TaxTMI 
TaxTMI 
2013 (6) TMI 376
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....ne of Rs. 29,67,31,922/-. Accordingly, the assessing officer referred the case to the Transfer Pricing Officer (TPO) to determine the Arm's Length Price (ALP). The TPO, after examining the details furnished by the assessee, passed an order under section 92CA of the Act dated 27.8.2010, by making an adjustment of Rs. 2,76,72,297/- in respect of software development services. The assessing officer thereafter passed a draft assessment order on 18.11.2010, assessing the total income of the assessee at Rs. 3,12,46,899/-. In the draft assessment order, the following additions were made while computing the total income of the assessee: (a) Adjustment to arm's length price to the tune of Rs. 2,76,72,297/- with reference to TPO's order in respect of international transaction dealt by the assessee with its AE; & (b) the reduction of the amount of Rs. 17,32,230/- being the lease line charges, Rs. 4,29,869/- being the broadband charges, Rs. 78,26,397/- towards the foreign travel expenses and Rs. 80,115/- towards the insurance expenses which directly attributable to the export of software were excluded from the export turnover only and the deduction u/s 10A was recomputed, acc....
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....mputing deduction under section 10A of the Act. Alternatively, in ground no.3, it was submitted that if the above expenses are reduced from the export turnover, an equal amount also be reduced from the total turnover for computing deduction under section 10A of the Act. The alternative submission, according to the learned AR, is squarely covered by the ruling of the Hon'ble jurisdictional High Court in the case of CIT v Tata Elxsi Ltd. [2012] 349 ITR 98/204 100 (Kar.). 5.1 The learned DR was unable to controvert the submissions made by the learned AR. 5.2 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 the said sum from the export turnover as well as from the total turnover while computing deduction under section 10A of the Act. It is ordered accordingly. I....
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....Global Systems Limited 6.73% 11 Larsen & Toubro Infotech Limited 11.03% 12 Maars Software International Limited 17.12% 13 Melstar Information Technologies Limited 1.30% 14 MindTree Consulting Limited 16.60% 15 Orient Information Technology Limited 2.68% 16 Quintegra Solutions Limited 11.93% 17 R S Software (India) Limited 12.19% 18 S I P Technologies and Exports Limited 25.25% 19 Sasken Communication Technologies Limited 17.71% 20 Sasken Network Systems Limited 16.19% 21 Satyam Computers Services Limited 29.27% 22 TVS Infotech Limited -4.81% 23 TransworldInfotech Limited 26.34% 24 Tyche Industries Limited 10.62% 25 VJIL Consulting Limited 6.26% 26 VMF Softech Limited 18.39% 27 Visualsoft Technologies Limited 18.73% 28 Zylog Systems Limited 16.32% Arithmetic Mean 14.53% 6.1 The TPO had considered the TNMM, as selected by the assessee, as the most appropriate method in the facts and circumstances of the case. However, the TPO rejected the analysis carried out by the assessee and conducted a fresh eco....
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.... 23.59% Operating cost (D) 26,24,84,197 Arm's length Price (E = D* [100%+C]) 32,44,04,219 Price Charged in International Transaction (F) 29,67,31,922 Shortfall being adjustment u/s 92CA (G=E-F) 2,76,72,297 6.2. The adjustment made by the TPO was affirmed by the DRP and the same was incorporated in the final assessment order by the assessing officer. This has been objected to by the assessee. 6.3 It was submitted by the learned AR that the assessee's margin would be within the parameters, if certain comparable are excluded by following the reasoning of the orders of the Tribunal; namely, * Genesis Microchip (I) (P.) Ltd. Dy. * Trilogy E-business Software India (P.) Ltd. v. Dy. (Bang.); * Mercedes Benz Research Development India (P.) Ltd. v. Dy. CIT [IT (T.P.) Appeal No.1222(Bang.) of 2011, dated 22-2-2013.] (I) Turner Filter & Functional Dissimilarity 6.4 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) Assessee's own case for assessment year 2006-07 Centillium In....
