IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH `I - 1' : NEW DELHI)
BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER
and
SHRI A.T. VARKEY, JUDICIAL MEMBER
ITA No.1035/Del./2015
(ASSESSMENT YEAR : 2010-11)
M/s. ION Trading India Private Ltd., vs. ITO, Ward 12(4),
A-136, Defence Colony, New Delhi.
New Delhi
(PAN : AAECA4325R)
(APPELLANT) (RESPONDENT)
ASSESSEE BY : Shri Manoj Pardasani, CA
REVENUE BY : Shri Amrendra Kumar, CIT DR
Date of Hearing : 09.09.2015
Date of Pronouncement : 07.12.2015
ORDER
PER A.T. VARKEY, JUDICIAL MEMBER :
This appeal arises from an order passed by Income Tax
Officer, Ward 12(4), New Delhi dated 21.01.2015 u/s
144C(13)/143(3) of the Act in pursuance to directions of the DRP
2 ITA No.1035/Del./2015
dated 14.11.2014 u/s 144C(5) of the Act and relates to assessment
year 2010-11.
2. The grounds raised by the appellant in this appeal are as
under:
"1. On the facts and in law, the Learned Income Tax Officer,
Ward 12(4), New Delhi ("Ld. AO") erred in passing the impugned
assessment order dated 21 January 2015 pursuant to the directions
of the Hon'ble Dispute Resolution Panel ("Hon'ble DRP") and
computing the total income of the Appellant for Assessment Year
("AY") 2010-11 at Rs. 30,678,470 as against the returned income
of Rs. 353,440, thereby making an adjustment of Rs. 30,325,034
to the Officer-1 (2)value of the international transaction of
provision of computer software development services by the
Appellant to its Associates Enterprises ("AEs").
2. On facts and in law, the Ld. AO erred in making a reference
to the Learned Additional Commissioner of Income Tax, Transfer
Pricing Officer-1 (2), New Delhi ("Ld. TPO"), inter alia, since he
has not recorded an opinion that any of the conditions in section
92C(3) of the Income Tax Act, 1961 ("the Act"), were satisfied in
the instant case. Accordingly, the order passed by the TPO is
without jurisdiction.
3. On facts and in the circumstances of the case and in law, the
Ld. TPO erred in not demonstrating that the motive of the
Appellant was to shift profits outside India by manipulating the
prices charged in its international transactions, which is a pre-
requisite condition to make any adjustment under the provisions of
Chapter X of the Act.
4. On facts and in law, the Ld. TPO/Ld. AO erred in
conducting and the Hon'ble DRP further erred in allowing a fresh
benchmarking analysis using "non contemporaneous" data and
substituting the Appellant's analysis with the fresh benchmarking
analysis on his own conjectures and surmises.
3 ITA No.1035/Del./2015
5. On facts and in law, the Ld. TPO/Ld. AO and Hon'ble DRP
erred in violating the provisions of Rule 10B(2) of Income Tax
Rules, 1962 ("the Rules") by introducing new companies without
considering the differences in the functions performed, assets
employed and risks assumed by such companies vis-à-vis the
Appellant, thereby resorting to unsubstantiated selection of
comparables.
6. On the facts and in law, the Hon'ble DRP violated the
provisions of Rule 10B(2) of the Rules by rejecting CG-VAK
Software & Exports Limited, a comparable company selected by
the Appellant in the TP documentation by modifying the filter of
employee cost being less than 25% of turnover as proposed by the
Ld. TPO to employee cost of less than 75% of turnover; and
further erred in incorrectly computing the filter ratio at less than
75% instead of correct ratio of 79.69% of turnover.
7. On the facts and in law, the Ld. AO/Ld. TPO and the
Hon'ble DRP erred, violating provisions of Rule 10B(2) by
considering E-Infochips Bangalore Limited as a comparable to the
Appellant.
8. On the facts and in law, the Ld. AO/Ld. TPO and the
Hon'ble DRP erred, violating provisions of Rule 10B(2) by
considering Infinite Data System Private Limited as a comparable
to the Appellant.
9. On the facts and in law, the Ld. AO/Ld. TPO and the
Hon'ble DRP erred, violating provisions of Rule 10B(2) by
considering Infosys Technologies Limited as a comparable to the
Appellant.
10. On the facts and in law, the Ld. AO/Ld. TPO and the
Hon'ble DRP erred, violating provisions of Rule 10B(2) by
considering Persistent Systems Limited as a comparable to the
Appellant.
11. On the facts and in law, the Ld. AO/Ld. TPO and the
Hon'ble DRP erred, violating provisions of Rule 10B(2) by
considering Sasken Communications Technologies Limited as a
comparable to the Appellant.
4 ITA No.1035/Del./2015
12. On the facts and in law, the Ld. AO/Ld. TPO and the
Hon'ble DRP erred, violating provisions of Rule 10B(2) by
considering Thirdware Solutions Limited as a comparable to the
Appellant.
13. On the facts and in law, the Ld. AO/Ld. TPO and the
Hon'ble DRP erred, violating provisions of Rule 10B(2) by
considering Wipro Technology Services Limited as a comparable
to the Appellant.
14. On facts and in law, the Ld. TPO, the Ld. AO and the
Hon'ble DRP erred in contravening provisions of Rule
10B(1)(e)(i) by considering the unutilized rent and maintenance
expenses as expenses incurred in relation to the international
transaction of the provision of software development services.
15. On the facts and in law, the Ld. TPO/Ld. AO and the
Hon'ble DRP grossly erred in not allowing the risk adjustment
under Rule 10B(1)(e)(iii) and Rule 10B(3) to account for
differences in the risk profile of the comparable companies vis-à-
vis the Appellant.
16. On the facts and in law, the Ld. AO/Ld. TPO and the
Hon'ble DRP 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.
17. On the facts and in circumstances of the case, the Ld. AO
erred in levying tax at the rate of 40% on the assessed income vis-
à-vis applicable tax rate of 30%, given the fact that the Appellant
is a domestic company incorporated under the Companies Act,
1956.
18. On the facts and in the circumstances of the case, the Ld.
AO erred in computing interest under section 234B of the Act.
19. On the facts and in the circumstances of the case, Ld. AO
erred in demanding an amount of Rs. 162,976 in relation to tax
refunded earlier as this amount was never refunded and not
received by the Appellant.
5 ITA No.1035/Del./2015
20. On the facts and in the circumstances of the case, the Ld.
AO erred in levying interest under section 234A and 234D of the
Act.
21. On the facts and in law, the Ld. AO erred in initiating
penalty proceedings under section 271(1)(c) of the Act."
3. Grounds 1 to 15 relate to adjustment of Rs. 3,03,25,034/- to
the arm's length price of the international transaction of provision of
software development services provided by the appellant company
to its holding company M/s ION Trading UK Ltd.
4. The factual matrix as emanating from the material on record is
that the appellant company is a wholly owned subsidiary company
of M/s ION Trading UK Ltd. It is engaged in the business of
providing computer software development services to its AE on a
captive basis. In the instant assessment year, the appellant furnished
a return of income on 11.10.2010 declaring an income of Rs.
3,53,440/-. During the year the appellant had entered into following
international transaction with its Associated Enterprise (AE):
Sr. Type of International Method Total Value of
No. Transaction Selected transaction
1 Computer Software Transactional 21,82,68,570
Development Services Net Margin
Method
6 ITA No.1035/Del./2015
5. In view of the above, AO made a reference u/s 92CA(1) to the
Transfer Pricing Officer (TPO) for determining the Arm's Length
Price (ALP). In course of proceeding before TPO, appellant
submitted a TP study report. In the TP analysis, appellant selected
Transactional Net Margin Method (TNMM) as the most appropriate
method for benchmarking the international transaction and for the
purpose of applying TNMM, the assessee company identified itself
as the tested party. Further, operating profit to operating cost
(OP/OC) was considered as the profit level indicator (PLI) to
demonstrate its adherence to the arm's length provisions contained
in the Act. The PLI of the assessee was calculated at 9.37%;
whereas average PLI of the comparables was arrived at 6.48%. The
calculation of the assessee's margin is as under:
Particulars As on March 2010 (Amt. in Rs.)
Operating income 22,29,50,213
Operating cost 20,38,55,648
Operating profit 1,90,94,565
OP/OC 9.37%
It is to be noted here that while calculating the operating cost of
Rs.20,38,55,648/-, a deduction of Rs. 82,18,899/- on account of
7 ITA No.1035/Del./2015
adjustment of cost relating to rent and maintenance charges for
under-utilization of capacity was claimed by the appellant.
6. Furthermore, the appellant had computed the PLI of the
comparables by selecting a set of 6 comparables and the margin of
these was shown to be 6.48% using the current year data as under:
Sr. No. Name of the company Margin for FY 2009-
10
1 CG- Vak Software & Exports
-12.48%
Ltd.
