Income Tax Appellate Tribunal - Delhi
Stryker Global Technology Center Pvt. ... vs Assessee on 23 September, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH 'I-2' : NEW DELHI)
BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER
and
SHRI A.T. VARKEY, JUDICIAL MEMBER
ITA No.149/Del./2013
(ASSESSMENT YEAR : 2008-09)
Stryker Global Technology Centre vs. ACIT, Circle 9 (1),
Private Limited, New Delhi.
Vatika Business Park, 8th - 12th Floor,
Sohna Road, Sector 49, Block - B,
Gurgaon - 122 001 (Haryana).
(PAN : AAJCS9528D)
(APPELLANT) (RESPONDENT)
ASSESSEE BY : Shri Rohit Tiwari, CA and
Ms.Shruti Khimta, Advocate
REVENUE BY : S/Shri Rahul Garg and
Vijay Choudhary, Senior DRs
Date of Hearing : 30.06.2015
Date of Pronouncement : 23.09.2015
ORDER
PER A.T. VARKEY, JUDICIAL MEMBER :
This appeal, at the instance of the assessee, is directed against the order dated 24.02.2014 under section 143 (3) read with section 144C of the Income-tax Act, 1961 (hereinafter 'the Act') in pursuance to the directions of Disputes Resolution Panel (DRP) dated 20.12.2013 for the Assessment Year 2008-09. 2 ITA No.149/Del./2013
2. In this appeal, the following grounds have been raised by the assessee :-
" Transfer Pricing Matters
1. The Learned Dispute Resolution Panel ("Ld. DRP") and the Learned Assistant Commissioner of Income-tax ("Ld. AO") (following the directions of the Ld. DRP), erred on facts and in law, in not granting the Appellant complete relief, instead re-computing the mean margin of comparable companies and upholding in part (Rs.5,805,299) the enhancement effected to the income of the appellant on account of the initial Transfer Pricing (UTPU) adjustment u/s 92CA(3) of the Income Tax Act, 1961 ("Act") made by the Learned Additional Director of Income-tax, Transfer Pricing Officer - 11(2) ("Ld. TPO") amounting to Rs.8,409,662 and holding that the price charged by the appellant varies more than 5% from the value of international transactions in the contract software development segment and thus does not satisfy the arm's length principle envisaged under the Act. In doing so the Ld. DRP and consequently the Ld. AO (following the directions of the Ld. DRP) have grossly erred in;
2. disregarding the ALP as determined by the appellant in the Transfer Pricing ('TP') documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('Rules') as well as fresh search; and in particular modifying/ rejecting the filters applied by the appellant.
3. disregarding multiple year and prior years' data as used by the Appellant in the TP documentation and holding that current year (i.e. FY 2007-08) data for comparable companies should be used despite the fact that the same was not available to the Appellant for most of the finally selected comparables at the time of preparing its TP documentation.
4. Arbitrarily rejecting/ retaining comparables without providing any cogent reasons or substance for the same. 3 ITA No.149/Del./2013
5. arbitrarily including high-profit making companies in the final comparable set for bench marking a low risk captive unit such as the Appellant and thereby disregarding various relevant judicial pronouncements.
6. ignoring the business and commercial reality that since the Appellant (in the course of its contract software development services segment) is remunerated on an arm's length cost plus basis, i.e. it is compensated for all its operating costs plus a pre-agreed mark-up based on a bench marking analysis, the Appellant undertakes minimal business risks as against comparable companies that are full-fledged risk taking entrepreneurs, and by not allowing a risk adjustment to the Appellant on account of this fact.
7. ignoring the fact that the Appellant is entitled to tax holiday under section 10A of the Act on its profits and therefore would not have any untoward motive of deriving a tax advantage by manipulating transfer prices of its international transactions.
8. ignoring the reality that the facts and circumstances of the Appellant's case during the year remained unchanged from those during the previous year, during which the Appellant's international transactions were found to be at arm's length.
