Syniverse Mobile Solutions Private ... vs Assessee

ITA No.1416/Hyd/2014 : Assessment year 2010-11

M/s. Syniverse Mobile Solutions V/s. Dy. Commissioner of Income-tax Private Limited (Earlier Known Circle 16(2), Hyderabad as M/s. MACH Mobile Solutions Private Limited) Hyderabad

(PAN - AABCT 4348 N )

(Appellant) (Respondent)

Appellant by : S/Shri Kanchun Kaushal, Dhanesh Bafna & Abhiroop Bhargav

Respondent by : Shri D.Sudhakar Rao DR

Date of Hearing 28.1.2015 Date of Pronouncement 11.2.2015

ORDER

Per P.M.Jagtap, Accountant Member :

This appeal filed by the assessee is directed against the order of the Dy. Commissioner of Income-tax Circle 16(2), Hyderabad (Assessing Officer) dated 23.7.2014 passed under S.143(3) of the Act read with the directions given by the Dispute Resolution Panel(DRP) under S.144C(5) of the Act.

2. In grounds No.1 to 10 of the present appeal, the assessee has challenged the addition of Rs.2,61,64,283 made by the Assessing Officer/TPO on account of TP adjustment in respect of its 2 ITA No.1416/Hyd/2014 M/s. Syniverse Mobile Solutions Private Limited, Hyderabad

international transactions with Associated Enterprises involving the provision of IT/ITE Services.

3. The assessee in the present case is a company, which is engaged in the business of providing data clearing, financial settlement and back-end support services to mobile operators. The return of income for the year under consideration was filed by it on 11.10.2010 declaring total income of Rs.6,21,34,880. During the course of assessment proceedings, it was noticed by the Assessing Officer that the assessee company has entered into the following international transactions with its Associated Enterprises (AEs) for providing contract software development and IT enabled back office services to its AE.

A.E. Nature of transaction Amount (Rs.)

MACH s.a.r.l. Provision of software 2,04,99,753 Development Services

End 2 End VAS ApS Provision of software 71,54,167 Development Services

MACH Connectivity ApS. Provision of software 41,06,236 Development Services

Cibernet Corporation Provision of software 3,12,78,371 Development Services

Progrator/gatetrade Provision of software 2,61,79,069 (Division of MACH Aps) Development Services

Cibernet Plc Provision of ITES 2,32,16,719

MACH s.a.r.l. Payment for operational 1,00,96,631 and marketing services

MACH s.a.r.l. Payment for product 35,83,734 management support services 12,61,14,680 3 ITA No.1416/Hyd/2014 M/s. Syniverse Mobile Solutions Private Limited, Hyderabad

4. In order to determine the Arm's Length Price(ALP) of the international transactions of the assessee company with its Associated Enterprises(AE), a reference was made by the Assessing Officer to the Transfer Pricing Officer (TPO) under S.92CA(1) of the Act. In the TP Study Report submitted by the assessee, TP analysis was done separately in respect of three segments, namely, provision of software development services, provision of IT enabled services and procurement of support services, and the same was claimed to be done on the basis of segmental details/financials. For the software development services, TP analysis was done by the assessee by applying Transactional Net Margin Method (TNMM), as the most appropriate method, taking Operating Profit to Operating Cost (OP/OC) as Price Level Indicator (PLI). In total, fourteen comparables were selected by the assessee by applying certain filters and since the Arithmetic Mean of OP/OC of the said fourteen comparables was 14.03% as against the OP/OC of 15% of the assessee in relation to its relevant international transactions with AEs, the price charged to the AEs in respect of these transactions was claimed by the assessee to be as at Arm's Length. For the transactions relating to ITES, TP analysis was done by applying TNMM as the most appropriate method and taking OP/OC as the Price Level Indicator. A total of 14 comparables was selected by the assessee by applying certain filters, and since the Arithmetic Mean of OP/OC these fourteen comparables was 13.55% as against OP/OC of 31.43% of the assessee in relation to the relevant international transactions with its AEs, these transactions involving provision of ITES also were claimed to be as at Arm's Length. Similarly, in respect of transactions relating to procurement of support services, TNMM was taken as the most appropriate method with OP/OC as PLI and since the Arithmetic Mean of OP/OC of the 12 comparables selected was 4 ITA No.1416/Hyd/2014 M/s. Syniverse Mobile Solutions Private Limited, Hyderabad

16% as against 7.5% shown in relation to these international transactions with Associated Enterprises involving payment towards support services, the same were also claimed to be at arms' length.

