TaxTMI 
TaxTMI 
2010 (3) TMI 898
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....essee or the prayer. However, for the sake of ready reference, these grounds are reproduced below : "1 The orders passed by the Asstt. CIT under section 143(3) of the Income-tax Act, 1961 and the CIT(A) under section 250 of the Act, are bad in law and on facts. 2 The learned CIT(A) erred in determining the arithmetical mean of the comparables at 16.584 per cent and in confirming transfer pricing adjustment of Rs. 1,06,38,003. 3 The CIT(A) erred in law and facts in not granting the suitable adjustments to the net profit margins in terms of rule 10B(1)(e)( iii) of the Income-tax Rules, particularly, the working capital adjustment and the risk adjustment. 4 The CIT(A) erred in law and facts in disregarding the decision of Hon'ble Tribunal, Pune Bench in the case of Honeywell Automation India Ltd., Hon'ble Tribunal, Mumbai Bench in the case of UCB India (P.) Ltd., Hon'ble Delhi Tribunal in the case of Sony India & Mentor Graphics (Noida) (P.) Ltd. and Hon'ble Tribunal, Pune Bench in the case of E-Gain Communication (P.) Ltd. 5 The CIT(A) erred in law in not granting the benefit of +/- 5 per cent variances as per proviso to section 92C(2) of ....
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.... for short), an AE for Rs. 13,28,78,923. Since the transactional value was more than Rs. 5 crores, the Assessing Officer made a reference to the TPO for determining Arm's Length Price ('the ALP' for short) under section 92CA(1) of the Income-tax Act, 1961 ('the Act'). The TPO determined the value at Rs. 14,37,19,100, being Rs. 1,08,40,177 more than the value declared by the assessee. The Assessing Officer furnished an opportunity to the assessee to state its case as to why the aforesaid difference of Rs. 1,08,40,177 should not be taken as the ALP and the corresponding addition be made to the returned income. After hearing the assessee, he came to the conclusion that the value determined by the TPO represented the ALP and, thus, made the addition to the income returned by the assessee. This addition was challenged before the learned CIT(A). 2.1 Coming to the order of the TPO, it was explained that Vedaris UK is a leading provider of energy trading and risk management solutions in Europe, with a high quality customer base in UK, Germany and Scandinavian countries for gas and electricity trading. The software developed by the assessee is used by the traders, marketers, producers an....
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....ing through the directors' report, audited financial accounts etc. and finally 20 companies were shortlisted as the comparables. The data in respect of these 20 companies was tabulated in Annex AI, which is reproduced below : Sl. No. Name of case NCP (%) 1. Aptech Ltd. 2.67 2. Blue Star Infotech Ltd. 25.75 3. Advance Technologies Ltd. 44.36 4. Datamatics Technologies Ltd. 30.87 5. Eonour Technologies Ltd. 24 6. Fore C. Software Ltd. 6.12 7. Ideaspace Solutions Ltd. 18.16 8. Integrated Hitech Ltd. 3.06 9. KCC Software Ltd. 19.32 10. Kushal Software Ltd. (-)7.35 11. Max Healthscribe Ltd. 5.68 12. NUT Gis Ltd. 28.68 13. OCL Informations Ltd. 4.26 14. SMR Universal Softech Ltd. 22.53 15. Sark Systems India Ltd. 23.25 16. Soffia Software Ltd. 28.94 17. Tata Elxsi Ltd. 15.1 18. Teledata Informatics Ltd. 25.56 19. Tera Software Ltd. (-) 0.62 20. Universal Media Network Ltd. 11.35 Mean or average 16.585 2.2 The assessee raised objection about some of the companies, but the TPO was of t....
