Case Law Details
Brief of the Case
ITAT Delhi held In the case of Alcatel-Lucent Technologies. vs, DCIT that merely because the assessee in the TP study had included the comparable, which was accepted by TPO, it does not follow that the assessee cannot resile from its original claim at a later stage of proceeding, if it can demonstrate that a company has to be excluded because its FAR analysis clearly shows that it is not comparable to the listed party. Accordingly, we direct exclusion of this comparable.
Facts of the Case
ITA no. 2297/Del/08
TP adjustment
The assessee was a subsidiary of Lucent Technologies International Inc., USA with 0.33% share being held by Lucent Technologies Asia Pacific (HK) Ltd. The assessee was engaged, inter alia, in the business of development of software, sub-contracting and export system engineering services, technical engineering services, technical services including systems installation maintenance (both hardware and software development and training). The assessee was primarily undertaking contract software designing and development for Lucent Group and, thus, functioning as a captive software development centre for its AEs.
For A.Y. 2003-04, the assessee had filed return declaring total income of Rs. 4,12,10,285/-. The AO determined the total income at Rs. 19,12,29,580/-, after making various additions including addition on account of understatement of value of transactions with AEs amounting Rs. 11,26,75,000.
Accordingly, for 41 companies TPO arrived at revised average OP/TC margin of 23.54%. After considering the assessee’ submission that it was a risk mitigated company, being captive service provider, allowed 20% deduction out of the mean OP/TC determined at 23.54% and thus arrived at a mean OP/TC at 18.83%, applying the same, the ALP was determined at Rs. 13,34,361,000 as against the declared value of Rs. 122,16,86,000/- and, therefore, there was upward revision of the income by Rs. 11,26,75,000.
Adjustment on account of risk environment
Before TPO, the assessee had pointed out that since it is a captive service provider and does not bear any risk related to market risk, product risk, technology risk, risk of project cost over runs etc. some adjustment had to be made while making any comparison. TPO allowed an ad hoc benefit of 20% and adjusted the PLI accordingly.
Held by CIT (A)
TP adjustment
CIT (A) examined the comparables finally selected by TPO and finally concluded that a total of 18 companies out of list of 48 companies, were found to be comparable to the assessee, out of which in 17 cases there was agreement between the assessee and the TPO. Only one company finds place in the final list which was included by the TPO. Thus, out of the five companies, included by ld. TPO, the ld. CIT (A) accepted only one. These were rejected on the ground that they had substantial related party transactions.
CIT (A) had retained only Aftek Infosys Ltd. 18 companies had been rejected , though there was agreement between the assessee and the TPO regarding their comparability with the assessee. CIT(A) also confirmed the rejection of 7 companies which were considered by the assessee in its TP documentation but were rejected by TPO in the TP order on the basis of final set of 18 companies, the OP/.TC margins of the revised comparable set was computed at 18.60%. CIT (A) while applying the above arm’s length margin also denied the 20% risk adjustment (to the mean margin of the OP/TC of the comparables), allowed by TPO to the assessee on account of the risk free nature of its software development services as compared to the full fledged risk bearing comparable companies. CIT (A) reduced the quantum of TP adjustment of Rs. 25,82,624/- and finally sustained the TP adjustment at Rs. 11,00, 92,376/-..
Adjustment on account of risk environment
CIT (A) held that TPO had committed an error by allowing downward adjustment of 20% in an ad hoc fashion, without following any scientific methodology.
Held by ITAT
TP adjustment
The assessee has primarily assailed the finding of CIT (A) in regard to sustaining one comparable included by TPO in the list of comparable viz. Aftek Infosys Ltd. and exclusion of 7 comparables selected by assessee.
Aftek Infosys Ltd.
We find that TPO had included this company on account of it dealing in software activity after pointing out that assessee had not been able to establish how the company was functionally different. Thus, it is evident that the functional differences, as pointed out by ld. counsel for the assessee in synopsis, have not been critically examined with reference to the annual report and, therefore, we restore this matter to the file of AO to find out the factual aspects on this count and, if, the company is found to be only a software product company, then the same cannot be compared with the assessee company, which is primarily a designing and developing software on contract basis for its AE. This issue is allowed for statistical purposes.
Infosys Technologies Ltd.
In the list of 41 comparables, finally selected by CIT(A), Infosys Technologies Ltd. was included, inter alia, pointing out that there was agreement between TPO and the assessee on this comparable. We find considerable force in the submission of ld. counsel for the assessee, because of the diversified functions performed by Infosys Technologies Ltd., and also on account of ownership of branded/ proprietary products, it cannot be compared with the assessee because difference in functions performed, asset base and risk assumed by both the companies.
We may observe that merely because the assessee in the TP study had included the comparable, which was accepted by TPO, it does not follow that the assessee cannot resile from its original claim at a later stage of proceeding, if it can demonstrate that a company has to be excluded because its FAR analysis clearly shows that it is not comparable to the listed party. Accordingly, we direct exclusion of this comparable.
Satyam Computers Services Ltd.
We are in agreement with ld. counsel for the assessee that due to unreliable financial data of Satyam Computers Services Ltd., which is in public domain now, the company, cannot be considered as a comparable to the assessee.
Xansa India Ltd.
Ld. counsel very fairly contended that no plea was taken before ld. CIT (A) on the basis of RPT, but now this objection has been taken as annual report is available and, therefore, the matter may be restored back to the file of CIT(A) in order to arrive at proper conclusion. We restore this issue to the file of CIT(A) for decision afresh in accordance with law.
Geodesic Information Systems Ltd.
CIT (A) confirmed the TPO’s action observing that the annual report for the FY 2002-03 submitted by the assessee clearly showed that the financial data of the company is available which confirmed that the OP/TC ratio was 74.55%. Since this comparable was chosen by assessee, therefore, CIT (A) rejected the assessee’s contention. However, now ld. counsel for the assessee has pointed out that this company as engaged in development of software products and operated as full fledged risk taking entrepreneur having IPR and trade mark. These aspects were not considered by TPO.
We find that the issues raised before us needs to be examined by ld. TPO because assessee itself had taken into consideration this comparable. We, accordingly, restore this issue to the file of TPO for decision afresh in accordance with law.
Adjustment on account of risk environment
We are of the opinion that no interference is called for in the order of CIT (A) on this count because assessee failed to propose the necessary adjustment by filing a scientific methodology during TP proceedings or during appellate proceedings. The onus for quantification was on assessee on the risk assumed by comparables vis a vis tested party. Accordingly, this ground is rejected.
Accordingly appeal disposed of.