2 Quintegra Solutions Ltd. -9.42%
3 R S Software (India) Ltd. 9.29%
4 Tata Elxsi Ltd. 20.60%
5 Thinksoft Global services Ltd. 11.82%
6 Zylog Systems Limited 19.08%
Average 6.48%
7. The TPO vide its order dated 22.01.2014, has observed that
appellant has selected 6 companies as comparables on the basis of
the search conducted in the public data base Prowess only. Further,
TPO applied the following filters:
i) Companies with RPT greater than 25% of revenue should have
been excluded;
ii) Companies who have less than 75% of the revenue as export
sales should have been excluded; and
iii) Companies whose employee cost to revenue ratio is less than
25% should have been excluded.
8 ITA No.1035/Del./2015
8. Pursuant to the above, final comparables out of comparables
selected by the appellant are as under:
Sr. No. Name of the company Remarks
i) Quintegra Solutions This is a suitable comparable but
Ltd. the PLI (OP/OC) is 0.75% as on
31st March, 2010 and not -9.42%.
ii) R S Software (India) This is a suitable comparable,
Ltd. hence accepted.
iii) Tata Elxsi Ltd. This is a suitable comparable,
hence accepted.
iv) Thinksoft Global This is a suitable comparable,
services Ltd. hence accepted.
v) Zylog Systems This is a suitable comparable,
Limited hence accepted.
9. As a further step, based on the above stated filters, search on
the Capitaline database was also conducted by the TPO and further
18 comparables were identified and included in the final list of
comparables. As a result, 23 comparables were selected and, the
margin computed as under::
Sr. No. Name of the company OP/OC with
Forex
1 Accelya Kale Solutions Ltd. 12.51%
2 Akshay Software Technologies Ltd. -3.91%
3 Allgo Embedded 8.72%
4 CTIL Ltd. 18.22%
5 E-Infochips Bangalore Ltd. 71.38%
6 Evoke Tech 18.20%
7 E-Zest Solutions 18.38%
8 Infinite Data System Pvt. Ltd. 72.67%
9 Infosys Limited 45.47%
10 Kuliza Technologies Private Limited 12.94%
9 ITA No.1035/Del./2015
11 Larsen & Toubro Infotech Ltd. 19.76%
12 Mindtree Limited (Segment) 20.47%
13 Persistent Systems Limited 30.15%
14 Persistent Systems & Solutions
11.37%
Limited
15 Quintegra Solutions Ltd. -8.83%
16 RS Software (India) Ltd. 9.07%
17 Sasken Communication Technologies
22.65%
Ltd.
18 Sonata Software 32.16%
19 Tata Elxsi Ltd. 17.08%
20 Thinksoft Global services Ltd. 11.22%
21 Thirdware Solutions Limited 29.05%
22 Wipro Technology Services Limited
63.27%
(Formerly Citi Technologies)
23 Zylog Systems Limited 19.08%
Average 23.99%
10. On the aforesaid basis, the TPO made an adjustment of Rs.
4,46,82,661/- in the manner as under:
Sr. No. Particulars Amount (Rs.)
1. Total Operating Cost 21,20,74,547*
2. Arm's Length Price at a margin of 26,29,51,231
23.99%
3. Transfer Price received by the taxpayer 21,82,68,570
4. Shortfall of Transfer Price from ALP 4,46,82,661
*by disallowing deduction of Rs. 82,18,889/- on account of adjustment
of cost relating to rend and maintenance charges for under utilization of
capacity.
11. DRP vide directions dated 14.11.2014 out of the set of 23
comparables adopted by the TPO directed for exclusion of one of
the comparables, namely, Sonata Software Ltd. and also to grant
10 ITA No.1035/Del./2015
working capital adjustment. After giving the effect of the aforesaid
directions, margin of comparables was re-determined at 17.22% on
a set of 22 comparables in the manner as under:
Sr. No. Name of the company OP/OC with
Forex
1 Accelya Kale Solutions Ltd. 7.18%
2 Akshay Software Technologies Ltd. -6.83%
3 Allgo Embedded 2.18%
4 CTIL Ltd. 7.47%
5 E-Infochips Bangalore Ltd. 61.40%
6 Evoke Tech 14.60%
7 E-Zest Solutions 12.75%
8 Infinite Data System Pvt. Ltd. 64.96%
9 Infosys Limited 39.83%
10 Kuliza Technologies Private Limited 7.71%
11 Larsen & Toubro Infotech Ltd. 15.51%
12 Mindtree Limited (Segment) 14.46%
13 Persistent Systems Limited 4.80%
14 Persistent Systems & Solutions
24.70%
Limited
15 Quintegra Solutions Ltd. -23.63%
16 RS Software (India) Ltd. 5.68%
17 Sasken Communication Technologies
18.32%
Ltd.
18 Tata Elxsi Ltd. 12.66%
19 Thinksoft Global services Ltd. 4.53%
20 Thirdware Solutions Limited 22.88%
21 Wipro Technology Services Limited
56.61%
(Formerly Citi Technologies)
22 Zylog Systems Limited 11.03%
Average 17.22%
12. The Assessing Officer accordingly passed an order under
section 144C(13)/143(3) of the Act determining the adjustment at
Rs.3,03,25,034/- and as such, income of the appellant was finally
11 ITA No.1035/Del./2015
assessed at Rs.3,06,78,474/-. The said adjustment has been
computed in the manner hereunder:
Sr. Particulars Amount (Rs.)
No.
1. Operational Cost 21,20,74,547
2. Arm's Length Price at a margin of 17.22% 24,85,93,784
3. Transfer Price received by the taxpayer 21,82,68,570
4. 105% of International Transaction 22,91,82,188
5. Proposed Adjustment u/s 92CA 3,03,25,034
13. Before us the learned counsel for the appellant made oral
arguments and also filed written submissions. Both during the
course of oral arguments and in written submissions, no specific
submission have been made viz-a-viz grounds 1 to 5 of grounds of
appeal. It has been contended that ION Trading is engaged in
rendering generic, repetitive software development services to its
AE-ION Trading UK Limited and is therefore characterized as a
captive or low-risk service provider, compensated on a fixed fee
basis. It was further submitted that the TPO/DRP/AO have erred in
making an adjustment of Rs. 3,03,25,034/- to the value of the
international transaction of provision of computer software
development services by the appellant to its AE. In support of the
12 ITA No.1035/Del./2015
above submission, it has prayed for inclusion of the comparable M/s
CG-Vak Software and Exports Limited (segmental) and exclusion
of (i) M/s E-Infochips Bangalore Ltd., (ii) M/s Infinite Data System
(P) Ltd. (iii) M/s Infosys Ltd., (iv) M/s Persistent Systems Ltd., (v)
M/s Sasken Communication Technologies Ltd. (vi) M/s Thirdware
Solutions Limited and (vii) M/s Wipro Technologies Services
Limited. in the final set of comparables. Apart from the above, it
was also prayed that AO/TPO/DRP erred in contravening provision
of rule 10B(1)(e)(i) by considering the unutilized rent and
maintenance expenses as expenses incurred in relation to the
international transaction of the provision of software development
services. It was also submitted that the authorities below have
grossly erred in not allowing the risk adjustment under Rule
10B(1)(e)(iii) and Rule 10B(3) to account for differences in the risk
profile of the comparable companies vis-a-vis the appellant. The
learned DR has supported the orders of DRP/TPO/AO and
contended that adjustment made should be sustained and, no
interference is warranted.
13 ITA No.1035/Del./2015
14. We have considered the rival submissions and perused the
material placed on record. The first and foremost substantive
contention raised by the learned counsel vis-a-vis Ground 6 of
Grounds of Appeal is that DRP violated the provisions of Rule
10B(2) of the Rules by rejecting CG-VAK Software Exports
Limited, a comparable company selected by the appellant in the TP
documentation by modifying the filter of employee cost being less
than 25% of turnover as proposed by the ld. TPO to employee cost
of less than 75% of turnover and further erred in incorrectly
computing the filter ratio at less than 75% instead of correct ratio of
79.69% of turnover. The TPO had rejected the above comparable by
holding as under:
"Rejection of CG-VAK as a comparable by the undersigned is
valid for the reasons explained in the show cause notice. Further,
the assessee has not submitted any detail to justify that each one of
the identified filters are satisfied in this case. Since the assessee
company has failed to discharge its onus, the undersigned is
constrained, to reject the said company as comparable."
15. It is seen that the reasons mentioned in the show cause notice
vis-à-vis the said comparable was that the financials do not reflect
the details of related party transaction and the other important filters
14 ITA No.1035/Del./2015
which have been ignored by the assessee from the final list of
comparable companies.
16. Before the DRP the appellant contended as under:
"CG-VAK Software & Exports Ltd. was incorporated in 1995.
The company specializes in consulting services and offshore
software development. It is engaged in providing outsourced
software product services (product lifecycle, product maintenance,
product migration, product testing, tech writing/documentation);
custom software services (e-commercie application, website
design, client servicer application); testing services; and
professional services. The company has three business segments
namely software services; BPO services and training. The
software services segment has been considered for the purpose of
our analysis.
