TaxTMI 
TaxTMI 
TaxTMI 
2013 (9) TMI 191
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....detailed reasons recorded in his impugned order, made an adjustment of Rs. 11,07,50,525/- under s. 92 CA of the Act. Further, the assessing officer had, in her draft assessment order, proposed to make certain disallowances under the heads, viz., (i) purchase on computer software; and (ii) rental deposit written off. 2.2 Aggrieved by the adjustment of the arm's length price (ALP) on international transactions and proposed disallowances in the draft assessment order, the assessee had filed its objections before the Dispute Resolution Panel. 2.3 During the course of hearing before the DRP, the assessee had filed comprehensive objections on the above mentioned issues. After due consideration of the assessee's objections and also having provided an opportunity to the assessee to put-forth its views, the DRP had issued directions u/s 144C(5) r.w.s. 144C (8) of the Act dated 22.8.2011, wherein it had upheld the adjustment to the ALP as suggested by the TPO and also rejected the assessee's contentions with regard to (i) write off of the rental deposits; and (ii) the expenditure incurred on purchase of computer software. Thereafter, the AO passed the final order dated 19.9.201....
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....68 9 SIP Technology & Exports Ltd NA 21.99 NA 21.99 10 Sankhya Infotech Ltd 27.33 25.81 NA 26.77 11 Shree Tulsi Online.com Ltd 01.75 2.82 NA 02.29 12 Systemlogic Solutions Ltd 26.52 3.94 NA 28.73 13 Tutis Technologies Limited 07.28 10.85 NA 09.07 14 V & K Softech Limited 16.33 1.49 NA 08.91 15 VJIL Consulting Limited 8.26 9.86 NA 09.06 16 Visualsoft Technologies Limited 16.10 13.29 NA 14.70 17 Bodhtree Consulting Limited 26.47 17.18 NA 21.83 Arithmetic Mean 11.03 10.46 13.55 10.86 3.2 When the matter was referred to the TPO, the TPO undertook his own study and accepted certain filters adopted by the assessee. The methodology adopted by the TPO was the same as that of the assessee, namely, TNMM. Twenty-six companies were selected as comparables by the TPO and the arithmetical mean of the comparables was fixed at 25.14%. After providing for the working capital adjustment, the adjusted arithmetical mean arrived at by the TPO for the comparables was at 23.79%. By adopting 23.79% of ALP of the operating cost, the adjustment was made under section 92CA of the Act amounting to Rs. 11,07,50,525/-. The comparables selected ....
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....SIP Technologies & Exports Ltd 13.90 11.29 24 Tata Elxsi Ltd (Segment) 26.51 26.82 25 Thirdware Solutions Ltd (segment) 25.12 22.15 26 Wipro Ltd (segment) 33.65 35.18 Arithmetic Mean 25.14 23.79 Arm's Length Mean margin 25.14 Less: Working capital adjustment 01.35 Adjusted mean margin of the comparables 23.79 Operating cost (INR 77,14,39,357 + reimbursement of expenses received of INR 5,99,87,648) Rs.83,14,27,005 Arms Length Margin (23.79% of operating cost Arms Length Price (ALP) 123.79% of operating cost Rs.102,92,23,489 Price charged in international transactions (INR 858515316 + reimbursement of expenses received of INR 59987648) Rs. 91,84,72,964 Shortfall being adjustment u/s 92CA Rs. 11,07,50,525 The computation made by the TPO which was affirmed by the DRP was incorporated by the AO in her final assessment order. 3.3 Aggrieved by the assessment order dated 19.9.2011, the assessee in its written submissions, has raised broadly the following issues before us:- * that the TPO's action in applying the filter of related party transactions >25% is against the reasonable limit of 15% fixed by the Hon'ble Tribu....
