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Income Tax Appellate Tribunal, PUNE BENCH “B”, PUNE
आदेश / ORDER
PER SUSHMA CHOWLA, JM:
The cross appeals filed by the assessee and Revenue are against order of DCIT, Circle 7, Pune, dated 30.01.2015 relating to assessment year 2010-11 passed under section 143(3) r.w.s. 144C of Income Tax Act 1961 (in short the ‘Act’).
The cross appeals filed by the assessee and Revenue were heard together and are being disposed of by this consolidated order for the sake of convenience.
The assessee in ITA No.242/PUN/2015 has raised the following grounds of appeal:- Ground No.1: On the facts and circumstances of the case and in law, the Learned ('Ld.') Assessing Officer ('AO') has erred in not allowing the set off of brought forward loss of Rs.8,87,13,096 pertaining to earlier assessment years while determining the taxable income for AY 2010-11. The Assessee prays that the Ld. AO be directed to consider the brought forward loss of Rs.8,87,13,096 while determining the taxable income for AY 2010-11. Ground No. 2: On the facts and circumstances of the case and in law, the Ld. AO has erred in not considering the business loss of Rs.4,14,79,881 pertaining to AY 2010-11 while determining the taxable income for AY 2010-11. The Assessee prays that the Ld. AO be directed to consider the business loss of Rs.4,14,79,881 pertaining to AY 2010-11 while determining the taxable income for AY 2010-11. Ground No. 3: On the facts and circumstances of the case and in law, the Ld. AO following the directions of the Ld. Dispute Resolution Panel ('DRP') has erred in disregarding the transfer pricing analysis conducted by the Assessee and consequently erred in making the transfer pricing adjustment of Rs.9,61,57,054 in respect of Assessee’s international transactions. The Assessee prays that the Ld. AO be directed to delete the transfer pricing adjustment of Rs.9,61,57,054.
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Ground No. 4: On the facts and circumstances of the case and in law, the Ld. AO following the directions of the Ld. DRP has erred in disregarding the segmental information pertaining to the transactions with associated enterprise ('AE business') and transactions with third parties ('Non-AE business') and consequently erred in considering the operating margin of the Assessee at an entity level while determining the arm's length price of the international transactions. The Assessee prays that the Ld. AO be directed to consider the segmental information pertaining to AE business while determining the arm's length price of international transactions, Ground No. 5: On the facts and circumstances of the case and in law, the Ld. AO following the directions of the Ld. DRP has erred in considering certain functionally uncomparable companies/segments as comparables without following a structured search process and thereby resorting to cherry picking of comparables. The Assessee prays that the Ld. AO be directed to determine the arm's length price of the impugned international transactions with reference to the comparables selected by the Assessee in the transfer pricing report. Ground No. 6: On the facts and circumstances of the case and in law, the Ld. AO following the directions of the Ld. DRP has erred in rejecting certain functionally comparable companies/segments selected as comparables by the Assessee. The Assessee prays that the Ld. AO be directed to determine the arm's length price of the impugned international transactions with reference to the comparables selected by the Assessee in the transfer pricing report. Ground No. 7: On the facts and circumstances of the case and in law, the Ld. AO following the direction of the Ld. DRP has erred in applying / modifying certain additional quantitative filters while conducting the benchmarking analysis. The Assessee prays that the Ld. AO be directed not to apply / modify additional quantitative filters while conducting the benchmarking analysis. Ground No. 8: On the facts and in the circumstances of the case and in law, the Ld.AO has erred in computing the operating margin of all the comparable companies considered in the final assessment order. The Assessee prays that the Ld. AO be directed to consider the correct operating margin of the aforesaid comparable companies. Ground No.9: On the facts and in the circumstances of the case and in law, the Ld.AO has erred in not allowing the economic adjustments while calculating the operating margin of comparable companies. The Assessee prays that the Ld. AO be directed to allow economic adjustments while computing the operating margin of comparable companies.