Further, it is submitted that CG-VAK Software & Exports Ltd.
does not fall the 25% related party filter applied by the learned
TPO. A working of the same was provided to the TPO vide
submission dated 15.1.2014 and has been provided below based
on the details available in the Annual Report for FY 2010-11:
The detailed computation of the related party percentage is as
under:
Nature of related party transaction Amount (in
INR)
Purchase of assets 27,07,672
Interest receipts 7,28,390
Interest BPO 10,979
Salary 33,00,000
Rent 13,20,000
Interest paid on FD 4,36,429
Total related party transactions (A) 85,03,470
Total income as per Annual Report (B) 6,19,81,460
RPT as a % of sales (A/B) 13.72%"
15 ITA No.1035/Del./2015
17. However the DRP upheld the exclusion on the following
basis:
"Having considered the above and the material placed on record,
we are of the opinion that the said company does not satisfy the
filter applied by the TPO of employee cost less than 75% of
turnover and therefore the same cannot be taken as comparable. In
view of the above, action of the TPO is upheld."
18. Before us it was submitted that DRP incorrectly applied
employee cost filter which was never proposed by the TPO. It was
submitted in the profit and loss account, CG-VAK has reported
certain "Cost of Services", however, the breakup of the same is not
known (to ascertain whether the same includes any employee cost
or not). It was further submitted that from the annual report for
financial year 2010-11 and financial year 2011-12, it is can be seen
that the employee cost was disclosed as cost of services. The
relevant extracts from the annual report is given below:
PROFIT & LOSS STATEMENT FOR THE YEAR ENDED 31ST MARCH
2012
Note 31.3.2012 31.3.2011 (Rs.)
No. (Rs.)
III Expenditure: 3.03 5,33,80,368 4,73,01,685
Employee Benefit
Expenses
PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31.3.2011
Schedul 31.3.2011 (Rs.) 31.3.2010 (Rs.)
e
Expenditures 135 4,73,01,685 4,73,59,185
Cost of services
16 ITA No.1035/Del./2015
19. It was also submitted that the company has followed "different
nomenclature" in the FY 2009-10, wherein the employee cost is
shown as cost of services. The relevant extract from the annual
report of the company is reproduced below:
Schedule 31.3.2010 31.3.2009
(Rs.) (Rs,)
Income:
Income from Software
Development, Services &
Products
- Overseas 12 5,74,87,587 7,16,87,088
- Domestic 13 19,40,663 6,52,093
5,94,28,250 7,23,39,181
Other Income 14 25,53,210 72,26,721
6,19,81,460 7,95,65,902
Expenditure:
Cost of Services 15 4,73,59,185 5,88,05,074
Administrative Expenses 16 1,32,67,939 1,04,53,160
Interest 17 19,16,993 30,47,952
Depreciation 63,65,886 59,23,335
6,89,10,003 7,72,29,521
Net Profit/(Loss) for the year (69,28,543) 23,36,381
20. It was submitted that since the cost of service/employee cost
(i.e. Rs.4,73,59,185) is 79.69% of turnover (i.e. Rs.5,94,28,250) it
satisfies the filter applied by the Hon'ble DRP and thus, CG-VAK
should be accepted as a comparable to the appellant. Reliance was
placed on the following judgments:
17 ITA No.1035/Del./2015
- Lam Research India (P) Ltd. vs. DCIT [TS 203-ITAT-2015 (Bang)]
- Yodlee Infotech (P) Ld. vs. ITO [TS-465-ITAT-2014 (Bang)]
- Cisco System India (P) Ltd. vs. DCIT [TS-246-ITAT-2014 (Bang)]
21. We have considered the submission of the ld. counsel for the
assessee and have considered the argument of the ld. DR that the
assessee is not producing any product, however, we find that CG-
Vak Software and Exports Limited is not only into computer
software but it is a product manufacturer too. Since assessee is not
into product manufacturing and the segmental details cannot be
bifurcated from the financial details, we find that the assessee and
the CG-Vak Software and Exports Limited are not comparables.
Therefore, we are inclined to uphold the orders of the authorities
below in rejecting this company as a comparable. We direct
accordingly.
22. Now taking up Grounds No.7 to 13 of Grounds of Appeal, the
learned counsel made his submission for exclusion of comparables
selected by TPO. We will now consider the merits of the arguments
of the parties with regard to selection of the these companies as
comparables by TPO.
18 ITA No.1035/Del./2015
23. E-Infochips Bangalore Limited
24. The learned AR contended that DRP/TPO have erred both in
law and on facts by considering E-Infochips Bangalore Limited as a
comparable to the appellant. The learned counsel for the assessee
contended that the DRP, however has ignored the submissions
made by the assessee and upheld the action of the Assessing
Officer/TPO to include M/s. E-Infochips Bangalore Ltd. in the list
of final comparables. The appellant has objected to the inclusion of
the comparable on the ground of functionally not comparable and,
abnormal deviation in profit margin. The appellant submitted that
the functional profile of M/s. E-Infochips Bangalore Ltd. is different
from that of the assessee company. In this regard, he pointed out
that the said company is a product engineering services provider
having a technical expertise in software, firmware, hardware,
FPGPA, ASIC, Quality testing etc. Its key focus area in product
engineering services includes conceptualization, Architecture and
Design, Sustenance and Support, Development, Production and
Quality testing. Further it focuses on wide array of industries
including aerospace, security and surveillance, semiconductor,
19 ITA No.1035/Del./2015
medical devices, consumer devices, software and retail & E-
commerce. It also has its IPs and accelerators in software domain
namely "Automated Quality Assurance TestBorg (Aqua TestBorg)
and the same was supported by the screenshot taken from the
company's website (https://www.einfochips.com/software-ips). He
thus contended that M/s. E-Infochips Bangalore Ltd. thus is liable to
be excluded, besides due to functional differences, even on the basis
of insufficient information available in the public domain from the
list of comparables.
25. We have considered the rival submissions and also perused the
relevant material on record. The contention raised by the learned
counsel for the assessee is that the entity M/s. E-Infochips
Bangalore Ltd. taken by the Assessing Officer/TPO as comparable
should be excluded from the list of final comparables for the
purposes of transfer pricing analysis on the ground of functional
differences as well as on the ground of insufficient information
available in respect of the said entity in public domain. In order to
support and substantiate his contention of functional dissimilarity,
the learned counsel for the assessee has heavily relied on the
20 ITA No.1035/Del./2015
contents of the website www.einfochip.com., the print out of
relevant portion of which is placed on record before us. On the basis
of the said contents, he has made an attempt to point out that M/s.
E-Infochips Bangalore Ltd. is functionally different form the
assessee company in as much as the said company is mainly into
development of new products whereas the assessee company is
mainly providing software development services. It is seen that
reference to the website of company is not of much help as it may
not have information which pertained to FY 2009-10. It is possible
that these services were provided by E-Infochips Ltd. instead of E-
Infochips Bangalore Ltd. Also, it is possible that provision of these
services is a subsequent development. Further, many of these
services like software, FPGA, ASIC, QA & Testing require
software engineers only. Hence, the services and personnel required
are not entirely different. The reference made by the taxpayer is in
respect of website of E-Infochips Ltd. and not that of E-Infochips
Bangalore Ltd. After having gone through the website
www.einfochip.com., we however find that the same is in respect of
the entire group of E-Infochips, of which M/s. E-Infochips
21 ITA No.1035/Del./2015
Bangalore Ltd. is only a part. The functional profile given on the
said website thus is that of the entire group and not just of the M/s.
E-Infochips Bangalore Ltd. The content of the said website in our
opinion, therefore, cannot be relied upon to ascertain the functional
profile of M/s. E-Infochips Bangalore Ltd., especially when the
nature of functions/services given there are materially different from
the functions/services stated to be rendered by M/s. E-Infochips
Bangalore Ltd. in its annual report. Even the details of services
stated to be rendered by M/s. E-Infochips Bangalore Ltd. at
different places in its Annual Report are very sketchy and it is very
difficult to ascertain from the same, exact nature of services
rendered by the said entity.
26. A perusal of the order of the DRP/TPO however, shows that
no finding/observation has been recorded by them on the ground of
functional differences as well as insufficient data/information
available in the public domain. It is also worthwhile to note here
that the profit margin of M/s. E-Infochips Bangalore Ltd. is
abnormally high and although the said entity cannot be excluded
from the list of final comparables merely on the ground of high or
22 ITA No.1035/Del./2015
abnormal profits, as held by in the case of Maersk Global Centres
(India) (P.) Ltd. v. Asstt. CIT 147 ITD 83 and by jurisdictional High
Court in the case of Chryscapital Investment Advisors (India) (P)
Ltd. It should trigger further investigation in order to establish
whether it can be taken as comparable or not. As further held by the
Special Bench in the case of Maersk Global Centres (India) (P.) Ltd.
