Ntt Data Global Delivery Services Limited Hyderabad

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IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH ?A?, HYDERABAD

BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER
AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER

ITA No. 505/Hyd/2014
Assessment Year: 2009-10

NTT Data Global Delivery vs. Dy. Commissioner of Income-
Services Ltd., Hyderabad. tax, Circle ? 16(1),
Hyderabad.
PAN ? AABCK 7777
(Appellant) (Respondent)

Assessee by : Shri Pankaj Jain
Revenue by : Smt. Pallavi Agarwal

Date of hearing 22-06-2015
Date of pronouncement 08-07-2015

O R D E R

PER SAKTIJIT DEY, J.M.:

This appeal of the assessee is directed against the assessment

order passed u/s 143(3) read with section 144C in consequence upon

the directions of the Dispute Resolution Panel (DRP). The appeal is

pertaining to AY 2009-10.

2. Assessee has in total raised 14 grounds. Ground No. 1 to 12

are on TP issues whereas ground Nos. 13 & 14 are on other matters.

3. At the outset we will deal with TP issues.

4. As far as these issues are concerned, Ground No. 1 is general

ground, hence, do not require any specific adjudication.

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5. Ground No. 2 reads as under:

?2. Not applying TNMM to the internal uncontrolled transactions
of the company for determining the ALP.?

6. Briefly the facts are, assessee formally known as Intelligroup

Asia (P) Ltd. is a IT solution company providing software development

services in the area of ERP solutions, design, implementation and

maintenance and internet technology solution to its customers. The

company has a 100% Export Oriented Unit (EOU) registered with the

software technology parks of India (STPI). Assessee?s AE is a global

provider of innovative consulting, technology and outsources

services. Services of the group are broad based and include business

process improvement, analytical services, ERP implementation,

global rollouts, e-business solutions, upgrades, testing application

management and infrastructure support and life cycle management

services. As per the 3CEB report/TP document submitted by

assessee, international transactions between assessee and AEs are

as under:

A.E. Nature of transaction Amount (Rs.)
Intelligroup Inc. Provision of software 1,458,652,000
services
Reimbursement by AE 62,964,000
Reimbursement to AE 38,763,00
Intelligroup Provision of software 137,055,000
Europe Ltd. services
Reimbursement by AE 3,845,000
Reimbursement to AE 3,269,00
Empower Provision of software 15,949,000
Solutions services
Reimbursement by AE 566,000
Reimbursement to AE 1,598,000

7. For the AY under consideration, assessee filed its return of

income on 30/09/2009 declaring total income of Rs. 20,80,77,095.

During the assessment proceeding, AO noticing that assessee has

entered into international transactions made a reference u/s 92CA of

the Act to the Transfer Pricing Officer (TPO) for determining the Arm?s
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Length Price (ALP). In course of proceeding before TPO, various

informations and documents were called for by him. TPO found that

assessee through an external consultant has undertaken a TP study.

To bench mark the price charged, assessee has made an analysis by

applying internal transaction net margin method (TNMM) as far as

software development services are concerned with operating profit to

total cost as profit level indicator (PLI) by comparing the price

charged in case of controlled transactions with AE to price charged

for similar uncontrolled transactions with non-AEs. It was found that

by applying internal TNMM margin of assessee is 15.35% as against

margin of comparables at (-) 7.84%. Of course, assessee had also

undertaken a similar analysis by applying external TNMM. Using

certain filters, assessee has searched Prowess and Capitaline data

bases for comparable companies and short listed 21 companies as

comparables with average margin of 11.42% as against 9.39% of

assessee. Since the margin of assessee both under internal TNMM as

well as external TNMM was within the tolerance band of +/- 5%, no

adjustment was required to be made to ALP. TPO, however, after

considering the submissions of assessee to the show cause notice as

well as examining various informations submitted by assessee was of

the view that TP document of the assessee cannot be accepted

because of various defects and deficiencies in them which include

use of multiple year of data in stead of contemporaneous data, use of

inappropriate filters, defect in search process etc. Thus, on the

aforesaid basis, TPO rejected TP documentation of assessee, though

he observed that external TNMM is the most appropriate method.