Corporate Tax Matters
9. The Ld. AO has grossly erred in adding back the amount of Rent equalisation reserve of Rs.18,45,875 to the book profits of the Appellant, declared under section 115JB of the Act, erroneously proposing that the amount of rent equalisation reserve charged to profit and loss account is covered under clause (b) or (c) of Explanation 1 to Section 115JB of the Act, and thus needs to be added in Book profits."
3. The brief facts of the case are that the assessee company was incorporated on June 14, 2008 under the Companies Act, 4 ITA No.149/Del./2013 1956 as a wholly owned subsidiary of Stryker Group (Stryker Mauritius Holding Ltd. 99.99% and Stryker Far East Incorporation 0.01%). Stryker Group operates in the medical equipment industry and manufactures and markets specialty surgical and medical products worldwide including orthopaedic implants, and also provides outpatient rehabilitative health services in the United States of America (USA). The Group operates through various products and sales divisions and has manufacturing facilities in Europe, USA, Latin America, etc. while all other entities of the Group are essentially engaged in distribution of these products in their respective territories.
4. During the relevant assessment year, the Stryker Global Technology Centre Private Limited rendered software development and IT Enabled Services (ITES) to its various Associate Enterprises (AEs). For this, it was compensated based on the terms of agreements entered between the entities on cost plus 17%. As per the transfer pricing document furnished for the assessment year 2008-09, the taxpayer has entered into the following international transactions with its AEs :- 5 ITA No.149/Del./2013
S.N. Nature of transaction Method
1. Provision of CAD/Engineering Design TNMM
services
2. Provision of Contract Software TNMM
Development Services
3. Provision of IT enabled back office support TNMM
services.
4. Reimbursement of expenses CUP
5. The Arm's Length Price (ALP) of the international transaction representing software development services provided to the AEs is determined by applying Transactional Net Margin Method (TNMM) which is stated to be the most appropriate method in the facts and circumstances of the case. The operating profit to total cost (OP/TC) ratio is taken as profit level indicator (PLI) in the TNMM analysis. The assessee prepared the PLI by TNMM analysis on multiple year data i.e. FYs 2005-06, 2006-07 and 2007-08 using 16 comparables and arm's length mean OP/TC was 12% whereas the PLI of the company was 17%. It is further seen that average profit level indicator was computed on the basis of 16 comparables selected by the taxpayer. For benchmarking the contract software development services, the assessee had selected 16 comparable companies with OP/TC margin of 11%. The mean margin of the comparable selected by 6 ITA No.149/Del./2013 the assessee, as stated above, was 12% and since the profit margin of the assessee is within ± 5% range of the mean margin of the comparables, no transfer pricing was offered in the return of income. The results as submitted by the taxpayer can be summarized as under :-
S.N. Nature of transaction Method Value of Margin transaction OP/TC
1. Provision of CAD/Engineering TNMM 77,187,428 17% Design services
2. Provision of Contract Software TNMM 107,775,779 17% Development Services
3. Provision of IT enabled back TNMM 11,664,838 17% office support services.
4. Reimbursement of expenses CUP 18,622,126 The TPO vide order dated 21.10.2011 rejected the transfer pricing study of the assessee and substituted a fresh process and modified the filters and comparables selected by the assessee.
The TPO benchmarked international transactions rejecting the assessee's selection of three multiple year data to that of a single/current year financial data and resorted to fresh search along with the comparables based on the data available at the time of assessment proceedings. The TPO also held that the assessee is not a risk free entity. Thereafter, the TPO selected 7 ITA No.149/Del./2013 seven comparables and proceeded to pass an order dated 21.10.2011 u/s 92CA (3), making a TP adjustment of Rs.84,09,662/- holding that the international transactions with the AEs under Contract Software Development Segment do not satisfy the arm's length principle envisaged under the Act. So, it can be seen that the dispute is only with regard to the transaction of contracts software development services wherein the TPO has ordered addition while computing arms length price.
