TaxTMI 
TaxTMI 
2013 (6) TMI 56
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....ferred the case to the Transfer Pricing Officer (TPO) to determine the Arms Length Price (ALP). The TPO, after examining the details furnished by the assessee, passed an order under section 92CA of the Act dated 28/10/2010, by making an adjustment of Rs. 7,47,59,120/- in respect of software development services. The Assessing Officer thereafter passed a Draft Assessment Order on 30.11.2010, assessing the total income of the assessee at Rs. 8,07,92,079/-. In the Draft Assessment order, following additions/disallowances were made while computing total income of the assessee:- (a) An adjustment to 'arms length price' to the extent of Rs. 7,47,59,120 with reference to transfer pricing officer's (TPO) order in respect of international transaction dealt by the assessee with its AE. (b) The reduction of the amount of telecommunication charged of Rs. 58,18,751 and travel expenses incurred in foreign currency for providing technical services of Rs. 9,59,94,590/- attributable to delivery of software outside India, as provided under section 10A of the Act and without simultaneously reducing the said amount from total turnover. 2.1 Aggrieved, the assessee approached the Di....
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....issue in favour of the assessee by following the case of Tata Elxsi Ltd. 4.1 The learned DR was unable to controvert the submissions made by the learned AR. 4.2 We have heard the rival submissions and perused the materials on record. The Hon'ble jurisdictional High Court in the case cited supra had held that when the expenses are reduced from the export turnover while computing deduction under section 10A of the Act, the same should also be reduced from the total turnover in order to maintain parity between the numerator and the denominator. In the light of the above judgment, we direct the Assessing Officer to reduce a sum of Rs. 10,18,13,341/- from the export turnover as well as from the total turnover while computing deduction under section 10A of the Act. It is ordered accordingly. In the result, ground no.3 is allowed. Since we have decided the alternate plea of the assessee, following the judgment of the Hon'ble jurisdictional High Court cited supra, we are not adjudicating ground no.2 referred above. II. Transfer Pricing (Ground Nos.5 to 16) 5. As stated earlier, the assessee's reported value of the international transaction with its AE during the assessment year....
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....e companies in India with rates charged by the assessee; that for the FYs 2001-02 and 2002-03, the TPO had considered the international transaction of the assessee to be at arm's length and no adjustment has been proposed for those AYs. Relies on the finding of the Hon'ble Mumbai Tribunal in the case of Agility Logistics Private Limited v. ACIT [ITA No.2000/Mum/2010] - For AY 2007-08, the rates charged by the software companies in the industry were in the range of USD 5.73 to 32.10; that the assessee had considered companies in the IT space which commands premium in the market and substantiated that the hourly rate charged by the assessee - USD 41.42 - was higher than the rates charged by comparable companies; Relies on the finding of the Hon'ble Mumbai Tribunal in 3 Global Services Pt. Ltd v. DCIT [ITA No.1812/Mum/2009] & MSS India Private Limited v ACIT [32 SOT 132 (Pune)] 5.3.2 The learned DR, in rebuttal, submitted as follows:- - that the assessee had claimed that CUP method was the most appropriate method for the TP analysis by taking refuge in the findings of the earlier Bench in the assessee's own case for the earlier AY in M.P. NO.60/Bang/ 2012 dated 21....
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....rdia Technologies India Private Limited-ITA No.7821/Mum/2011 * 24/7 Customer Com Private Ltd. (ITA No.227/Bang/2010 dated 9/11/2012) I) Turner Filter & Functional Dissimilarity (Part of ground no.10, 11) 5.5 It was submitted that the 8 comparables are to be rejected from the TPO's list on account of the turnover filter. The learned AR relies on the following orders of the Tribunal for the above proposition:- i) M/s. Kodiak Networks (I) Pvt. Ltd v. ACIT - ITA No.1413/Bang/2010; ii) M/s. Genesis Microchip (I) Pvt. Ltd v. DCIT - ITA No.1254/Bang/2010; iii) M/s. Trilogy E-Business Software India Pvt. Ltd v. DCIT - ITA No.1054/Bang/2011 dated 23.11.2012. It was, further, submitted that 5 companies are to be excluded on account of functional dissimilarity. For the above argument, the learned AR relied on the orders of the Tribunal in the case of (i) M/s. Trilogy E-Business Software India Pvt. Ltd.; (ii) Mumbai Tribunal in the case of Telcordia Technologies India Private Limited. Lastly it was submitted that Ishir Infotech Ltd. (the comparable of the TPO) also should be rejected since it fails employees cost filter of 25% of revenue and for thi....
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....e assessee sought to exclude (i) Ishir and (ii) Lucid following the decisions of other Tribunals (supra), however, it had not demonstrated that these comparables were functionally different; that any comparable or set of comparables which have been held to be functionally different in a particular case viz., Triology or Telecordia, need not be excluded in assessee's case, as it was not the case of the assessee that Triology or Telecordia were functionally similar to the assessee if that be the case, these companies should have been selected by the assessee in its TP study or at least suggested during the TP proceedings; 5.6.1 We have heard the rival submissions and perused the materials on record. Before we proceed to consider the issues, it is to be mentioned that the line of business of the assessee in this case and that of three case laws (Trilogy, Telecordia & 24/7 Customer) are similar, namely, development of software and the size/turnover was also similar to that of the assessee in the instant case. Moreover, the assessment year 2007-08 was subject matter of consideration in the case of Trilogy E-Business Software India Pvt. Ltd. and Telcordia Technologies India Private Lt....