After rejecting the TP documentation, TPO by applying his own filters

conducted a search in the data bases which yielded 17 companies as

comparables with average margin of 22.03%. After making negative

working capital adjustment of 0.97%, ALP of transactions with AE was

determined at Rs. 188,24,08,718 as against price shown by assessee

at Rs. 168,06,29,000. Resultant shortfall of Rs. 20,17,79,718 was

treated as adjustment to be made u/s 92C of the Act. In terms with
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the order passed by TPO, AO completed assessment by adding TP

adjustment of Rs. 20,17,79,718 to the income of assessee. Being

aggrieved of the draft assessment order passed, assessee objected

the same before the Dispute Resolution Panel (DRP).

8. Before the DRP, assessee challenged the determination of ALP

by TPO on various grounds including the rejection of internal TNMM.

It was submitted by assessee before the DRP that as per the statutory

provision, if, assessee has entered into transactions with AE as well

as third parties and necessary segmental details are available, then,

preferably comparability analysis should be made adopting internal

TNMM by comparing price charged in case of controlled transactions

with AE to price charged with uncontrolled transactions with third

parties.

9. Ld. DRP, however, did not find merit in the submissions of

assessee. The DRP observed that assessee did not raise any such

objections before TPO whereas such objections before the DRP was

only raised as a general observation. Further, the DRP observed that

percentage of non-AE turnover being only 21.45% of the total

turnover results on such small portion of the turnover (approximately

Rs. 45 lakhs) cannot be an appropriate comparable. Being aggrieved

of such observation of the DRP in pursuance to which final

assessment order was passed, assessee is before us.

10. Ld. AR reiterating the submissions made before DRP submitted,

for the year under consideration, assessee not only has maintained

segmental details in respect of transactions made with AEs as well as

third party non-AEs under software development services segment,

but, has also undertaken a detailed analysis in its TP study by

applying internal TNMM to find out ALP. It was submitted, in spite of

having brought all facts and materials on record in respect of analysis

made by applying internal TNMM, neither TPO nor the DRP has

properly appreciated the issue. It was submitted, as per Rule
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10B(1)(e)(ii) of IT Rules, if, segmental details are available, then,

internal TNMM has to be preferred over all other methods including

external TNMM. In support of such contention, ld. AR relied upon the

following decisions:

1. Cable and Wireless India Ltd., ITA No. 822/Mum/2013, dated
05/02/2014.

2. Genisys Integrating System (India) P. Ltd., ITA No.
908/Bang/2011, dtd. 29/01/13.

3. Lummus Technology Heat Transfer BV, ITA No. 6227/Del/12,
dtd. 21/02/14.

11. Ld. DR, on the other hand, relied upon the order of DRP.

12. We have considered the submissions of the parties and perused

the orders of revenue authorities as well as other materials on record.

We have also carefully applied our mind to the decisions relied upon

by ld. AR. It is a fact on record, assessee during the year has

provided software development services to both AE and Non-AEs.

There is no dispute to the fact that assessee in its TP documentation

has undertaken an analysis by applying internal TNMM. The TPO in

his order also accepts this fact. It is also the plea of assessee that as

it has maintained segmental details with regard to the transactions

made with AE as well as transactions made with non-AEs during the

relevant period and has also maintained relevant record indicating

segmental details with regard to both the transactions, then, as per

rule 10B(3) internal comparables have to be given preference as

price charged by assessee for controlled transactions with AEs can

be compared with similar uncontrolled transactions with third parties.

