TaxTMI 
TaxTMI 
2011 (6) TMI 392
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....y the Transfer Pricing Officer (TPO)/Assessing Officer and confirmed by the Dispute Resolution Panel (DRP) varying the reported value of international transaction be deleted; (iii) various adjustments ought to have been made to reduce the ALP but have not been so made, be directed to be made; (iv) telecommunication charges, insurance charges and expenses incurred in foreign currency be not excluded from export turnover in computing deduction under section 10A; (v) without prejudice, expenses, if any, reduced from export turnover to be reduced from the total turnover in computing deduction under section 10A of the Act; and (vi) interest levied under section 234B and 234D of the Act require to be deleted. 3. Briefly stated, the assessee company ['the assessee' in short] engaged in the business of development of software including E-business software. For the assessment year under consideration, the assessee filed its return of income, admitting a total income of Rs. 4.91 lakhs. The case was referred to determine the arm's length price in relation to the international transactions entered into by the assessee with its AEs under section 92CA of th....
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.... agreement with the reasoning of the TPO. (v) Rejection of certain companies taken by the assessee as comparable and adoption of certain companies as comparable by the TPO - After going through the reasons given by the TPO for accepting/rejecting comparables, the Panel is in agreement with TPO. During the course of hearing, the assessee had raised objection that M/s. Megasoft Ltd. has to be rejected as a comparable because it is a IT product company. The Panel had called for a report from the TPO who had held that Megasoft Ltd. is mainly a software development company can be retained as a comparable. The Panel found that the correct PLI i.e., operating profit/operating cost of the company is 51.73 per cent instead of 52.74 per cent while passing the final assessment order, the TPO is directed to take the mean PLI of comparable companies after adopting the correct PLI of Megasoft Ltd. Apart from this, other objections of the assessee to use of filters and adoption of comparables is not accepted. (vi) The TPO excluding foreign exchange gain, bank charges of the assessee as part of operating profit while computing net profit margins - The panel is of the opinio....
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.... 3.2 In the final assessment order under section 143(3) read with section 144C of the Act on 13-9-2010, the ld. Assessing Officer had computed the deduction under section 10A of the Act at Rs. 4,44,03,914. While doing so, the ld. Assessing Officer had reduced Rs. 57.64 lakhs being telecommunication and insurances expenses and also expenses in foreign exchange of Rs. 2.41 crores [travelling and conveyance and training and recruitment expenses] from the export turnover, as according to the ld. Assessing Officer, all the above expenses in foreign exchange were attributable to providing technical services outside India in accordance to proviso to Explanation 2(iv) of section 10A(8) of the Act. Under the caption transfer pricing, on receipt of order under section 92CA of the Act from TPO and after considering the assessee's objections, the total adjustment under section 92CA of the Act was Rs. 46,96,90,273 as against Rs. 43,61,89,694 shown by the assessee, the difference of Rs. 3,35,00,579 being adjustment under section 92CA of the Act, the same was added to the assessee's income under the head 'Transfer Pricing' and, accordingly, the assessment was concluded. 4. Aggrieved, the asses....
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....with respect to these transactions and they have been accepted at values they were undertaken; - in his final order, the ld. TPO had selected 20 companies as comparables and considered six additional companies as comparables from that proposed, out of which two companies were selected by the assessee, that these new companies were adopted as comparables without proposing the same or affording an opportunity to the assessee to present its objection to their adoption; that the arithmetic mean was determined at 20.68 per cent and after factoring a working capital adjustment of 1.47 per cent the adjusted arithmetic mean was determined at 19.2 per cent. The transfer pricing adjustment for the software development services was, accordingly, determined at Rs. 3,39,73,620. - when the assessee had approached the Dispute Resolution Panel [DRP] for succor, the DRP had, however, virtually rejected the assessee's objection except for correcting an error in the margin computation of one comparable, viz., M/s. Megasoft. The ld. Assessing Officer incorporated the TP adjustment as per the directions of the DRP, while determining th....
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.... that the size as one of the selection criteria and especially the Hon'ble Chandigarh Special Bench had rejected adoption of the turnover range of one crore on lower end and infinity on the higher end DCIT v. Quark systems Pvt. Ltd. 38 SOT 207. Such a view has been accepted by various Tribunals, viz., (a) Egain Communications Pvt. Ltd. v. ITO 118 TTJ 354 (Pune); (b) M/s. Sony India (P.) Ltd v. DCIT 114 ITD 448 (Del.); (c) DCIT v. Indo American Jewellery Ltd., - ITA No. 6194/Mum./2008 - Mumbai; (d) Philips Software Centre Pvt. Ltd. 26 SOT 226 (Bang). - that the size as a criteria for selection of comparable was also recommended by OECD in its TP Guidelines, 2010 that - "(Page 343) Size criteria in terms of sales, assets or number of employees: the size of the transaction in absolute value or in proportion to the activities of the parties might affect the relative competitive positions of the buyer and seller and, therefore, comparability." - that the ICAI TP Guidance Note (Para 15.4) had also observed that a transaction entered in....