6. Thereafter, the DRP vide order dated 20.09.2012 held the adjustment made by the TPO, however, added one more comparable, M/s. VMF Softech Limited as a comparable and directed the TPO to recompute the mean margin of comparables. Pursuant to the DRP order, the final list of comparable companies are as under :-
Company OP/TC (%) 1 Akshay Software Technologies Ltd. 9 2 FCS Software 71 3 Goldstone Technologies 34 4 Mindtree Consulting 14 5 PSI Data Systems 6 6 Bodhtree Consulting Ltd. 21 7 Lanco Global Systems 28 8 VMF Softech Ltd. 1 Mean Margin 23 % 8 ITA No.149/Del./2013
The TPO vide order dated 18.10.2012 recomputed the mean margin of comparables at an upward adjustment of Rs.58,05,299/-. Accordingly, the Assessing Officer made the assessment vide order dated 26.10.2012 passed u/s 143(3) read with section 144C of the Act assessing the total income of the assessee at Rs.2,05,44,662/- after making transfer pricing adjustment of Rs.58,05,299/-.
7. During the course of hearing, the ld. Counsel for the assessee, Shri Rohit Tiwari submitted that all his contentions vis- à-vis grounds raised in the memo of appeal confined to the exclusion of the following inclusions from the list of comparables by the DRP :-
(i) FCS Software
(ii) Goldstone Technologies
(iii) Lanco Global Systems
8. We have considered the rival submissions and perused the material on record. We are taking up each of the comparables contested and disputed by the assessee in this appeal as under :- 9 ITA No.149/Del./2013
(i) FCS SOFTWARE
9. Before the TPO, the assessee contended that FCS Software have super-normal profit and, therefore, should be excluded from the list of comparables and relied on the orders of M/s. Mentor, M/s. SAP Labs and Quark Systems. The TPO takes note that FCS Software has margin of 34% and he was of the opinion that in comparability analysis loss or so called higher margin is not a determining factor unless there are any peculiar circumstances in such a case and the TPO relied on certain decisions like Exxon Mobile Company India Pvt. Ltd. (2011-TII-68-ITAT-MUM-TP) and held that :-
"7.23 It may also be mentioned that the taxpayer's margin is not been compared with the margins of these "high margin"
comparables alone. These comparables are only part of set of 20 comparables taken in the show cause notice which contains even low margin cases. The margin of the taxpayer is being finally compared with the average margin of the comparables finally selected in this order. The average margin of such comparables even after including so called high margin cases is around 26.l4%. This margin cannot be termed as abnormal by any standards.
7.24 In view of the above discussion and the position of law the taxpayer's contention that high profit making comparables should be rejected, is not accepted."
10 ITA No.149/Del./2013
10. Before us, the ld. Counsel, Shri Rohit drew our attention to the annual report of FCS Software for financial year 2007-08 which is placed at pages 203 to 283 of the paper book and took our attention to page 274 wherein the product description and business profile is written as software development and IT enabled services and contended that though it was assessee's initial comparable, however, after going through the annual report, of the said company the assessee realized that assessee who is only into contract software development cannot be compared with FCS Software because they are functionally dissimilar and further no segmental break up is available from the annual report, therefore, it needs to be excluded. The Ld counsel took our attention to Page 275 of P.B. to buttress his point that this company is functionally dissimilar and contented that FCS software is engaged in software consultancy, technical support and other e-learning services. And it is also engaged in diversified activities like management of hardware, network, LAN/WAN etc. The relevant extract from the Annual Report is reproduced below:
11 ITA No.149/Del./2013
"P.2.4 Quantitative Details, The company is engaged in the software consultancy, technical support services, e-learning and other related allied services. These services cannot be expressed in any generic unit. Hence it is not possible to give the quantitative details of sales and the information as required under paragraphs 3, 4C and 4D of part II of schedule VI of the companies Act 1000."
