Income Tax Appellate Tribunal - Delhi
Cadence Design Systems (India) Pvt. ... vs Dcit, New Delhi on 5 January, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: 'I-2', NEW DELHI
BEFORE SH. AMIT SHUKLA, JUDICIAL MEMBER
AND
SH. O.P. KANT, ACCOUNTANT MEMBER
ITA No. 380/Del/2015
Assessment Year: 2010-11
M/s. Cadence Design Systems Vs. DCIT, Circle -5(2), New Delhi
(India) Pvt. Ltd., O Floor, Hotel
The Suryaa, New Friends
Colony, New Delhi
PAN : AAACC1138Q
(Appellant) (Respondent)
Appellant by Sh. Nageshwar Rao, Adv.
Respondent by Sh. H.K. Choudhary, CIT(DR)
Date of hearing 13.11.2017
Date of pronouncement 05.01.2018
ORDER
PER O.P. KANT, A.M.:
This appeal by the assessee is directed against order dated 15/12/2014 of the Deputy Commissioner of Income Tax, Circle-5(2), New Delhi (hereinafter referred to as "the Assessing Officer") for assessment year 2010-11, which has been passed pursuant to the direction of the Ld. Dispute Resolution Panel (DRP). The grounds of appeal raised by the assessee are reproduced as under:
"1 The final assessment order dated 15 December 2014 passed by the Deputy Commissioner of Income Tax, Circle 5(2) New Delhi ('Learned AO') pursuant to the directions of the Hon'ble Dispute Resolution Panel ('DRP'), draft assessment order passed by Learned AO and the order dated 11 December 2014 passed by Additional Commissioner of income Tax, 2 ITA No. 380/Del/2015 Transfer Pricing Officer-1(3), New Delhi ('Learned TPO'), is bad in law and void-ab-initio.
2 That on facts and in law, the Learned AO has erred in computing the total income of the Appellant at INR 33,20,95,411 as against the returned income of INR 28,10,94,267 by making an upward adjustment of INR 4,89,94,226 and INR 20,06,918 with respect to transfer pricing ("TP") and corporate tax matters, respectively.
Part I - Transfer Pricing Grounds 3 That on facts of the case and in law, the DRP/TPO/AO have erred in rejecting the economic analysis undertaken by the Appellant by conducting a fresh economic analysis for international transaction pertaining to provision of IT back office support services ("impugned transaction").
4 That on facts of the case and in law, the DRP/TPO/AO have erred in rejecting certain companies and adding certain companies to the final set of alleged comparable companies on an ad-hoc basis, thereby resorting to cherry picking of comparable companies for benchmarking the impugned transaction.
5 That on facts of the case and in law, the DRP/TPO/AO have erred in selecting companies in the final set of alleged comparables which have different business / operating models as compared to the Appellant for the impugned transaction.
6 That on facts of the case and in law, the DRP/TPO/AO erred and vitiated the principle of natural justice by not giving due cognizance to the detailed analysis and technical arguments submitted by the Appellant in respect of certain companies considered/rejected for benchmarking of impugned transaction.
7 That on facts of the case and in law, the DRP has grossly erred in giving a direction to rectify the arithmetical errors in the computation of the operating margins of alleged comparable companies in compliance with the Income Tax Act ("the Act") without appreciating that Indian regulations do 3 ITA No. 380/Del/2015 not enumerate the methodology for computing operating margins which may apply to the Appellant. DRP has erred in directing the TPO to re-compute margins of alleged comparables using safe harbour rules without understanding that:
· Appellant has not applied for being assessed under safe harbor provisions · Safe harbour provisions do not reflect arm's length nature of margins · Safe harbour rules cannot be applied retrospectively and are only applicable for assessment year ("AY") 2013-14 and AY 2014-15 on specific application by a taxpayer 8 That on facts of the case and in law, the DRP/TPO/AO have erred in conducting a fresh economic analysis by using arbitrary filters for identifying companies comparable to the Appellant. The arbitrary filters applied by the TPO and confirmed by the DRP/Assessing Officer inter-alia include the following:
· Rejecting companies having turnover less than INR 5 Crores;
· Rejecting companies having different accounting year than that of the Appellant;
· Rejecting company having employee cost less than 25 percent of the total sales.
· Rejection of companies identified by the Appellant on account of having peculiar economic circumstances which are not in line with the industry trend, companies which showed diminishing revenue trend; and · Rejecting companies having export revenue less than 75 per cent of the operating revenue.
9 That on facts of the case and in law, the DRP/ TPO/AO have erred by selecting certain companies which are earning super normal profits as comparable to the Appellant for the impugned transaction.
10 That on facts of the case and in law, the DRP/TPO/AO have failed to make appropriate adjustments to account for varying risk profiles of the Appellant vis-a-vis the alleged comparables for impugned transaction and in the process 4 ITA No. 380/Del/2015 inter-alia neglected the Indian transfer pricing regulations, international guidelines on transfer pricing and judicial precedence in this regard.
11 That on facts of the case and in law, the DRP and TPO/AO have erred by not considering that the adjustment to the arm's length price, if any, should be limited to the lower end of the 5 percent range as the Appellant has the right to exercise this option under the second proviso to section 92C(2) of the Act.
12 That on facts of the case and in law, the DRP/ TPO/AO have erred in using single year data for financial year ("FY") 2009- 10 of alleged comparable companies without considering the fact that the same was not available to the Appellant at the time of complying with the transfer pricing documentation requirements and disregarding the Appellant's claim for use of multiple year data for computing the arm's length price.
13 That on facts of the case and in law, the DRP/TPO/AO have erred in erroneously allocating the indirect costs on the basis of the respective segmental revenue of the Appellant and re-
determined the operating margin of the Appellant for the impugned transaction.
14 That on facts of the case and in law, the DRP/AO has erred in confirming that AO/TPO has discharged his statutory onus by establishing that the conditions specified in clause (a) to
(d) of Section 92C(3) of the Act have been satisfied before disregarding the arm's length price determined by the Appellant and proceeding to determine the arm's length price.
Part II - Corporate Tax Grounds 15 That on the facts and circumstances of the case and in law, the AO/ DRP erred in facts placed on record.
16 That on the facts and circumstance of the case and in law, the AO/ DRP erred in holding that the Appellant intentionally debited director's salary to non STP unit to reduce its taxable income, without appreciating the operating model (cost plus mark-up) of the Appellant.
5 ITA No. 380/Del/201517 Without prejudice to grounds 15 and 16 above, the AO/ DRP erred in not shifting the income linked with director's remuneration cost, from non-STP unit to STP unit, based on the operating model of the Appellant.
18 That on the facts and in the circumstances of the case, the Learned AO has erred in initiating penalty under section 271(1 )(c) of the Act, as consequences of the additions made in the assessment order passed under section 143(3) read with section 144C of the Act.
19 That on the facts and in the circumstances of the case, the Learned AO has erred in charging interest under section 234B of the Act, as consequence of the additions made in the assessment order passed under section 143(3) read with section 144C of the Act.
The above grounds of appeal are mutually exclusive & without prejudice to each other. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal.
The Appellant prays for appropriate relief based on the said grounds of appeal and the facts and circumstances of the case.