(supra), such investigations should be to ascertain as to whether
earning of super profits reflects normal business condition or
whether it is the result of some abnormal condition prevailing in the
relevant year. The profit margin of such entity in the immediately
preceding year(s) may also be taken into consideration and the FAR
analysis in such cases may be reviewed to ensure that the potential
comparable earning higher profit satisfies the comparability
condition. Since this exercise has not been done either by the
AO/TPO or the DRP in the present case, we are of the view that the
matter should go back to the Assessing Officer/TPO for fresh
consideration. This, in our opinion, will also take care of the
grievance of the assessee relating to the lack of sufficient
information in respect of M/s. E-Infochips Bangalore Ltd. available
23 ITA No.1035/Del./2015
in the public domain in as much as the TPO can obtain such
information in the form of relevant schedules of the Profit & Loss
Account of the said entity as well as the segmental details, if any,
directly from the said entity.
27. Following the above judgments, we therefore, set aside the
impugned order of the Assessing Officer as well as the direction
given by the DRP on this issue and restore the matter to the file of
the Assessing Officer/TPO for deciding the same afresh after giving
the assessee proper and sufficient opportunity of being heard.
28. Infinite Data System Private Limited
29. The learned counsel for the assessee further contended that the
DRP, has completely ignored the submissions made by the assessee
and upheld the action of the Assessing Officer/TPO to include
Infinite Data System Private Limited in the list of final
comparables. The appellant objected to the inclusion of the
comparable before TPO on the following grounds:
i) Functionally not comparable
ii) Abnormal/Supernormal profits
iii) Significant intangibles
iv) Accepted as a non comparable in previous year by TPO
24 ITA No.1035/Del./2015
30. The DRP upheld the order of TPO as under:
"The TPO has dealt the issue in para 8,4, of the order and held that
the company is providing software development services which is
parimaterial with the functions carried on by the assessee. Having
considered the material placed on record we find that the company
is mainly involved in software services. Therefore we hold that
TPO is right in including the same for the purpose of
comparability analysis."
31. Before us the learned AR of the appellant has contended as
under:
"Substantially Related Party Transactions
- Company's operations relates to providing services to its
sole customer-Fujitsu Services Ltd." (substantially related) which
can be substantiated as per the news letter and annual report.
As per the News Letter
Fujitsu entered into a BOT (Built, Operate & transfer) contract
with Infinite Computer Solutions (India) Ltd. holding company of
Infinite for development of offshore centre in India.
The contract was signed in July 2008 for period of three years.
Infinite have been set up as a separate entity for BOT the Indian
Offshore centre of Fujuitsu
(Source-http:/www.Indianofline.com/article/newsinfite-computer-
solutions-india-suffessfull completes-bot-contract-with fujitsu-
services-4020499021_1.html)
As per the Annual report
The company's operations are predominantly related to providing
software technical consultancy services to us sole customer Fujitsu
"services Ltd."
25 ITA No.1035/Del./2015
(Refer page 689 of the Paper Book Volume II)
b) Functionally not comparable
As per Annual Report S(chedule 17)
It provides solutions that encompass technical consulting, design
and development of software, maintenance, system integration,
implementation, testing and infrastructure management services.
As per Annual Report (Revenue recognition section)
It generates revenue primarily from Technical Support &
Infrastructure Management services
(Refer Page 685 of Paper Book Volume II)
-Segmental information not available for software design and
development.
-Further, the financial state that more than 10% of the
administration expenses & other expenses are towards project
implementation expenses, which are different from software
development
(Refer Page 683 of the Paper book Volume II)
c) Ld. TPOs approach of using data from Infinite's website as
on the current date and drawing comparison thereof with FY
2009010 i.e. 4 years prior to the current year is incorrect.
(Refer page 70 of the Paper book for TPO's observation)"
32. On the other hand, the learned DR supported the order of the
lower authorities regarding the inclusion of the same in the list of
comparables. He reiterated the contents of the TPO's order which
states as under:
26 ITA No.1035/Del./2015
"It is seen that Infinite is providing following services:- technical
consulting, design & development of software, maintenance,
systems integration, implementation, testing and infrastructure
management services. These services except infrastructure
management services have also been refereed as `technical support
services' in Revenue Recognition portion and as `software
technical consultancy services' in Segment Reporting portion of
the annual report. All these services are in the nature of software
development services.
.......It can be seen that all the services have been referred
primarily as IT services. The objection of the assessee is mainly
on verticals of the company. Under TNMM the standards of
comparability are relatively relaxed and only broad similarity of
functions is required. It is further stated that TNMM can be used
with data for companies that are broadly comparable to the
taxpayer, as functional differences are likely to be reflected in the
level of operating expenses incurred by each company. These
expenses are deducted in the calculation of operating profit and
are accordingly taken account of in the comparability analysis. It
is further seen that this company has been chosen as it is engaged
in providing software development, which is broadly similar to the
services being provided by the assessee. Since, the assessee is also
providing similar services, so this company can be used as a
comparable."
33. We have heard the rival submissions and considered the facts
and materials on record. After considering the submissions, we are
in agreement with the conclusion of TPO/DRP held that Infinite is
providing following services: technical consulting, design &
development of software maintenance, systems integration,
implementation, testing and infrastructure management services.
These services except infrastructure management services have
27 ITA No.1035/Del./2015
been referred as "technical support services in revenue recognition
portion and as `software technical consultancy services' in segment
reporting portion of the annual report and thus services are in the
nature of software development services and having regard to the
above it is concluded that the Infinite is a functionally similar
company to the appellant company.
34. We have gone through the annual report of the appellant
company. The said company provides solutions that encompass
technical consulting, design and development of software,
maintenance, system integration, implementation, testing and
infrastructure management services which is functionally similar to
the appellant company. There is no RPT transaction of the
comparable and transaction with a sole customer does not constitute
a RPT transaction.
35. Having regard to the above and for the reasons stated above,
we uphold the conclusion of TPO for inclusion of Infinite Data
System Private Limited since it is comparable to appellant
company.
28 ITA No.1035/Del./2015
36. Infosys Limited
37. The learned counsel for the assessee contended that the DRP
has completely ignored the submissions made by the assessee and
upheld the action of the Assessing Officer/TPO to include Infosys
Limited in the list of final comparables and submitted that Infosys
Limited cannot be considered as a comparable as it is engaged in
diversified activities as it has wide spectrum of services such as
business services, technology services and outsourcing services. It
was contended that Infosys Limited is engaged in significant
Research & Development (R&D) that has led to creation of
significant Intellectual property. It has been further pointed out that
as per Annual Report of FY 2009-10, the company claims itself as
the most reputed and admired company in India (Pg. 18 of
Director's Report). Further assessee contended that Infosys Limited
has a turnover of Rs 21,140 crores, which is even more than 968
times of that of the assessee. The Ld. Counsel for the appellant has
placed reliance upon the various decisions, in which Infosys
Limited has been rejected as a comparable considering the same not
29 ITA No.1035/Del./2015
only as a giant company but is also engaged in development of
various niche products, which are as follows:
i) 35 taxmann.com 421 (Hyd) Intoto Software India Pvt. Ltd. vs.
Asst. CIT
ii) 40 taxmann.com 173 (Hyd) NTT Data India Enterprise
Application Services (P.) Ltd. vs. Asst. CIT
iii) 38 taxmann.com 306 (Del) Agnity India Technologies (P.) Ltd.
vs. DCIT
iv) 38 taxmann.com 166 (Hyd) Virtusa (India) (P.) Ltd. vs. DCIT
38. The TPO has observed as under:
"The brand name may have helped Infosys in increasing its
number of clients & retention of existing clients and this an
increase in its market share, but it has not necessarily resulted in
better profit margins. Brand may bring more revenues but not
necessarily higher margins....a brand may generate revenue but
with a cost compensating any extra benefit, if any derived from
such efforts."
"Assessee had objected on the high turnover of this comparable
company which is already discussed in the order. However, TPO
has made an analysis in respect of influence of scale of operations
on the profitability in the case of Infosys Technologies Ltd. From
the year 1997 to 2012 based on the information extracted from the
Capitaline Plus database, which shows that there is no positive
correlation between the two... Although the turnover of the
company has increased 183 times from the year 1997 to 2012, the
operating margins has more or less remained the same i.e. ranging
between 35% to 51%.... Hence, the taxpayer's argument that
companies having large scale of operations have better margins is
without any basis, and is therefore liable for rejection."
30 ITA No.1035/Del./2015
39. The DRP supported the action of the TPO in including this
company in the final list of comparables by holding as under:
"The TPO has dealt the issue in para 8.5 of the order and held that
the company is providing software development services which is
parimateria with the functions carried on by the assessee."
Having considered the material placed on record we find that the
company is mainly involved in software services"
Therefore, we hold that TPO is right in including the same for the
purpose of comparability analysis."