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....list) would be 9.98% and the assessee's margin being 11.29, price charged by the assessee for its international transaction with its AE would be Arm's length price. The adjusted arithmetical mean of eight comparable companies and that of the assessee's are as follows:- Sl. No. Name of the Company Operating Revenues Operating margin on cost - Unadjusted Operating margin on cost - WC adjusted 1 Datamatics Ltd 54,50,88,027 1.38% -0.08% 2 Geometric Ltd. (Segment) 158,37,97,773 10.71% 10.19% 3 LGS Global Ltd. 45,38,93,898 15.75% 15.76% 4 MediaSoft Solutions Pvt. Ltd 1,85,08,785 3.66% 2.12% 5 Megasoft Ltd 63,71,32,545 23.11% 17.06% 6 Quintegra Solutions Ltd 62,72,16,924 12.56% 9.80% 7 R S Software (India) Ltd 101,04,49,441 13.47% 13.72% 8 S I P Technologies & Exports Ltd 3,79,80,955 13.90% 11.29% ARITHMETIC MEAN 11.82% 9.98% + / - 5% of the Net Margin of the assessee: Particulars Margin Margin of the Appellant 11.29% Adjusted arithmetic Mean of Comparable Companies (arm's length margin) 9.98% - 5% of the ALP post working capital adjustment 4.48% [0.95*(1+9.98%)]-1 + 5% of the ALP post working....
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....turnover of Rs. 85.85 crores, there is no justification to exclude any of the comparables above Rs. 200 crores applying turnover filter, which would be merely 2.2 times higher turnover cap. Even if 20 times higher cap filter is applied to the assessee's case the upper turnover limit should be about Rs. 1700 crores. Assessee in its earlier submission (Page12) has accepted Rs. 500 crores to be acceptable upper limit. 2.4 Unless the assessee is able to demonstrate that after crossing the turnover of Rs. 200 crores, let us say Rs. 262.58 crores (Tata Elxi) with margin of 26.51%, or Rs. 293.75 crores (Persistent Systems) with margin of 24.52%, such comparables necessarily undergo any structural change resulting in higher/lower margin, such argument cannot be accepted as reasonable or just, or based on any principles of economics. More so when the comparables accepted by the assessee (Megasoft with TO of Rs. 139.33 crores) show much higher margin (60.23%). 2.5 It is humbly submitted that the decision of the Hon'ble Tribunal in Honeywell would have a direct and significant implication for the case in hand, and the order in Honeywell be considered. ...............................
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....missions and perused the materials on record. Before we proceed to consider the issues, it is to be mentioned the line of business of the present case and that of Trilogy E-business Software India (P.) Ltd. (supra), Telecordia Technologies India (P.) Ltd. (supra) and CSR India (P.) Ltd. (supra) are similar, namely, development of software and the size/turnover range was also similar to that of the assessee's in the instant case. Further, the assessment year 2007-08 was subject matter of consideration in the case of Trilogy E-Business Software India (P.) Ltd. (supra), Telecordia Technologies India (P.) Ltd. (supra) and CSR India (P.) Ltd. (supra) and the comparables selected by the TPO in those cases are identical to that of the present case. Therefore, the finding recorded in the case of Trilogy E-Business Software India (P.) Ltd. (supra), Telecordia Technologies India (P.) Ltd. (supra) and CSR India (P.) Ltd. (supra) will hold good in this case also. We shall now proceed to dispose off of the issues raised by the assessee as under: (i) Turnover filter: 3.6.1 The TPO had, while selecting the above 26 comparables, applied a lower turnover filter of Rs. 1 crore, but, preferred....
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....n & 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 Rs. 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." 3.6.3 The above view has been followed in the case of Trilogy E Business Software India (P.) Ltd. (supra) and the relevant portion of the finding is extracted as under: "20. In this regard, we find that the provisions of law pointed out by the learned counsel 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 in ITA No.1231/Bang/2010). Thus, companies having turn....
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....his company as comparable by the TPO was rejected by the earlier order of the Tribunal in the case of Trilogy E-Business Software India (P.) Ltd. (supra) 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 Telecordia 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 Limited: This company was also selected by the TPO as comparable. However, on due consideration of the issue, the earlier Bench in Trilogy E-Business Software India (P.) Ltd. (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 bi....
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....iture 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, it is essential that the characteristics and the functions are by and large similar as that of the assessee company and TP analysis / study can be made with fewest and most reliable adjustment. If a company has employed heavy capital in development of a product then pr....
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....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 customers. While implementing these standardized products, customers may request the company to customize products or reconfigure products to fit into their business environment. Thereupon the company takes up the job of customizing the packaged software. The company also explained that 30 to 40% of the product software (software developed) would constitute packaged product and around 50% to 60% would constitute customized capabilities and expenses related to travelling, boarding and lodging expense. Based on the above reply, the TPO proceeded to hold that the comparable company was mainly into customization of software products developed (which was akin to software development) internally and that the portion of the revenue from development of software sold and used for customization was less than 25% of the overall revenues. The TPO therefore held th....
