Case Law Details
Brief of the Case
ITAT Hyderabad held In the case of M/s. OSI Systems Pvt. Ltd. vs. DCIT that it may be a fact that software development services is a very wide term and takes within its ambit, whole software development services. But all types of software development services cannot be clubbed together for comparability analysis, as in our view, it will not give an appropriate result. As in assessee’s case also software development services are for two different sectors i.e. security system as well as medical services, we are not able to accept assessee’s contention that operating profit to operating cost of the revenue earned from software development services segment should be considered as a whole for computing the margin of the assessee. Moreover, when assessee has maintained entity specific a/c with segmental details and has also conducted analysis on this basis in its TP study, we do not find any reasons to disturb the order of the TPO and DRP on this issue.
Facts of the Case
ITA No.683/Hyd/2014
The assessee a domestic company is a wholly owned subsidiary of OSI Systems, USA. Earlier the company was known as “Rapiscan Systems Private Ltd (Rapiscan India). However, during the financial year 2008-09, two other companies of OSI group in India viz., Spacelabs Healthcare Solutions Pvt. Ltd (Spacelabs) and OSI Optoelectronics Pvt Ltd (OSI Opto) were merged with Rapiscan India from 1.4.2008 and consequent to such merger, the name of the assessee was changed to OSI Systems (P) Ltd. It is also pertinent to mention here that as per the order of merger of the Hon’ble Andhra Pradesh High Court, the companies had maintained separate books of accounts for financial year 2008-09. As could be seen from the materials on record, Rapiscan India is engaged in the business of software services to its AEs in the field of security and inspection. Spacelabs provides software development services to its AEs in the field of medical equipment and services, whereas OSI Opto is providing purely Information Technology enabled services (ITeS) to its AEs by maintaining a help desk.
For the A.Y under consideration, assessee filed its return of income on 30.09.2009 declaring nil income under the normal provisions and book profit of Rs.15,61,69,200 u/s 115JB. During the assessment proceedings, AO noticing that assessee has entered into international transactions with its overseas AE made a reference to the Transfer Pricing Officer (TPO) u/s 92CA1) for determining ALP of the international transactions between assessee and the AE. In course of proceedings before him, TPO called for various informations from assessee in support of the Arms Length margin of the price charged by it to its AE.
Thus the total TP adjustment made by TPO was to the tune of Rs.2,85,89,750. In pursuance to the order passed by the TPO, AO proposed a draft assessment order incorporating the adjustments to the ALP recommended by the TPO. Being aggrieved of the draft assessment order, assessee raised objections before the DRP. The DRP rejected assessee’s objections on TP adjustment while granting partial relief. In pursuance to the directions of the DRP, the impugned assessment order has been passed by the AO.
Rejection of resale price method for determining ALP
Apartfrom providing services to its AE in software services as well as ITES segment, assessee is also engaged in distribution of medical equipments manufactured by its AE. Assessee, while bench marking ALP of the distribution segment has selected RPM as the most appropriate method. TPO however, did not accept the method selected by the assessee by observing that TNNM is the most appropriate method considering the nature of the services. Though assessee objected for adoption of TNNM as the most appropriate method but, the TPO was not convinced with the explanations of the assessee. Thus, after adopting TNNM as the most appropriate method, TPO proceeded to select comparables. After a search in the Databases, TPO selected 3 companies as comparable with arithmetic mean of 4.43% While doing so, TPO rejected one of the comparable selected by the assessee in the alternative analysis made under TNNM. The company rejected by the TPO is ASCO Industries Ltd.
Contention of the Assessee
Aggregation of software services transactions for determining ALP
The ld counsel of the assessee submitted that after the merger of Spacelabs with the assessee company, assessee has considered the revenue earned from software development services as a whole while computing its margin. Further submitted that while the margin of Rapiscan Systems Ltd is shown at 57.27%, that of Spacelabs is at 11.35%. Therefore, if both Spacelabs and Rapiscan are taken together the combined profit margin will come to 30.14%, which is more than the margin of comparable companies selected in software segment by the TPO at 27.23%.
The ld AR submitted since the company after merger is having one segment as far as software development services is concerned, the entire revenue earned from this segment should be aggregated for determining the ALP.
Rejection of resale price method for determining ALP
The ld counsel of the assessee submitted that the activity of theassessee is to import medical equipments against orders placedby customers and to sell it to them without any value addition. Therefore, the most appropriate method for determining the ALP is re-sale price method as the assessee purchases the productfrom its AE and sell it to third parties. The ld AR submitted that this is the second year of operation of the assessee as far as the distribution segment is concerned, therefore, it takes time to settle down. In these circumstances, TNNM cannot be applied in the initial years as it will be difficult to find comparables, hence some assumptions and presumptions have to be brought into the comparative analysis while making adjustment to the profit earned by the assessee and the comparable companies.