40. We have considered the rival submission and perused the
material placed on record. The said comparable was recently
considered by the decision of ITAT in the case of Mentor Graphics
(Noida) (P) Ltd. 60 taxmann.com 164 wherein following the
judgment of Jurisdictional High Court in the case of Agnity India
Technologies vs. ITO ITA No. 3856/2010 (Del), it was held as
under:
"15. We find that Ld. CIT(A) after considering the facts of the
case and the submission of the AR observed that with regard
to Infosys Technologies Ltd. it was evident from the Annual
Report of the company that Infosys Technologies provides much
wider range of services, performs extensive functions, undertakes
diversified business activities and assumes significant risks
as compared to routine software development service providers
like the assessee. Further, the company undertakes substantial
R&D activities and derives majority of its revenues the sale of
proprietary products unlike the assessee. Also, the turnover of the
company is significantly higher than that of the appellant and in
no manner is comparable to the size/operations of the assessee.
31 ITA No.1035/Del./2015
16. We note that all the above facts highlight
that Infosys Technologies Ltd. is a product owner, undertakes
substantial advertising/sales promotion and brand-building
activities and is engaged in significant R&D activities, and is very
huge in size/volume as compared to the assessee. Hence, it cannot
be said to be comparable with the assessee. The said proposition
has also been confirmed by Delhi Tribunal in Agnity
India Technologies v. ITO [IT Appeal No.3856 (Delhi) of 2010]
wherein the Coordinate Bench held as follows :
"Various arguments, as stated earlier, were taken before the DRP
which inter-alia included rejection of comparable cases;
application of arbitrary filter of wage to sales ratio; ignoring that
the assessee is a limited risk company; inclusion
of Infosys Technologies Ltd.; and inclusion of Sat yam Computers
Services Ltd. in spite of the fact that its data is not reliable as
publicly known. On the basis of these arguments, the DRP
excluded the case of Sat yam Computers Services Ltd., thereby
reducing the arm's length margin to 25.6%. It is argued that the
case of the assessee is
not comparable with Infosys Technologies Ltd., the reason being
that the latter is giant in the area of development of software and it
assumes all risks, leading to higher profit. On the other hand, the
assessee is a captive unit of its parent company in the USA and it
assumes only limited currency risk. Having considered these
points, we are of the view that the case of aforesaid Infosys and
the assessee are not comparable at all as seen from the financial
data etc. of the two companies mentioned earlier in this order.
Therefore, we are of the view that this case is required to be
excluded. Once that is done, it is the accepted position of both the
parties that the results of the assessee are in line with the mean
margin of comparable cases even if no adjustment is made on
account of capital etc. Therefore, it is held that no adjustment was
required to be made to the results declared by the assessee
company."
11.5 The aforesaid order was upheld by the Hon'ble Delhi High
Court after taking note of the chart as given below:
32 ITA No.1035/Del./2015
Basic Particular Infosys Technologies Ltd. Assessee
Risk Profile Operate as full-fledged risk Operate at minimal
taking entrepreneurs risks as the 100 percent
services are provided
to AEs
Nature of services Diversified-consulting, Contract software
application design, development services
development, re-
engineering and
maintenance system
integration, package
evaluation and
implementation and
business process
management, etc. (refer
page 117 of the Paper Book)
Turnover 20,264 crores 209.83 crores
Ownership Develops/owns proprietary
branded/proprietar products like
y products Finacle, Infosys Actice
Desk, Infosys iProwe, Infosy
s Connect. Also the
company derives substantial
portion of its proprietary
products (including its
flagship banking product
suite ,,Finacle)
Onsite v. Offishore As much as half of the The appellant provides
software development only offshore services
services rendered by (i.e. remotely from
Infosys are onsite (i.e. India)
services performed at the
customer's location
overseas). And offshore
(50.20 per cent) Refer p.
117 of the Paper Book) than
half of its service, income
from onsite services
Expenditure on Rs. 80 crores Rs. Nil (as the 1-
33 ITA No.1035/Del./2015
advertising/sales percent services are
promotion and provided to AEs)
brand building
Expenditure on Rs. 236 crores Rs. Nil
Research and
Development
Other 100 per cent offshore
(from India)
11.6 On the basis of the above chart, the Hon'ble High Court
affirmed the conclusion that a captive unit of
acomparable company which assumed only a limited risk cannot
be compared with a giant company in the area of development of
software who assumes all types of risks leading to higher profits.
The facts of the appellant are akin and therefore, do not warrant
any different conclusion. The assessee is also captive service
provider to its AE and as such, M/s. Infosys Ltd. is not a
valid comparable with the assessee
17. Accordingly, Ld. CIT(A) proposed to exclude this company
from comparable set of companies. Therefore, the ld. CIT (A) has
rightly ordered exclusion of the Infosys Technologies Ltd. from
the comparable and this impugned order is upheld."
41. Having regard to the above regard to the above judicial
pronouncement, we hold that Infosys Limited cannot be considered
as comparable for the purpose of benchmarking international
transaction of the assessee.
42. Persistent Systems Limited
43. The assessee has sought exclusion of the aforesaid company
on the ground that this company is a technology company into
software product development services and is focused mainly on
34 ITA No.1035/Del./2015
three industries i.e. Infrastructure & Systems, Telecom & Wireless,
Life Science and Healthcare, whereas the assessee is operating in
finance domain which is totally different. It was further submitted
that on economy of scales, the company Persistent Systems Limited
is very large in comparison with that of the assessee. It was also
submitted that the company has revenue from sale of products as
well with the software services. It has been submitted that
segmental break of sales on sale of products and services has not
been given by the company as the pricing consequently the margin
would differ that on sale of products and sale of services. Per contra,
the learned Departmental Representative supported the action of the
TPO in including this company in the list of comparables.
44. The TPO has held as under:
"The company does have some products but as has been brought
out above, the product revenue (from IP led businesses) are only
7.2%. Hence, the company is predominantly a software service
provider and will be taken as a comparable. Under TNMM, the
standards of comparability are relatively relaxed and only broad
similarity of functions is required."
45. The DRP supported the action of the TPO in including this
company in the final list of comparables by holding as under
35 ITA No.1035/Del./2015
"The TPO has dealt the issue in para 8.6 of the order and held that
the company is providing software development services which is
paramateria with the functions carried on by the assessee.
Having considered the material placed on record we find that the
company is mainly involved in software services.
Therefore, we hold that TPO is right in including the same for the
purpose of comparability analysis."
46. We have heard the rival submissions and perused and
carefully considered the material on record. It is seen from the
details on record that this company i.e. Persistent Systems Ltd., is
engaged in product development and product design services while
the assessee is a software development services provider. We find
that, as submitted by the assessee, the segmental details are not
given separately. A Coordinate Bench in the case of Agnity India
Technologies (P) Ltd. vs. ITO 154 ITD 293 (Del) regarding the said
comparable has held as under:
"11. So far as exclusion of three comparables i.e. Larsen and
Tourbo Infotech Ltd., Persistent Systems Ltd. and Mindtree Ltd.,
it is noted that before the CIT(A) the assessee contended that
during the financial year 2008-09, it has a turnover of approx. Rs.
14.45 crores which cannot be compared with certain companies
having turnover of more than 200 crores. Support was drawn from
the following decisions :
(a) Decision of ITAT in the case of appellant for A.Y. 2006-07
ITA No. 3856/D/2010 A.Y. 2006-07;
36 ITA No.1035/Del./2015
(b) Genisys Integrating Systems (India) (P.) Ltd. v. Dy. CIT
[2012] 20 taxmann.com 715/53 SOT 159 (Bang.)
(c) Centillium India (P.) Ltd. v. Dy. CIT [2012] 23
taxmann.com 34/53 SOT 145 (Bang.)
(d) Kodiak Networks (India) (P.) Ltd. v. Asstt. CIT [2012] 18
taxmann.com 32/51 SOT 191 (Bang.)
(e) Actis Advisers (P.) Ltd. v. Dy. CIT [IT Appeal No. 5277
(Delhi) of 2011]
13. Having considered the rival submissions and perused the
material on record. We find this issue is no longer res-integra. The
Hon'ble High Court upholding the decision of Tribunal in the case
of the appellant for A.Y. 2006-07 has held in an order dated
10.7.2013 in ITA No. 1204/2011 in [CIT v. Agnity India
Technologies (P.) Ltd.[2013] 36 taxmann.com 289/219 Taxman
26 (Delhi)] that a giant company in the area of development of
software which assumed all risks leading to higher profits is not
comparable with the assessee which was a captive unit of the
parent company and assumed only a limited risk.
The Hon'ble High Curt has held as under :
"8. It is a common case that Satyam Computer Services Ltd.
should not be taken into consideration. The Tribunal for valid and
good reasons has pointed out that Infosys Technologies Ltd.
cannot be taken as a comparable in the present case. This leaves
L&T Infotech Ltd. which gives us the figure of 11.11%, which is
less than the figure of 17% margin as declared by the respondent-
assessee. This is the finding recorded by the Tribunal. The tribunal
in the impugned order has also observed that the age had furnished
details of workables in respect of 23 companies and the mean of
the comparables worked out to 10%, as against the margin of 17%
shown by the assessee. Details of these companies are mentioned
in para 5 of the impugned order. 9. In view of the aforesaid
position, we do not think that any substantial question of law
arises for consideration. The appeal is dismissed."
