Telcordia Technologies India (P.) Ltd. v. Asstt. CIT

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The Tax Publishers2012 TaxPub(DT) 2586 (Mum-Trib) : (2012) 137 ITD 0001 : (2013) 151 TTJ 0445 : (2012) 080 DTR 0351 : (2013) 023 ITR (Trib) 0364 INCOME TAX ACT, 1961 --Transfer pricing--Computation of ALP Rejection of assessees' comparables--The assessee was wholly-owned subsidiary of 'T Inc., USA,' which is mainly engaged in providing various kinds of software and services for Internet Protocol, wire line, mobility and cable networks, helping various communications companies. The assessee-company was engaged in the business of marketing products and technical support services and software development related services in India. For providing the said services, the assessee earned a compensation which equalled to its total operating cost of providing the services plus a mark-up of 15%. Looking to the nature of its working, the assessee company can be termed as 'captive service provider' having least complex operations and for lesser share of risks. For establishing the arm's length price relating to software development and related services, the assessee in the TP Study of the relevant financial year adopted the 'Transactional Net Margin Method' ('TNMM') as the most appropriate method. As per the TP Study report submitted by the assessee, it had identified 18 comparable companies engaged in the software development services and the operating profit margin worked out in the certain manner. The AO referred the matter of determining the Arm's Length Price (ALP) to the Transfer Pricing Officer (TPO). During the course of TP assessment proceedings, the TPO rejected the comparables adopted by the assessee-company and directed to submit margin of comparable companies using only the relevant year's data. Based on that, the assessee submitted results of the comparable companies using financial year 2006-2007 data. The arithmetic mean of such comparable entities worked out at 10.67% as against 15% shown by the assessee. The TPO, this time again not being satisfied of the comparable companies adopted by the assessee conducted a fresh comparability analysis and selected 28 companies which also included three common companies also identified by the assessee. The arithmetic mean of the 28 companies was arrived at 27.96%. Based on this, the adjustment to ALP value worked out to Rs. 11,65,46,468 by the TPO as against the ALP of Rs. 10,47,45,490 shown by the assessee in its account. Thus, the difference of Rs. 1,18,00,978 was proposed by the AO to be added to the assessee's income. Aggrieved by the said proposal, the assessee approached the DRP (Disputes Resolution Panel) and filed its objections. The DRP mostly rejected the objections of the assessee and directed the TPO to verify the comparables in respect of three entities, namely, Bodhtree Consulting Ltd. (Seg.), Helios & Matheson Information Technology Ltd. and TVS Infotech Ltd. The other companies and the result of operating profit margins were confirmed by the DRP. After giving effect to the DRP's directions to the comparables, the AO finally took the arithmetic mean of 27 comparables which worked out to 24.72%. Based on this, the arm's length price for international transactions from the AEs was determined after making adjustment of Rs. 88,49,974, which was added to the income of the assessee. Held: On facts of case, some of comparables were rightly selected by TPO, whereas objections were rightly raised by the assessee in respect of some of companies. Matter is, therefore, remanded back to assessing officer to determine ALP afresh after taking into consideration arithmetic mean of profit ratio of all finally tested comparables. There is no dispute that here in this case most appropriate method for determining 'arm's length price' is 'Transactional Net Margin Method' (TNMM), wherein the 'arm's length price' is determined by comparing the operating profit relative to an appropriate base, i.e., cost, sales, assets of the tested parties with the operating profit of an uncontrolled party engaged in comparable transactions. There is no quarrel at this stage that out of 27 tested parties selected by the TPO for comparability analysis, 19 entities have not been objected to by the Authorised Representative. Only 8 parties which are appearing from Sl. No. 20 to 27 as given in table at para 5 of order, have been disputed by the AR. So, one has to examine as to whether these entities can be taken for comparability analysis for determining the 'arm's length price' of the assessee. Therefore, proceed to analyze each and every comparables as have been objected to by the AR. [Para 7] R. Systems International Ltd. (Segment): R Systems International Ltd (Segment) has been rightly included in the list of entities for comparability analysis for determining the arm's length price in the case of the assessee. However, the discrepancy in the figures of provision of doubtful advances and provision for doubtful debts as pointed out by AR., needs verification which TPO is required to look into and examine the same. [Para 7.1] Lucid Software Limited : Due to non-availability of full information about the segmental details as to how much is the sale of product and how much is from the services, therefore, this entity cannot be taken into account for comparability analysis for determining arms length price in the case of the assessee. [Para 7.2] Celestial Labs Ltd.: The 'Celestial Labs Limited' is a good comparable case, whose operating profit can be taken for comparability analysis in determining the arms length price for the assessee. Accordingly, the assessing officer is directed to include this company for comparability analysis. [Para 7.3] Infosys Technologies Ltd.: The profit level indicators in relation to return of cost, return of sales and return of assets are huge between Infosys and the assessee company and therefore, the Infosys cannot be treated as comparable entity for making comparability analysis with the assessee company. The comparability of Infosys Technology of the company as that of an assessee has been dealt with ITAT Delhi Bench in the case of Agnity India Technologies (P.) Ltd. (supra), wherein it was held that Infosys is a giant in the area of development of software and it assumes all risks, leading to higher profit and cannot be compared with the company which is a captive unit of its parent company assuming only limited currency risk. In view of the above finding, the Infosys cannot be taken