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Ground No.10:On the facts and in the circumstances of the case and in law, the Ld. AO following the directions of the Ld. DRP has erred in considering only single year financial data which was not available in public domain at the time of conducting the transfer pricing analysis. The Assessee prays that the Ld. AO be directed to consider multiple year data while determining the arm's length price for the international transactions. Ground No.11: On the facts and in the circumstances of the case and in law, the Ld. AO following the direction of the Ld. DRP has erred in computing transfer pricing adjustment on the basis of entity level turnover instead of computing the adjustment only with respect to the revenue from international transactions of the Appellant following the principle of proportionality. The Assessee prays that the transfer pricing adjustment, if any, should be computed on a proportionate basis. Ground No.12: On the facts and in the circumstances of the case and in law, the Ld. AO has erred in computing the transfer pricing adjustment while passing the final assessing order. The Assessee prays that correct amount of transfer pricing adjustment, if any, should be computed. All the above grounds are independent and without prejudice to one another.
The Revenue in ITA No.335/PUN/2015 has raised the following ground of appeal:- As there is no relationship between Turnover and profitability, whether DRP was correct in deleting the comparable without taking into account FAR analysis of the comparable company and assessee company.
First, we take up the appeal of assessee. The learned Authorized Representative for the assessee at the outset did not press grounds of appeal No.1, 2 and 3, hence the same are dismissed as not pressed. He further pointed out that the issue raised vide ground of appeal No.4 is against transfer pricing adjustment made in the hands of assessee by disregarding segmental information pertaining to transactions with associated enterprises and the transactions with third party i.e. non-associated enterprises business. The assessee is aggrieved by the order of Assessing Officer/Dispute Resolution
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Panel (DRP) in considering the operating margins of assessee at an entity level while determining the arm's length price of international transactions as against the segmental information pertaining to associated enterprises business filed by the assessee. The learned Authorized Representative for the assessee at the outset pointed out that if segmental profitability was accepted, then the margins of international transactions would be +/- 5% range. He also pointed out that though the ground of appeal raised by the Revenue is vague but apparently it is with regard to application of turnover filter and against directions of DRP in excluding Infosys Technologies Ltd. on the basis of turnover filter. He further pointed out that other grounds of appeal raised by the assessee in the present appeal would become academic.
We proceed to decide the ground of appeal No.4 raised by the assessee and the issue raised by the Revenue in its appeal.
Briefly, in the facts of the case, the assessee for the year under consideration had furnished return of income declaring total income of ₹ 26,82,997/-. The assessee was engaged in the business of Telecom software development in domestic and European market. The assessee had entered into international transactions with its associated enterprises at ₹ 16,91,26,367/-. Thus, the Assessing Officer made reference under section 92CA(1) of the Act to the Transfer Pricing Officer (TPO) for determining the arm's length price of international transactions. The TPO in view of the FAR analysis of functions performed, risk undertaken and the assets employed, took note of filters selected by the assessee. However, the TPO proposed application of different filters and issued show cause notice to the assessee. The PLI working was also re- computed considering the Forex loss as non-operative. The assessee objected
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to the same. The second proposal of the TPO for working of PLI was to consider the same at entity level. The case of the assessee before the TPO was that PLI with reference to work carried out with associated enterprises was 21.92% and with non-associated enterprises was (-) 24.85%. The TPO further observed that the auditor in the audit report had not given segmental account as provided by the assessee with regard to its work with associated enterprises and non- associated enterprises. The basis of cost allocation between associated enterprises and non-associated enterprises by the assessee was based on hours in respect of man power cost; and at actuals in respect of administration and other overheads. The depreciation was based on hours and the financial cost on the basis of exchange gains and losses in the ratio of exports with associated enterprises and non associated enterprises. The TPO was of the view that where the assessee has not followed any scientific method for allocation of expenses, the same cannot be accepted. The first allocation of expenses on man hour basis, as per the TPO, was not correct, because it did not take into account the personnel who remained idle during the year. The assessee had failed to provide complete details thereof. The TPO observed that even if it is presumed that such data was available with the assessee, the reliability of data was not verifiable. Secondly, while allocating the expenses on man hour basis, the TPO was of the view that the same requires that the work assigned by the associated enterprises and the work contracted by non associated enterprises would be of similar skill set. Another objection of the TPO was that for allocating expenses on man hour basis uniformly to associated enterprises and non- associated enterprises was possible, only when FAR analysis of both the work matches. However, there was no such matching FAR observed in the agreement with non-associated enterprises. In view thereof, segmental accounts prepared by the assessee were held to be non-reliable and non-authentic. The