16. When considering the exclusion of persistent system Ltd, we
find no need to interfere in the order of the Ld CIT(A) because it
37 ITA No.1035/Del./2015
is engaged in development of software product; and this company
was excluded by the Tribunal in assessment year 2006-2007,
which has been up held by the Hon'ble High Court, thus the issue
about exclusion of persistent system Ltd, while making TP
adjustments in it's case stands settled in view of these decisions in
its own case. Therefore we do not find any necessity to interfere
this company's exclusion.
17. Having regard to the factual position and respectfully
following the judgment of the Hon'ble High Court we partly allow
the ground raised by the revenue and uphold the exclusion of
persistent system Ltd, and direct inclusion of Larsen & Toubro
Infotech Ltd and Mind tree Ltd."
47. Similar view has also been expressed in the case of Fiserv
India (P) Ltd. vs. DCIT 60 taxmann.com 345 (Del), it was held as
under:
"12.2 We have considered the rival submission and perused the
material on record. The counsel for the assessee has contended
that Persistent Systems Ltd. is functionally different from the
assessee as the company is into software development services as
well as software products unlike the assessee who is a captive
service provider. Moreover, no segmental details are available in
the annual report. It can be thus derived that the prices may have
been influenced. The rationale of applying a related party filter is
defended.
12.3 The Bangalore Bench of the Tribunal in the case of CSR
India (P.) Ltd . v. ITO [2013] 31 taxmann.com 265 , has held as
under:
'(i) Turnover Filter
3.3 We have heard the rival submissions and perused the materials
on record. The TPO had, while selecting the above 26
comparables, applied a lower turnover filter of Rs.1 crore but
preferred not to apply any upper turnover limit. The size of the
comparable is an important factor in comparability. The ICAI TP
38 ITA No.1035/Del./2015
guidance note has observed that the transaction entered into by a
Rs.1000 crores company cannot be compared with the transaction
entered into by a Rs.10 crores company and the two most obvious
reasons are the size of the two companies and related economies
of scale under which they operate. The TPO's range had resulted
in selection of companies as comparable such as Infosys which
was 277 times bigger than that of the assessee. The Bangalore
Bench of the Tribunal in the case of M/s. Genisys Integrating
Systems (India) Pvt. Ltd. v. DCIT - ITA No.1231/Bang/2010
relying on Dun and Bradstreet's analysis had held that turnover
range of Rs.1 crore to 200 crores is appropriate. The said
proposition has followed by the earlier Benches of this Tribunal in
the following cases: (i) M/s. Kodiak Networks (I) Pvt.
Ltd. v. ACIT - ITA No.1413/Bang/2010; (ii) M/s Genesis
Microchip (I) Pvt. Ltd. DCIT - ITA NO.1254/Bang/2010; (iii)
Electronic for Imaging India Pvt. Ltd - ITA NO.1171/Bang/2010;
& (iv) M/s. Trilogy E-Business Software India Private Ltd .
v. DCIT - ITA No.1054/Bang/2011 dated 23.11.2012.
3.3.1 In the case of M/s.Genisys Integrating Systems (India) Pvt.
Ltd . v. DCIT (supra ), relying on Dun and Bradstreet', has
observed as under:
"9. .............we find that the TPO himself has rejected the
companies which are making losses as comparables. This shows
that there is a limit for the lower end for identifying the
comparables. In such a situation, we are unable to understand as to
why there should not be an upper limit also. What should be upper
limit is another factor to be considered. We agree with the
contention of the learned counsel for the assessee that the size
matters in business. A big company would be in a position to
bargain the 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, the turnover also would come down reducing profit
margin. Thus, as held by the various benches of the Tribunal,
when companies which are loss making are excluded from
comparables, then the super profit making companies should also
be excluded. For the purpose of classification of companies on the
basis of net sales or turnover, we find that a reasonable
classification has to be made. Dun & Bradstreet is more suitable
and reasonable. In view of the same, we hold that the turnover
39 ITA No.1035/Del./2015
filter is very important and the companies having a turnover of
Rs.1 crore to 200 crores have to be taken as a particular range and
the assessee being in that range having turnover of 8.15 crores, the
companies which also have turnover of 1.00 to 200 crores only
should be taken into consideration for the purpose of making TP
Study."
3.3.2 The above view has been followed in the recent order of the
Tribunal in the case of Trilogy E -Business (supra ). The relevant
findings of the Tribunal are extracted as under:
20. In this regard we find that the provisions of law pointed out by
the ld. counsel for the assessee as well as the decisions referred to
by the ld. counsel for the assessee clearly lay down the principle
that the turnover filter is an important criteria in choosing the
comparables. The assessee's turnover is Rs.47,46,66,638. It would
therefore fall within the category of companies in the range of
turnover between 1 crore and 200 crores (as laid down in the case
of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA
No.1231/Bang/2010) . Thus, companies having turnover of more
than 200 crores have to be eliminated from the list of comparables
as laid down in several decisions referred to by the ld. counsel for
the assessee. Applying those tests, the following companies will
have to be excluded from the list of 26 comparables drawn by the
TPO viz. Turnover Rs. (1) Flextronics Software Systems Ltd.
848.66 crores (2) iGate Global Solutions Ltd. 747.27 crores (3)
Mindtree Ltd. 590.39 crores (4) Persistent Systems Ltd. 293.74
crores (5) Sasken Communication Technologies Ltd. 343.57
crores (6) Tata Elxsi Ltd. 262.58 crores (7) Wipro Ltd. 961.09
crores. (8) Infosys Technologies Ltd. 13149 crores"..
In view of the above said reasoning and the orders of the Benches
of Bangalore Tribunal cited supra, the following 8 companies will
have to be eliminated from the list of comparables selected by the
TPO, namely: · Flextronics Software Systems Limited; · iGate
Global Solutions Limited; · Mindtree Limited; · Persistent
Systems Limited; · Sasken Communication Technologies Limited;
· Tata Elxsi Limited; · Wipro Limited; & · Infosys Technologies
Limited. It is ordered accordingly.'
12.4 Following the aforesaid decision of the Tribunal and the
judgment of Hon'ble High Court of Delhi in the case of Aginity
40 ITA No.1035/Del./2015
Technologies (supra ) we hold that Persistent Systems Ltd. should
not be regarded as a comparable."
48. Therefore, following the above judgments we hold that this
company i.e. Persistent Systems Ltd. ought to be omitted from the
set of comparables for the year under consideration. It is ordered
accordingly.
49. Sasken Communication Technologies Limited (Sasken)
50. The assessee has sought exclusion of the aforesaid company
on the ground that this company has different business model and
there is presence of intangibles. It has also submitted that, as per
Annual Report, the company derives revenue from software
products, which suggests that the company is a product company
unlike the assessee. It was further submitted that the company has
inventories amounting to Rs. 166.55 lakhs and being a software
service company, it was also provided that should not be holding
any inventory in the books of accounts. The assessee also contended
that company is also actively engaged in product development and
earns revenue also from sale of software products, there were also
41 ITA No.1035/Del./2015
peculiar economic circumstances as it underwent restructuring
during the year which inflated its profit by Rs. 1,519.70 lakhs in
addition to other factors affecting its sales and margins. Further, the
turnover of the company is more than 19 times of the appellant.
The TPO has held as under:
"It is seen that this cost (contract staff cost) is insignificant in
comparison to employee cost of Rs. 213.46 cr."
"All software companies have software in their fixed assets. It is
only when it is significant and developed by them and is being
amortized on sale of software products exceeding 25% of total
income, it can be said to be resulting in different income which
changes the profile from pure software developer to a company
also selling products. It is further seen that this company has been
chosen as it is engaged in providing software development, which
is broadly similar to the service being provided by the assessee.
Since, the assessee is also providing similar services, so this
company can be used as a comparable."
51. The DRP supported the action of the TPO in including this
company in the final list of comparables by holding as under:
"The TPO has dealt the issue in para 8.8 of the order and held that
the company is providing software development services which is
parimateria with the functions carried on by the assessee.
Having considered the material placed on record we find that the
company is mainly involved in software services.
Therefore, we hold that TPO is right in including the same for the
purpose of comparability analysis."
42 ITA No.1035/Del./2015
52. We have considered the submission and perused the material
placed on record. A Coordinate Bench of Tribunal in the case of
Tibco Software (India) (P) Ltd. vs. DCIT ITA No. 94/PN?2014
dated 10.4.2015, it was held as under:
"32. By way of Ground of Appeal No.4.5, the appellant has
assailed the action of the TPO in excluding Sasken
Communications Technologies Ltd. from the final set of
comparables. As per the discussion in para 11(viii) of the order of
the TPO, it is noticed that the said concern has been excluded on
the ground that during the year under consideration it has
undertaken business restructuring. The Ld. Representative also
pointed out that in the show-cause notice dated 31.10.2012 issued
by the TPO another reason has been advanced which is to the
effect that the said concern fails the export turnover filter of 75%
of the total turnover."