5. After going through the relevant documents maintained by the assessee and after analyzing the relevant transactions, the TPO was of the opinion that the method adopted by the assessee for selecting the comparables suffered from defects and the same, therefore, had resulted in selection of inappropriate comparables and rejection of appropriate comparables. He also found that the TP analysis done by the assessee was based on segmental results, which were not audited. According to him, unaudited information could not be taken as the basis to compute the profitability of the segments for Transfer Pricing Analysis, as the same was unreliable. He observed that the allocation of expenses, even otherwise, involved a lot of assumptions and presumptions and it was, therefore, not possible to arrive at segmental financials, without giving room for any ambiguity. He held that it was therefore, better to go with the enterprise level margins for the purpose of ALP determination under TNMM. He accordingly rejected the TP study report furnished by the assessee and proceeded to carry out his own TP analysis for the purpose of determining the ALP of the relevant international transactions by applying TNMM at enterprise level margin. In this regard, he considered the various objections raised by the assessee to the new search conducted by him for selecting the appropriate comparables and after analyzing the data base and other relevant information and documents, the TPO finally selected the following eighteen entities as comparables with Arithmetic Mean of their OP/OC at 22.69%.

5 ITA No.1416/Hyd/2014 M/s. Syniverse Mobile Solutions Private Limited, Hyderabad

Sl. Company Name OP/OC No.

1. Avani Cimcon Technologies Ltd. 3.39 2. CAT Technologies Ltd. 13.04 3. Comp-U-Learn Tech India Ltd. 19.96 4. E-Infochips Bangalore Ltd. 72.32 5. Evok Tech 18.61 6. E-Zest Solutions Ltd. 22.1 7. Infosys Technology Ltd. 45.44 8. Kals Information Systems Ltd. (Seg) 22.05 9. Kuliza Tech 25.92 10. L&T Infotech Ltd. 19.97 11. Mindtree Ltd. (Seg.) 20.47 12. Persistent Systems & Solutions Ltd.(Merged) 11.37 13. R.S. Software (India ) Ltd. 9.88 14. Sasken Communication Technologies Ltd. 25.23 15. Tata Elxsi Ltd. (Seg.) 17.24 16. Thinksoft Global Services Ltd. 11.22 17 Zylog Systems Ltd. 18.62. 18. Persistent Systems Ltd. 31.57

Total 408.4

Average 22.69

6. In order to calculate the OP/OC of the assessee in respect of international transactions with its AE, the TPO apportioned the total cost pertaining to AE and Non-AE segments on pro-rata basis, 6 ITA No.1416/Hyd/2014 M/s. Syniverse Mobile Solutions Private Limited, Hyderabad

based on the revenue, and accordingly worked out the OP/OC at 15.73% as under-

Amount Description (in Rs.)

Operating 12,34,85,961 Revenue Operating Cost 10,67,04,545 Operating profit 1,67,81,417 OP/OR(%) 13.59% OP/OC(%) 15.73%

7. After making working capital adjustment of (-)3.84%, the arithmetic mean margin of the selected comparables at 26.53% was taken by the Assessing Officer at adjusted Arms Length margin and applying the same to the corresponding Operating Cost of Rs.10,67,04,545, the Arms Length Price of the international transactions of the assessee company with its AEs was worked out by him at Rs.13,50,13,260 as against the price of Rs.12,34,85,951 charged by the assessee. The difference of Rs.1,15,27,299 accordingly was worked out by the TPO as the TP adjustment that is required to be made in respect of the relevant international transactions of the assessee with its AE.