2. Briefly stated facts of the case are that the assessee company filed its return of income on 17/09/2010, declaring total income of Rs.28,10,94,267/-. The case was selected for scrutiny and notice under section 143(2) of the Income-tax Act, 1961 (in short 'the Act') was issued and complied with. In view of the international transactions carried out by the assessee with its Associated Enterprises (AEs), the Assessing Officer referred the matter of determination of Arm's Length Price (ALP) of international transactions to the Ld. Transfer Pricing Officer (TPO). The Ld. TPO vide his order dated 20/01/2014 under section 92CA(3) of the Act, computed arm's length price (ALP) of the international transactions by making adjustment of Rs.21,54,03,221/-. On the basis of 6 ITA No. 380/Del/2015 the order of the Ld. TPO, the Assessing Officer proposed addition of Rs.21,54,03,221/-. The Assessing Officer also proposed reduction in deduction of Rs.20,06,918/- under section 10A of the Act in view of the re-allocation of director's salary amount in STP and non-STP units. The Assessing Officer issued a draft assessment order on 24.03.2014 proposing above two additions. The assessee filed its objections to the draft assessment order before the Ld. DRP. After considering the submission of the assessee, the Ld. DRP issued directions on 11/11/2014 to the Assessing Officer. The Assessing Officer after incorporating the direction of the Ld. DRP, issued final assessment order under section 143(3) read with section 144C of the Act on 15.12.2014. Aggrieved with the said order, the assessee is in appeal before the Tribunal raising the grounds as reproduced above.
3. The ground Nos.1 and 2 have been stated as general in nature, therefore, would get covered while adjudicating the issues raised in other grounds of appeal and not required to adjudicate upon specifically.
4. The ground nos. 3 to 14 are related to transfer pricing adjustment. In the case of the assessee, there are two segments i.e. "Software Research & Development Service" and "Information Technology (IT) back-office support services". In the transfer pricing adjustment, the assessee has pressed before us for exclusion and inclusion of certain comparables in IT back-office support services only. The issue of exclusion/inclusion of comparables has been challenged in ground No. 4, 5, 6 ,8 and 9 only. Other grounds have not been pressed before us, thus, balance grounds of transfer pricing adjustment are dismissed as infructuous.
5. Before adjudicating the transfer pricing grounds challenged by the assessee, it is relevant to reproduce background of the transfer pricing adjustment.
7 ITA No. 380/Del/20155.1 The assessee is a wholly-owned subsidiary of 'Cadence Design Systems' Inc., USA (in short 'CDS'). The assessee submitted profile of the "CDS" Group as well as its own profile before the lower authorities. The Ld. DRP has reproduced detailed profile of the group as well as the assessee company. According to the submission of the assessee, the "CDS" supplies electronic design technologies and services, which assists customers in designing high-performance electronic systems and Integrated Circuits (ICs). The "CDS" and its group companies are engaged in developing Electronic Design Automation (EDA) software and hardware, its sales and also licensing .
5.2 The assessee company was established in India to undertake software research and development services, related information technology back-office support services and related pre-sales marketing and post sales technical support services. According to the assessee, it is a captive contract service provider and compensated on a cost plus markup basis for the services rendered to its Associated Enterprises (AEs).
5.3 The functions performed by the assessee and the "CDS" with regard to identified transactions, which have been reproduced by the Ld. DRP in their order, are extracted as under:
· Conceptualization of services The SPL is generally a 3 Phases, multi step process involving the collaboration among Product Management, Marketing and Product Engineering. The 3 phases of Product Engineering are Product Definition, Product Development and Servicing.
In the Product Definition (Conceptualization) phase, a value proposition and a product prototype are developed based on customer feedback from the servicing phase, surveys, competitive analysis, the product leader's vision for future and CDS's overall vision for the product category. Then, marketing 8 ITA No. 380/Del/2015 research is performed to test the value proposition and the marketing feasibility of a product prototype; The product leadership team and product engineers will work with the marketing research team to address software engineering issues and technical feasibility. When the prototype is finalized the next phase of the lifecycle begins.
The second phase is Product Development, which is a 5 step process involving determination of the requirements, design, implementation; verification and release. Again, each stage is a collaborative effort among the Product Engineering Team, the Marketing Team and Product Management to ensure that the product is on track to meet the value proposition framework. Product Engineering is a generic term to identify software architecture development, design, code development, testing and various other technical services.
The final phase is known as Servicing. In this phase, the marketing team is researching and tracking product awareness and perceptions, customer satisfaction deployment and user experience. This information is used by the product leaders to help determine the concept of the next version of the product.
Cadence India's Role in the SPL The most important aspect of determining the marketability and profitability of a software product is the decision of "what" to develop next. This decision is made at CDS, based on the factors described above in the Product Definition Phase ("PDP"). All of the work in the PDP is performed outside of India.
Cadence India's role is limited to rendering software research and development services to CDS. All decisions regarding Product Definition are made by CDS. In particular, all decisions regarding which products to develop, product design and how much to invest in such development are made by the CDS. Cadence India is involved in rendering software development services as per the directions and guidance provided by CDS.
· Marketing and business development 9 ITA No. 380/Del/2015 CDS conceptualizes the marketing strategy for the sale of its products and services and undertakes functions such as customer lead identification, marketing and securing the orders for the products to be developed. As part of its marketing function, CDS is involved in the identification of key prospective customers and understanding their requirements.
Being a captive unit of CDS, Cadence India does not undertake any marketing or business development functions.
· Requirement analysis CDS provides the software module specifications, instructions, product specifications for the software to be developed by Cadence India. Based on instructions/information provided by CDS, the requirements are internally analyzed by Cadence India and converted into functions and features of the intended application.
Upon receiving the approval from CDS, the development work is commenced by Cadence India.
· Coding, testing and documentation Cadence India undertakes code development in accordance with product specifications defined by CDS. The code generated is subsequently tested to ensure that functions performed by the code are in accordance with the protocol design and standard specifications. Cadence India generates and makes available documentation for the software developed and transferred. The software "developed by Cadence India is subsequently integrated into the final software product by CDS and other Cadence group entities.
· Project management Although the day-to-day management of the project is undertaken by Cadence India, CDS is responsible for the overall project management. CDS regularly conducts meetings to analyse the progress and monitors the project plan.
· Quality control, testing and integration 10 ITA No. 380/Del/2015 Cadence India is responsible for ensuring that requisite quality/ performance standards are complied with while rendering services.
5.4 The assessee reported following international transactions:
International Transactions Method Value (INR) Provision of software research and TNMM using development services Operating profit as 1,57,79,32,410 PLI Operating Cost TNMM using Provision of IT back office support services Operating profit as 42,69,64,705 PLI Operating Cost TNMM using Provision of pre-sales marketing and post-
Operating profit as 34,16,72,056
sales technical support services
PLI Operating Cost
TNMM using
Payment of bank guarantee Operating profit as 1,60,417
PLI Operating Cost
Payment of interest towards foreign currency
loan CUP Method 41,07,358
Purchase of free of cost assets from No benchmarking
associated enterprises required
Receipt of share under Employee Stock
Purchase Plan from Cadence Design No benchmarking
System Inc. required
5.5 The Ld. AO/TPO made adjustment only in respect of two
transactions as under:
S. Nature of international ALP ALP Adjustment
No. transaction determined by determined under section
the assessee by the TPO 92CA (INR)
(INR) (INR)
1. IT back-office support 42,69,64,705 500492805 73683663
services( ITes services)
2. Software research and 1577357496 1719077054 141719558
development services
Total 215403221
11
ITA No. 380/Del/2015
5.6 During the year under consideration, no adverse inference was drawn by the Ld. TPO for pre-sales marketing and post-sales technical support services rendered by the assessee.
5.7 As regard to the software research and development service segment , the Ld. DRP provided relief to the assessee with regard to the adjustment made by the Ld. TPO and due to which, entire adjustment made to software research and development service segment stands deleted.
