AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2011 (5) TMI 499
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....ing documentation the assessee determined the arm's length price of the international transactions of software development and related services by applying TNMM as most appropriate method. The assessee had benchmarked its international transactions with 10 comparable companies with an average operating profit ratio (OP/TC) of 9.31%. 3.1 The final list of comparable companies is as under:- S.No. Name of the company FY OP/TC 1. Birlasoft Ltd. 200503 -0.06% 2. Datamatics Ltd. 200409 -6.09% 3. Goldstone Technologies Ltd. 200503 -1.50% 4. Maaars Software International Ltd. 200603 3.18% 5. Melstar Infotech International Ltd. 200503 -9.17% 6. Prithvi Information Solutions Ltd. 200603 12.48% 7. Quintegra Solutions Ltd. 200603 13.51% 8. RS Software India Ltd. 200603 15.29% 9. Visualsoft Technologies Ltd. 200503 15.99% 10. Zenith Infotech Ltd. 200603 49.47% Mean 9.31% The operating profit margin (OP/OC) of the assessee was computed at 12.49%. Since the (OP/TC) earned by the assessee on transactions with the associated enterprise at 12.49% was higher than the average operating profit margin earned on similar transactions with un....
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....e us. 5. Assessee's submissions in this regard are summarized as under:‑ "(i) The TPO has considered Zenith Infotech even though when it earning supernormal profits and does not satisfy his own additional filters:‑ Zenith Infotech has remarked an abnormal high profit margin of 49.73% during the financial year 2005-06 and there has been sharp increase in profitability and sales. The OP/TC during the year is summarized as follows:- Year Mar-04 Mar-05 Mar-06 Mar-07 Sales in crores % sales in increase 18.28 21.90 35.37 66.97 over base year Mar 04 120% 193% 366% OP/TC 3.10% 22.27% 49.73% 87.88% % margins increase Over base year Mar 04 719% 16.05% 28.35% It may be pointed out that Zenith Infotech is pre-dominantly software product company, while the appellant is engaged in rendering software development services. It is a matter of common knowledge that a software product company ends up earning higher margin as they are engaged in selling software products owned by them. The aforesaid is also corroborated from the facts that wages to cost ratio of Zenith Infotech is only 37.5% (whic....
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.... The average of operating profit over cost of the remaining three companies after eliminating Zenith Infotech Software is as follows: S. No. Name of the company FY OP/TC 1. Prithvi Information Solutions Ltd. 200603 12.65% 2. Visualsoft Technologies Ltd. 200603 12.67% 3. Quintegra Solutions Ltd. 200603 13.71% Arithmetic Mean 13.01 % Since the OP/TC of the appellant at 12.49% is within the safe harbour range of (+/-)5% as per the proviso to section 92C(2) of OP/TC margin of 3 comparable companies at 13.01%, no adjustment is warranted on account of difference in arm's length price of the international transaction. (ii) Rejection on the basis of additional filters. In addition to the filter of wages/cost ratio, the TPO in his order has applied the following additional filters: (a) Forex earning (b) Declining operating results and sales (c) Negative networth It is submitted that that the additional filters have been used by the TPO to suit his requirement and to arrive at predetermined results. It would be appreciated that rejection of the companies on the basis of the profit margin, rather than fu....
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....ech Ltd. which had shown super normal profits should also be excluded. Ld. counsel of the assessee further claimed that there is no estoppels against the assessee. Now assessee has claimed that Zenith Infotech is not comparable. Ld. counsel further claimed that there cannot be any motive to the assessee as the entire income is exempt under section 10A. 8. We have heard the rival contentions in light of the material produced and precedents relied upon. We find that TPO in his order has rejected the five comparables companies identified by the assessee. The TPO benchmarked the operating profit margin by the assessee-company with four profit making companies, which excluded Zenith Infotech Ltd. The margin of these companies are as under:- S.No. Name of the company FY OP/TC 1. Prithvi Information Solutions Ltd. 200603 12.65% 2. Visualsoft Technologies Ltd. 200603 12.67% 3. Zenith Infotech Ltd. 200603 49.73% 4. Quintegra Solutions Ltd. 200603 13.71% Arithmetic Mean 22.19% 8.1 Now it is the contention of the assessee that when loss making companies were taken out from the comparables by the TPO, the super profit earning company, Zenith ....
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....the safe harbour range of (+/-)5% as per the proviso to section 92C(2) of OP/TC margin of 3 comparable companies at 13.01%, no adjustment is warranted on account of difference in arm's length price of the international transaction. 8.2 The contention of the Ld. Departmental Representative that assessee has not vigorously agitated the issue of inclusion of Zenith Infotech before the authorities below is not acceptable, as all the necessary documents for assessee's contention in this regard were before the authorities below. 8.3 In the background of the aforesaid discussion, we delete the addition made by the Assessing Officer with regard to arm's length price. 9. The next issue raised is that Assessing Officer has erred in making disallowance of Rs. 1,18,31,549 out of expenditure on advertisement and sale promotion and recruitment and training expenses. aggregating to Rs. 1,57,75,411 holding that such expenses were incurred for better sales and turnover and contribution to the profits of the business and hence benefit of which expenditure accrued to the assessee over the years. 10. On this issue the Assessing Officer noted that as per the profit and loss account the ....