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TPO also rejected the objection with reference to Forex gain being non-operative and also held that the same treatment was provided to the comparable, hence no merit in the objections of assessee. The TPO also applied single year data of comparables selected and after considering the submissions of assessee vis-à- vis companies which were initially selected by the assessee and were rejected by the TPO and in respect of concerns selected by the TPO in its analysis, final set of comparables were drawn, which is enlisted at page 27 of the order of TPO. The mean margins of PLI of comparables was worked out at 23.90% and proposal was made for an upward adjustment of ₹ 10,86,03,623/- to the international transactions relating to software development services of assessee. The Assessing Officer in the draft assessment order show caused the assessee as to upward adjustment, against which the assessee filed objections before the DRP. The DRP upheld the order of Assessing Officer / TPO in disregarding segmental results and in considering net margins of assessee at the entity level. Further, the DRP directed Assessing Officer / TPO to exclude certain concerns which were finally selected by the TPO. However, the plea of assessee in some cases was rejected. Further, certain directions were given by the DRP on account of different economic adjustments. The Assessing Officer / TPO in view of the above directions of DRP, drew final set of comparables which are enlisted at page 4 of the assessment order passed under section 143(3) r.w.s. 144C of the Act, dated 30.01.2015. The mean margins of comparables worked out to 20.67% as against PLI of assessee at 12%. In view thereof, adjustment on account of transfer pricing of ₹ 9,61,57,054/- was made to the income of assessee.
The assessee is in appeal against the order of Assessing Officer / DRP. However, before us it has raised several grounds of appeal regarding inclusion /
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exclusion of comparables but had restricted the arguments only to the issue of application of segmental details pertaining to transactions with associated enterprises as against the order of Assessing Officer / TPO / DRP in considering the operating margins of assessee at entity level. The Revenue is in appeal against directions of the DRP in excluding Infosys Technologies Ltd.
The learned Authorized Representative for the assessee while referring to the background of the case pointed out that Fortuna Technologies Pvt. Ltd. was acquired by Tieto in 2007. The learned Authorized Representative for the assessee pointed out that except for financial year 2007-08, in all the other years starting from financial years 2008-09 to 2012-13, the assessee had shown sales both in associated enterprise business and non-associated enterprise business. He further pointed out that in all the years both preceding and succeeding, there was no reference to the TPO and no adjustment was made by the TPO in respect of same transactions i.e. sales to associated enterprises. It was only in the year under appeal that associated enterprise sales were compared to non- associated enterprise sales and the adjustment was made. He pointed out that initially the assessee was providing services only to non-associated enterprises i.e. in financial year 2007-08, there was no associated enterprise business; but because of the availability of staff, services were rendered to associated enterprises. The learned Authorized Representative for the assessee pointed out that TNMM method was selected as most appropriate method and PLI was determined on the basis of OP/TC of segmental profits of associated enterprises were worked and PLI was 21.92% as against mean margins of comparables at 8.20%. He further pointed out before the TPO the assessee filed cost allocation on the basis of man hours. Even the DRP certified that data was filed in respect of cost allocation. However, the TPO rejected skill segmental details and had
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taken margins at the entity level at (-) 11.64%. The TPO then compared mean margins of the comparables newly selected by him at 20.67%. He stressed that against associated enterprise business of ₹ 11 crores, TP adjustment was proposed at ₹ 9.61 crores. Our attention was drawn to pages 380 to 388 of the Paper Book and it was pointed out that segment-wise operating profitability was available before the Assessing Officer / TPO and also before the DRP as mentioned in para 7.5.1. The learned Authorized Representative for the assessee explained that man hour data was system generated i.e. the data on working of employees for the services to be provided by the assessee to its associated enterprises. The assessee was remunerated on the basis of operating cost plus 15% as against non-associated enterprise business where the