5.8 As regard to IT back-office support services segment, the assessee reported that it has rendered services on cost plus margin of 15%. The assessee had entered into an agreement with "CDS" under which, the assessee was responsible for providing IT back-office support services comprising of UNIX/WINDOW administration and support;
Internal helpdesk services; application document & support; Web development and support and customer support. In its transfer pricing study, the assessee accepted TNMM as the most appropriate method and determined Profit Level Indicator (PLI) of operating profit /operating cost (OP/OC) at 15.00% , which was revised by the Ld. TPO to 16.23% in view of allocation of depreciation of Palladium Machine. The assessee selected 10 comparables with weighted averages margin PLI. The comparables selected by the taxpayer are reproduced as under:
OP/OC (%) as calculated Sl. No. Company Name by the taxpayer 1 CG Vak Software and exports Ltd. 0.53 2 Cosmic Global Limited 16.59 3 Informed Technologies Ltd. 31.46 4 Microgenetics Systems Ltd. 6.49 5 R Systems International Ltd. 7.15 6 Jindall Intellicom Pvt. Ltd. 18.67 7 Omega Healthcare Limited 15.31 E4e Healthcare business services 8 Pvt. ltd. 21.01 12 ITA No. 380/Del/2015 9 Caliber point Business Sol. Ltd. 21.92 10 Axia IT & T Ltd. 13.51 5.9 Ld. TPO rejected seven comparables selected by the assessee as under:
Sl. No. Comparables TPO's Comments
CG VAK Software and Exports Fails turnover filter
1
Limited (Segmental)
Informed Technologies Limited Turnover is less than Rs. 5
2 crores
R Systems International Limited Financial year ending other
3
than March 31
4 Caliber Point Business Solutions This comparable has different
Ltd financial year ending.
Rejected.
5 Axis-IT&T Limited. It fails export sales filter.
Rejected.
Omega Healthcare Limited No annual report is available in
6
public domain
7 Microgenetics System Ltd. Sales less than 5 crore, fails
a turnover filter
5.10 Further Ld. TPO used following new comparables:
SL. No, Company Name 1 Accentia Technologies 2 Eclerx Services Ltd.
3 Fortune Infotech Ltd.
4 Igate Global Solns. Ltd.
5 TCS E Serve Intnl. Ltd.
6 TCS E-Serve Ltd.
7 Infosys BPO 5.11 The comparables finally selected by the TPO under IT back-office support service are as under:
SL. No. Company Name OP/OC%) 13 ITA No. 380/Del/2015 1 Accentia Technologies 43.07 2 Cosmic Global Limited 18.28 3 Infosys BPO Ltd. 31.46 4 Jihdall Intellicom Pvt. Ltd. 18.67 5 Eclerx Services Ltd. 55.97 6 Fortune Infotech Ltd. 22.8 7 . igate Global Solns. Ltd. 24.54 8 TCS E Serve Intnl. Ltd. 53.8 9 TCS E-Serve Ltd. 63.38 e4e Healthcare Business services 10 31.03 Ltd. AVG 36.30
5.12 The Ld. TPO took current year data for comparison. The Ld. TPO applying average PLI (OP/OC) of 36.30%, computed the adjustment to Rs.7,36,83,663/-.
5.13 The Ld. DRP directed to exclude the comparable "E-clarx" and include "Omega" to the set of comparables companies selected by the Ld. TPO. In view of the directions of Ld. DRP, the adjustment to IT back-
office support services has been revised by the Ld. TPO in order giving effect dated 11/12/2014 to Rs.4,89,94,226/-. The list of comparables retained in the final list of comparables is reproduced as under:
I.T back Office Support Services Sl. No. Name of the Company F.Y. 2009-10 1 Accentia Technologies Limited 38.41% 2 Cosmic Global Limited 19.29% e4e Healthcare Business Services Private 3 Limited 27.22% 4 Fortune Infotech Limited 16.05% 5 iGate Global Solutions Limited 22.38% 6 Infosys BPO Limited 30.32%"
7 jindal Intellicom Private Limited 13.3/7% Omega Healthcare Management Services 13.21% 8 Private Limited 9 TCS e-Serve Limited 62.23% 10 TCS e-Serve International Limited 54.13% 11 eClerx Services Limited NC 14 ITA No. 380/Del/2015 Arithmetic mean 29.66 Operating cost 367,082,316 Arm's length margin 29.66% Ann's length price 475,958,931 Transfer Price 426,964,705 Adjustment 48,994,226 5.14 Before us, Ld. counsel of the assessee argued for exclusion of the four companies included by the Ld. TPO, namely, (i) TCS e-serve International ltd., (ii) TCS e-serve Ltd., (iii) Accentia Technologies Ltd.,
(iv) Infosys BPO Ltd. and inclusion of the two companies rejected by the Ld. TPO, namely, (i) CG- VAK Software & Exports Ltd (Segmental) and
(ii) R systems International Limited (Segmental).
5.15 We have heard the rival submission and perused the relevant material on record and accordingly, the grounds of the appeal related to exclusion/inclusion of comparables are adjudicated as under:
6. First we take up the issue of exclusion of companies considered comparable by the Ld. Transfer Pricing Officer (A) TCS E-serve International Ltd.
6.1 Before us, the Ld. counsel relying on the submission made before the Ld. TPO and the Ld. DRP, submitted that due to peculiar economic circumstances, the company need to be excluded. He submitted that pursuant to acquisition by the Tata Group (page 258-259 of the annual report), there is exceptional rise in turnover (173 percent) and profit (283 percent). He further submitted that the company was engaged in providing technical services like software testing, verification and validation of softwares, transaction processing including processing, 15 ITA No. 380/Del/2015 collection, customer care and payments to corporate and retail clients of Citigroup and voice-based services (page 3 of audited accounts of the company), which are functionally different from ITES services rendered by the assessee. According to the Ld. counsel for a variety of services rendered, no segment data was available (page 39 of the Annual Report of the company). The Ld. counsel further submitted to exclude the company on the ground of the deemed related party transactions (RPT). According to him, the company provided services to 'Citigroup Global Services holding LLC', which was the holding company till 31/12/2008. He submitted that services have been continued to be provided under the agreement entered into with Citigroup by erstwhile entity during which period the transaction was controlled in terms of Chapter X and consequently the terms and condition under which services rendered during the appeal continued to be incomparable. The Ld. counsel further submitted that the company was having access to 'Tata' brand and due to which it was entitled to higher margins associated with the use of reputed brand unlike the assessee, who was a captive service provider working on cost plus mark-up model.
6.2 The Ld. CIT(DR), on the other hand, submitted that increase in turnover or profit cannot be a ground for exclusion of the company. He submitted that turnover of the company is in the range of the turnover of the assessee. Further, he referred to page 282 of the compilation of the Annual Reports and submitted that it is clearly mentioned that the company was engaged in providing Information Technology Enabled Services (ITes)/Business Processing Outsourcing (BPO) services. The testing, verification and validation of the software was done at the time of implementation of software only, and thus, it cannot be said that activity of the company is different from the assessee company. According to him, there was no requirement of separate segment. On the issue of 16 ITA No. 380/Del/2015 deemed RPT, he submitted that TCS Ltd has become the holding company w.e.f. 1st January, 2009 and, thus, in the year under consideration, the TCS Ltd is the holding company and, therefore, transaction of the company with city group clients is no more related party transactions. He further submitted that Ld. counsel has not given any evidence as the transaction was still governed by the old agreements. On the issue of 'TATA' brand, he submitted that first of all, 'Tata' brand has not affected the PLI of the company. Secondly, the assessee was also using "Cadence" brand. Further, he referred to page 281 of the compilation of the Annual Reports and submitted that the company incurred only expenses of Rs. 37.38 Lakhs towards 'Tata' brand equity contribution, which is 0.43% of the total expenses only. In view of submission, he stated that action of Ld. DRP in retaining the company as comparable was justified.
