CAPGEMINI INDIA P.LTD, MUMBAI V. DCIT 10(2), MUMBAI

ITA 540/MUM/2014

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 8413 (ITAT-MUMBAI)
• Duration Of Justice: 9 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-11-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 28-10-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 22-01-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: KISHAN VYAS
• Assessee Lawyers: M P LOHIA SHRI NIKHIL TIWARI
• Keywords: Related party transaction; Depreciation; Transfer pricing; International transaction; Question of law; Working capital adjustments
• Section: 143(3); 154

Judgement Text

1 CAPGEMINI INDIA PRIVATE LIMITED IT(TP) A 540/MUM/2014 K IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH K, MUMBAI , !' #'' ' , $ % BEFORE SHRI R.C. SHARMA, ACCOUNTANT MEMBER AND SHRI VIVEK VARMA, JUDICIAL MEMBER IT(TP) A : 540/MUM/2014 (ASSESSMENT YEARS: 2009-10) CAPGEMINI INDIA PRIVATE LIMITED, PLANT 2, BLOCK A, GODREJ IT PARK, GODREJ & BOYCE COMPOUND LBS MARG, VIKHROLI (WEST), MUMBAI -400 079 .: PAN: AAACK 2632 B VS INCOME TAX OFFICER- RANGE-10(2), ROOM NO. 432, AAYAKAR BHAVAN, M K ROAD, MUMBAI -400 020 (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI M P LOHIA SHRI NIKHIL TIWARI RESPONDENT BY : SHRI KISHAN VYAS /DATE OF HEARING : 20-10-2014 / DATE OF PRONOUNCEMENT : 21-11-2014 & O R D E R #''' , ' PER VIVEK VARMA, JM: INSTANT APPEAL IS FILED BY THE ASSESSEE AGAINST THE ORDER OF DISPUTE RESOLUTION PANELI, MUMBAI (DRP), PASSED UNDER SECT ION 144C(5), DATED 31.10.2013. 2. THE FACT ARE THAT THE ASSESSEE IS COMPANY, WHICH IS SUBSTANTIALLY OWNED BY CAPGEMINI US LLC USA (CG US LLC) AND IT AC TS AS CAPTIVE DELIVERY CENTRE OF CAPGEMINI GROUP, WHICH DELIVERS SERVICES TO CUSTOMERS IN NORTH AMERICA, UK, CONTINENTAL EUROPE AND ASIA P ACIFIC. IT PROVIDES SERVICES IN THE FIELDS OF SOFTWARE TECHNOLOGY SERVICES OUTSOURCING SERVICES CUSTOMISED SOFTWARE DEVELOPMENT SERVICES TO ITS FOLLOWING AES 2 CAPGEMINI INDIA PRIVATE LIMITED IT(TP) A 540/MUM/2014 SR. NO INTERNATIONAL TRANSACTION TOTAL VALUE OF TRANSACTIONS AY 2009-10 TOTAL VALUE OF TRANSACTIONS AY 2008-09 METHOD SELECTED 1 LICENSING OF INTELLECTUAL PROPERTY 15,854,302 8,783,405 CUP 2 PAYMENT OF HEADQUARTERS FEES UNDER THE SERVICE AGREEMENT 7,797,910 2,825,500 TNMM 3 RECEIPTS FOR PROVIDING SOFTWARE SERVICES 20,162,4 38,459 15,584,696,950 TNMM 4 ALLOCATION OF VARIOUS COSTS TO ASSESSEE 347,374,9 01 298,131,795 - 5 REIMBURSEMENT OF EXPENSES INCURRED BY VARIOUS CAP GEMINI ENTITIES ON BEHALF OF ASSESSEE 198,780,013 174,396,814 - 6 REIMBURSEMENT OF OUT OF POCKET EXPENSES INCURRED BY ASSESSEE ON BEHALF OF CAP GEMINI GROUP ENTITIES 2,637,911,454 2,189,543,752 - 7 PAYMENT OF TRAINING CHARGES TO CAP GEMINI GROUP ENTITIES 20,621,736 18,538,031 TNMM 8 PURCHASE OF SOFTWARE AND E-TRAINING LICENSES FROM OVERSEAS THIRD PARTY VENDORS UNDER GLOBALLY NEGOTIATED CONTRACT 8,625,970 1,576,246 TNMM 9 BANK GUARANTEE CHARGES PAID 3,680,045 - TNMM 10 PROFESSIONAL FEES PAID TO GROUP ENTITIES 2,547, 130 - TNMM TOTAL 18,285,109,074 3. THE ASSESSEE SUBMITTED ITS TP STUDY REPORT FOR T HE CURRENT YEAR, WHEREIN THE ASSESSEE HAD ENTERED INTO THE FOLLOWING INTERNATIONAL TRANSACTIONS: SR. NO INTERNATIONAL TRANSACTION WITH ITS ASSOCIATED ENTERPRISES (AES) TOTAL VALUE OF TRANSACTIONS AY 2009-10 1 TRADEMARK LICENSE FEES 15,854,302 2 PAYMENT FOR SERVICE FEES TO CAPGEMINI SERVICE SAS (CG SERVICE) 7,797,910 3 SOFTWARE PROGRAMMING SERVICES 20,162,438,459 4 BANK GUARANTEE CHARGES TO CAPGEMINI GROUP ENTITIES 20,621,736 5 PURCHASE OF SOFTWARE AND E-TRAINING LICENSES