M/S MPHASIS LIMITED,BANGALORE vs. THE JOINT COMMISSIONER OF INCOME TAX SPECIAL RANGE-4, BANGALORE

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ITA 67/BANG/2019Status: DisposedITAT Bangalore08 November 2019AY 2014-152 pages
AI SummaryRemanded

What did the Tribunal hold?

The Tribunal is analyzing the TPO's reallocation of expenses and the selection of comparable companies to determine the ALP. The case involves the application of the Transactional Net Margin Method (TNMM).

What were the facts?

The Assessing Officer (TPO) reallocated certain expenses to IT Services and BPO sectors and determined the Arm's Length Price (ALP) for international transactions. The TPO used comparable companies to arrive at operating margins for the SWD services and ITES segments.

What were the issues?

The primary issues revolve around the correct allocation of expenses and the appropriateness of the comparable companies selected by the TPO for determining the ALP of international transactions.

Which sections of the Income-tax Act were involved?

Section 92C

AI-generated summary — verify with the full judgment below

IT(TP)A No.67/Bang/2019 Page 5 of 23 The TPO has no alternative other than to allocate this expense shown under "OTHERS" to the IT Services and BPO sectors in the ratio of income. Therefore, the TPO has recomputed the segmental allocation as below – BPO Particulars IT Services Total in (INR) (ITES) Income 31579293132 Revenue from Operations 27966385354 3612907778 Total operating Income (A) 27966385354 3612907778 31579293132 Expenditure Employee benefits expense 13268955028 1808398605 15077353633 Depreciation and amortization 556929373 75902760 632832133 Expenses Other expenses 9329528487 1271502260 10601030747 Total operating Expenses (B) 23155412889 3155803624 26311216513 Operating Profit (C=A-B) 4810972465 457104154 5268076619 Net Operating Margin on Cost 20.02% 20.77% 14.48%

6.

It can be seen from the aforesaid action of the TPO that the operating margins of the assessee in SWD services segment and the ITES segment came down drastically from 31.88% to 20.77% as shown by the Assessee in its Transfer Pricing Study to 24.41% to 14.48% respectively. The TPO thereafter chose comparable companies in the SWD services segment and ITES segment and ultimately determined the ALP in the SWD services segment and the ITES segment as follows:

“23. FINAL SET OF COMPARABLES CONSIDERED BY THE TPO: 23.1 After considering the objections of the taxpayer to the comparable proposed in the show-cause notice, perusal of relevant annual reports and examination of additional comparable suggested by the taxpayer on the touchstones of filters and functionality, the final set of comparable companies considered by the TPO, is as under.

IT(TP)A No.67/Bang/2019 Page 6 of 23 SWD Segment Amounts in Rs. Lakh SL NO NAME OF TAX PAYER OR/SALES OC OP OP/OC (in %) 1 46,91,700 32,77,700 11,84,200 36.13% Infosys Ltd. Larsen & Toubro 2 4,54,360 3,64,619 89,741 24.61% Infotech Ltd. 3 Mindtree Ltd. 2,99,010 2,48,290 5,072 20.43% 4 Persistent Systems Ltd. 1,18,412 87,649 3,07,625 35.10% 5 35,188 28,321 6,867 24.25% R S Software (India) Ltd. 6 5,563 4,359 1,204 Cigniti Technologies Ltd. 27.62% 7 SQSIndiaBFSILtd. 20,061 16,394 3,667 22.37% 8 Thirdware Solution Ltd. 19,883 13,742 6,140 44.68% 29.40% Average ITeS segment Amounts in Rs. Lakh SL OP/OC Company Name OR/SALES OC OP NO. (in %) 1 Infosys 13 P 0 Ltd. 2,30,900.00 1,81,200.00 49,700.00 27.43% 2 Microgenetic Systems 225.97 191.41 34.56 18.06% Ltd. 3 Microland Ltd. 34,471.00 28,709.00 5,762.00 20.07% 4 B N R Udyog Ltd. (Seg) 142.59 114.00 28.59 25.08% Crossdomain Solutions 5 7,462.75 6,164.00 1,298.76 21.07% Pvt Ltd Average 22.34% 24. DETERMINATION OF ARMS LENGTH PRICE Based on the detailed discussion held in various parts of this order, the arm's length price of the international transactions entered into by the taxpayer is computed as under: 24.1 Method Used: TNMM is used as the most appropriate method both by the taxpayer as well as the TPO. 24.2 Comparable: The comparable are as discussed above. The computation of the PLI of the comparable is as per Annexure 'A' & 'Annexure B'. 24.3 Data used: Data pertaining to the FY 2013-14 as mandated under Rule 10B (4).

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