6.3 We have heard the rival submission and perused the relevant material on record. The contention of the Ld. counsel to reject the company as comparable on the ground of rise in turnover and profit as compared to last year, is not tenable. Under the transfer pricing provisions of the Act, the company is to be compared on the basis of FAR (functions carried out, assets employed and risk taken). Once the company is found to be comparable in FAR analysis, in our opinion rise in turnover or profit compared to earlier year cannot be a ground enough for its exclusion from the set of comparables. In normal business scenario, there cannot be a fixed rate of growth and fluctuations in the growth is normal part of business activity, which cannot be made a basis for exclusion of the company from the set of comparables, if otherwise it is functionally similar.
6.4 The second contention of the Ld. counsel that company is functionally dissimilar, is also not found to be correct. On page 31 of the 17 ITA No. 380/Del/2015 Annual Report of the company, background and principal activities have been mentioned under Schedule 'N' of Notes To Account. The relevant extract is reproduced as under:
"1. Background and Principal activities TCS e-Serve International Limited is engaged in the business of providing Information Technology - Enables Services (ITes)/Business Processing Outsourcing (BPO) services, primarily to Citigroup entities globally.
The Company's operations broadly comprise of transaction processing and Technical Services. Transaction Processing includes the broad spectrum of activities involving the processing, collections, customer care and payments in relation to the services offered by Citigroup to its corporate and retail clients. Technical Services involve software testing, verification and validation of software at the time of implementation and data centre management activities."
6.5 Thus, it is evident from the Annual Report of the company for the year under consideration that primarily the company is not engaged in software development and it was engaged in providing IT enabled services (ITes) only. The technical services of software testing, verification and validation the software were carried out at the time of implementation of software only and are in the nature of back-office support. On perusal of the service agreement between "CDS" and the assessee, we find that the assessee was also engaged in application development and support, web development etc. The relevant part of the agreement which is available on page 871 of the assessee's paper book is reproduced as under:
"Article II SUBJECT MATTER OF THE CONTRACT
1. Authorization: Cadence India is authorized to provide the following services to die company and its affiliates: Back Office IT operations, comprising of UNIX / Windows Administration and Support; Internal 18 ITA No. 380/Del/2015 Helpdesk Services: Application Development & Support; Web- Development & Support (collectively. 'IT Back Office Support') and Customer Support services."
6.6 The Ld. DRP in its order on page 43 has reproduced other pages of the Annual Report of the company indicating that the company was engaged in BPO services or ITES.
6.7 In view of the comparison of the services rendered by the assessee and the services rendered by the company , we are of the opinion that the company cannot be rejected on the ground of functional dissimilarity.
6.8 Further, the contention of Ld. counsel to exclude the company on the ground of non-availability of segment information is also not tenable as the company was functioning in one segment of ITES only. 6.9 The contention of the Ld. counsel for exclusion on the ground of deemed RPT is also not acceptable. w.e.f. 01/01/2009, the Tata consultancy services Ltd is the holding company of the company and thus during the entire period under consideration i.e. 01/04/2009 to 31/03/2010, the transactions with Citigroup Companies cannot be held as related party transactions in the case of the company. We agree with the contention of the Ld. CIT(DR), that the assessee has not brought on record any evidence that the assessee company continued to provide services to the city group companies on the basis of agreements contracted prior to 01/01/2009. Even if, we consider that the services were provided under a long-term contract, still it cannot be deemed a related party transaction in view of the change of ownership. 6.10 Further, the contention of Ld. counsel of impact of 'Tata' brand on profitability of the company is also not tenable in view of the facts the no evidence has been brought on record as how the 'Tata' brand has impacted the profitability of the company. Further, the expenditure 19 ITA No. 380/Del/2015 corresponding to contribution to 'Tata' brand by the company, is also very small part (0.43%) of the total operational expenses of the company. 6.11 In view of the above discussion, we uphold the finding of the DRP in retaining TCS E-serve International Ltd. in the set of comparables.
(B) TCS E-serve Ltd.
7. The Ld. counsel submitted to exclude the company from the set of comparables on the grounds similar to the grounds taken in the case of TCS e-serve International Ltd. The Ld. CIT(DR) also repeated same arguments .
7.1 The Ld. counsel submitted that pursuant to the acquisition by 'Tata' group, there is increase in revenue of 12.17% and growth in profit before tax of 226%. The reasons for excluding a company from set of comparables on the basis of turnover or profit has already been rejected by us while examining the comparability of TCS e-serve international Ltd. The Ld. counsel further submitted that the company is functionally dissimilar with assessee company. The Ld. counsel submitted that the company was engaged in providing technical services like software testing, verification and validation of software. This contention is identical to the contention raised in the case of TCS e-serve international Ltd. On perusal of the Annual Report of the company, we find that it has rendered services identical to the services rendered by TCS e-serve international Ltd. In Schedule 'O' to the notes of account of the company, available on page 105 of the Annual Report, the principal activities of the company reported are as under:
"1. Background and principal activities TCS e-Serve Limited is engaged in the business of providing Information Technology - Enables Services (ITes)/Business 20 ITA No. 380/Del/2015 Process Outsourcing (BPO) service, primarily to Citigroup entities globally.
The company's operations broadly comprise of transaction processing and technical services. Transaction processing includes the broad spectrum of activities involving the processing, collections, customer care and payments in relation to the services offered by Citigroup to its corporate and retail clients. Technical service involve software testing, verification and validation of software at the time of implementation and date centre management activities.
7.2 Thus, we find that the activities of the company are identical to the activities of TCS e-serve International Ltd., which are held to be in the nature of ITes and functionally similar to the assessee. Accordingly, we hold that the company cannot be excluded on the ground of functional dissimilarity.
7.3 The arguments of the Ld. counsel on the issue of non-availability of segment information, deemed related party transactions and entity having access to Tata brand are identical to the arguments taken in the case of TCS e-serve international Ltd. Thus following our finding in the case of comparable TCS e-serve international Ltd, we reject these arguments taken in respect of TCS e-serve Ltd also. 7.4 In view of the discussion, we uphold the direction of the Ld. DRP in retaining, TCS e-serve limited as a valid comparable.
(C) Accentia Technologies Ltd.
8. The Ld. counsel submitted that the company is functionally different from the assessee company. He referred to page 4, 5 and 39 of the Annual Report and submitted that the company was engaged in diversified services which include HRCM (using Saas Model), Knowledge Process Outsourcing (KPO) and Legal Process Outsourcing (LPO) and separate segment information for HRCM is not available. The Ld. counsel drawn our attention to page 73 of the Annual Report and 21 ITA No. 380/Del/2015 submitted that the company owns significant intangible assets in the form of goodwill, Brands and IPRs, which constitutes 57% of the value of assets.