On examining relevant statutory provisions, we find merit in the

submissions of ld. AR. In case of M/s Tecnimont ICB Pvt. Ltd. in ITA

No. 4608/Mum/2010 dated 17/07/2012, the Hon?ble Third Member of

the ITAT, Mumbai Bench while considering similar issue held as

under:
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“10. Clause (I) ‘of Rule 10B(e) stipulates that net profit margin from an
international transaction with an AE is computed in relation to cost
incurred or sales effected or assets employed etc. Clause (if) is
material for the present purpose. It provides that the net profit
margin realized by the enterprise or by an unrelated enterprise from a
comparable uncontrolled transaction or a number of such transactions is
computed having regard to the same base. The ‘base’ of this
provision takes one back to clause (I) which refers to cost incurred or
sales effected or assets employed or to be employed On splitting clause
(Ii) into two parts, it divulges that the reference is made to internal and
external com parables. One part of clause (if) refers to ‘the net profit
margin realized by the enterprise…… from a comparable
uncontrolled transaction’ and the other part talks of ‘the net profit margin
realized by an uncontrolled enterprise from a comparable uncontrolled
transaction: It transpires that whereas the first part refers to the profit
margin from internal comparable uncontrolled transactions, the second
part refers to profit margin from an external comparable uncontrolled
transaction. Thus it is discernible that what is to be compared under this
method is profit from a comparable uncontrolled transaction. The
word ‘comparable’ may encompass internal comparable or external
comparable. There is cue in the rule itself as to preference to be
given to internal comparable uncontrolled transactions vis-a-vis
externally comparable uncontrolled transactions. It is because the
delegated legislature has firstly referred to the net profit margin realized
by the enterprise (internal) from a comparable uncontrolled
transaction and, thereafter, it points towards net profit margin realized by
an unrelated enterprise (external) from a comparable uncontrolled
transaction. Thus where potential comparable is available in the shape of
an uncontrolled transaction of the same assessee, it is likely to have
higher degree of comparability vis-a-vis comparables identified
amongst the uncontrolled transactions of third parties. The underlying
object behind computing ALP of an international transaction is to
find out the profits which such enterprise would have earned if the
transaction had been with some third party instead of related party.
When the data is available showing profit margin of that enterprise
itself from a third party, it is always safe and advisable to have
recourse to such internal comparable case. The reason is patent that
the various factors having bearing on the quality of output, assets
employed, input cost etc. continue to remain by and large Same in case
of an internal comparable. The effect of difference due to such I
nherent factors on comparison made with the third parties, gets
neutralized when comparison is made with internal comparable. Ex
consequenti, it follows that an internal comparable uncontrolled
transaction is more noteworthy vis-a-vis its counterpart i.e. external
comparable.?

This view expressed by Hon?ble Third Member was followed by ITAT,

Mumbai Bench and ITAT Bangalore Bench, in the decisions cited
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before us by ld. AR, while observing that internal comparables should

get preference over external comparables. Therefore, applying

aforesaid principle to the facts of the present case, it can be held

that, as the assessee during the year has undertaken transactions

with both AEs and non-AEs, and as claimed, has not only maintained

segmental details of such transactions, but, has also undertaken

comparative analysis in its TP study, it has to be looked into in an

objective manner before rejecting the same. However, as noticed from

the order passed by TPO, he has not assigned even a single reason

why internal comparables/transactions should not be considered.

Even the DRP has also not properly appreciated assessee?s

contention in this regard. As far as observation of the DRP that

uncontrolled transactions constitute merely 21.4% amounting to Rs.

44 crores as against huge volume of transactions with AE, therefore,

it cannot be compared, we are of the view that claim of assessee

cannot be rejected on such general observations. Before rejecting

assessee?s analyzation under internal TNMM, departmental

authorities are required to assign cogent reasons for not accepting

the same. Only because volume of transaction is small or

insignificant, on that ground alone it cannot be rejected. ITAT, Delhi

Bench while considering rejection of internal comparable on similar

ground in case of Lummus Technology Heat Transfer BV (supra) held

as under:

