertech.
6.1 Product strategy and design carried out by assessee relates to
devising plan for positioning a product in marketplace and
developing strategy for selling the products. The decisions related to
product strategy and designs are taken by assessee and Intertech
together.
6.2 Marketing and distribution activities carried out by assessee
involves, decision-making, regarding promulgation of information
about companies products to potential customers and development
of effective sales and distribution channels for delivering products
to customers. It also involves marketing and advertising of
products/services for business and promotion of brand name in
market, which is carried out by Intertech alone. Further Intertech
also takes up marketing and promotion activities of products
developed by assessee whereas, assessee is involved in marketing
sales and distribution of the same only.
6.3 Assessee also carries out accounting, administration, human
resource management to manage the office and assignments.
Assets:
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7. Assessee owns normal routine assets like computers officer
except at equipments furniture fittings vehicles software etc it does
not own any intangibles and non-routine that assets and does not
own any trade secrets or undertake research and development
activities on its own account, that would lead to development of
non-routine intangibles.
Risks:
8. Assessee experiences moderate market risk low product
liability risk locus, credit risk high foreign exchange risk and nil on
inventory risk.
9. Ld. Counsel submitted that Ground No. 1-3 are general in
nature and therefore do not require any adjudication.
Accordingly the same are dismissed.
10. Ground No. 4-5 relates to filters arbitrarily applied by Ld.TPO
for exclusion/inclusion of comparables.
11. Ground No. 6-8 is in respect of comparables
exclusion/inclusion by Ld.TPO.
12. Ground No. 9-10 is on the basis of functional dissimilarity of
companies selected by Ld.TPO; and
13. Ground No. 11 is in respect of denial of working capital
adjustment.
14. Ld. Counsel submitted that Ground No. 4-5 has been raised
for using following filters by Ld.TPO to reject comparables based on;
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· turnover filter less than 5 crore
· export revenues less than 75% of total revenues
· companies having RPT of 25% and more
· where service income is less than 75% of sales
· turnover filter/super profit companies being excluded
· companies with diminishing revenue/persistent loss making
companies being excluded
· employee cost filter of 25% of cost being applied.
15. Further it has been argued that Ground No. 6-10 deals with
comparables and its functional similarities/dissimilarities
rejected/accepted by Ld.TPO, which can be taken up together. Ld.
Counsel contended that assessee is providing low end services and
therefore cannot be compared with companies which are providing
specialised software services. It has been submitted that filters are
used by Ld.TPO arbitrarily, to accept/reject comparables. It has
been contended that assessee has turnover of 9.38 crores, whereas
Ld.TPO used turnover filter of less than 5 crores, which is
inappropriate. Ld. Counsel submitted that companies having sales
10 times more than that of assessee cannot be compared together.
He submitted that Ld.TPO rejected companies having employee cost
less than 20% of sales which is contrary to turnover filter and total
revenue filter applied by him. Ld. Counsel thus submitted that
modifications brought by Ld.TPO to filters has rendered economic
analysis conducted by assessee to be inadequate or defective.
Further Ld. Counsel argued that Ld.TPO failed to consider gross
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dissimilarities between assessee and comparables selected by him,
without conducting FAR analysis.
16. Now coming to filters adopted by assessee, which has been
modified by Ld. TPO.
17. From records before us, it is observed that assessee included
companies having financial data of at least 2 years prior for which
Ld.TPO observes that as per Rule 10 B (4) it is mandatory to use
current year data, unless it is shown by assessee that such earlier
years data has an influence in determining transfer price and that,
use of earlier year data is in addition to current year data. Ld.TPO
rejected company, where current year data was not available and
assessee had sought to rely upon preceding two years data, which
in our considered opinion is appropriate as assessee has not been
able to establish what is required under rule 10 B (4) of Income Tax
Rules 1963.
18. Next filter that has been modified by Ld.TPO is in respect of
turnover. Assessee had included companies with an average sales of
less than 1 crore during the year and companies with more than 50
crores were rejected. Ld.TPO observed that companies whose
income is less than 5 crore would be appropriate as otherwise
analysis may not lead to proper compatibility. It is observed that
Ld.TPO modified lower limit of turnover filter from less than 1 crore
to less than 5 crore.
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19. We have also observed that Ld.TPO rejected companies which
are making losses as comparables. This shows that there is a limit
for lower end for identifying comparables. In such a situation, we
are unable to understand as to why there should not be an upper
limit also. What should be an appropriate upper limit is another
factor to be considered.
19.1 In our view, big company would be in a position to bargain
price and also attract more customers. It would also have a broad
base of skilled employees who are able to give better output. A small
company may not have these benefits and therefore, turnover also
would come down reducing profit margin. Thus, as held by various
benches of this Tribunal, when companies which are loss making
are excluded from comparables, then super profit making
companies should also be excluded. Thus in present case, rage of 1
crores to 200 crores would be ideal.
19.2 For purposes of classification of companies on the basis of net
sales or turnover, we find that a reasonable classification has to be
made. In our opinion companies with revenues less than 75% from
software development services would be ideal to be excluded, as
economic circumstances of such companies would be different. We
draw our support from Rule 10 B (2) in respect of this view.
19.3 Thus based on these criteria, as discussed in foregoing
paragraphs, we reject following companies as comparables which
are under challenge by assessee either for exclusion or inclusion, as
the case may be.