8.1 He further referred to page 79 of the Annual Report and submitted that during the year, a company namely, 'Asscent Infoserve Private Limited' amalgamated with the company. He further referred to page 37 of the Annual Report and submitted that during the year, the company acquired 'IQ Group' of companies in the United Kingdom. 8.2 The Ld. counsel submitted that the company has been excluded by the Tribunal in assessee's own case in assessment year 2009-10, being functionally different and extraordinary events. 8.3 The Ld. CIT(DR) submitted that the company is not a software development company and it earned its revenue from healthcare information technology management. He referred to pages 77 of the Annual Report and submitted that in schedule 8, income other than income from coding, interest income and income from exchange fluctuations are in the nature of IT enabled services. The Ld. CIT(DR) supported the finding of the Ld. DRP that percentage of non-IT enabled services was only 15.03%, hence it was predominantly an ITES provider. He further referred to pages 39 of the Annual Report and submitted that "Saas" is effectively a software application delivery model in which the clients pay to access and use software functionally or a network through a hosted web native platform operated by the software vendor, either independently or through third-party. According to him "SaaS" model mean only 'software as a service' and not development of software. 8.4 The Ld. counsel in his rejoinder referred to page 39 of the annual report and submitted that the acquisition of the IQ group companies UK was a strategic move in the direction to to increase the capability of the service delivery to offer the "SaaS" model to its clients. The Ld. counsel 22 ITA No. 380/Del/2015 also referred to page 79 of the paper book and submitted that the company itself has admitted that in view of the amalgamation during the year under consideration, the figures of current year were not comparable with those of the previous year.
8.5 We have heard the rival submission and perused the relevant material on record. We find that the in assessment year 2009-10 in the case of the assessee itself, the company has been excluded by the Tribunal in ITA No. 2074/Del/2014. The relevant finding of the Tribunal is reproduced as under:
"14.3 We have considered the rival submissions and also perused relevant finding given in the impugned order. Accentia Technologies Ltd. has two main business areas namely, health care receivable cycle management services and software products for BPOs. It earns substantial part of its income from coding activities which is primarily related to e-software development. Various streams of income shown in the annual report reflects that it has income from medical transcription, billing and collections, income from coding, etc. It is not in dispute that segmental information for each streams of income are not available, therefore, it would be very difficult to benchmark profit margin with the assessee-company, which is only rendering back office support services. Another important fact which is borne out/ from the its annual report is that, during the year under consideration, assessee has acquired business of Oak Technologies Inc. USA which has led to rapid increase in its customer base. Such acquisition definitely has an impact on the trading result and can distort profit margin. Thus, we hold that Accentia Technologies Ltd. cannot be included in the list of final comparables and accordingly, the same is directed to be excluded."
8.6 We note that the company has been excluded on the ground of lack of segment information of various streams of income and events of acquisition of companies. We find that in the year under consideration also the income derived by the company is from various streams 23 ITA No. 380/Del/2015 including medical transcription; Billings and collection, income from coding etc and no segmental information of each of the streams are available. Similarly, the company has itself mentioned in the Annual Report that due to acquisitions of companies during the year, its results were not comparable with the earlier year.
8.7 Thus, in view of the identical facts during the year under consideration, respectfully following the decision of the Tribunal in assessment year 2009-10, we hold that company cannot be included in the set of comparables and accordingly, we direct the AO/TPO to exclude it from the set of comparables.
(D) Infosys BPO Ltd.
9. The Ld. counsel referred to page 135 of the Annual Report and submitted that the company was engaged in rendering wide array of services including customer service outsourcing, finance and accounting, knowledge services, human resource outsourcing, legal process outsourcing, sales and fulfillment, sourcing and procurement, banking and capital outsourcing, media outsourcing, energy outsourcing, retail etc, which cannot be compared with the services of back-office support attended by the assessee. According to him, no segmental data of different functional activity is reported in the Annual Report. He further referred to page 177 of the Annual Report and submitted that the company has incurred heavy expenses of Rs. 69.16 lakhs for brand building and advertising, which is assisted in earning high profit, whereas no such expenses were incurred by the assessee. The Ld. counsel further referred to page 203 of the Annual Report and submitted that the company was having a turnover of Rs.1,126.66 crores, whereas the assessee was having revenue of 42.70 crores from provision of IT back- office support services. He further referred to page 115, 116 and 233 of 24 ITA No. 380/Del/2015 the Annual Report and submitted that the company has acquired 'McCamish Systems LLC' during the year under consideration, which has impacted the profitability of the company.
9.1 Ld. CIT(DR), on the other hand, submitted that all the activity reported might be in different verticals but the function carried out falls under the category of BPO or ITES only. He submitted that the company in the profit and loss account has reported its revenue from business process management services, which being ITES segment, no separate reporting for different verticals was required ,for selecting the company as comparable. On the issue of high brand value expenses, the Ld. CIT(DR) supported the finding of the Ld. DRP that the assessee has not brought on record any evidence of AMP expenditure incurred by the company resulted into higher profit. On the issue of large scale of operation, the Ld. CIT(DR) submitted that the turnover of the assessee was in the comparable range of the turnover of the company and it was not too low as compared to the comparable company. On the issue of acquisition of McCamish Systems LLC, the Ld. CIT(DR) submitted that the assessee has not demonstrated any effect on the PLI of the company. He further referred to page 121 of the Annual Report of the company and submitted that only member's interest had been purchased and there is no merger or demergers due to acquisition. He submitted that due to purchase of members interest in the said LLC, actually there was a loss and it has not increased the profit of the company. Accordingly, he submitted that the assessee failed to demonstrate increase in profit due to this event of acquisition. 9.2 We have heard the rival submission and perused the relevant material on record. We note from page 7 of the Annual Report of the company that it was established in April 2002 as the business process outsourcing subsidiary of the Infosys technologies Ltd. The Annual 25 ITA No. 380/Del/2015 Report further mentioned that it is among the top 10 third-party BPO company in India according to the ranking of National Association of software and service companies (NADDCOM). Thus, the contention of the Ld. counsel that the company provided wide array of the services, is not relevant as far as the function of BPO carried out by the company are similar to the functions carried out by the assessee. When, the assessee itself has characterized its activity as BPO, in such circumstances, the functions of the company cannot be held as the dissimilar. 9.3 With regard to contention of the Ld. counsel of high brand value expenses on brand building and advertising amounting to Rs.69,16,780/- , we find that the total expenses on brand building in advertisement constituted 0.1% of the total turnover and which is insignificant. Further we agree with the contention of the Ld. CIT(DR) that the assessee has not brought on record any evidence that such expenditure has resulted into higher profit to the comparable company. Thus we reject the contention of the Ld. counsel of having impact of higher brand value expenses on the profitability of the company.
9.4 On the issue of large scale operations of the company, we find that company was having turnover of Rs.1,126.63 crores as against Revenue of Rs.42.70 crores reported by the assessee from provision of IT back- office support services. The turnover of the companies 26.38 times the turnover of the assessee. In our opinion, turnover of the company cannot be a ground for rejecting a comparable until and unless, there is wide variation. Accordingly, this contention of the Ld. counsel of the assessee for excluding the company as comparable, is also rejected. 9.5 Further, the Ld. counsel objected the inclusion of the company on the ground of acquisition of Maccamish Systems LLC. Before the Ld. DRP also the assessee failed to adduce any evidence as how the merger had impacted the profitability of the company. Further, we have 26 ITA No. 380/Del/2015 observed from page 13 of the Annual Report of the company, which reads as under:
"Consequent to the purchase of Members Interest in McCanmish Systems LLC ("McCamish"), Infosys BPO has become the sole member of McCamish with effect from December 4, 2009. During the period from December 4, 2009 to March 31, 2010 the company generated revenue of Rs.38.02 Crore with a loss of Rs.17.67 Croes................."
9.6 Thus, it is evident that acquisition of McCamish Systems LLC has contributed revenue of Rs. 38.02 crores and loss of Rs. 17.67 crores, therefore, there is no increase in exceptional profit due to acquisition of the said LLC. Thus, the contention of the Ld. counsel of having increase in the profitability due to acquisition, is not tenable. 9.7 In view of the above discussion, we uphold the direction of the Ld. DRP to retain the 'Infosys BPO Ltd.' as a valid comparable for back- office support service transaction
10. Now, we take up the request of the assessee for inclusion of the two comparables .
(A) CG VAK Software and Exports Ltd.