53. Having regard to the above judgment and since it is evident
from record that Sasken Communication Technologies Limited is
functionally not similar to the appellant and also having gone
through restricting in the instant year, it cannot be treated as
comparable to assessee. We order accordingly.
54. Thirdware Solutions Limited (Thirdware)
55. The assessee has objected to the inclusion of the said
comparable on the following ground that the aforesaid company is
focused on solutions and services in the Enterprise Allocation Space
43 ITA No.1035/Del./2015
(EAS) in the Transaction, Analytics, and Collaborative Solution
Layers. This includes ERP, customer relationship management
(CRM), SCM, BI/DW, BPM etc. Thirdware offers Application
Implementation Services (AIS), Application Development Services
(ADS) and Application Management-support Services (AMS). It
was further submitted that it is engaged in development of own
software-PAPA and has incurred expenses towards import of
software service, evidencing outsourcing of software services unlike
the Applicant company. The TPO has not provided any reason for
holding Thirdware as a company comparable to the Appellant
whereas, The DRP while upholding Thirdware as comparable to the
Appellant company observed as under:
"The audited report of the company reveals that company is
mainly engaged in software development. The majority of income
is from software development.
Having considered the material placed on record we find that the
company is mainly involved in software services.
Therefore, we hold that TPO is right in including the same for the
purpose of comparability analysis."
56. We have heard the rival submissions and perused and
carefully considered the material on record. It is seen from the
details on record that the functions of Thirdware are in contrast with
44 ITA No.1035/Del./2015
the assessee which only provides software development in the
finance domain as per the instruction of its AE. Also, Thirdware has
incurred expenses towards import of software services, evidencing
outsourcing of software services unlike the assessee. Since it is also
engaged in outsourcing its activities as it has incurred expenses
towards imports of software services, evidencing outsourcing of
software services unlike the appellant company. Hence, it is
functionally not comparable and cannot be treated as a comparable
to assessee. We order accordingly.
57 Wipro Technology Services Limited (Wipro)
58. As far as this company is concerned, the arguments of the
assessee were not only on account of functional dissimilarity but the
assessee also raised the other objection that there was an
extraordinary event during the year. Wipro provides program
management and third party information security assessment
services to businesses that outsource technology and operations to
third party vendors in India, the Philippines, China and the Russian
Federation. It also offers software quality management, quality
assurance, and business process management services as well as
45 ITA No.1035/Del./2015
technology infrastructure support, development and deployment for
strategic software applications to information technology and
business professionals. During the year, Wipro Limited (Wipro) has
reached an agreement with Citigroup Inc. for acquiring all of
Citigroup interest in CTS w.e.f. 21 January 2009. On 21 January
2009, Wipro signed a master service agreement (MSA) with
Citigroup Inc. for the delivery of technology infrastructure services
and application development and maintenance services for the
period of six years. Without prejudice, it was submitted that before
20.01.2009, the Company was part of the Citi group and rendered
services to various entities of the Citi group worldwide. With effect
from 21.01.2009, the Company was acquired by Wipro Ltd.
however, in order giving effect to the directions of Hon'ble DRP,
Ld. TPO has held that "In the case of M/s Wipro Technology
Services Ltd., assessee is submitting that the transaction of
rendering services by Wipro Technology to Citi Group are
construed as deemed international transactions as per section 92B(2)
of the Act. However, Annual Report of the company has been
perused and it is seen from the audited Financial that in RPT
46 ITA No.1035/Del./2015
schedule it is not considered as an Associated Enterprise. The TPO
has not provided any reason for holding Wipro as a company
comparable to the Appellant whereas The DRP while upholding
Wipro as comparable to the Appellant company observed as under:
"The audited report of the company reveals that company is
mainly engaged in software development. The majority of income
is from software development.
Having considered the material placed on record we find that the
company is mainly involved in software services.
However, the assessee has brought to the notice that Wipro
Technologies Service Ltd has RPT of more than 25%. The AO is
directed to verify the computation provided by the assessee and if
RPT is more than 25% than it should not be included for the
purpose of comparability analysis."
59. We have considered the rival submissions, perused the
material on record. In our view, Companies that are affected by
factors like persistent losses, declining sales, extraordinary Income
or expense, mergers and acquisitions or other such factors which
affect the operations of the company substantially should not be
used as comparables as they will not prove to be good benchmarks.
Further, while repelling the objection regarding extra-ordinary event
taking place for this comparable, but for a different reason, i.e. the
relevant extra ordinary event took place in the preceding Financial
47 ITA No.1035/Del./2015
Year i.e. FY 2008-09. However, we concur with the submissions
advanced by Ld AR that the Director's Report and Notes to Account
for this comparable are not available in public domain. Ld. DR has
not been able to controvert this fact. Since sufficient information for
this comparable is not available, we direct exclusion of this
company as a comparable.
60. Now taking up Ground No. 14, which relates to adjustment of
unutilized rent and maintenance expenses as expenses incurred in
relation to the international transaction of the provision of Software
development services. The assessee contended that as per the rule
10B(1)(e)(i) of Income Tax Rules, 1962 which details transactional
net margin method provides "the net profit margin realized by the
enterprise from an international transaction entered into with an
associated enterprise is computed in relation to costs incurred or
sales effected or assets employed or to be employed by enterprise or
having regard to any other relevant base". In view of the above, for
computing margin from an international transaction adjustment
claim ought to be allowed.
48 ITA No.1035/Del./2015
61. The TPO has rejected the contention of the assessee by
holding that:
"The contention of the assessee company is not acceptable on
account of the following reasons:-
a) The assessee has admitted that the expansion was at the
behest of the AE only. Since the assets for the anticipated increase
in business had allegedly gone unutilized, the compensation
thereof should have been borne by the AE and in no case should
be charged on the assessee company.
b) Expenditure on enhancement of business is a routine
operating expenditure which is undertaken with the intention of
gaining more business. The assessee has done just the same in its
case by taking the step of hiring more space. This expenditure
cannot be taken to be extra ordinary in nature for the simple
reason that it was expended in the hope of gaining business as is
done by millions of businesses worldwide and every failure cannot
be written off by the tax authorities as being extra ordinary. In
this case the assessee has over reached itself in the hurry to get
business by committing a sum of money in terms of rental and
maintenance charges.
c) The assessee is required to support its claim for any
adjustment with robust data and full details and evidences so as to
enable the TPO to examine the claim. The burden is on the
assessee whenever it makes a claim and in this case, it has not
discharged the burden of proof. These adjustments are being
claimed in an adhoc manner. Further, according to assessee since
fixed cost remain constant irrespective level of operation and
therefore such costs could not be optimally utilized to low level of
capacity utilization. In view of this office capacity adjustment in
service industry is not applicable as the business model I s cost
plus so there is no question of idle capacity in terms of fixed costs
assets.
d) If the taxpayer had seen a sudden spike in the volume o f its
work during the year, it would have reaped the benefits of
advance planning and foresight. This would have resulted in
49 ITA No.1035/Del./2015
greater profits and better margins owing to its smart moves.
However, when the volume of work did not grow as anticipated,
it is seeking an adjustment due to the same smart business move.
It cannot cut both ways.
e) Moreover, the method of computing the adjustment is also
not correct. Any comparability adjustment in transfer pricing
analysis has to be carried out in respect of the comparable
companies. In the instant case, the taxpayer has reduced its own
employee costs to achieve the desired goal.
62. We have considered the rival submissions, perused the
material on record. We uphold the order of Hon'ble DRP, as it has
rightly held that as there is no objective basis led by the assessee to
support its claim; mere submission that there was underutilization
does not discharge the burden upon the assessee. Moreover, the
assessee has not given any cogent basis to satisfy the reasons for
under utilization. Once the assessee is a software service provider
to its AE then there can be no claim on account of under utilization
of capacity as it was AE who initiates such expansion. Hence, we
reject the ground raised by the assessee.
63. The next issue raising in Ground No. 15 of Grounds of Appeal
relates to the risk adjustment under Rule 10B(1)(e)(iii) and Rule
10B(3) to account for differences in the risk profile of the
comparable companies vis-à-vis the Appellant.
50 ITA No.1035/Del./2015
64. The assessee contended that since it is a captive unit, it does
not bear any entrepreneurial risks. However, while proposing the set
of comparables in the notice, the Ld. TPO has not understood the
risk-free nature of the assessee and has failed to consider the full-
risk taking profiles of the companies selected as comparables.
65. The AR has highlighted the significance of comparing the
level of risks between independent comparables and the taxpayer. It
was submitted that TPO should consider the risk free nature of the
taxpayer's operations while adjudicating on the transfer prices.
Based on the above, ignoring the risk profile of the Assessee would
be unjust on the part of the revenue. He contended that TPO/drip
should have appreciated that the intent of the transfer pricing
legislation in India is to avoid tax evasion and not to cause any
hardship to the assessee.