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....herefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which are loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs. 1 crore to 200 crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200 crores only should be taken into consideration for the purpose of making TP Study." 5.6.4 The above view has been followed in the recent order of the Tribunal in the case of Trilogy E -Business (supra). The relevant findings of the Tribunal are extracted as under: "20. In this regard we find that the provisions of law pointed out by the ld. counsel for the assessee as well as the decisions referred to by the ld. counsel for the assessee c....
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....counsel for the assessee, has accepted that this company was not comparable in the case of the assessees engaged in software development services business. Accepting the argument of the ld. counsel for the assessee, we hold that the aforesaid company should be excluded as comparables". B. Avani Cimcon Technologies Ltd: The selection of this company as comparable by the TPO was rejected by the earlier Bench of the Tribunal in Trilogy E-Business for the reasons that- "41. We have given a careful consideration to the submissions made on behalf of the Assessee and are of the view that the same deserves to be accepted. The reasons given by the Assessee for excluding this company as comparable are found to be acceptable. The decision of ITAT (Mumbai) in the case of Telcordia Technologies Pvt. Ltd. v. ACIT (supra) also supports the plea of the assessee. We therefore accept the plea of the Assessee to reject this company as a comparable". C. Celestial Labs. Ltd: This Company was also selected by the TPO as comparable. However, on due consideration of the issue, the earlier Bench of this Tribunal in Trilogy E- Business had opined that this company cannot be as comparable on t....
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.... "7.2 Lucid Software Limited: It has been submitted before us that this company, besides doing software development services, is also involved in development of software product. The learned AR has tried to distinguish by pointing out that product development expenditure in this case is around 39% of the capital employed by the said company, and, therefore, such a company cannot be considered as tested party. Even as per the information received in response to notice under section 133(6), the company has described its business as software development company or pure software development service provider. This information itself is very vague as the segmental details of operating revenue has not been made available to examine how much is the ratio of sale from software product and sale of software service and development. Looking to the fact that it has developed a software product named as "Muulam" which is used for civil engineering structures and the product development expenditure itself is substantial vis-à-vis the capital employed by the said company, this criteria for being taken as comparable party, gets vitiated. For the purpose of comparability analysis....
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....lea of the assessee that M/s. Megasoft Ltd should be rejected as comparable. However, the Tribunal accepted the alternative submission of the assessee that the segmental profit margin is to be reckoned with instead of entity level margin and held that the profit margin of 23.11% which is the margin of the software service segment be taken for comparability. The discussion and the findings of the Bench with regard to the acceptance of the alternative submission of the assessee to adopt the segmental margin of 23.11% are reproduced below: "37. The next plea of the Assessee is that if at all this company is considered as a comparable then the segmental margin of 23.11% (which is the margin for software service segment) alone should be considered for comparability. On the above submission, we find that the TPO considered the segmental margin (Software service segment) in the case of Geometric, Kals Info systems, R Systems, Sasken Communication and Tata Elxsi. Before DRP the Assessee pointed out that the segmental margin of 23.11% alone should be taken for comparability. The DRP has not given any specific finding on the above plea of the Assessee. Perusal of the order of the TP....
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....ce of the software product segment and no finding has been given that reasonably accurate adjustments can be made to eliminate the material effects of such differences. For this reason, we are inclined to hold that the profit margin of 23.11% which is the margin of the software service segment be taken for comparability...........". In conformity with the findings of the earlier Bench (supra), we are of the considered view that the TPO was justified in selecting M/s. Megasoft Ltd as comparable. However, the AO/TPO is directed to take segmental margins of 23.11% for comparability. It is ordered accordingly. G) Ishir InfoTech Limited: The assessee had objected to the inclusion of Ishir Infotech Limited as a comparable, since that company fails employee's cost filter of 25% revenue. According to the learned AR. The Ishir InfoTech Ltd, employee cost as a percentage of revenue is only 3.96%. It was submitted by the learned AR that the TPO on response obtained under section 133(6) considered "professional fee paid" as part of employee's cost of the Ishir InfoTech Ltd. It was stated that professional fee paid is payment made to external third parties for the performance ....
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...........". 5.8.1 In conformity with the above finding, we direct the AO/TPO to consider the foreign exchange gain or loss as part of the operating cost or revenue, as the case may be, for both the assessee as well for the comparable companies. III) Incorrect margin computation of comparable margin (Ground no.13) 5.9 It was the grievance of the assessee that certain arithmetical mistakes have crept in, in the order of the TPO, for which, an application u/s 154 of the Act filed by the assessee is still pending for disposal which requires to be disposed off. It is desired that the TPO shall look into the matter and decide the issue on merits, expeditiously. IV) Working capital adjustment (ground no.14) 5.10 We have duly considered the submission made by the assessee on this issue. To be precise, it was the contention of the assessee that the working capital adjustment has been wrongly worked out by the TPO which requires reconciliation. Since the assessee's allegation requires to be reconciled at the AO/ TPO's level, the issue is remitted back on the files of the AO/TPO with a direction to verify the veracity of the assessee's claim and to rectify the same, if it so warr....