FROM OVERSEAS THIRD PARTY VENDORS UNDER GLOBALLY NEGOTIATED CONTRACT 8,625,970 6 PROFESSIONAL FEES PAID BY CIPL TO ITS GROUP ENTITIES 2,547,130 7 ALLOCATION OF VARIOUS COSTS TO CIPL 347,374,901 8 PURCHASE OF SOFTWARE AND E-TRAINING LICENSES FROM OVERSEAS THIRD PARTY VENDORS UNDER GLOBALLY NEGOTIATED CONTRACT 8,625,970 9 REIMBURSEMENT OF EXPENSES INCURRED BY VARIOUS CAPGEMINI GROUP ENTITIES ON BEHALF OF CIPL 198,780,013 10 REIMBURSEMENT OF OUT OF POCKET EXPENSES INCURRED BY CIPL ON BEHALF OF CAPGEMINI GROUP ENTITIES 2,637,911,454 4. ACCORDINGLY, THE ASSESSEE DECLARED ITS MARGIN AS UNDER, 3 CAPGEMINI INDIA PRIVATE LIMITED IT(TP) A 540/MUM/2014 PARTICULARS SOFTWARE DEVELOPMENT OPERATING REVENUES 22,037,598 OPERATING EXPENSES 18,876,846 OPERATING PROFIT 3,160,75 OP/OC 16.74% METHOD USED TNMM PLI OP/OC (%) NO OF COMPARABLES 21 MEAN MARGIN OF COMPARABLES 14.13% 5. WHILE EXPLAINING THE RESULTS, THE ASSESSEE SUBMI TTED WHICH IS STATED TO BE THE MOST APPROPRIATE METHO D IN THE FACTS AND CIRCUMSTANCES D THE CASE. THE OPERATING P ROFIT TO TOTAL COST (OP/TC) RATIO IS TAKEN AS THE PROFIT LEVEL IND ICATOR (PLI) IN THE TNMM ANALYSIS. THE PLI OF THE COMPANY IS ARRIVED AT [16.74%] ON COST WHEREAS THE UNADJUSTED AVERAGE PLI OF THE COMP ARABLES IS ARRIVED AT [14.13%] AS PER THE ANALYSIS IN THE TP DOCUMENT. IN THE TP STUDY, THE TAXPAYER HAS CLAIMED RISK ADJUSTMENT OF 6.75%. IT IS SEEN THAT THE PLIS OF TH E COMPARABLE COMPANIES HAVE BEEN WORKED OUT BY ADOPTING WEIGHTED AVERAGES FOR THE CURRENT YEAR AND THE IMMEDIATELY PRECEDING TWO YEARS. THEREAFTER, THE ARITHMETICAL MEAN OF THESE WEIGHTED AVERAGES HAS BEEN TAKEN FOR COMPUTING THE ALP. AS THE PRICE CHARG ED IN ITS INTERNATIONAL TRANSACTIONS IS MORE THAN THE SAID AR ITHMETICAL MEAN PRICE, THE PRICE CHARGED IN THE INTERNATIONAL TRANS ACTIONS IS TREATED AS AT ARM'S LENGTH. IT IS ALSO NOTICED THAT THE COM PUTATIONS OF THE PLIS OF THE COMPARABLES HAS BEEN ARRIVED AT BY CONS IDERING THE DATA FOR THE FYS 2006-07, 2007-08 AND 2008-09. 6. WHILE DECLARING ITS RESULTS SERVICE WISE, THE CO MPANY DECLARED OPERATING PROFIT MARGIN OF 17.74% IN SOFTWARE PROGR AMMING SERVICE, TAKING INTO CONSIDERATION 21 COMPARABLE UNDER TNMM. ACCORDINGLY, AVERAGE PROFIT MARGIN OF THE 21 COMPARABLES CAME TO 14.31%, CONSIDERING WEIGHTED AVERAGE MARGIN ON THREE YEARS DATA, FROM FINANCIAL YEARS 2006-07, 2007-08 & 2008-09. 7. THIS BASIS OF BENCH MAKING WAS REJECTED AND THE AO GAVE A FRESH LIST OF COMPARABLES. 8. THE AO, WHILE EXAMINING THE COMPARABLES AS PROVI DED BY THE ASSESSEE OBSERVED, THAT SOME OF THOSE WERE INADEQUA TE. THE AO, THEREFORE, OBSERVED THAT CERTAIN COMPARABLES, WERE TAKEN AS ADEQUATE AND HE ADDED CERTAIN COMPARABLES ACCORDING TO HIM, WOULD LEAD THE RESULTS TO FUNCTIONALLY SIMILAR. THE AO, THEREFORE, EXCLUDED THOSE 4 CAPGEMINI INDIA PRIVATE LIMITED IT(TP) A 540/MUM/2014 COMPANIES WHOSE REVENUE FROM SERVICES ACTIVITY WAS LESS THAN 75% OF THE TOTAL OPERATING REVENUES: COMPANIES WHOSE DATA IS NOT AVAILABLE FOR THE FY 2 008-09 ARE EXCLUDED. AS PER THE RULE 106 (4), IT IS MANDATORY TO USE THE CURRENT YEAR DATA I.E. THE DATA FOR THE FY 2008-09. THE PRO VISO TO RULE 1 O (4) SAYS THAT DATA FOR EARLIER TWO YEAR CAN ALSO BE USED IF IT IS SHOWN THAT SUCH EARLIER YEAR'S DAT A HAD AN INFLUENCE IN DETERMINING THE TRANSFER PRICE. FURTHER, THE USE OF EARLIER YEAR DATA IS IN ADDITION TO THE CURRENT YEAR DATA, PROVIDED THE CONDITIONS ARE SATISFIED. THIS V IEW IS UPHELD BY VARIOUS ITAT DECISIONS. HENCE COMPANIES, FOR WHOM DATA FOR FY 2008-09 IS NOT AVAILABLE, ARE EXCL UDED. COMPANIES WHOSE SOFTWARE DEVELOPMENT INCOME