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....heard earlier by the TPO was being cured now and, thus, as admitted by the DRP that the error of not having afforded a sufficient opportunity to the assessee continues, vitiating the entire process whereby making the orders bad in law; Authenticity of the information received: - Rule 10(3) provide that the information specified in sub-rule (1) shall be supported by authentic documents. The TPO, had not, however, established whether the information obtained by way of notice under section 133(6) was authentic and complete; - brushed aside the differences between the annual reports of the comparables and replies received under section 133(6) [for e.g., in the case of Accel] as highlighted by the assessee, the ld. TPO had relied and concluded his report based on replies received, in preference to annual report of the companies which were audited by professional qualified CAs and approved by Board of Directors; - for e.g., Sankhya Infotech was selected as comparable in preceding assessment year (2005-06) on the ground that it was a software development company despite the stout objec....
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....e to re-determine ALP on the basis of up-dated information; - that the OECD in its TP guidelines discourages use of secret comparables, the data of which is unavailable to the taxpayer; - that the data as available to it may be used for determination of the arm's length price; that the data available subsequently or obtained through notices under section 133(6) should be rejected as such approach adopted by the TPO of using subsequent data was bad in law; - without prejudice, that even adopting the subsequent data as used by the TPO, the assessee's margin satisfy the arm's length range Margin or adoption of various companies as comparables: (i) Megasoft Ltd.: - that Megasoft Ltd. [ML] was selected by the TPO in his final order under section 92CA by adopting the margin at 52.74 per cent in the final computation of the arm's length price without affording an opportunity to the assessee; - that it was contented before the DRP that ML was having revenues from software products as well as software revenues and its....
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....bsp; ITO v. M/s. Saunay Jewels Pvt. Ltd. 2010-TII-51-ITAT-MUM.-TP (d) Mentor Graphics (Noida) Pvt. Ltd. v. DCIT 109 ITD 101. (ii) KALS Information Systems Limited - The TPO had considered KALS as a comparable on the ground that it was engaged in software services and its margin was computed at 39.75 per cent. As there were unusual features such as consistent losses in providing training, salary cost etc., the assessee urged that KALS cannot be adopted as a comparable. However, TPO and DRP have considered KALS as a comparables adopting the figures supplied in compliance to notice under section 133(6), that KALS had claimed that 'the core of our business may be classified as that of Pure Software Development service provider', which was contrary to the information available in the Annual report of KALS; that the assessee's request to summon KALS for cross examination was turned down which is against various rulings including that of Kishinchand Chellaram v. CIT 125 ITR 713 (SC). Thus, KALS Information Systems Limited cannot be considered as comparable. (iii) Tata Elxsi Limited - Tata Elxsi Ltd. [TEL] had two segments, viz., software development and....
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....account. On receipt of prize money by the team, each employee was paid Rs. 1 lakh and the balance amount was credited to Profit and Loss account. Since this activity was in the nature of software development service which was the main business of the assessee and the assessee incurred various expenses towards this, the said income should be considered as operating in nature; - that the assessee's margins after considering foreign exchange gain and share in prize money from online competitions, the operating profit/operating cost was worked out at 14.05 per cent; that the margin of the assessee as worked out was greater than the adjusted margin of the comparables after eliminating KALS, Tata Elxsi and Accel. Even at the unadjusted level and without elimination of the above companies, the differential is within the permissible 5 per cent bandwidth and, thus, no adjustment was required to be made to the reported value of the assessee's transactions with its associated enterprises; and - based on all the above, the assessee's transactions with the associated enterprises were at arm's length and the addition made by the....