as a comparable for determining the arm's length price in the case of the assessee. [Para 7.4] Wipro Ltd. IT Services Segment ('Wipro') : This company is also a global IT Company having varieties of service and products and looking to the magnitude of its operations, sales and expenses, the same cannot be taken into consideration for comparability analysis. Moreover, 67% of its sales relates to its product which are sold on premium resulting into higher profitability, therefore, cannot be compared with the assessee company at all. There are several judgments of ITAT that Wipro cannot be taken as comparable case for comparable case with the company like assessee. In view of these facts and the reasoning given in the case of Infosys, Wipro also cannot be considered as a comparability analysis, hence, would not be included in the list of the comparable entities as identified by the TPO. [Para 7.5] Flextronics Software Systems Ltd.: From the perusal of the profit and loss account of the said company, it is seen that the revenue sales from services constitutes almost 90% and the product sales is only 10%. Thus, in this case also not much adjustment is required to be made for taking the profit ratio for comparing it with the assessee in determining the arm's length price. In view of the above, this Bench of Tribunal helds that TPO has rightly included the said company as comparable case which can be taken into consideration for comparing the profit ratio. [Para 7.6] Tata Elxsi Limited:] Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, Tribunal is unable to treat this company fit for comparability analysis for determining the arm's length price for the assessee, hence, should be excluded from the list of comparable parties. [Para 7.7] Avani Cincom Technologies Ltd Avani Cincom'): Commissioner Departmental Representative has provided a copy of profit loss account which shows that mainly its earning is from software exports, however, the details of percentage of export of products or services have not been given. Therefore, this company is also rejected from taking into consideration for comparability analysis. [Para 7.8] Further, the AR also submitted that the benefit under section 92C(2) for +/- 5% range should be given and if adjustment as per the assessee is made then the same would fall within the 5% range. [Para 8] In view of finding of each and every eight comparable case, which are in dispute, the AO is directed to determine the profit ratio after taking the arithmetic mean of all the final tested parties (i.e., after excluding five entities) and determine the arms length price of the assessee company for international transactions. Further, after arriving at the arithmetic mean the TPO will examine whether +/- range of 5% is applicable or not and will decide this aspect in accordance with the provision of section 92C(2). [Para 9] SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2012 TaxPub(DT) 2586 (Mum-Trib) : (2012) 137 ITD 0001 : (2013) 151 TTJ 0445 : (2012) 080 DTR 0351 : (2013) 023 ITR (Trib) 0364

INCOME TAX ACT, 1961

--Transfer pricing--Computation of ALP Rejection of assessees' comparables--The assessee was wholly-owned subsidiary of 'T Inc., USA,' which is mainly engaged in providing various kinds of software and services for Internet Protocol, wire line, mobility and cable networks, helping various communications companies. The assessee-company was engaged in the business of marketing products and technical support services and software development related services in India. For providing the said services, the assessee earned a compensation which equalled to its total operating cost of providing the services plus a mark-up of 15%. Looking to the nature of its working, the assessee company can be termed as 'captive service provider' having least complex operations and for lesser share of risks. For establishing the arm's length price relating to software development and related services, the assessee in the TP Study of the relevant financial year adopted the 'Transactional Net Margin Method' ('TNMM') as the most appropriate method. As per the TP Study report submitted by the assessee, it had identified 18 comparable companies engaged in the software development services and the operating profit margin worked out in the certain manner. The AO referred the matter of determining the Arm's Length Price (ALP) to the Transfer Pricing Officer (TPO). During the course of TP assessment proceedings, the TPO rejected the comparables adopted by the assessee-company and directed to submit margin of comparable companies using only the relevant year's data. Based on that, the assessee submitted results of the comparable companies using financial year 2006-2007 data. The arithmetic mean of such comparable entities worked out at 10.67% as against 15% shown by the assessee. The TPO, this time again not being satisfied of the comparable companies adopted by the assessee conducted a fresh comparability analysis and selected 28 companies which also included three common companies also identified by the assessee. The arithmetic mean of the 28 companies was arrived at 27.96%. Based on this, the adjustment to ALP value worked out to Rs. 11,65,46,468 by the TPO as against the ALP of Rs. 10,47,45,490 shown by the assessee in its account. Thus, the difference of Rs. 1,18,00,978 was proposed by the AO to be added to the assessee's income. Aggrieved by the said proposal, the assessee approached the DRP (Disputes Resolution Panel) and filed its objections. The DRP mostly rejected the objections of the assessee and directed the TPO to verify the comparables in respect of three entities, namely, Bodhtree Consulting Ltd. (Seg.), Helios & Matheson Information Technology Ltd. and TVS Infotech Ltd. The other companies and the result of operating profit margins were confirmed by the DRP. After giving effect to the DRP's directions to the comparables, the AO finally took the arithmetic mean of 27 comparables which worked out to 24.72%. Based on this, the arm's length price for international transactions from the AEs was determined after making adjustment of Rs. 88,49,974, which was added to the income of the assessee. Held: On facts of case, some of comparables were rightly selected by TPO, whereas objections were rightly raised by the assessee in respect of some of companies. Matter is, therefore, remanded back to assessing officer to determine ALP afresh after taking into consideration arithmetic mean of profit ratio of all finally tested comparables.