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....nally, it was held that NIIT Gis Ltd., Teledata Informatics Ltd., SMR Universal Softech Ltd., KCC Software Ltd. and Universal Media Network Ltd. were not valid comparables on this ground. Thus, the learned CIT(A) was of the view that there were five valid comparables, which were enumerated by him on page 16 of his order. These are as under : Sl. No. Comparable Turnover OP/TC as per TPO OP/TC (as per appellate) 1. Soffia Software Ltd. (Quintegra Solutions Ltd.) 36.64 28.94% 12.86% 2. Datamatics Technologies Ltd. 42.60 30.87% 43.85% 3. Kushal Software Ltd. 5.19 -7.35% -5.86% 4. Sark Systems India Ltd. 5.74 23.25% 31.09% 5. Tera Software Ltd. 10.15 -0.62% 0.15% 2.4 It was also submitted before him that adjustment in regard to working capital should have been allowed by the TPO. The learned CIT(A) considered the argument in the light of rule 10B(3), OECD Guidelines and the cases decided by the Tribunal in this matter. On the basis of the aforesaid jurisprudence, the following principles were extracted : (i) Rule 10B(1)(e)(iii) and 10B(3)(ii) made provision for such adjustment; (ii) the....
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....tioned by the TPO and the Assessing Officer. His case was that these cases were not comparable cases and they ought to have been excluded by the learned CIT(A) for determining the ALP. 3.1 In regard to Datamatics Technologies Ltd., it was submitted before him that it is purely a BPO company whose business is entirely different from the business of the assessee. The profit margins in the two businesses will be totally different. However, after examining the financial accounts of the aforesaid company and the submissions of the assessee, it was held by the learned CIT(A) that no concrete information has been submitted with regard to the claim that it is purely a BPO company. The segmental accounts in terms of receipt from BPO business and the other business were not available. 3.2 In regard to Sark Systems India Ltd., it was submitted that it is a project company and, thus, it is not a valid comparable case. The learned CIT(A) examined the financial statement of this company also and it was seen that segmental accounts were not furnished, and expenditure on employees and software development amounted to 89 per cent of the receipt. However, he was of the view that software indus....
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....ing the ALP. As the assessee did not submit any data before him to justify the book value of international transactions and it was found that cost plus method had not been followed by the assessee, he proceeded to value of the transactions by applying TNMM. For this purpose a preliminary search was made and thereafter comparability test mentioned in rule 10C(2) was applied. 20 cases were found to be comparables under the aforesaid rule. The mean of the profitability was taken for valuing the ALP. The learned CIT(A) considered various submissions of the assessee and thereafter excluded certain cases applying the filters of related-party transaction, turnover and functionality. Thus, it was held that only five cases could be said to be the comparable cases. 4.1 Coming to the arguments, it was submitted that the assessee had not maintained any document to substantiate its case that international transactions were valued on cost plus method. Thus, it failed to comply with the relevant statutory provision. In such a case, the Revenue authorities had to determine the ALP and the burden of proof cast on them stood highly reduced, as held by the Bangalore Bench of the Tribunal in the ca....
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....d comparable case. It was also submitted that although analysis regarding differences in the line of business, expertise and complexities of the product may be useful, but absence thereof will not make the analysis of the TPO faulty more particularly in a situation where the assessee has not maintained documents required under the statute. Finally, it was urged that the cases of Teledata Informatics Ltd., Soffia Software Ltd. and Sark Systems India Ltd. were the comparables on the basis of which the ALP ought to have been determined. 4.4 In the rejoinder, the learned Authorised Representative stressed that the assessee is not a project development company and there is a difference between software development and project development. The risk in the case of software development is lower and the risk of project development was borne by Vedaris, UK. It was submitted that the assessee had charged Vedaris, UK on the basis of manhours and the rate applied was fair and reasonable. However, it was fairly conceded that the assessee is not challenging the method employed by the TPO for determining the value of related-party transactions. Our attention was drawn to the submissions made be....
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....ssee charged the parent company on the basis of man-days spent for developing the software, being $165 per man-day. The assessee also provided after sale services to the clients of the Vedaris, UK. It was claimed that the value of the international transactions was based upon cost plus method. However, no documentation was maintained to prove the aforesaid assertion. It was further claimed that the rate of $ 165 per man-day was fair and reasonable looking to the prevailing market charges of $ 80 per man-day. Again, no evidence was filed to prove that the charges were at arm's length. The Assessing Officer referred the matter to the TPO, who came to the conclusion that the international transaction should be valued on TNMM. There is no dispute raised by the assessee regarding the appropriate method of valuation. After applying functionality test, the TPO selected 20 comparables out of 118 companies available from PROWESS and CMIE database. The average net profit and ratio in these cases worked out to 16.585 per cent. The TPO granted 5 per cent deduction in valuing the ALP determined on the basis of the above average profit ratio. The learned CIT(A) considered the matter further in t....