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....(k) Bodhtree Consulting Ltd. (1) Synfosys Business Solutions Ltd. (m) Megasoft Ltd. (n) Lanco Global Solutions Ltd. & (o) Flextronics Software Systems Ltd. - that the margins of the assessee as computed after considering foreign exchange gain and income from share in prize money from online competition was greater than the adjusted margin of the comparables on the above companies after eliminating KALS, Tata Elxsi, Accel, Infosys Technologies and Mindtree and, thus, no adjustment was required to be made to the reported values of the assessee's transactions with its associated enterprises. Benefit of 5 per cent range: - assuming without admitting that a TP adjustment was to be made, it should be given a standard deduction of 5 per cent as provided under proviso to section 92C(2) before making adjustments for the transfer price; that the following case laws support the assessee's view: (i) Sap Labs India Pvt. Ltd. v. ACIT 2010-TII-44-ITAT-BANG.-TP (ii) Philips Software Centre Pvt. Ltd. 26 SOT 226 (iii) MSS India Pvt. Ltd. 32 SOT 132 (iv) Customer Services Indi....
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....der section 92CA of the Act, the difference of Rs. 3,35,00,579 [total adjustment was determined under section 92CA at Rs. 46,96,90,273 as against the assessee's claim of Rs. 43,61,89,694] was also added to the assessee's income. 5.2 The cruxes of the submission of the assessee are summarized as under: "(i) the TPO had applied a lower turnover filter of Rs. 1 crore, but, not applied the upper turnover limit on the ground that there was no relationship between sales and margins which, according to the assessee, contrary to the guidelines laid down in rule 10B(3); (ii) the TPO had not provided the basis of selection of companies for issuance of notice under section 133(6) of the Act and also it was not clear as to whether all the responses received have been incorporated in the CD supplied to the assessee; (iii) as the initial details provided to the assessee, e.g., Megasoft Ltd. was rejected on the ground that it fails RPT filter and employee cost filter; (iv) in initial show-cause notices, the TPO had detailed the process adopted, however, in disclosing the process exercise of its powers under section 133(6) and the information obta....
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.... had overruled the assessee's objection and concluded that 65 per cent of the efforts of the product division could be categorized as resulting to software services. This view of the DRP was quite contrast to the TPO's view that a product segment is substantially different from a software service segment. At page 55 of the TP order, the TPO himself has listed various differences between software product company and software service company; (xi) In the cases of iGate Global, Geometric, KALS Info Systems, R. Systems, Sasken Communication, Tata Elxsi Comparables, the TPO had used segmental margins for comparability purposes where the revenues from software development exceed 75 per cent of total revenues of the entity. Considering Megasoft at the entity level would be inconsistent with the TPO's position in case of other comparables. In case of Megasoft, the margins at the entity level were higher than that at the segment level whereas in case of other comparables e.g., KALS, Sasken, Tata Elxsi, iGate etc., margins at the segment level were higher. This shows the approach of the TPO was arbitrary and without basis. 5.3 On a decisive examination of the relevant records, pe....
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....pt of the directions of the DRP, the assessee came to know that the DRP mentions about having made good the opportunity not being afforded earlier. It appears that no reasonable opportunity was afforded to the assessee either by the TPO or by the DRP to put-forth its view on the issue and, thus, as admitted by the DRP, the error was allowed to continue thereby vitiating the entire process as highlighted by the assessee; (iv) there were inconsistencies in selecting the companies as comparables; (v) On the margin or adoption of various companies as comparable, it was the case of the assessee that Megasoft Limited was selected by the TPO in his final order under section 92CA of the Act without giving an opportunity of hearing at any time to the assessee and when the assessee had protested before the DRP the selection of Megasoft Limited as comparable by the TPO, the DRP, brushing aside the assessee's objection, had justified the TPO's stand; (vi) The assessee also opposed the TPO's stand in considering KALS Information Systems Limited, Tata Elexsi Limited, Accel Transmatic Limited etc., as comparables which has been summarily rejected by the TPO ....
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....pped up before the earlier Bench wherein the Hon'ble Bench in the case of Sap Labs India Pvt. Ltd. v. Asstt. CIT [2011] 44 SOT 156 (Bang.) referred supra had held that the foreign exchange gain needs to be considered as being operating in nature while determining arm's length price. In conformity with the said finding, we decide the issue in favour of the assessee; and (ii) In respect of deduction under section 10A of the Act, the assessee's contention was that the expenses claimed were not recovered from the customers and also did not form part of export turnover as the assessee was not engaged in providing technical services outside India. In this connection, we recall the finding of the Hon'ble ITAT, Chennai Special Bench in the case of ITO v. Sak Soft Ltd. [2009] 30 SOT 55 wherein the Hon'ble Special Bench made it unambiguously that "53...........the freight, telecom charges or insurance attributable to the delivery of articles or things or computer software outside India or the expenses, if any, incurred in foreign exchange in providing the technical services outside India are to be excluded both from the export turnover and from the total turnover which are ....