“5. Rule 10B(1)(e) of the Income Tax Rules, which deals with the
Transactional Net Margin Method, provides requires that “the net profit
margin realised by the enterprise (i.e. the assessee] from an I
nternational transaction entered into with an associated enterprise is
computed in relation to costs incurred or sales effected or assets
employed or to be employed by the enterprise or having regard to any
other relevant base” is compared with” the net profit margin realised by
the enterprise ( i.e. the assessee] or by an unrelated enterprise from a
comparable uncontrolled transaction or a number of such transactions
is computed having regard to the same base” – of course, subject to
comparability adjustments which could affect the amount of net profit
margin in uncontrolled conditions. It is not at all necessary, as the
authorities below seem to suggest, that such net profit computations, in
the case of internal comparables (i.e. assessee’s transactions with
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independent enterprise), are based on the audited books of
accounts or the books of accounts regularly maintained by the
assessee. In our considered view, all that is necessary for the purpose of
computing arm’s length price, under TNMM on the basis of internal
comparables, is computation of net profit margin, subject to
comparability adjustments affecting net profit margin of uncontrolled
transactions, on the same parameters for the transactions with AEs as
well as Non AEs, i.e. independent enterprises, and as long as the
net profits earned from the controlled transactions are the same or
higher than the net profits earned on uncontrolled transactions, no ALP
adjustments are warranted. It is not at all necessary that such a
computation should be based on segmental accounts in the books of
accounts regularly maintained by the assessee and subjected to audit.
We are, therefore, of the view that the authorities below were in error
in rejecting the segmental results on the ground that the segmental
accounts were not audited and that these segmental accounts were
not maintained in the normal course of business. As regards vague
generalizations by the TPO to the effect that these accounts are
manipulated, that allocation basis of expenses is unfair and that these
accounts conceal true profitability, we find that these observations are
too sweeping and generalized the observations to have any merits. In
any event, learned counsel for the assessee has painstakingly taken us
through the segmental accounts, pointed out the basis of allocation of
the expenses. We have noted that the allocation of expense is on
the man hour basis, which is quite fair and reasonable, and that every
person has to punch in hours on a specific project. We have also noted
that all these details and expense allocation basis were also before the
TPO and even then, no specific defects were pointed out by the TPO.
Taking into account all these factors, as also entirety of the case, we are
of the considered view that the TPO indeed erred in rejecting the
segmental accounts and thus declining to accept the internal
comparable. We are also of the view that the size of the uncontrolled
transaction or transactions being smaller, by itself, does not make
these transactions incomparable with the transactions in controlled
conditions. Size of the comparable does matter in entity level
comparison because scale of operations substantially vary-arid so does
the underlying profitability factor, but in a transaction level comparison
within the same entity, mere difference in size of the uncontrolled
transactions does not render the transaction incomparable. If the size of
uncontrolled transaction is too big, it may call for an adjustment for
volume business. If the size of the uncontrolled transaction is too
small, it can provoke an inquiry by the TPO to ensure that it is not a
contrived transaction outside the normal course of business or with
regard to other significant factors surrounding smallness of such
transaction. However, in our considered view, in none of these cases, a
comparable can be rejected on the basis of its size per se. In this
view of the matter, the authorities below were clearly in error in rejecting
the internal comparable, i.e. profitability of assessee’s transactions
with non AEs, on the ground that the volume of business with non
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AEs was too small vis-a-vis business with AEs. In view of these
discussions, as also bearing in mind entirety of the case, the assessee
was quite justified in adopting internal TNMM and comparing the profit
earned on its transactions with AEs with profit earned with non-AEs.
Accordingly, the ALP adjustment of Rs 2,72,42,940 deserves to be
deleted. We order so. The assessee gets the relief accordingly. ?
(Emphasis by us)

Therefore, considered in the light of the principle laid down in the

cited decisions, we are unable to uphold the finding of DRP on this

issue. Since the matter has not been properly enquired into or

examined ether by TPO or DRP, we are inclined to remit the issue to

the file of TPO for examining afresh after due opportunity of being

heard to assessee. TPO must make an endeavour to examine

segmental details and find out whether internal

transactions/comparables can form the basis of determination of ALP.

