M/S TRIANZ HOLDINGS PVT LTD ,BANGALORE vs. ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-7(1)(1), BANGALORE

Upon receipt of reference, Ld.TPO called upon assessee to file economic details of international transaction in Form 3 CEB. Ld.TPO observed that, assessee is providing information technology services to global clientele to high technology, banking, healthcare, insurance, telecom manufacturing clients. It was observed that assessee has its operations in USA, Japan and India. In USA assessee operates through its subsidiaries.

Ld.TPO observed that, assessee had following transaction with associated enterprises:

Ld.TPO rejected analysis carried out by assessee and observed that functions of assessee was to develop software/providing software services, as was in previous year. Ld.TPO observed that in previous year, assessee chose TNMM as most appropriate method in transfer pricing analysis, whereas for current year, though there is no change in business scenario, and that assessee was providing same kind of services to both AE and non-AE, CUP has been used. Ld.TPO therefore rejected CUP, instead, considered TNMM for determining ALP of the transaction. Ld.TPO applied filters for determining set of following 8 comparables, with an average margin of 29.40%: Sl. No. Comparables selected Margin 1. Infosys Ltd 36.13% 2. Larsen and Toubro Infotech Ltd 27.36% 3. Mindtree Ltd 20.43% Page 8 of 14 IT(TP)A 3136/Bang/2018 A. Y : 2014 – 15 4. Persistent systems Ltd 35.10% 5. R S software (India) Ltd 24.23% 6. Cigniti technologies Ltd 27.62% 7. SQS India BSFI Ltd 22.25% 8. Thirdware solutions Ltd 50.45% Total 29.40% 7. Ld.TPO computed average margin of comparables at 29.48% as against 7.80% of assessee, thereby proposing an adjustment being shortfall amounting to Rs.41,00,84,082/-.

Ld.TPO also made following observations:  that operational arrangement of assessee with its associated enterprise AE is of a routine contract software development service provider:  Ld.TPO rejected TNMM as most appropriate method as against CUP, and disregarded submissions of assessee in this regard;  Ld.TPO concluded that assessee operates on a cost-plus markup basis, and observed that turnover is not relevant, since there is no impact of turnover on cost plus margin earned by assessee;  Ld.TPO rejected submissions of assessee regarding Infosys being functionally different and failing upper turnover filter;  Ld.TPO rejected submissions of assessee regarding comparables alleged for exclusion on functional dissimilarity;  Ld.TPO rejected companies having different financial year ending and rejected companies having software development service income less than 75% of the total turnover; Page 9 of 14 IT(TP)A 3136/Bang/2018 A. Y : 2014 – 15  Ld.TPO rejected assessee’s contention treating provision for doubtful debts as operating expenses, instead, treated it non- operating item while calculating margins of comparable companies.  Ld.TPO rejected certain comparables alleged for inclusion by assessee.

Ld.AO while passing draft assessment order computed disallowance under section 14 A at Rs.23,90,960/-, and also did not grant deduction under section 10AA of the Act to the extent of certain expenditure in foreign currency amounting to Rs.19,92,074/- in Chennai unit and Hydrabad unit from export turnover.

Aggrieved by additions made by Ld.AO/TPO in draft assessment order, assessee raised objections before DRP. DRP simply upheld findings of Ld.TPO in respect of transfer pricing issues, however excluded ICRA Techno Analytics Ltd. DRP also held that, since assessee did not have any provision for doubtful debts during the year under consideration, objection in relation to treating it as operating item in respect of comparables was rejected.

Upon receipt of directions from DRP, Ld.AO passed impugned assessment order, against which assessee is in appeal before us. Ld.AR submitted that assessee do not wish to press Grounds 1, 2.1, 2.2., 2.3. Accordingly, these ground stands dismissed as not pressed.

Ld.AR submitted that, observations of Ld.TPO regarding associated enterprises baring all risk related to services rendered and that assessee is working on cost plus mark-up basis is not in accordance with facts. Ld.AR submitted that, it is incorrect to say that assessee in preceding year used CUP as MAM in relation to income earned for rendition of software development services. He submitted that for assessment year 2013–14 TNMM was considered only in respect of services availed from U.S. associated enterprises and not for services rendered to subsidiary AE’s. It has been submitted that in current year as well as in earlier year, Page 11 of 14 IT(TP)A 3136/Bang/2018 A. Y : 2014 – 15 assessee used CUP for software services rendered to subsidiary AE’s.

Ld.AR thus been submitted that, Ld.TPO on wrong assumption of facts, carried out transfer pricing analysis, and selected inappropriate comparables which do not match with the functional profile of assessee. He submitted that even DRP also failed to appreciate contentions of assessee, and simply upheld observations of Ld.TPO without dealing with objections raised.

Ld.CIT DR though referred to orders passed by authorities below, could not controvert functional profile of assessee, having regards to agreements entered into by assessee which is placed in the paper book. We have perused submissions advanced by both sides and having regards to the records before us.

Admittedly, ongoing through agreements entered into by assessee at page 659 of paper book, it is clear that assessee has 2 segments being AE segment and non-AE segment. Associated enterprises are subsidiaries of assessee, and in order to have the ease of business, associated enterprises enter into contract with 3rd parties for providing services. From these agreements it is clear that assessee bares all risk related to services rendered, whereas subsidiary AE’s only. On the contrary, authorities below assumed that assessee is working on a cost-plus model with associated enterprises and that associated enterprises undertakes all risk related to service provided by assessee.

We observe that, Ld.TPO considered assessee to be a contract service provider, assuming minimal risk, which is contrary to the Page 12 of 14 IT(TP)A 3136/Bang/2018 A. Y : 2014 – 15 business model of assessee. We agree with contention of Ld.AR that Ld.TPO conducted TP analysis on erroneous understanding of business model of assessee, and comparables selected by Ld.TPO cannot be looked into.

We are therefore of opinion that, adjustment made by Ld.AO on the proposed adjustment by Ld.TPO should be revisited de novo. Accordingly, we set aside all issues raised by assessee on transfer pricing issues to Ld.AO/TPO. LD.AO/TPO is directed to carry out transfer pricing analysis having regard to the business model of assessee. It is also directed that comparables selected should be functionally similar with assessee, having similar business model like assessee.

Assessee is directed to produce all relevant documents to bring out its role in providing services to the parties situated outside India. Ld.TPO is also directed to grand working capital adjustments in comparables in actual where ever necessary, for computing correct margins of comparables. Needless to say, that assessee shall be granted proper opportunity of being represented. Accordingly, we set aside Grounds 2.4- 2.6 to Ld.AO/TPO for statistical purposes. Corporate Tax issues: 21. Ld.AR submitted that, assessee do not wish to press Ground no. 3.2 accordingly these ground with its sub grounds raised