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....d that if the related party transaction exceeded 15% of the total sales/revenue, the same cannot be taken as a comparable. The relevant contention that was raised and the finding of the Tribunal read as follows:- "13.0 RELATED PARTY TRANSACTIONS In respect of the ground raised at S. No. 1 regarding acceptance of comparable companies having related party transactions as proposed by the TPO, the learned counsel for the assessee argued that the transfer pricing regulations do not stipulate any minimum limit of related party transactions which form the threshold for exclusion as a comparable. In this regard, the learned counsel for the assessee objected to the TPO's setting a limit of 25% on related party transactions. He objected to the inclusion of comparables being related party transactions in excess of 15% of sales/revenue. In support of this proposition, the learned counsel for the assessee placed reliance on the decision of the Hon'ble Bench of the ITAT, Delhi in the case of Sony India (P) Ltd. reported in 2008-TIOL-439-ITAT-Delhi dt.23.12.2008. The learned counsel for the assessee drew our attention to para 115.3 of the order wherein the Tribunal has held that - &....
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....and after adjusting the margin of Megasoft (segmental margin), the assessee's margin would be within the range of +/-5% of margin of the above mentioned comparables. Therefore, the assessee's contention to exclude the following companies as comparables:- (i) E Zest Solutions Limited (ii) Helios & Matheson Information Technology Ltd (iii) R Systems International Ltd (Seg) & (iv) Thirdware Solutions Ltd (Seg) are not adjudicated/considered. 3.9.3 In conclusion, the Assessing Officer/TPO is directed to work out the ALP of the assessee in accordance with the directions of this Bench (supra) and if found that the differential in the margin of the assessee and the comparables is beyond 5% bandwidth recognized in proviso to section 92C(2) of the Act, then adjustment is required to be made to the reported value of the assessee's transaction with its AE. It is ordered accordingly. 3.9.4 It is to be noted that no submissions/arguments were raised in the course of hearing with regard to other issues of TP adjustment, apart from the above discussed issues. Hence, the issues relating to rejection of certain comparables selected by the assessee, companies having abnormal profits ma....
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....of its AE for administrative convenience and later got reimbursed at cost. Therefore, the DRP has erred in including the reimbursements received for the purpose of calculating the adjustment under section 92CA. The assessee also relied on the order of the Tribunal in the case of Dy. CIT v. Cheil Communications India (P.) Ltd. [2011] 46 SOT 60 (URO)/11 taxmann.com 205 (Delhi) wherein the ITAT held that it is appropriate to cross charge the "pass-through costs" without mark-up. 4.4 The learned DR present was duly heard. 4.5 We have heard the rival submissions and perused the materials on record. We have noticed that the details of reimbursement expenses are given at page 334 of the paper book filed by the assessee. The break-up of the said expenses are not given in detail and it is not clear whether it is the reimbursement of expenses incurred on behalf of the AE. Since the issue is not clear and there is no detailed discussion of the break-up of expenses, we deem it fit and proper to remit the issue to the file of the Assessing Officer/TPO for detailed verification. We make it clear that if the receipts are mere recovery of expenses without any service then the same should not be ....
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....gh Court of Karnataka, which was dismissed on the ground that the lease deed was not duly registered. Hence, the assessee wrote off the rental deposit in its books and claimed as deduction while computing business profits of the assessee. The AO has disallowed the same with the contention that the same is not revenue in nature and, hence, not deductible under the Act. The view of the AO was affirmed by the DRP; hence, the assessee is in appeal before us on this issue. 6.1 The learned AR has filed written submissions. The summary of the same reads as follows: "The losses arising in course of the business, other than a capital loss, which is incidental to the trade would qualify for deduction under section 28 of the Act. Reliance is placed on the decision of the Hon'ble Supreme Court in the case of Badridas Daga v. CIT(34 ITR 10) (SC), wherein it was held that "When a claim is made for a deduction for which there is no specific provision in the Act, allowability of the same would depend on whether, having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and to be incidental to it". Since the very purp....