11. The Ld. counsel submitted that company has been rejected by the Ld. TPO on the basis of inappropriate turnover filter. According to him, the turnover of the company was Rs.5,94,28,000/- as reported on page 490 of the compilation of the Annual Report. He further submitted that the company also qualifies employee cost to operating cost filter. He referred to page 176 of the paper book and submitted that employee cost of the company was 76.73%. He further submitted that the company has been included as comparable in assessee's own case in assessment year 2009-10 by the Tribunal relying on the Delhi High Court ruling in the 27 ITA No. 380/Del/2015 case of 'Chryscapital Investment Adviser India Private Limited Vs. DCIT in ITA No. 417/2014 wherein it was held the turnover cannot be reason for rejecting a functionally similar company.
11.1 Ld. CIT(DR), on the other hand, relying on the finding of the Ld. DRP, submitted that during the year under consideration the company was mainly involved into software development and revenue from ITES/BPO service was only 14% i.e. 83 lakhs and, thus, the turnover of the BPO segment was extremely small as compared to the turnover of the assessee. According to the Ld. CIT(DR), as per the contention of the Ld. counsel the total turnover of the assessee company was more than Rs. 5 crore, but the turnover of the BPO segment was only 82.78 Lacs, thus it fails the turnover filter of Rs. 5 crore.
11.2 We have heard the rival submission and perused the relevant material on record. We find that in the assessment year 2009-10 also the turnover of the company was less than Rs.1 crore, however, the Tribunal in ITA No. 2074/Del/2014 for the assessment year 2009-10 in the case of the assessee directed the TPO to include the company as a comparable company. The relevant finding of the Tribunal is reproduced as under:] "18.3 We have heard the rival submissions and perused the relevant finding given in the impugned order. The main reason for not including this company is that its turnover is less than Rs.1 crore. So far as exclusion of this comparable on basis of turnover filter criteria of less than Rs.1 crore, we find that, first of all, it was a comparable chosen by the assessee and at the time of selection process the assessee as stated had not applied any turnover filter for accepting or rejecting the comparables. Once the turnover filter has not been applied at the quantitative level then comparability has to be done on qualitative level based on FAR analysis. If on FAR analysis it is found that there are differences on account of either assets deployed, risk assumed materially affecting the cost or margin then only comparability analysis fails in such cases. Further, under the TNMM, the comparability of an international transaction with an 28 ITA No. 380/Del/2015 uncontrolled transaction is to be seen with reference to functions performed after taking into assets employed and the risk assumed. While reckoning the comparability analysis under TNMM, the main emphasis is into net margin realized on the transactions undertaken and not the price of the product or services. The transfer pricing rules under Rule 10B and 10C also contemplate for eliminating the material effects and to make reasonably accurate adjustment for eliminating the differences on account of such material effects. Mere circumstance of a company which otherwise confirm to the comparability analysis in terms of Rule 10B(2) and (3), huge profit or huge turnover ipso facto does not lead to its exclusion unless and of course it is shown that turnover or huge profit is on account of factor leading to a different results in FAR analysis. We find that the Honhle Delhi High Court in the case of Ciyscapital Investment Advisors India Pvt. Ltd. vs. DCIT (supra) after detailed analysis of rule 10B(3), same principle has been reiterated that if the company is functionally comparable then same cannot be rejected on the basis of turnover. The Hon'ble High Court in its very detailed judgment wherein it was required to answer, whether the comparable can be rejected on the ground that they have high profit margin as compared to the assessee in TP analysis, has also dealt upon the turnover factor in detail and reiterated that if the company is functionally comparable then same cannot be rejected on the basis of turnover. Thus, following the ratio laid down by the Hon'ble Delhi High Court, we hold that the company cannot be held to be incomparable simply on the ground of low turnover, unless it is demonstrated that the assets and risk are completely different and are incomparable. Thus, we direct the TPO to include CG Vak Software And Exports Ltd. as a comparable company."
11.3 Since in the year under consideration also the Ld. DRP has rejected the company on the ground that it does not fulfill the turnover criteria of five crore, respectfully, following the finding of the Tribunal (supra), we set aside the direction of the Ld. DRP and direct the AO/TPO to include 'CG Vak Software and exports Ltd' (segment) as a comparable company.
29 ITA No. 380/Del/2015R Systems International Ltd.
12. The Ld. counsel referred to pages 522, 523 and 611 of the compilation of the Annual Report and submitted that the company was engaged in providing IT solutions and BPO services, which being functionally similar to the transaction of the assessee under consideration. He further submitted that filter of different financial year applied by the Ld. TPO is not an appropriate filter. The Ld. counsel submitted that the company has been included as comparable by the Tribunal in assessee's own case for assessment year 2009-10, wherein relying on the ruling of the Hon'ble Punjab and Haryana High Court in CIT versus Mercer Consulting India Private Limited (ITA No. 101 of 2015), it is held that if the audited quarterly results can be used to compute margin for the year ending on March 2009, then company should be included in the final set of comparables. 12.1 The Ld. CIT(DR), on the other hand, relied on the finding of the Ld. DRP in para-6.5.2 of their order and submitted that it is very difficult to carryout adjustment, assumptions, classification etc of the comparable to bring the transaction at par with the international transaction and therefore, such comparable should be eliminated from the set of comparables.
12.2 We have heard the rival submission and perused the relevant material on record. We find that the Ld. DRP in para-6.5.2 of their order has given finding on the principle whether comparable having different financial year should be considered or not. The relevant finding of the Ld. DRP is extracted as under:
"6.5.2 DRP Findings:
The issue of Comparables maintaining accounts in terms of period other than the financial year has befen considered by this Panel as under:30 ITA No. 380/Del/2015
1. So far as the issue of requirement of data pertaining to the F.Y. as provided in rule 10B{4) is concerned, the submission of taxpayer that there is no impediment in law to use data even if the comparables do not maintain their accounts in terms of financial year, the same is correct. However, Rule 10B{4) is not to be read in isolation. This rule has been provided for the purpose of determination, analysis and benchmarking of international transaction with an appropriate comparable in uncontrolled transactions for the purpose of determination of Arm's Length Price (ALP). So, the determining factors as identified by this Panel are:
i. Whether the taxpayer/the Department will be able to identify an Uncontrolled comparable to benchmark an international transaction of the taxpayer who is maintaining data and accounts in terms of financial year.
ii. Whether the taxpayer/ the Department will be able to carry out such adjustments so as to make the uncontrolled transactions materially identical with that of the taxpayer if such comparable is not maintaining its accounts financial year wise.
iii. Whether the taxpayer/ the Department will be able to apply such filters to be applied to publicly available data so as to bring out only those companies which are broadly functionally similar to that of the taxpayer if the comparable is not maintaining its account financial year wise.
2. In cases of companies, the data in respect of which are available publicly and which maintain accounts other than in terms of the financial year, following adjustments are required to be ' carried out in order to bring the data at par with that of the taxpayer:
i. Apportion the data from preceding or subsequent period so as to make data equivalent to the financial year available for comparison with the international transaction.31 ITA No. 380/Del/2015
ii. While apportioning such data, adequate care needs to be taken so that the Profit Level Indicators are computed comparably.
3. For the determination of profit level indicators, certain entries having bearing on the cost and income are- interest, provisions, losses/ gains on account of foreign exchange, etc, which normally as per the business practice are accounted for at the end of the accounting year. Under both the situations, whether the data pertaining to the period prior to the accounting year or subsequent to the accounting year are integrated with the relevant portion of the accounting year of the comparable, the same gives a lopsided picture of the accounts so far as the financial year data is concerned. Since, there is no requirement as per company law or as per accounting standards that the data pertaining to a particular quarter needs to be closely compartmentalized by providing for various provisions etc. for each quarter, the validity of such data for the purpose of comparability will be a matter of question mark. Also, some of the companies provide for depreciation at the end of the accounting period. Apportionment of such depreciation on pro-
rata basis to a particular quarter or month will be a difficult proposition.
