TaxTMI 
TaxTMI 
2013 (9) TMI 191
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....submissions made by the assessee, and for the 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. Therea....
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....66 NA -00.65 6 Quintegra Solutions Ltd 12.81 14.95 NA 13.88 7 R.S. Software (India) Ltd 08.08 15.69 13.55 12.44 8 Ranklin Solution 05.80 7.55 NA 06.68 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 comp....
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.... 36.63 35.12 9 iGate Global Solutions Ltd 07.49 06.17 10 Infosys Technologies Ltd 40.30 39.67 11 Ishir Infotech Ltd 30.12 31.07 12 KALS Information Systems Ltd 30.55 24.06 13 LGS Global Ltd 15.75 15.76 14 Lucid Software Ltd 19.37 17.65 15 Media Soft Solutions Pvt. Ltd 03.66 02.12 16 Megasoft Ltd. 60.23 52.07 17 Mindtree Ltd 16.90 15.96 18 Persistent Systems Ltd 24.52 24.06 19 Quintegra Solutions Ltd 12.56 09.80 20 R.S. Software (India) Ltd 13.47 13.72 21 R Systems International Ltd (segment) 15.07 13.84 22 Sasken Communication Tech. Ltd (Segment) 22.17 21.71 23 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 + reimbur....
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....n the above judicial precedent, the companies at Sl.Nos.5, 8, & 21 require to be rejected as functionally dissimilar; - that comparable at Sl.No.14 - Lucid Software Ltd -requires to be rejected in view of the findings of the Mumbai Tribunal in the case of Telcordia Technologies India (P.) Ltd. (supra), CSR India (P.) Ltd. (supra); - that comparable at Sl. No.8 requires to be rejected on account of abnormal growth as the CAGR of the company for the year 2007 was 65% which was above the industry's average of 30%; - that comparable at Sl.No.11 requires to be rejected as its RPT exceeds 15% in view of the findings in the case of 24/7 Customer.com (P.) Ltd. (supra), CRS India Pvt. Ltd. (supra). 3.4 In conclusion, it was submitted that if the above argument of the learned AR is accepted, adjusted the arithmetic mean of the remaining eight of the comparables (out of 26 of TPO's 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&#....
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....s should be excluded, in view of D&B study referred to in the ITAT, Bangalore decisions in Genesys Integrating Systems (ITA 1231/B/2010), and Triology (ITA No.1054/B/2011). 2.3 In Honeywell, it has been argued on behalf of Revenue that in cases of Genesis and Triology, D&B study has been referred in order to restrict the comparables with higher turnover of Rs. 200 crores. These decisions do not lay any law/principle for lower limits of turnover. In fact, in both the cases, comparables with turnovers, which is 5-25 times higher have been accepted. It has been submitted that the D&B study (copy enclosed) itself is based on study of sample of 'listed' companies with turnover above Rs. 100 mn, i.e. Rs. 10 crores. Further, the D&B study,2007 does not lead to the conclusion/classification of software companies, into three water-tight compartments of financially similar entities. In fact, the classification is made as a study tool for the purpose of study of performance behaviour over three years of study. Thus for the purpose of selecting comparables for TP study in case with turnover of Rs. 85.85 crores, there is no justification to exclude any of the comparables above ....
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....s anti-virus software needs updating and improved programming depending on the threats. Oral arguments have been made that software services are not basically different from what is being construed as software product services, as both require the same skilled manpower who have to work on the software programme and are paid on the basis of manhours spent on the work/project, as per contract. Unless the assessee is able to demonstrate that any comparable is purely into software product business which results in off the self products with intangibles and IPs, it cannot be said to be functionally dissimilar. 6. Certain cases have been argued to be excluded based on RPT filter of >15% as held in 24x7 Customer decision, such as Ishir. 7. Assessee has argued that 'Helio and Matheson' should be rejected on the basis of abnormal profits or fluctuating margins over the year. This issue has been held in favour of Revenue by ITAT, Bangalore in case of 24x7 Customer case, which has held that on the basis of a profits which the assessee feels is abnormal, the comparable cannot be rejected". 3.6 We have heard the rival submissions and perused the materials on record.....
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....ess Software India (P.) Ltd. (supra). 3.6.2 In the case of Genesis Microchip (I) (P.) Ltd. (supra), relying on Dun & Bradstreet analysis had observed as under: "9. .........We find that the TPO himself has rejected the companies which are making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered? We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and, therefore, 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 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. D....
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.... (8) Infosys Technologies Ltd It is ordered accordingly. (ii) Functional dissimilarity: 3.7 We shall now deal with the improper selection of comparables by the TPO for the reasons that they were functionally different, as held by the Tribunal in the cases of Trilogy E-Business Software India (P.) Ltd. (supra), Telecordia Technologies India (P.) Ltd. (supra) and CSR India Pvt. Ltd. (supra). (a) Accel Transmatic Limited (seg): The section of this company by the TPO was duly considered by the Tribunal in the case of Trilogy E-Business Software India (P.) Ltd. (supra) and the reason recorded in its finding is extracted as under: "50. We have considered the submissions and are of the view that the plea of the assessee that the aforesaid company should not be treated as comparables was considered by the Tribunal in Capgemini India Ltd. (supra) where the assessee was software developer. The Tribunal, in the said decision referred to by the ld. Counsel for the assessee, has accepted that this company was not comparable in the case of the assessee engaged in software development services business. Accepting the argument of the ld. Counsel for the assessee, we hold t....