8. When the addition on account of TP adjustment was proposed to be made by the Assessing Officer to the total income of the assessee in the draft assessment, objections were raised by the assessee before the Dispute Resolution Panel which inter alia included the objections of the assessee in respect of rejecting its TP study report, based on segmental financials, by the TPO holding that the same were not reliable. These objections raised by the assessee were found to be not sustainable by the DRP, barring one objection raised by the assessee for the inclusion of Infosys 7 ITA No.1416/Hyd/2014 M/s. Syniverse Mobile Solutions Private Limited, Hyderabad

Technologies Ltd. as comparable by the TPO. The DRP accordingly directed the AO/TPO to recompute the ALP of the international transactions of the assessee with its Associated Enterprises by excluding Infosys Technologies Ltd. from the list of final comparables. As per the directions of the DRP, the Assessing Officer/TPO recomputed the Arm's Length Price of the international transactions of the assessee with its AEs at Rs.13,35,83,419 and accordingly an addition of Rs.1,00,97,458 was made by the Assessing Officer to the total income of the assessee on account of TP adjustment in respect of relevant international transactions of the assessee involving the provision of IT/ITE Services to its Associated Enterprises, in the assessment completed under S.143(3) read with S.144C(5) of the Act.

9. We have heard the arguments of both the sides and also perused the relevant material on record. As rightly submitted by the learned counsel for the assessee, segmental details taken by the assessee in its TP analysis cannot be rejected merely on the ground that they are unaudited, as done by the TPO and this position duly supported by several decisions of the Tribunal is not disputed even by the Learned Departmental Representative. He however, has submitted that the segmental details and financials were rejected by the TPO not merely on the basis of unaudited aspect, but he has also given certain specific reasons, such as assumptions and presumptions involved in the allocation of various expenses between different segments. He has also contended that the different segments of the assessee company are heterogeneous and in order to rely upon the financials of such segments for the TP analysis, it is always better to have the same duly audited. He has contended that although there is no legal 8 ITA No.1416/Hyd/2014 M/s. Syniverse Mobile Solutions Private Limited, Hyderabad

requirement to get the segmental financials audited, it is always preferable for establishing the reliability.

10. We are unable to accept the contentions of the Learned Departmental Representative. As submitted by the learned counsel for the assessee, direct overheads attributable to the respective segments were duly allocated by the assessee to the said segments and even for indirect overheads, allocation was done by applying appropriate allocation keys. It is also observed in this regard that there was no objection specifically raised by the TPO in his order to show that any such allocation key adopted or applied by the assessee was wrong or unreasonable. As regards the objection of the Revenue that the allocation of overheads and working of any segmental financials in the absence of separate books of account involve assumptions and presumptions, it is pertinent to note that even the TPO allocated the overheads in the ratio of sales to work out the OP/OC of the AE segment, which itself involved assumptions and presumptions. We therefore, find merit in the contentions of the learned counsel for the assessee that there is no point in rejecting the entire segmental details when the segmental activities are different and specific allocation keys are given for allocating the indirect expenses between different segments. In these facts and circumstances, we are of the view that it is incumbent upon TPO to examine the segmental details after verifying the allocation of direct and indirect expense made by the assessee with reference to the respective allocation keys and if on such examination/verification, it is found that the segmental financials are not reliable, he could reject the same by giving specific reasons. Otherwise, if the allocation of overhead is by and large fair and reasonable and the segmental results can be fairly and appropriately adjusted, by changing/adjusting the allocation, the TPO, in our opinion, should 9 ITA No.1416/Hyd/2014 M/s. Syniverse Mobile Solutions Private Limited, Hyderabad

make such adjustments and do the Transfer Pricing Analysis on the basis of such adjusted segmental financials, instead of rejecting the same straight away. We, therefore, remit this issue to the file of the AO/TPO to decide the same afresh after examining/verifying the segmental financials of the assessee and after giving reasonable opportunity of hearing to the assessee. Grounds No.1 to 10 are accordingly treated as allowed for statistical purposes.

11. The next issue involved in grounds No.11 and 12 relates to the addition of Rs.1,60,66,825 made to the total income of the assessee by way of TP adjustment on account of interest attributable to the excess credit period allowed by the assessee to its Associated Enterprise.