4. Most important many of the companies maintaining accounts other than on financial year basis do not keep such data in public domain. Such inaccessibility of vital information in public domain may not render the comparison the warranted judicious effect creates a hurdle wherein the effort required to search for such comparables data for the financial year is not commensurate with the result.
5. In addition, in order to reach at such uncontrolled comparables, the taxpayer as well as the TPOs apply certain filters in accordance with the provisions of Rule 10B. For e.g. the filter of export income/ realization is applied for comparison of an international transaction involving export of goods and services; filter of related party transaction is applied for the purpose of identifying only those comparables which are functioning in a relatively uncontrolled environment. It is difficult to apportion information required for applying such filters if the accounting period is not congruent to the accounting period of the taxpayer. In order to carry out FAR analysis, taxpayers and the TPOs 32 ITA No. 380/Del/2015 apply the filter of networth. Generally, networth of a company is determined on the last day of the accounting year. Therefore, apportionment of data will again lead to lopsided indicator for comparability analysis.
6. Rule 10C(2)(c) provides for the requirement of "the availability, coverage and reliability of data necessary for application of the method." In the light of the discussions made in the above paragraphs, the reliability of such data is a question mark and as such the requirement of the rule will not be fulfilled if the comparable does not maintain its accounts in terms of financial
7. It will also be very difficult to carry out adjustments, assumptions, classifications, etc, of such comparables to bring the transactions at par with the international transactions in such situations.
In view of the above, the question as referred to in para 1 above cannot be justifiably answered to treat the comparables maintaining accounts in terms of period other than the financial year to be treated as uncontrolled transaction for the purpose of determination of ALP. The Panel, therefore, rejects the objection of the taxpayer on this account."
12.3 However, we note that the Tribunal in ITA No. 2074/Del/2014 for assessment year 2009-10 in the case of the assessee itself has held the company as comparable despite being different financial year. The relevant finding of the Tribunal is reproduced as under:
"19.2 We have heard rival submissions and also perused the relevant finding given in the impugned order. This comparables company has been rejected not on the ground of functionality albeit on the ground that it is following the financial year accounting from January to December (i.e. calendar year). Though a comparable company following a different financial year may not be generally taken for comparability analysis, however, if financial data is available for all the quarters including January to March and it is otherwise possible to determine the value of the transaction as well as the profitability during the corresponding period, then it suffices the comparability criteria. Because, ultimately the core point in comparability analysis is to benchmark the margin of a given period of a comparable uncontrolled transaction with controlled transaction. If the financials of the corresponding period is available then it 33 ITA No. 380/Del/2015 cannot be rejected simply on the ground that it has a different financial year. As brought out on record by the Ld. Counsel before us submitted that the audited accounts of R- Systems for the year ending 31.12.2008 and for the quarter starting from 31.01.2008 to 31.03.2009 is available and once such an audited statement is available, then the proportionate working for 31.03 2009 can easily be deduced. If there are no major incident of factors disturbing the profit margin in that quarter, whose results are being worked out and the transactions of the Company are carried out in the normal course of business, then we do not find any reason to reject the comparable out rightly on the aforesaid ground. The working of PLI based on audited accounts as incorporated above clearly clinches the point. The Hon'ble P&H High Court in CIT Vs. M/s. Mercer Consulting India Pvt. Ltd., in the context of R-Systems only had made a very important observation which reads as under:-
"27. The TPO excluded the case of R-Systems International Limited from the list of comparables. The ITAT included the same. The Transfer Pricing Officer excluded the case of R- Systems International Limited on the ground that it follows the calendar year i.e. 1st January to 31st December for maintaining its annual account whereas the accounting year of the assessee is 1st April to 31st March. The Transfer Pricing Officer followed an order passed by the Mumbai Bench of the Tribunal in ACIT v. Hapag Lloyd Global Services Ltd. 2013- TH-68-ITATMUM-TP in which it had been held that a company with a different financial year ending cannot be compared.
28. We are unable to agree with the decision of the Transfer Pricing Officer and of the DRP that affirmed it. The view taken by the Tribunal commends itself to us. It is not the financial year per se that is relevant. Even if the financial years of the assessee and of another enterprise are different it would make no difference. If it is possible to determine the value of the transactions during the corresponding period, the purpose of comparables would be served. The question in each case is whether despite the financial years of the assessee and of the other enterprise being different, the financials of the corresponding period of each of them are available. If they are, the Transfer Pricing Officer must refer to the corresponding period of both the entities in determining whether the two are comparable or not for the purpose of determining the ALP.
29. As noted by the Tribunal, the audit accounts ofR System International Ltd. for the year ending 31.12.2008 had been given under one column and the data for the quarter ending 31.03.2009 and 31.03.2008 (both audited) had been given in two other columns. Thus, as rightly held by the Tribunal, if from the yearly data ending 31.12.2008, the results of the quarter ending 31.03.2008 are excluded and if the results for the quarter ending 31.03.2009 are included, it is possible to obtain the data for the financial year 01.04.2008 to 31.03.2009.34 ITA No. 380/Del/2015
30. This view is not contrary to Rule 10(B)(4) which reads as under:-
"10B(4) The data to be used in analysing the comparability of an international transaction shall be the data relating to the financial year in which the international transaction has been entered into."
31. The Rule does not exclude from consideration the data of an entity merely because its financial year is different from the financial year of the assessee. What the Rule requires is that the data to be used in analyzing the financial results of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. Thus, so long as the data relating to the financial year is available, it matters not, if the financial year followed is different. In the case before us the data relating to the relevant financial year of R-Systems International Limited is available.
32. We are, therefore, entirely in agreement with the decision of the Tribunal that if the data relating to the financial year in which the international transaction has been entered into is directly available from the annual accounts of that comparable, the same cannot be held as not passing the test of sub-rule (4) of Rule 10 B."
Thus, respectfully following the judgment of Hon'ble High Court, we hold that this company should be accepted as comparable company for the purpose of benchmarking the assessee's margin."
12.4 Since in the year under consideration also the company has been rejected on the ground of different financial year, but the relevant data for the concerned financial year can be deducted from the data available from the Annual Reports and thus in the facts and circumstances of the case, respectfully following the finding of the Tribunal (supra), we set aside the direction of the Ld. DRP and direct the AO/TPO to include the company in the set of comparables.
13. As far as the issue of working out margin of the comparable for the period from 01/04/2009 to 31/03/2010 is concerned, the Hon'ble High Court of Punjab and Haryana in Mercer Consulting India Private Limited (supra) in the context of 'R system' observed that if from the data ending on 31/12/2008, the result of the quarter ending 31/03/2008 are excluded and if the results for the quarter ending 31/03/2009 are included, it is 35 ITA No. 380/Del/2015 possible to obtain the data for the financial year 01/04/2008 to 31/03/2009. The Hon'ble High Court further observed that said view is not contrary to Rule 10(B)(4) of Income Tax Rules, 1962. Since the Tribunal (supra) in assessment year 2009-10 in the case of the assessee has followed the decision of the Hon'ble Punjab and Haryana High Court in Mercer Consullting India Private Limited (supra), We feel it appropriate to restore this issue to the Ld. AO/TPO for computation of margin of the company for the period from 01/04/2009 to 31/03/2010 from the adjusted data of relevant years. The assessee is directed to provide relevant audited accounts of the company.