assessee was incurring losses. Our attention was drawn to page 7 of the DRP’s order in para 7.5.2, wherein cost was allocated to associated enterprises and non-associated enterprises and then the margins were worked out. The learned Authorized Representative for the assessee further referred to Advance Pricing Agreement (APA) and document placed at page 30 of the Paper Book to point out that APA had accepted man hour allocation in the later years. He stressed that if segmental profitability was accepted then the margins of international transactions would be within range. Reliance was placed on the decision of the Pune Bench of Tribunal in Visteon Engineering Center (India) Pvt. Ltd. Vs. DCIT in ITA No.331/PN/2014, relating to assessment year 2009-10, order dated 11.04.2016 and Mumbai Bench of Tribunal in DCIT Vs. Technimont ICB Ltd. in ITA No.1820/Mum/2015 along with CO No.68/Mum/2015, relating to assessment year 2010-11, order dated14.09.2016. The learned Authorized Representative for the assessee also filed on record the intimation received under section 143(1) of the Act for assessment year 2009-10, wherein the assessee had undertaken similar transactions on account of associated
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enterprise business and non-associated enterprise business and no TP adjustment was made. He further pointed out that in assessment year 2011-12, no reference was made to the TPO under section 92CA(1) of the Act. Similarly, in assessment year 2014-15, no TP adjustment was made. He referred to the copy of assessment order passed under section 143(3) of the Act in this regard. In respect of assessment years 2012-13 and 2013-14, the learned Authorized Representative for the assessee submitted that though reference was made to the TPO, however, no adjustment was made. In this regard, he filed copy of TPO’s order and also copy of assessment order passed under section 143(3) of the Act. He stressed that there was no merit in applying margins at entity level in order to benchmark the international transactions.
The learned Departmental Representative for the Revenue placed reliance on the orders of authorities below in this regard. In respect of appeal of Revenue, the learned Departmental Representative for the Revenue referred to decisions of Mumbai Bench of Tribunal in Capgemini India Pvt. Ltd. Vs. ACIT in ITA No.7861/Mum/2011, relating to assessment year 2007-08, order dated 28.02.2013 and in M/s. Symantec Software Solutions Pvt. Ltd. Vs. ACIT in ITA No.7894/MUM/2010, relating to assessment year 2006-07, order dated 31.05.2011. The learned Authorized Representative for the assessee on the other hand, placed reliance on the ratio laid down by the Hon’ble Bombay High Court in CIT Vs. Pentair Water India Pvt. Ltd. (2016) 381 ITR 216 (Bom).
We have heard the rival contentions and perused the record. The issue which arises by way of ground of appeal No.4 is against the transfer pricing adjustment made in the hands of assessee. The assessee was engaged in provision of software services to its overseas group companies and third party
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customers in India. The assessee in TP study report had considered TNMM method as most appropriate method with OP / OC as PLI to benchmark its international transactions. The assessee in the TP study report had benchmarked the international transactions by comparing the operating margins of external comparable companies with operating margins of AE segment of assessee. The assessee had declared the margins earned by associated enterprise in AE segment at 12%, whereas that of comparable companies was 8.20%. Hence, the claim of assessee that international transactions were at arm's length. The TPO however, rejected the approach adopted by assessee i.e. segmental profitability of AE segment and benchmarked the international transactions by considering the entity level profitability of assessee. The first argument which has been raised by the assessee is that there is no merit in applying entity level results in order to benchmark the international transactions of provision of software services to overseas associated enterprises. The case of assessee in this regard was that the assessee was incorporated to provide the services to third parties i.e. non-associated enterprises. However, since it had surplus available workforce and other resources, services were also provided to associated enterprises and the revenue from AE segment comprised 43% of total revenue. The assessee claims that the operating margins of AE segment had to be compared with the mean margins of comparables finally selected in the case of assessee. It may be put on record that the assessee has raised various grounds of appeal against selection and exclusion of comparables by the TPO and applying the margins of said finally selected companies to benchmark the international transactions of assessee. However, during the course of hearing before us, the learned Authorized Representative for the assessee fairly pointed out that in case the margins of AE segment are considered and not the margins at entity level, then mean margins of comparables and the assessee would be +/-
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5% range and no transfer pricing adjustment had to be made in this regard. However, the same was qualified by the learned Authorized Representative for the assessee that for this proposition to be applied, the appeal of Revenue of exclusion of Infosys Technologies Ltd. on high turnover needs to be rejected.