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....he transactions operate etc. are of relevance. The assessee has, however, not referred to contractual terms of the transactions which lay down explicitly or implicitly the responsibilities, risks and benefits are to be divided between the Vedaris, UK and itself. Rule 10C(3) lays down that an uncontrolled transaction shall be a comparable transaction if-(i) none of the differences, if any, between the transaction and the enterprises is likely to materially affect the cost, and (ii) reasonably accurate adjustments can be made to eliminate the material effects of the aforesaid differences. We may examine the questioned comparables in the light of the aforesaid rules and the cases referred to by the learned Authorised Representative and the learned Departmental Representative. 5.3 We have perused the 9th annual report of Kushal Software Ltd. for financial year 2002-03, which also furnishes corresponding figures for the financial year 2001-02. It is seen that this company has shown sale of software at about Rs. 5.17 crores against purchase of about Rs. 5.05 crores. The financial division is also undertaking some transactions, which appear to be in the nature of purchase and sale of s....
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....g integrated solutions and also undertakes the manpower supply. Therefore, the sales of about Rs. 5.59 crores appear to be in respect of providing integrated solutions, which may be in the nature of project development rather than software development. The technical services receipts are in respect of the manpower supply. Thus, this company is engaged in providing technical services, integrated solutions and sale of software. Therefore, the business model of this company is also different from that of the assessee, which is stated to be development of software for the Vedaris, UK. In the light of this discussion, the mention about future focus of the company regarding computer education in Government schools becomes of no significance. Thus, we find that the argument taken by the learned Departmental Representative is valid that this case should be excluded from the consideration as a comparable, mainly for the reasons discussed in the case of Kushal Software Ltd. (supra). 5.5 We have also perused the annual accounts of Sark Systems India Ltd. for financial year 2001-02. From the directors' report, it is seen that the company focuses on transportation, e-governance, CRM solution....
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....s clear that the company is primarily a BPO company. Therefore, its business model is totally different from that of the assessee. The finding of the learned CIT(A) was that the plea of the assessee is not acceptable for the reason that it is engaged in the business of IT enabled services and software development services apart from the BPO business. We are unable to accept this argument because on the face of it, the company is a pioneer in BPO business and, therefore, it is clear that bulk of its export turnover is on account of this business. Therefore, the company does not meet the requirement of rule 10C(2)(a), which is a major factor in judging the comparability of the case. 5.7 It was also the argument of the learned Departmental Representative that the case of Teledata Informatics Ltd. was wrongly excluded by the learned CIT(A). We have examined the annual accounts of this company also. Its directors' report mentions that the company is a software products and service company and it focuses on development of marine, educational and internet software. It is located in Chennai and is supported by marketing offices across the globe, including at Mumbai and Coimbatore in Ind....
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....s and growth and R&D expenses was not seriously pressed before the learned CIT(A). In any case, he has not dealt with adjustment on aforesaid accounts. The assessee asked for adjustment to the extent of 4.11 per cent on all these grounds. The working capital adjustment has been worked out at 1.30 per cent on the basis of Soffia Software Ltd. (3/2 of the paper book). In the course of hearing before us, the learned counsel relied on OECD guidelines and orders of Tribunal that adjustment in respect of various unequal factors has to be made. On the other hand, the learned Departmental Representative relied on the order of the learned CIT(A). 6.2 We have considered the facts of the case and submissions made before us. Rule 10B(1)(e)(iii) provides that the net profit margin worked out under TNMM is to be adjusted to take into account the differences between international transaction and comparable uncontrolled transaction, which could materially affect the amount of net profit margin in the open market. Thus, the question is, whether the availability of advances from the Vedaris, UK is a material factor in determining the rate of net profit ? We are of the view that availability of fu....