14. Accordingly, the grounds of the appeal related to transfer pricing adjustment are allowed partly for statistical purpose.
15. The corporate issues raised in ground numbers 15 to 17, relate to allocation of directors remuneration between STP unit and non-STP unit. Before us, both the parties admitted that this matter had come for consideration before the Tribunal in the assessee's own case in assessment year 2008-09 in ITA No. 39/Del/2013 order dated 20/05/2016, wherein the matter has been remanded back to the file of the AO for fresh examination.
15.1 We have gone through the decision of the Tribunal and the relevant finding, and find that this precise issue has been dealt by the Tribunal in assessee's own case. We also find that the Tribunal in assessment year 2009-10 in ITA No. 2074/Del/2014 following the decision of the Tribunal in assessment year 2008-09 has restored the matter back to the file of the Assessing Officer. The relevant observation of the Tribunal in ITA No. 39/Del/2013 for assessment year 2008-09 is reproduced as under:
36 ITA No. 380/Del/2015"26.1 After going through the decision of the Tribunal and the relevant finding given in the impugned order, we find that this precise issue has been dealt by the Tribunal in the assessee's own case. The relevant observation of the Tribunal is reproduced hereunder:-
"14. In support of the grounds i.e. Ground Nos. 6 to 8, the Learned AR submitted that the Assessing Officer has erred in not correctly verifying the record submitted during the course of assessment proceedings contrary to DRP directions. He was not justified in disallowing income-tax holidays claimed by the assessee in respect of STP unit hi its 8th year of operation. The authorities below have also erred in allocating director's remunerations between STP unit and non-STP units by ignoring the facts placed on record and holding that the assessee intentionally debited director's salary to non-STP units to reduce its taxable income without appreciating the operating model being followed by the assessee. The Learned AR submitted that assessee's STP unit has its own finance/operational team which is responsible for the day to day affairs/functioning of the said unit. The directors of the assessee have no active involvement on the affairs of STP units. All cost related STPI unit and non- STPI unit of assessee were being booked into irrespective unit and no apportionment was required/done for any other cost. He submitted further that assessee was operating on cost + mark up arrangements with its overseas group companies. Under the said arrangement, the assessee was entitled to receive pre- agreed mark up on cost incurred by it. Allocating cost from non- STP unit to STP unit will result in reducing the cost based for the assessee, which will eventually lead to lower taxable income. Thus, the reason provided by the Assessing Officer for making the adjustment does not stand correct in the case of assessee. The Learned AR submitted that in the subsequent years 2009-10 and 2010-11, the claimed deduction under sec. 1OA was allowed. He referred page Nos. The Learned AR also tried to point out typographical and arithmetical errors in the working of the disallowance under sec. 10A of the Act by the Assessing Officer at page Nos. 6 to 8 of the assessment order.
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19. Considering the above submissions, we find that in the case of CTT vs. Western Outdoor Interactive (P) Ltd. (supra), the Hon'ble High Court has been pleased to hold that benefit of deduction under sec, 10A is available for a particular number of years on satisfaction of certain conditions under provisions of the Act and unless relief granted for first assessment year in which claim is made and accepted, the Assessing Officer cannot withdraw relief for subsequent years, Undisputedly, it is 8th year of the claim of deduction under sec. 1 OA of the Act made by the assessee and it has been allowed in earlier years and in subsequent remaining two assessment years, i.e. 2009-10 and 2010-11. Before the ITAT, as discussed above, the Learned AR has tried to meet out the objections raised by the Assessing Officer in making the disallowance of the claimed deduction. In brief, the submission of the assessee against the objection of the Assessing Officer that the assessee has intentionally debited directors' salary to non-STP units to reduce its taxable income, the submission of the assessee remained that the assessee maintains its account in a manner that costs relating to STP and non-STP units are booked in the respective units; MD responsible for establishing/leading strategic R&D partnership and R&D central operations functions for NOIDA site where major portion ofR&D work was carried out; director financed responsible for finance and accounting, legal, tax and company secretarial compliance functions at Noida; STP unit at Bangalore since has its own core management staff and each person is responsible for their areas, the cost of such personnel are debited to their undertaking only; and appellant operates own cost plus model, hence, increase in cost in non-STPI unit will result in increase in Revenue and, therefore, results in increase in tax liability. Against the objection of the Assessing Officer that separate books of account are not maintained, the submissions of the assessee remained that as per the provisions of law, there is no requirement of maintaining separate books of account for a unit eligible to claim deduction under sec. 10A of the Act; and that it is the 8 year of claim of deduction under sec. IOA of the Act and the claim of deduction under sec. 1OA of the Act only needs to be seen in first year. Against the objection of the Assessing Officer that additions shown in block of computers is not in agreement with records maintained in computers, the submissions of the assessee remained that as per fixed assets schedule provided to the Assessing Officer total addition in computer made during financial year 2007-08 in STP unit was 38 ITA No. 380/Del/2015 Rs. 32,05,095; in the assessment order, the Assessing Officer stated that as per details provided to him,addition made in block of computer was of Rs.31,73,495 which is against the facts on record; the Assessing Officer compared alleged additions of Rs.31,73,495 with details extracts from SAP and wrongly concluded that amounts do not match. The Learned AR in his above submissions has pointed out as to how the Assessing Officer has committed mistake in coming to the conclusion that amounts do not match. The Learned AR submitted that total addition made to block of computers as per SAP details after correcting above mistakes made by the Assessing Officer is Rs.32,05,095 which matches with fixed assets scheduled submitted to the Assessing Officer during assessment proceedings. Against the objection of Assessing Officer that invoices raised in US dollars are not verifiable with amounts recorded in books as some amounts is in INR, the submission of the assessee remained that all the details on account of service income was furnished before the Assessing Officer; invoices are usually raised in USD, however, if there is. an adjustment entry to be passed, same is passed in INR in the ledger account; and audit adjustment entry was passed by auditor for financial year 2007-08; bonus expenses pertaining to financial year 2008-09 inadvertently considered by Cadence India as cost for financial year 2007-08 and as the assessee operates on a cost plus model invoice on such cost was raised already in financial year 2007-08; etc. The grievance of the assessee in this regard also remained that the Assessing Officer has not followed DRP's directions. It was submitted that as per directions issued by the DRP, the Assessing Officer was directed to rectify the details of accounts submitted by the assessee with regard to additions in the computer account and differed Revenue. Keeping in view these material submissions of the assessee, we set aside the matter to the file of the Assessing Officer to verify the above submissions and decide the issue afresh in view of the decision of Hon'ble Bombay High Court in the case of CIT vs. Western Outdoor Interactive Pvt. Ltd. (supra). The ground Nos. 6 to 8 are thus allowed for statistical purposes."
26.2 Thus, respectfully following the earlier year's precedence, we also remand back this issue to the file of the Assessing Officer with similar directions and to be decided in the same manner.
39 ITA No. 380/Del/2015Accordingly, grounds No. 20 to 22 are treated as allowed for statistical purposes."
15.2 Thus, respectfully following the earlier years precedence, we accordingly set aside the direction of the Ld. DRP and restore the issue back to the file of the Assessing Officer with similar directions and to be decided in the same manner. Accordingly, grounds No. 15 to 17 of the appeal are treated as allowed for statistical purpose.
16. In the result, appeal of the assessee is allowed partly for statistical purposes.
The decision is pronounced in the open court on 5th Jan., 2018.
Sd/- Sd/-
(AMIT SHUKLA) (O.P. KANT)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 5th January, 2018.
RK/-(D.T.D)
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
Asst. Registrar, ITAT, New Delhi