66. In view of and taking due cognizance of all the differentiating
factors cited above, the assessee contended that an adjustment with
regard to the risk premium earned by comparable uncontrolled
companies is imperative for a fair and judicious comparison of the
51 ITA No.1035/Del./2015
transfer prices of the international transactions of the Assessee with
the arm's length price.
67. The TPO in its order dated 22.01.2014 has held as under:
"The assessee hasn't claimed raised Risk Adjustment in its
submission. However, it may claim at later stage on account of
adjustment commensurate to the risk profile of the assessee. After
carefully considering the facts of the case and the submissions of
the taxpayer, I am not inclined to accept the assessee's future
claim of risk adjustment. Risk adjustment as a general rule cannot
be allowed unless it is clearly shown that the comparables had
actually undertaken such risk and how the same materially
affected their margins. The revised OECD guidelines of 2010 has
also stated in Para 3.54 as under:-
"Ensuring the needed level of transparency of comparability
adjustments may depend upon the availability of an explanation of
any adjustments performed, the reasons for the adjustments being
considered appropriate, how they were calculated, how they
changed the results for each comparable and how the adjustment
improves comparability. Issues regarding documentation of
comparability adjustments are discussed in Chapter V."
From the above guidelines it can be seen that unless it is shown
that how the risk adjustment would change the result of each
comparable and how the same would improve the comparability
and unless adequate reasons are given for such adjustment, no
adjustment can be allowed to the taxpayer. In the present case,
except giving proportion of various risks borne, the taxpayer has
not shown with evidence as to whether each of the risk was
actually undertaken or not by the comparables and if so, how these
risks affected each of them and whether such adjustment would
improve the comparability. Mechanical adjustment cannot be
made to the margins of the comparables without knowing which
risk was taken by the entity concerned and how its profitability
was affected. Probability of risk and certainty of risk are two
different aspects and cannot be equated for the purpose of
adjustment. In my view assessee cannot be compared to a risk free
security. Even other methodology, whether adhoc adjustment as in
52 ITA No.1035/Del./2015
case of Sony India, CAPM or Sharpe Ratio (which is a measure of
the excess return on risk undertaken by an entity investing in a
particular asset), as applied by Hyderabad ITAT in the case of
ADP Private Ltd, are based on return of capital which is not the
PLI adopted by the assessee and the TPO. All this requires robust
and reliable data, both for the assessee and the comparables in the
absence of which risk adjustment cannot be considered for
enhancing comparability."
68. Further, DRP upheld the view of Ld. TPO by holding as
under:
"We have carefully considered the facts of the case and the
submissions of the assessee. As per Rule 10B(2) and 10B(3) of
Income Tax Rules, 1962, Indian Transfer pricing provisions
prescribe only for "reasonable accurate adjustment" and further
adjustment to the margins of comparables can be made only if
they enhance comparability. But at the same time the data for the
same must be relevant reliable and robust. Risk adjustment as a
general rule cannot be allowed unless it is clearly shown that the
comparables had actually undertaken such risk and how the same
materially affected their margins. The revised OECD guidelines of
2010 has also stated in para 3.54 as under:-
"Ensuring the needed level of transparency of comparability
adjustments may depend upon the availability of an explanation of
any adjustments performed the reasons for the adjustments being
considered appropriate, how they were calculated how they
changed the results for each comparable and how the adjustment
improves comparability. Issues regarding documentation of
comparability adjustments are discussed in Chapter V."
Even the various judicial decisions on the issue of adjustments and
even OECD guidelines, impresses upon time and again that the
adjustment should be "reasonable accurate adjustment".
13.10 From the above guidelines, it can be seen that unless it is
shown that how the risk adjustment would change the result of
each comparable and how the same would improve the
comparability and unless adequate reasons are given for such
53 ITA No.1035/Del./2015
adjustments, no adjustment can be allowed to the assessee. In the
present case, except pointing out various risks, the assessee has
not shown with evidence as to whether each of the risk was
actually undertaken or not by the comparables and if so, how these
risks affected each of them and whether such adjustment would
improve the comparability.
13.11 Mechanical adjustment cannot be made to the margins of
the comparables without knowing which risks were taken by the
entity concerned and how its profitability was affected. Probability
of risk and certainty of risk are two different aspects and cannot be
equated for the purpose of adjustments. The significant of risk
depends on its economic significance, likelihood of its realization
and predictability. All these requires robust and reliable data, both
for the assessee and the comparables in the absence of which tax
adjustments cannot be considered for enhancing comparability.
Thus the objection is rejected.
13.12 In the various judicial pronouncements the risk adjustment
has not been allowed by the ITATs. Some of these decisions are
discussed below:
(a) Vedaris Technology 2010-TII-10-ITAT-Del-TPL: No risk
adjustment to be allowed even on ad hoc basis particularly when
the same has not been quantified;
(b) Marubeni India Private Ltd. (2010-TII-36-ITAT-Del-TP) in
which it was held that as the assessee failed to bring any evidence
on record to show that there was any difference in risk profiles of
comparable companies and since the assessee failed to file the
details exhibiting risk borne by comparables, no risk adjustment
can be given, even on ad hoc basis.
(c) ADP Private Limited (2011-TII-44-ITAT-Hyd-TP) wherein
the ITAT held that there is no thumb rule for allowance of risk
adjustment.
(d) Symantec Software Solutions Pvt. Ltd. (2011-TII-60-ITAT-
Mum-TP): The ITAT held that;
54 ITA No.1035/Del./2015
(i) Until and unless it is shown that the difference in function
and risk results in deflation or inflation of financial results of the
comparables, it is not a general rule to grant it as a standard
adjustment.
(ii) The assessee could not show how such difference in risk
and functions affected the results of the comparables.
(e) ST Micro Electronics (2011-TII-63-ITAT-Del-TP): The
assessees claim that it was a risk free captive service provider and
hence cannot be compared with comparables who were full
entrepreneurs was not accepted by the ITAT.
(f) Exxon Mobil Company India Pvt. Ltd. (2011-TII-68-ITAT-
Mum-TP): The ITAT held that since working capital adjustment
has been given and the assessee has not worked out the risk
adjustment, no adjustment can be granted on this account.
13.13 Therefore, for the reasons mentioned above, we decline to
interfere with the action of TPO in this regard."
69. We have considered the rival submissions and perused the
material placed on record. In our view, where the assessee succeeds
in ably demonstrating that the comparables finally selected bore
relatively more risk than it, then there should be no denial of the risk
adjustment. If, however, the assessee fails in specifically pointing
out the extra risks undertaken by the comparables, then, of course,
there cannot be any question of granting risk adjustment. Under the
transfer pricing regime, onus is always on the assessee to show the
reasons for claiming any separate adjustment by pointing out the
55 ITA No.1035/Del./2015
differences between it and the comparables. Risk adjustment can be
allowed provided the assessee places on record some appropriate
material to demonstrate that the risk undertaken by the comparable
companies were relatively more than it, warranting downward
adjustment in their profit rates. Further, the variation in such risks, if
any, should be capable of quantification on some reasonable and
logical basis. Since the ld. AR has failed to objectively demonstrate
the relatively higher risks undertaken by the comparables on an
overall basis, we are disinclined to grant any risk adjustment.
69.1 In view of the foregoing discussion, we set aside the impugned
order and remit the matter of determination of ALP of the
international transaction of `Provision of IT enabled data conversion
services' to the file of TPO/AO for a fresh decision in accordance
with our above observations/directions. Apart from the issues
discussed in this order, the decision of the TPO on all other aspects
of the determination of the ALP of this international transaction
should be considered as final, as no other issue has been agitated
before us.
56 ITA No.1035/Del./2015
70. Ground No. 16: On the facts and in law, the Ld. AO/Ld. TPO
and the Hon'ble DRP 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.
71. This issue has been dealt at great length by the TPO/DRP.
Both have referred to the relevant provisions, circulars and
judgments on the issue. Accordingly, We do not find any infirmity
in the order of the TPO/ DRP in this respect and the same is
therefore upheld.
72. In Grounds No. 18 assessee has challenged the levy of interest
u/s 234B. Since the chargeability of interest u/s 234B will
ultimately depend upon the income to be determined in accordance
with our directions contained hereinabove, at this stage it is
premature to dwell upon this issue. It is open for assessee to raise
the issue at the appropriate stage. Similarly, Ground Nos. 19 and 20
are consequential in nature.
57 ITA No.1035/Del./2015
73. Ground No. 21 not connected on merits since the issue
emerges when the proceedings under section 271(1)(c) are
independently initiated. Therefore this ground is rejected.
74. In the result, the appeal is disposed off as above.
Order pronounced in open court on this 07th day of December, 2015.
-sd- -sd-
(R.S. SYAL) (A.T. VARKEY)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated the 07th day of December , 2015
TS
Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT(A)
5.CIT(ITAT), New Delhi.
AR, ITAT
NEW DELHI.
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