The case of assessee before us is that for preparing segmental details of AE segment, the assessee had applied man-hour basis which was accepted and where on providing segmental details and the same has been accepted even in APA proceedings i.e. document placed at page 30 of Paper Book, wherein APA had accepted man-hour allocation in the later years. Another aspect of the issue is that in the years preceding i.e. assessment year 2009-10 and in the succeeding years i.e. assessment years 2011-12 to 2014-15, no TP adjustment was made by the TPO and in some years, there is no TP reference at all. He stressed that in all the years, similar segmental profitability statement provided by the assessee was accepted by the Revenue authorities. The assessee has filed on record the copies of orders of TPO / Assessing Officer in this regard. In the totality of the above said facts and circumstances, we hold that while benchmarking international transactions of provision of services to Tieto Group companies by the assessee, the segmental details of AE segment need to be applied and not the results at entity level are to be applied. The assessee had applied a systematic manner of allocating the expenses to the AE segment i.e. on the basis of man-hour which is accepted method of allocation of cost. The same has also been applied under APA agreement signed by the assessee. Further, the assessee has also explained in detail the allocation of other costs either on actual basis or turnover basis and the same cannot be rejected. Accordingly, we reverse the order of Assessing Officer / TPO in applying the margins at entity level and direct the Assessing Officer to accept margins shown
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in segmental profitability of AE segment by the assessee. The case of assessee is that in case the segmental profitability of AE segment is applied, then the margins shown by the assessee are within +/- 5% range of mean margins of comparables as worked out by the TPO and no adjustment needs to be made on account of international transactions undertaken by the assessee. Accordingly, we hold so.
Before parting, we may also point out that in similar circumstances as in the year of appeal before us, no TP adjustment has been made on this count in any of the years both preceding and succeeding; in some cases there is no TP reference also. We have gone through the assessment orders and orders passed by the TPO in this regard starting from assessment year 2009-10 to 2014-15 which are placed on record and there is no adjustment was made in this regard. Accordingly, we find no merit in the order of Assessing Officer / TPO for the instant assessment year in rejecting the accepted method of applying segmental details of AE segment for benchmarking the international transactions with associated enterprises.
Another issue which is raised by the Revenue is against rejection of concern on turnover basis. Though the ground of appeal raised by the Revenue is vague in this regard but the perusal of order of DRP shows that it had directed exclusion of Infosys Technologies Ltd. on turnover basis. We find that the issue is covered by the ratio laid down by the Hon’ble Bombay High Court in CIT Vs. Pentair Water India Pvt. Ltd. (supra), wherein it has been held that the concern Infosys Technologies Ltd. having high turnover and having intangibles is not comparable to the concern providing software services to its associated enterprises. Applying the said ratio to the facts of present case, we uphold the
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order of DRP in excluding Infosys Technologies Ltd. from final set of comparables.
We are not addressing all the other grounds of appeal on exclusion / inclusion of other comparables, in view of the concession of learned Authorized Representative for the assessee in this regard. Consequently, grounds of appeal raised by assessee are partly allowed and the ground of appeal raised by Revenue is dismissed.
In the result, appeal of assessee is partly allowed and appeal of Revenue is dismissed.
Order pronounced on this 7th day of March, 2018.
Sd/- Sd/- (ANIL CHATURVEDI) (SUSHMA CHOWLA) ऱेखा सदस्य / ACCOUNTANT MEMBER न्याययक सदस्य / JUDICIAL MEMBER ऩुणे / Pune; ददनाांक Dated : 7th March, 2018. GCVSR आदेश की प्रयतलऱपप अग्रेपषत/Copy of the order is forwarded to : The Appellant; 1. The Respondent; 2. The DRP, Pune; 3. The DIT (TP/IT), Pune; 4. The DR ‘B’, ITAT, Pune; 5. Guard file. 6. आदेशािुसार/ BY ORDER, सत्यापऩत प्रतत //True Copy// वररष्ठ तनजी सचिव / Sr. Private Secretary आयकर अऩीऱीय अचधकरण ,ऩुणे / ITAT, Pune