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· L&T Infotech Ltd.,
· Sasken Communications Technologies Ltd.,
· Persistent Systems Ltd.,
· Space Computers and Systems Ltd.,
· Mel Starr Information Technologies Ltd.,
· Objectoen Information System Ltd.,
20. Before we proceed to examine comparables on the basis of
several decisions relied upon by both sides for inclusion/exclusion
of comparables, we are of considered opinion that every decision
rendered in respect of comparables for its inclusion/exclusion is
based upon facts of that case as well as FAR of assessee, in whose
case those have been either included/excluded. We are also aware
about precedent value of these decisions, while carrying out
comparability analysis. However, we feel that Paramount
importance must be given to Rule 10B (2). Unless, difference arising
on compatibility analysis affects prize or profitability of a
comparable, or cannot be adjusted reasonably, the same should be
upheld. Thus in our opinion, while deciding compatibility decisions
relied upon by both sides would be produced from this angle by us.
From TP study as well as TP order, it is observed that comparables
selected by assessee has been rejected as these fail revenue's filters.
However no FAR analysis has been conducted by Ld.TPO in respect
of comparables that has been rejected.
21. Comparables alleged for exclusion:
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1. Evoke Technologies Pvt. Ltd.
21.1 Ld. Counsel submitted that this comparable selected by
Ld.TPO is functionally dissimilar with that of assessee, as it
provides services relating to ITeS and not into rendering of software
development services like that of assessee.
21.2 On the other hand, Ld. DR submitted that this company has
revenue from software development charges and its website reveals
company to be providing quality software services to its clients.
21.3 We have perused submissions of both sides in light of records
placed before us. Audited account for relevant year of this
comparable is placed at page 402-416 of paper book volume 2. It is
observed that revenue earned by this company is from software
development charges. We are therefore not inclined to accept
argument advanced by Ld. Counsel that this company is performing
IT enabled services. Assessee has not been able to point out any
difference in functions performed by this company vis-a-vis that of
assessee.
21.4 We therefore, uphold inclusion of this company into final
list of comparables.
2. Think Soft Global Services Ltd.
22. From annual accounts placed in paper book at page 898-1025
of volume 3, it is observed that this company is generating revenue
from software testing on time and material contracts and is based
on software tested and build to clients as per terms of specific
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contract. In our considered opinion, software testing is not the
function performed by assessee, for this company to be considered
as suitable comparable. We are therefore inclined to direct
Ld.TPO to remove this comparable from final list.
Comparables alleged for inclusion:
23. Regarding following comparables it is observed from TP order
that, functional compatibility, assets owned and risk assumed has
not been carried out by Ld.TPO vis-a-vis that of assessee:
· Kalas Information Systems
· Laser infosystems Ltd.,
23.1 Further it is alleged by Ld.Counsel that in case of Zylog Sys.
India, Ld.TPO has considered a different company (M/s Zylog
systems Ltd) as has been submitted by assessee. It is observed from
final assessment order that DRP also considered M/s Zylog systems
Ltd.
Ld.TPO is directed to ascertain difference brought out by Ld.
Counsel, and to select correct comparable after undertaking
exercise of FAR analysis with that of assessee as per law.
23.2 It is observed that during TP assessment, assessee provided
fresh comparables being;
· Cybermate Infotek Ltd.,
· CTIL Ltd.,
· Cat Technology Ltd
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23.3 Out of the above, Ld.TPO has accepted CTIL Ltd., and Cat
Technology Ltd., as suitable comparable.
23.4 It is observed that Ld.TPO rejected Cybermate Infotek Ltd., by
holding that export turnover is less than 75%. Ld.Counsel before
us has placed annual report of Cybermate Infotek Ltd. It is also
observed that functional compatibility, assets owned and risk
assumed by this company has not been carried out by Ld.TPO vis-
a-vis that of assessee.
23.5 We, therefore direct Ld.TPO to undertake compatibility
analysis as per rule 10 D (2) for finalising comparables, to be
applied for determining the ALP of international transaction. We
also direct Ld.TPO to carry out proper FAR analysis in respect of
comparables which has been alleged for inclusion by assessee on
the basis filters hereinabove referred to and observations made by
us hereinabove.
24. Accordingly grounds raised by assessee stands allowed as
discussed above.
25. In the result appeal filed by assessee stands allowed for
statistical purposes.
Order pronounced in the open court on 15/01/2019.
Sd/- Sd/-
( G.D. AGRAWAL) (BEENA A PILLAI)
VICE PRESIDENT JUDICIAL MEMBER
Dt. 15/01/2019
*GMV
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Contata Solutions Pvt.Ltd.
Copy forwarded to: -
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT
- TRUE COPY -
By Order,
ASSISTANT REGISTRAR
ITAT Delhi Benches
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Contata Solutions Pvt.Ltd.
S.No. Details Date
Draft dictated on
1 11/01/19
Dragon
Draft placed before
2
author 15/01/19
Draft proposed & placed 15/01/19
3 before the Second
Member
Draft 15/01/19
4 discussed/approved by
Second Member
Approved Draft comes 15/01/19
5
to the Sr. PS/PS
6 Kept for pronouncement 15/01/19
7. Order uploaded on
8 File sent to Bench Clerk
Date on which the file
9
goes to Head Clerk
Date on which file goes
10
to A.R.
Date of Dispatch of
11
order
17
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