12. As noticed by the AO/TPO, the assessee company had shown receivables of RS.8,41,67,205 from its Associated Enterprises. After taking into consideration certain specific instances of excessive credit period allowed by the assessee company to its Associated Enterprises, the TPO was of the opinion that the assessee, from an independent party in an arm's length situation, would have received its funds within the credit period allowed and if not, would have normally charged interest for the delay. Reliance in this regard was placed by him on the decision of the Bangalore bench of the Tribunal in the case of Logix Micro Systems Ltd. (42 SOT 525), wherein it was held by the Tribunal that reasonable period should be provided as interest-free period and no interest should be calculated for such reasonable period. Accordingly, taking one month as a reasonable period of credit, the TPO calculated interest attributable to the delayed payments received by the assessee from its Associated Enterprises at Rs.1,60,66,825 and worked out the TP adjustment required to be made on this issue to 10 ITA No.1416/Hyd/2014 M/s. Syniverse Mobile Solutions Private Limited, Hyderabad

that extent. The Dispute Resolution Panel overruled the objection raised by the assessee for this TP adjustment proposed by the Assessing Officer in the draft order and held that no interference with the order of the Assessing Officer/TPO on this issue was called for. Accordingly, the addition of Rs.1,60,66,825 was made by the Assessing Officer on this issue to the total income of the assessee in the final assessment made by him, vide his order dated 29.10.2013.

13. We have heard the arguments of both the sides and also perused the relevant material on record. It is observed that although reliance was placed by the TPO on the decision of the Tribunal in the case of Logix Microsystems Ltd. (supra) wherein it was held that a reasonable period should be provided as interest free period, he has not given any basis whatsoever to take such reasonable period of credit in the case of assessee as one month. Although there were no credit terms specifically agreed between by the parties and there was also no definite credit policy followed by the assessee as submitted by the learned counsel for the assessee, the reasonable period of credit, in our opinion, should be taken on the basis of comparable instances. In this regard, it is pertinent to note that credit was being offered by the assessee company even in the case of non-AE transactions and these internal comparables thus were available for the comparability analysis. As agreed by the learned representatives of both the sides, the average credit period offered by the assessee in the non-AE transactions can be taken as the credit period offered in an arm's length situation. In this regard, the learned counsel for the assessee has submitted that the average credit period offered by the assessee to its AE, going by the quantum of receivables at the end of the year under consideration vis-à-vis corresponding turnover, is the same as 11 ITA No.1416/Hyd/2014 M/s. Syniverse Mobile Solutions Private Limited, Hyderabad

offered to the non-AEs. The learned Departmental Representative, however, has contended that this mater requires verification and the Assessing Officer may be allowed to work out the average credit period actually offered by the assessee in case of non-AE transactions and compare the same with the credit period allowed by the assessee in the case of AE transactions. We find merit in this contention of the learned Authorised Representative. This issue is accordingly remitted back to the file of the Assessing Officer/TPO with a direction to decide the same afresh after taking into consideration the credit period offered by the assessee to its Associated Enterprises vis-a-vis the average credit period offered by it to non-Associated Enterprises and after giving sufficient opportunity of hearing to the assessee. Grounds No.11 and 12 of the assessee's appeal are accordingly treated as allowed for statistical purposes.

14. The issues involved in ground No.13 relating to levy of interest under S.234B and S.234C are consequential in nature and the Assessing Officer is accordingly directed to allow consequential relief to the assessee on these issues.

15. In the result, appeal of the assessee is treated as allowed for statistical purposes.

Order pronounced in the court on 11th February, 2015

Sd/- Sd/-

(Saktijit Dey) (P.M.Jagtap) Judicial Member Accountant Member

Dt/- 11th February, 2015 12 ITA No.1416/Hyd/2014 M/s. Syniverse Mobile Solutions Private Limited, Hyderabad

Copy forwarded to:

1. M/s. Syniverse Mobile Solutions Private Limited (Earlier Known as M/s. MACH Mobile Solutions Private Limited), ILABS Centre, Lobby Floor, Plot lNo.18, Madhapur, Hyderabad 500 081.

2. Dy. Commissioner of Income-tax 16(2), Hyderabad

3. Dispute Resolution Panel, Hyderabad

4. Director General of Income-tax, International Taxation, Hyderabad 500 004.

5. Departmental Representative, ITAT, Hyderabad.

B.V.S