And took our attention to Page 230 of P.B. where it is stated as below:-
"Infrastructure Management Services: Our clients now also depend on us to manage their servers based either on client sites, or at data Centre or in our premises. Our engineers remotely or onsite manage all Hardware, Network, LAN/WAN, Data and Voice networks that a client needs to run its applications. Our skills in Document Management Systems, Data Backup and Recovery, Virus Protection, SPAM Control, Hacking protection, and Business Continuity will some of the key reasons for clients to outsource their infrastructure management to us apart from their desire to have us as their one stop shop."
The Ld counsel also brought to our notice that FCS Software is also engaged in significant R&D activities. The relevant extract from the Annual Report at page 221 is reproduced below :-
"Research and Development (R&D) Keeping our policy in line this year also the company has allocated 10% to 15% of time of senior and more skilled professionals to Research and Development. During this time, the assigned staff is only supposed to work on Research and Development of new methodologies and best practices so that we can reduce time to market for our clients. One other key objective is to develop reusable objects and we are glad to announce that the company has made good progress in this area. This helps us to increase productivity and revenue per 12 ITA No.149/Del./2013 person because of saving in effort that would have been needed otherwise.
Ld. Counsel for the assessee also brought to our notice to page 578 of the paper book, wherein the TPO's order in the case of assessee for assessment year 2009-10 is placed and the TPO himself has opined that the said company has three strategic business units i.e. IT Consulting, E-Learning Division and Infrastructure Management and the revenue from IT segment is less than 50%.and held that the FCS software solution Ltd cannot be taken as a suitable comparable. So in the said factual scenario, the Ld counsel contented that this company may be excluded from the list of comparable.
11. On the other hand, the ld. DR supported the decision of the TPO and DRP and pleaded that we may not interfere with the impugned order.
12. We have considered the rival submissions and perused the material on record. The arguments of the ld. AR that only on account of super normal profit this comparable should be excluded is not tenable in the light of the Hon'ble jurisdictional 13 ITA No.149/Del./2013 High Court decision in the case of ChrysCapital Investment Advisors (India) Pvt. Ltd in ITA 417/2014 judgment dated 27.04.2015 and so, the said contention is rejected. Further, the counsel for the assessee has contended that FCS Software is involved in providing not only software development but also in IT enabled services. He took our attention to page 275 P.B. of the annual report which is reproduced above, which states that the said company is engaged in software consultancy, technical support services, e-learning and other related allied services and it is recorded in the annual report that it is not possible to give the quantitative details of sales; and a perusal of page 229 reveals that the assessee is engaged in E-Learning and Digital Consulting which constitutes 30% of its functions; application support is 11%, infrastructure management service is 15% and IT consulting is 44%; and thus contended that the said company is engaged in different activities and so is not a comparable with the functional profile of the assessee. The ld. DR could not point out from the annual report of the said company the segmental break- up which is essential to work out the PLI, because admittedly this 14 ITA No.149/Del./2013 company operates in different segments. In such circumstances, we deem it fit to remand the matter back to the file of the TPO to examine whether the segmental data relating to software development are available to compute the PLI at segmental level of this company. In case, it is not able to discern the segmental data as aforesaid of this company then this company should be excluded from the list of comparables. It is ordered accordingly.
(ii) GOLDSTONE TECHNOLOGIES
13. Ld. Counsel for the assessee contended that this company has been rejected by the TPO in the assessment year 2010-11 and has not found in the final list of comparables of the TPO order. The assessee has rejected this comparable at the segmental level stating that the geographical segments are the primary reported segment and took our attention to page 55 of the paper book which is the annual report, wherein intangible assets of the company is shown in the heading of design, development testing of software tools for IT services and ld. Counsel argued that the said company is involved in the IT enabled services also. 15 ITA No.149/Del./2013
14. On the other hand, ld. DR took our attention to page 35 of the paper book and took our attention to profit and loss account of the company wherein the income has been shown from software development only and no other income from any other source was reflected in the same. The Schedule XIII at page 40 also reflects software services, domestic as well as exports. Therefore, the ld. DR contended that the TPO as well as DRP are justified in taking this company as a comparable.