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.... the case of Trilogy E-Business Software India (P.) Ltd. (supra) and Mercedes Benz Research Development India (P.) Ltd.'s case (supra) and the comparables selected by the TPO in those cases are identical to that of the instant case. Now we shall proceed to dispose of the issues argued as under:- (i) Turnover Filter 6.5.1 The TPO had, while selecting the above 26 comparables, applied a lower turnover filter of Rs. 1 crore but preferred not to apply any upper turnover limit. The size of the comparable is an important factor in comparability. The ICAI TP guidance note has observed that the transaction entered into by a Rs. 1000 crores company cannot be compared with the transaction entered into by a Rs. 10 crores company and the two most obvious reasons are the size of the two companies and related economies of scale under which they operate. The TPO's range had resulted in selection of companies as comparable such as Infosys which was 277 times bigger than that of the assessee. The Bangalore Bench of the Tribunal in the case of Genisys Integrating Systems (India) (P.) Ltd. v. Dy. relying on Dun and Bradstreet's analysis had held that turnover range of Rs. 1 crore to....
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....l for the assessee as well as the decisions referred to by the ld. counsel for the assessee clearly lay down the principle that the turnover filter is an important criteria in choosing the comparables. The assessee's turnover is Rs. 47,46,66,638. It would therefore fall within the category of companies in the range of turnover between 1 crore and 200 crores (as laid down in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010) . Thus, companies having turnover of more than 200 crores have to be eliminated from the list of comparables as laid down in several decisions referred to by the ld. counsel for the assessee. Applying those tests, the following companies will have to be excluded from the list of 26 comparables drawn by the TPO viz. Turnover Rs. (1) Flextronics Software Systems Ltd. 848.66 crores (2) iGate Global Solutions Ltd. 747.27 crores (3) Mindtree Ltd. 590.39 crores (4) Persistent Systems Ltd. 293.74 crores (5) Sasken....
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.... of the Assessee to reject this company as a comparable". C. Celestial Labs. Ltd: 6.6.3 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 Software India (P.) Ltd.'s case (supra) had opined that this company cannot be as comparable on the ground that - "45** ** ** We are of the view that in the light of the submissions made by the Assessee and the fact that this company was basically/admittedly in clinical research and manufacture of bio products and other products, there is no clear basis on which the TPO concluded that this company was mainly in the business of providing software development services. We therefore accept the plea of the Assessee that this company ought not to have been considered as comparable". D. KALS Information System Ltd (Seg): 6.6.4 Incidentally, the selection of this company as comparable by the TPO was rejected by the Tribunal in the case of Trilogy E-Business Software India (P.) Ltd.....
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.... 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, it is essential that the characteristics and the functions are by and large similar as that of the assessee company and T.P. analysis/study can be made with fewest and most reliable adjustment. If a company has employed heavy capital in development of a product then profitability in the sale of product would be entirely different from the company, who is involved in serve sector. Therefore, this company cannot be treated as having same function and profitability ratio. In our view, due to non-availability of full information about the segmental d....
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....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 TPO shows that the TPO relied on information which was given by this company in which this company had explained that it has two divisions viz., BLUEALLY DIVISION and XIUS-BCGI DIVISION. Xius-BCGI Division does the business of product software (developing software). This company develops packaged products for the wireless and convergent telecom industry. These products are sold as packaged products to cu....
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....f Trilogy E-Business Software India (P.) Ltd.'s (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. Ishir InfoTech Limited: 6.8 The assessee had objected to the inclusion of Ishir Infotech Limited as comparable, since that company fails employee's cost filter of 25% revenue. According to the learned AR, Ishir InfoTech Ltd, The 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 Ishir InfoTech Ltd. It was stated that professional fee paid is payment made to external third parties for the performance of their services on company's behalf and not salary paid to the employee's of the organization. The learned counsel placed reliance on the order of Bangalore Tribunal in the case of Mercedes Benz Research Development India (P.) Ltd. (supra) in support of his contention. 6.8.1 The learned DR present was duly heard. 6.8.2 We have ....