TaxTMI 
TaxTMI 
TaxTMI 
2013 (9) TMI 191
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....ons 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 19.9.2011 in line with her draft a....
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.... 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 by the TPO,....
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....ann.com 258/[2013] 140 ITD 344 (Bang.); * the TPO's action in not applying an upper limit to the sales turnover is against the law; o relies on in the case of Genisys Integrating Systems India (P.) Ltd. v. Dy. CIT [2012] 20 taxmann.com 715/53 SOT 159 (Bang.) and Trilogy E-Business Software India (P.) Ltd. v. Dy. CIT [2013] 29 taxmann.com 310/140 ITD 540 (Bang.); * TPO's action in selecting functionally dissimilar comparables is against the ruling of the findings of the Mumbai ITAT in the case of Telcordia Technologies India (P.) Ltd. v. Asstt. CIT [2012] 22 taxmann.com 96/137 ITD 1 and Trilogy E-Business Software India (P.) Ltd. (supra); * The TPO erred in applying the filter of onsite turnover >75% to reject otherwise comparable companies; * Relying on the findings of the Hon'ble Tribunals cited supra, the assessee's seeks rejection of 18 out of 26 comparables selected by the TPO; - that eight comparables at Sl. Nos. 6, 9, 10, 17, 22, 24 & 26 require to be rejected by applying the....
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.... - 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 capital adjustment 15.48% [1.05*(1+9.98%)]-1 3.5 The learned DR on the other hand supported the findings of the IT authorities and filed written submissions. The summary of the same is as follows:- "............................................................................... 2. Assessee has business turnover of Rs. 85.85 crores and international transactions with the AE, for software development services (receipt) of Rs.85.62 crores, and re-imbursement of expenditure (receipt) of Rs. 5.99 crores). Ld. AR has also argued for the application of turnover filter for rejecting any of the comparables selected by the TPO with turnover (or segmental turnover) above Rs. 200 crores as comparables. It has been argued by Ld. AR that out of the comparables below Rs. 200 crores turnover, companies with functional....
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....ch 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. ...................................................................... 5. On the issue (Ground No. 15) of comparables with functional dissimilarities, Ld. AR has relied on the decisions of ITAT, Mumbai and Bangalore in cases of Telecordia, Triology, and CSR India. It is submitted that what has been found to be functionally dissimilar in other cases, need not necessarily be different from that of the assessee. Thus while 'Celestial Labs' was rejected in Telecordia by Mumbai ITAT, the same comparable has been accepted in Tevapharma by Mumbai ITAT. Thus the assessee company engaged in software development for the AE, which is a major global player in ele....
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....ogies 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 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 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 Technologies Limited which was 150 times bigger than that of the assessee. Th....
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....wed 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 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.,: (Rs.) Turnover Flextronics Software Systems Ltd. 848.66 crores (2) iGate Global Solutions ltd 747.27 crores (3) Mindtree Limited 590.39 crores (4) Pers....
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....bsp; "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 ....
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....uct. The learned AR has tried to distinguish by point 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, 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 adjust....
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....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 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....
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....l in the case of 24/7 Customer Com Private Ltd. had held that if comparable company has related party transaction exceeded 15% of the total sales/revenue, the same should not be comparable. 3.8.1 The learned DR present was duly heard. 3.8.2 The Tribunal in the case of 24/7 Customer Com (P.) Ltd. (supra) had held 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/revenu....
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....s & Matheson Information Technology Ltd 5. LGS Global Ltd. 6. Mediasoft Solutions Pvt. Ltd 7. Megasoft Ltd 8. Quintegra Solutions Ltd 9. R S Software (India) Ltd 10. R Systems International Ltd (Seg) 11. SIP Technologies & Exports Ltd 12. Thirdware Solutions Ltd (Seg) 3.9.2 It was the contention of the assessee, that if the above companies are retained as comparables, 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 va....
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....behalf of related parties for administrative convenience and only represent "pass through costs". It was submitted that these reimbursements were not received against any specific services rendered by the assessee to its AEs. These were pure cost reimbursements (travel expenses, hotel stay expenses and other related expenditures) which the assessee had incurred on behalf 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 reimb....
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....e's contention on the issue. It is ordered accordingly. (B) Disallowance of rental deposits 6. The assessee had taken a building on lease for its office purposes. As per the lease deed the Appellant had placed a refundable deposit of Rs.24,93,600/- with the landlord. Since the assessee had difficulty in recovering the deposit from the landlord, it had filed a suit before the Hon'ble High 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 dec....