15. We have heard both the parties and have gone through the said annual report of the company. We find force in the argument of the ld. DR after perusal of the annual report that the company in the present assessment year is engaged in the software development, so is functionally similar, therefore, we uphold the decision of TPO/DRP to include this company as a comparable. This ground is rejected.
(iii) LANCO GLOBAL SYSTEMS
16. Ld. Counsel took our attention to page 507 of the paper book wherein the annual report of this company has been placed 16 ITA No.149/Del./2013 to show that the said company is involved in so many activities like consulting services, enterprise application integration, enterprise system solutions, testing service, business process outsourcing, application maintenance outsourcing, custom development and infrastructure management services etc. According to the ld. Counsel, the said company is involved in range of technical as well as in the financial human resources, life sciences, legal services, supply chain management, sales and customer care etc., in the BPO sector, custom development and took our attention to the chart wherein the segment wise and product wise performance has been discussed to show that the revenue yielding during the relevant assessment year from IT, ITES and Telecom is only 15.8% and the rest of it mainly from consulting i.e. consulting 28.4% and healthcare is 17.8%, manufacturing is 13.3% etc. So, according to the ld. Counsel, this company by no stretch of imagination can be termed as a comparable. So, it should be excluded. Further, the Ld. Counsel took our attention to page 575 of the paper book wherein the TPO in assessee's own case for assessment year 2009-10 has 17 ITA No.149/Del./2013 stated that the company is in the process of launching a local search business YReach and the software and system to manage the business was largely built in-house and observed that since the company has started a different business of local search by developing its own product YReach, the company cannot be said to be merely a software developer, hence, it cannot be taken as a comparable.
17. On the other hand, the ld. DR stated that assessee had not contested the exclusion of this company before DRP and now it cannot take a U-turn at this juncture before the Tribunal. Ld. DR relied on the orders of the TPO and DRP.
18. We have heard both the sides and perused the record. We find that the TPO in assessee's own case for assessment year 2009-10 has not included this company as a comparable. We are of the opinion that the TPO may de novo decide whether to include this company as a comparable for the instant year under consideration. Accordingly, we remand the matter back to the file of the TPO for de novo consideration.
18 ITA No.149/Del./2013
19. The last aspect is against not allowing any risk adjustment. During the course of proceedings the assessee claimed risk adjustment by contending that it is a captive service provider. The TPO examined risk matrix relevant to the business of the assessee and the risk matrix as disclosed in the TP study under Rule 10D. Thereafter, it was held that the assessee was not entitled to any risk adjustment because it was not a risk free entity. Apart from that, the TPO also declined to grant any such adjustment by noticing that no computation of risk adjustment was filed by the assessee and, as such, the onus in this regard was not discharged.
20. We have heard the rival submissions and perused the relevant material on record. We would like to remind that the initial onus for claiming any adjustment in the computation of ALP is always on the assessee. It is only when such initial onus is discharged that the turn of the TPO comes for ascertaining whether the claim so made by the assessee is correct or not. Adverting to the facts of the instant case, we find that there is no material worth the name justifying the claim of risk adjustment by comparatively showing particular risks undertaken or not 19 ITA No.149/Del./2013 undertaken by the assessee vis-a-vis the comparables. A generalized submission about the assessee assuming low/no risk vis-a-vis its comparables, cannot be countenanced. The assessee has to expressly exhibit that the specific risks undertaken by the comparables were absent in its case and vice versa. In the absence of any such working available either before the authorities below or us, we are disinclined to direct the granting of any risk adjustment. This contention of the ld. AR, therefore, fails.
21. In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in open court on this 23rd day of September, 2015.
Sd/- Sd/-
(R.S. SYAL) (A.T. VARKEY)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated the 23rd day of September, 2015
TS
Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT(A)
5.CIT(ITAT), New Delhi.
AR, ITAT
NEW DELHI.