There is no dispute that here in this case most appropriate method for determining 'arm's length price' is 'Transactional Net Margin Method' (TNMM), wherein the 'arm's length price' is determined by comparing the operating profit relative to an appropriate base, i.e., cost, sales, assets of the tested parties with the operating profit of an uncontrolled party engaged in comparable transactions. There is no quarrel at this stage that out of 27 tested parties selected by the TPO for comparability analysis, 19 entities have not been objected to by the Authorised Representative. Only 8 parties which are appearing from Sl. No. 20 to 27 as given in table at para 5 of order, have been disputed by the AR. So, one has to examine as to whether these entities can be taken for comparability analysis for determining the 'arm's length price' of the assessee. Therefore, proceed to analyze each and every comparables as have been objected to by the AR. [Para 7] R. Systems International Ltd. (Segment): R Systems International Ltd (Segment) has been rightly included in the list of entities for comparability analysis for determining the arm's length price in the case of the assessee. However, the discrepancy in the figures of provision of doubtful advances and provision for doubtful debts as pointed out by AR., needs verification which TPO is required to look into and examine the same. [Para 7.1] Lucid Software Limited : Due to non-availability of full information about the segmental details as to how much is the sale of product and how much is from the services, therefore, this entity cannot be taken into account for comparability analysis for determining arms length price in the case of the assessee. [Para 7.2] Celestial Labs Ltd.: The 'Celestial Labs Limited' is a good comparable case, whose operating profit can be taken for comparability analysis in determining the arms length price for the assessee. Accordingly, the assessing officer is directed to include this company for comparability analysis. [Para 7.3] Infosys Technologies Ltd.: The profit level indicators in relation to return of cost, return of sales and return of assets are huge between Infosys and the assessee company and therefore, the Infosys cannot be treated as comparable entity for making comparability analysis with the assessee company. The comparability of Infosys Technology of the company as that of an assessee has been dealt with ITAT Delhi Bench in the case of Agnity India Technologies (P.) Ltd. (supra), wherein it was held that Infosys is a giant in the area of development of software and it assumes all risks, leading to higher profit and cannot be compared with the company which is a captive unit of its parent company assuming only limited currency risk. In view of the above finding, the Infosys cannot be taken as a comparable for determining the arm's length price in the case of the assessee. [Para 7.4] Wipro Ltd. IT Services Segment ('Wipro') : This company is also a global IT Company having varieties of service and products and looking to the magnitude of its operations, sales and expenses, the same cannot be taken into consideration for comparability analysis. Moreover, 67% of its sales relates to its product which are sold on premium resulting into higher profitability, therefore, cannot be compared with the assessee company at all. There are several judgments of ITAT that Wipro cannot be taken as comparable case for comparable case with the company like assessee. In view of these facts and the reasoning given in the case of Infosys, Wipro also cannot be considered as a comparability analysis, hence, would not be included in the list of the comparable entities as identified by the TPO. [Para 7.5] Flextronics Software Systems Ltd.: From the perusal of the profit and loss account of the said company, it is seen that the revenue sales from services constitutes almost 90% and the product sales is only 10%. Thus, in this case also not much adjustment is required to be made for taking the profit ratio for comparing it with the assessee in determining the arm's length price. In view of the above, this Bench of Tribunal helds that TPO has rightly included the said company as comparable case which can be taken into consideration for comparing the profit ratio. [Para 7.6] Tata Elxsi Limited:] Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, Tribunal is unable to treat this company fit for comparability analysis for determining the arm's length price for the assessee, hence, should be excluded from the list of comparable parties. [Para 7.7] Avani Cincom Technologies Ltd Avani Cincom'): Commissioner Departmental Representative has provided a copy of profit loss account which shows that mainly its earning is from software exports, however, the details of percentage of export of products or services have not been given. Therefore, this company is also rejected from taking into consideration for comparability analysis. [Para 7.8] Further, the AR also submitted that the benefit under section 92C(2) for +/- 5% range should be given and if adjustment as per the assessee is made then the same would fall within the 5% range. [Para 8] In view of finding of each and every eight comparable case, which are in dispute, the AO is directed to determine the profit ratio after taking the arithmetic mean of all the final tested parties (i.e., after excluding five entities) and determine the arms length price of the assessee company for international transactions. Further, after arriving at the arithmetic mean the TPO will examine whether +/- range of 5% is applicable or not and will decide this aspect in accordance with the provision of section 92C(2). [Para 9]