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....same is contrary to the annual report of this company as highlighted by the assessee in its letter dated 21.6.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the assessee that this company is not comparable." 3.7.1 In conformity with the finding of the coordinate bench of the Tribunal in the case of Triology E-business Software India (P.) Ltd. (supra), we are of the considered view that (i) Accel Transmatic Limited (seg); (ii) Avani Cimcon Technologies Ltd.; (iii) Celestial Labs Limited & (iv) KALS Information System Limited (seg) cannot qualify as comparables in the case of the assessee under consideration. It is ordered accordingly. (e) Lucid Software Limited: The above company has been rejected as comparable in the case of Telecordia Technologies (P.) Ltd. (supra). The findings of the Hon'ble Mumbai Tribunal are reproduced below: "7.2. Lucid Software Limited: It has been submitted before us that this company b....
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....egasoft: It is to be noted that in the case of Trilogy E-Business Software India (P.) Ltd. (supra), the Tribunal turned down the plea 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....
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.... noticed that there is bound to be a difference between the Assessee and Megasoft and the profit arising to the Megasoft as a result of the existence 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. (iii) Related party transaction: 3.8 Ishir Infotech Limited : The assessee had objected to the inclusion of Ishir Infotech Limited as a comparable being related party transaction in excess of 15% of total sales/revenue. The TPO had set a limit of 25% on the related party transaction. According to the assessee, the recent order of the Tribunal in the case of 24/7 Customer Com Private Ltd. had held that if comparable company ha....
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....(supra) 3.9 Following the Coordinate Bench orders of the Tribunal in the case cited supra, we direct the Assessing Officer/TPO to exclude, after due verification, those comparables from the list with the related party transactions or controlled transactions in excess of 15% of the total revenue for the financial year 2006-07. It is to be mentioned here, Geometric Ltd. is also to be removed from the comparable list, since that company was having RPT at 19.98% (going by assessee's own calculation), however, no argument was raised for its exclusion by the assessee, probably, on account of low margin of Geometric Ltd. 3.9.1 After excluding from the TPO's list of comparables, the eight companies having turnover exceeding Rs. 200 crores, five companies on account of functional dissimilarity and one company on account of related party transaction in excess of 15% of total revenue, the following 12 companies are retained as comparables:- Sl. No. Name of the company 1. Datamatics Limited 2. E Zest Solutions Limited 3. Geometric Ltd. (seg) 4. Helios & Matheson Information Technology Ltd 5. LGS Global Ltd. 6. Mediasoft Solutions Pvt. Ltd....
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....dge the submission of the assessee and added ALP mark-up determined by the TPO to the cost of the cross charge. The relevant observation of the TPO at para 4 of the impugned order read as follows:- "Thus it can be reasonably said that the reimbursement of expense received are not routed through profit and loss account. No independent party would render such services without any mark up. Even otherwise, recovery of expenses is always form part of operating cost in the case of independent comparable companies. Thus these recovery of expenses (received) of Rs. 5,99,87,648/- are added to the operating revenues as well as the operating costs for the purpose of aggregation of transactions and determining arm's length price under TNMM". 4.1 The DRP in its direction, affirmed the TPO's action vide paras 15 to 15.2 of its impugned order. 4.2 Aggrieved by the affirmation of the TPO's order by the DRP and its incorporation in the assessment order dated 19.09.2011, the assessee is in appeal before us. 4.3 The learned AR reiterated the submissions made before the Income Tax authorities that the reimbursement of expenses incurred on behalf of related parties for adm....
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.... that the software produce is an enduring benefit to the assessee in the sense that it would accelerate to enhance the income due to its usage in its usage in software programme which was ultimately developed and sold by the assessee. Obviously, software produce is a part of profit making apparatus of the assessee which had, subsequently, helped the assessee in conducting its business more proficiently. As rightly highlighted by the AO, the expenditure incurred by the assessee during the year was capital in nature. The DRP also took a similar view that the software items produce was an enduring benefit to the assessee and, thus, it cannot be allowed as revenue expenditure. The assessee had not brought any evidence to controvert the findings of the Revenue. Before concluding, it is to be mentioned that the assessee had not seriously objected to the action of the Assessing Officer, probably for the reason, depreciation was granted at 60%. In view of the above, we are of the considered view that the AO was justified in treating the expenditure on purchase of computer software as capital in nature and we, therefore, decline to entertain the assessee's contention on the issue. It is....
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....and in connection with the acquisition of the premises on lease, were for the purpose of business. Naturally, therefore, when such advances are lost to the assessee, the loss would be a business loss and not a capital loss which is eligible for deduction while computing the business profits of the assessee. Reliance is also placed on the recent ruling of Mumbai Tribunal in the case of United Motors v. ITO (6 taxmann.com 32) wherein it was held that write off of the interest free deposit made by the assessee to the licensor against rental properties was a loss incidental to the business and hence could not be said to be unsustainable in law. The Appellant further places reliance on the Bangalore Tribunal Ruling in the case of Wendt (India) Limited (ITA 269/Bang/10) wherein write off of irrecoverable inter-corporate deposits were held to be an allowable deduction under the Act. Every expenditure resulting in some kind of enduing benefit would not necessarily be a capital outlay and hence what needs to be considered is whether such an expenditure is giving any benefit to the assessee in capital field. [Empire Jute Co. Ltd. v. CIT(1980) (124 ITR 1) (SC)]. Hence, the fact that ....