TaxTMI 
TaxTMI 
2010 (3) TMI 898
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.... 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 the Act. (6)The lower authorities should have accepted the results ....
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....ing 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 and generators and consumers of the power. The UK company, depending upon the feedback from the customers, develo....
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.... 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 Sl. No. Name of case NCP (%) 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 the view that the net profit margin of comparable companies can be calculated rather on a uniform, consistent and meaningful basis from the information available in public domain, which elimin....
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.... 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 OECD Guidelines and the draft notes on comparability may be relied upon for making such adjustment; (iii) the adjustment can be made in respect of capital, risk, growth and R&D expenses; (iv) rule 10B(3)(ii) provides for making reasonably accurate adjus....
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.... 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 industries have the main input as "human resources" and looking to the ratio of expenditure to receipt, it was a valid comparable case. 3.3 The case of the learned counsel was that Datamatics Technologies Ltd. had 70 per cent of its receipt from the BPO business a....
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.... 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 case of Aztec Software & Technology Services Ltd. v. Asstt. CIT [2007] 107 ITD 141 (SB). Nonetheless, the TPO carried out meticulous search to ascertain the comparables and determine the ALP. It was further submitted that the limited issue before the Tribunal in the app....
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....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 before the TPO, contained in para 4 of his order, wherein it is mentioned that the mark-up earned by comparable companies was about 8.1 per cent against 7.78 per cent by the assessee, which fell within the permissible difference of 5 per cent. The mark-up of other companies w....
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....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 the light of the objections raised by the assessee. Finally, he came to the conclusion that there were only five comparable cases. However, he rejected the plea that suitable adjustment to be made in respect of the capital employed in the business on the ground that reasonably accur....
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.... 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 shares. From the details mentioned above, it is clear that it is a trading company, engaged in the business of purchase and sale of software. It is not engaged primarily in the business of development of software. This becomes more clear from the fact that the accounts do not show payment of any significant amount of salaries t....
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....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 solutions and customer specific projects. The company has shown domestic sales at about Rs. 5.72 crores. The expenditure on software development and project development amounts to Rs. 2.26 crores and payment to employees amounts to about Rs. 1.15 crore. The company employed assets valued at about Rs. 2.294 crores for development of softwa....
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.... 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 India. Its total revenue amounted to about Rs. 24.72 crores, consisting of export sales of about Rs. 22.98 crores, domestic sales of about Rs. 1.62 crore and other income of about Rs. 12 lakhs. The major expenses were administrative expenses of about Rs. 9.97 crores, depreciation of about Rs. 9.58 crores, bad debts of about Rs. 56.23 lak....
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..... (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 funds without stipulation of interest does make difference in the rate of net profit. In the case of E-Gain Communication (P.) Ltd. (supra), the Division Bench of the Tribunal held that in comparing controlled and uncontrolled transactions under TNMM, the differences having tangible bearing on cost price or profit are to be considered with a v....