The ld AR referring to Rule 10B of the I.T. Rules submitted that when there is transaction involving purchase of a product and resale, the most appropriate method to be adopted is the resale price method. He relied on various case laws for this.
Contention of the Revenue
Aggregation of software services transactions for determining ALP
The ld counsel of the revenue submitted that even after the merger, since separate books of accounts are maintained and the nature of software development services for both the companies are different, the revenue earned from software development services cannot be aggregated for determining the ALP.
Rejection of resale price method for determining ALP
The ld counsel of the revenue submitted that assessee having accepted the rejection of resale price method in A.Y 2008-09, it cannot again press for acceptance of RPM as most appropriate method.
Held by ITAT
The issues relating to comparability of companies objected to by assessee were considered by different Benches of the ITAT in case of other ITES companies. In case of M/s. Capital IQ Information Systems (India) Pvt. Ltd vs. Addl. CIT (ITA No.124/Hyd/2014, dated 31.7.2014) all these companies were found to be incomparable to a pure ITES provider. As the aforesaid decision of the Coordinate Bench is for very same A.Y and facts are materially same, moreover, as the ld DR has not brought any contrary decision to our notice, therefore, respectfully following the aforesaid decision of Coordinate Bench, we exclude these comparables in ITES segment.
Further assessee’s objection with regard to rejection of Allsec Technologies as comparable, we find that TPO has rejected the company not only because of not satisfying export revenue filter, but also due to the fact that this company has made acquisitions during the relevant financial year. Though, the ld AR has relied upon the decision of the Coordinate Bench in the case of M/s. Capital IQ Information systems (India). Pvt. Ltd. for including this company, however, we find that the very same Coordinate Bench while considering the comparability of this company in case of TNS India Pvt. Ltd in ITA No.604/Hyd/2014 dated 13.02.2014 after taking into account the order passed in case of M/s. Capital IQ Information systems (India ). Pvt. Ltd rejected this company. Considering the fact that this company was rejected because it has made acquisition during the relevant financial year, we do not consider it appropriate to accept this company as a comparable. This ground of the assessee is therefore, dismissed.
Aggregation of software services transactions for determining ALP
The entire purpose behind introducing the TP provisions is to ascertain whether the price charged for an international transaction between two related parties is at Arm’s Length. For achieving this, the controlled transaction has to be compared with one or several uncontrolled transactions carried in the same line of business and with more or less similar facts and circumstances. It is apparent from the facts and materials on record, even after merger of Spacelabs with Rapiscan Systems India Ltd, maintenance of accounts is entity specific. Though, it may be a fact that software development services is a very wide term and takes within its ambit, whole software development services, such as medical, security, banking, accountancy etc., but for comparability analysis, verticals of the software development industry have to be looked into. All types of software development services cannot be clubbed together for comparability analysis, as in our view, it will not give an appropriate result.
As in assessee’s case also software development services are for two different sectors i.e. security system as well as medical services, we are not able to accept assessee’s contention that operating profit to operating cost of the revenue earned from software development services segment should be considered as a whole for computing the margin of the assessee. Moreover, when assessee has maintained entity specific a/c with segmental details and has also conducted analysis on this basis in its TP study, we do not find any reasonsto disturb the order of the TPO and DRP on this issue.
Rejection of resale price method for determining ALP
There is no dispute as far as the factual aspect is concerned. It is a fact on record that assessee purchases medical equipments from its AE and sells them to third parties in India without making any value addition to them. Therefore, assessee is purely a reseller of the products. That being the case, the most appropriate method for determining the ALP of such transactions, in our view, is re sale price method. In this context, the decision of ITAT Delhi Bench in case of Luxottica India Eyewear Pvt Ltd in ITA No.1115/Del/2014 dated 05.11.2014 requires consideration.
The principles laid down by the Delhi Bench clearly applies to the facts of the present case not only because the assessee is involved purely in trading activity, but also in the TP study assessee has adopted RPM as the most appropriate method. Only because in the preceding assessment year for some reason assessee has not challenged the decision of DRP in upholding application of TNMM, assessee cannot be prevented from objecting to adoption of TNMM in the impugned assessment year. In view of the aforesaid, we remit the matter back to the file of the AO/TPO to examine assessee’s analysis under the RPM and decide the issue accordingly after due opportunity of being heard to the assessee.
Accordingly appeal of the assessee partly allowed for statistical purpose.