13. Since we have remitted the issue relating to application of

internal TNMM, grounds raised by assessee on the alternative issues

arising out of external TNMM are not required to be gone into at this

stage. However, for the sake completeness we need to mention that

as far as the issue relating application of external TNMM is

concerned, ld. AR has made submissions before us with regard to

selection of comparables, rejection of comparables, negative working

capital adjustment, risk adjustment and charging of interest u/s 234B

of the Act. As far as the comparables selected by TPO is concerned,

ld. AR has raised specific objections with regard to following 7

comparables:

1. Bodhtree Consulting Ltd.,
2. Comp U Learn Tech India Ltd.
3. Igate Global Solutions Ltd.
4. Infosys Ltd.,
5. Kals Infosystems Ltd. (Seg.)
6. Tata Elxsi Ltd. (seg.) and
7. Thirdware solutions ltd.

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It is the specific contention of ld. AR before us that these companies

have been rejected as comparables in case of several software

development service provider by different benches of ITAT including

Hyderabad benches for the same AY i.e. 2009-10. In this context, ld.

AR has relied upon the decisions of the ITAT, Hyderabad bench in

case of Adaptec India Pvt. Ltd. Vs. ACIT, ITA No. 206/Hyd/14 dated

25/03/15 and Planet Online Pvt. Ltd. Vs. ACIT, ITA No. 464/H/14,

dated 31/01/15. As far as issues relating to rejection of comparables,

risk adjustment and negative working capital adjustment are

concerned, ld. AR also advanced arguments contesting the decision

of TPO and DRP. As already stated earlier, since we directed TPO to

consider the issue relating to application of internal TNMM, we need

not go into merits of assessee?s contention in relation to alternative

claim made under external TNMM. However, in case TPO does not

accept analysis done under internal TNMM or he is of the view that

internal TNMM does not apply to assessee, of course after assigning

reasons, then, we direct him to consider assessee?s submissions with

regard to the selection of comparables as well as other issues

relating to rejection of comparables, risk and working capital

adjustment, charging of interest u/s 234B etc., keeping in view the

decisions on similar issue by ITAT, Hyderabad Bench as well as other

benches of the Tribunal as relied upon before us by ld. AR. It goes

without saying, AO/TPO must afford a reasonable opportunity of being

heard to the assessee in the matter. In the result, grounds raised are

allowed for statistical purposes.

14. In ground No. 13, assessee has raised the issue of not allowing

credit of TDS amounting to Rs. 10,53,228.

15. We have considered the submissions of the parties and perused

the materials on record. It is the contention of ld. AR that directions

may be issued to AO to allow credit of TDS as per statement

appearing online. It was submitted that, though, application u/s 154

has been filed by assessee AO has not dealt with the same.
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Considering the nature of dispute, we direct AO to verify the facts

relating to the claim of TDS and if the online statement show credit of

the aforesaid TDS in the name of assessee, the same may be

allowed.

16. In ground No. 14, assessee has challenged initiation of

proceeding u/s 271(1)(c) of the Act. Since initiation of proceeding u/s

271(1)(c) at this stage of proceeding is premature, ground raised

cannot be entertained. Accordingly, this ground is dismissed.

17. In the result, appeal of assessee is partly allowed for statistical

purposes.

th
Pronounced in the open court on 8 July, 2015.

Sd/- Sd/-
(B. RAMAKOTAIAH) (SAKTIJIT DEY)
ACCOUNTANT MEMBER JUDICIAL MEMBER

th
Hyderabad, Dated: 8 July, 2015

kv

Copy to:-
th
1) NTT Data Global Delivery Services Ltd., Plot No. 18, 5 floor,
I Labs, Software Units Layout, Madhapur, Hyderabad ? 500 018
2) DCIT,Circle ? 16(1), Hyderabad
3)DRP, Hyderabad
4) TPO, Hyderabad
4) DIT (International Taxation & TP), Hyderabad
5) The Departmental Representative, I.T.A.T., Hyderabad.

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