TaxTMI 
TaxTMI 
2013 (11) TMI 189
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.... USA and other related services to its associated enterprises. During the financial year 2006-07 relevant to the assessment year 2007-08, the assessee had the following international transactions with its associated enterprises. RECEIPTS Rs. Software development and consultancy 27,38,62,943/- Reimbursement of expenses 3,15,42,899/- PAYMENTS Rs. Reimbursement of expenses 35,52,104/- 3.1 The assessee company, in order to justify its transfer pricing study, had adopted Transaction Net Margin Method (TNMM) as the most appropriate method and selected 17 companies as comparables. The operating/net margin of the assessee was arrived at 11.81%. With reference to the comparable companies, the data for the years 2005, 2006 and 2007 was taken and the arithmetical mean of the net margin was arrived at 10.86%. Therefore, according to the assessee company, since its margin was at 11.81% and that of the comparables being at 10.86% the price at which the assessee had entered with its AE was at Arms Length Price (ALP). 3.1.1 The details of the net margin on cost earned by the assessee company, the comparables selected by the assessee and the arithmetical mean of ....
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.... Accel Transmatic Ltd.(Segment) 21.11 22.04 2 Avani Cimcom Technologies Ltd 52.59 53.16 3 Celestial Labs Ltd. 58.35 56.26 4 Datamatics Ltd. 1.38 1.22 5 E-Zest Solutions Ltd. 36.12 37.99 6 Flextronics Software Systems Ltd. (Segment) 25.31 26.96 7 Geometric Ltd. (Segment) 10.71 11.48 8 Helio & Matheson Information Technology Ltd. 36.63 36.38 9 iGate Global Solutions Ltd. 7.49 7.47 10 Infosys Technologies Ltd. 40.30 40.92 11 Ishir Infotech Ltd. 30.12 32.34 12 KALS Information Systems Ltd. 30.55 25.33 13 LGS Global Ltd. 15.75 17.06 14 Lucid Software Ltd. 19.37 18.94 15 Media Soft Solutions Pvt. Ltd. 3.66 3.42 16 Megasoft Ltd. 60.23 53.30 17 Mindtree Ltd. 16.90 17.25 18 Persistent Systems Ltd. 24.52 25.34 19 Quintegra Solutions Ltd. 12.56 11.09 20 R S Software (India) Ltd. 13.47 15.01 21 R Systems International Ltd. (Segment) 15.07 15.13 22 Sasken Communication Technologies Ltd. (Segment) 22.17 22.99 23 S I P Technologies & Exp....
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....le of assets, from operating income in computing the net margin of the Appellant although the Appellant itself had not included the same in the operating income. 3.2 The learned Senior Counsel Shri K P Kumar has filed written submissions. The content of the same is summarized below:- C1 Submissions regarding operating income and net margin as computed by the TPO: The computation of net margin on cost as computed in the TP Report and by the TPO is as under: As per TP report As per TPO Operating Income Rs.27,68,28,114/- Rs.27,62,08,778/- Operating Expenses Rs.24,75,84,314/- Rs.24,68,94,579/- Operating Profit (Op. Income - Op. Expenses) Rs.2,92,43,800/- Rs.2,93,14,199/- Operating/Net margin (OP/TC) 11.81% 11.87% In arriving at the margin as computed above, the TPO made a reduction of Rs. 6,19,336/- to the operating income of Rs.27,68,28,114/- (as considered by the assessee) on the ground that the said income pertained to profit on sale of assets which would not form part of operating income. However, the assessee, while computing the margin in its TP report, had itself, in the first place not included the said amount of R....
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....lore Tribunal in the case of 24/7 Customer Com (P.) Ltd. (ITA No.227/Bang/2010 dated 9/11/2012). In conclusion, it was argued by the learned Sr. Counsel that the arithmetic mean of 12 remaining of the 26 comparables would be 16.92 after providing for working capital adjustment and that of the assessee being at 12.12%, the same would be within the range of +/-5% of the assessee's net margin and thus, no transfer pricing adjustment is required and, therefore, the TP adjustment made by the TPO is liable to be set aside. 3.2.1 On the other hand, the learned D R had supported the findings of the authorities below. It was, further, submitted that the learned TPO had analyzed the various factors, as recorded in his order u/s 92CA of the Act, to arrive at a conclusion that the assessee's international transactions had resulted in an adjustment to the extent of Rs.3,25,82,272/- which has been duly sustained by the DRP in its directions u/s 144C of the Act. It was, therefore, pleaded that there was no infirmity in the order of the AO warranting any interference of this Bench. 3.2.2 We have heard the rival submissions and perused the materials on record. Before we proceed to consider th....
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....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 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 t....
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.... they were functionally different. A. Accel Transmatic Ltd. (Seg): The selection of this company as comparable by the TPO was duly considered by the Tribunal in the case of Trilogy E-Business 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 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 sub....
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....velopment service provider. We therefore accept the plea of the Assessee that this company is not comparable". 3.4.1 In conformity with the findings of the coordinate Bench of the Tribunal in the case of Trilogy E-Business Software India (P.) Ltd. (supra), we are of the considered view that (i) Accel Transmatic Ltd (Seg); (ii) Avani Cimcon Technologies Ltd; (iii) Celestial Labs. Ltd., & (iv) KALS Information Systems Ltd (seg) cannot qualify as comparables in the case of the assessee under consideration. It is ordered accordingly. (E) Lucid Software Limited 3.4.2 The above company has been rejected as comparable in the case of Telcordia Technologies (P.) Ltd. (supra). The submissions and the finding of the Hon'ble Mumbai Tribunal is reproduced below:- "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, t....
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....n TPO list 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. Ishir Infotech Ltd. 6. LGS Global Ltd. (Lanco Global Solutions Ltd.) 7. Mediasoft Solutions Pvt. Ltd. 8. Megasoft Ltd. (Seg) 9. Quintegra Solutions Ltd. 10. R S Software (India) Ltd. 11. R Systems International Ltd. (Seg) 12. SIP Technologies & Exports Ltd. 13. Thirdware Solutions Ltd. (Seg) 3.4.5 The above companies have been retained as comparables in conformity with the findings of the earlier Bench in the cases of Trilogy E-Business Software India (P.) Ltd. and Telcordia Technologies (P.) Ltd. (supra). (F) Megasoft: It is to be noted that in the case of Trilogy E-Business, 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 t....
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....m software development services. Having drawn the above conclusion, the TPO did not bother to quantify the revenues which can be attributed to software product development and software development service but adopted the margin of this company at the entity level. In terms of Rule 10B(3)(b) of the Rules, an uncontrolled transaction shall be comparable to an international transaction if - (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 38. Neither the TPO nor the DRP have 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 ....
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....herein the Tribunal has held that - ".......We are further of the view that an entity can be taken as uncontrolled if its related party transactions do not exceed 10 to 15% of total revenue. Within the above limit, transactions cannot be held to be significant to influence the profitability of the comparables. For the purpose of comparison what is to be judged is the impact of the related party transactions vis-à-vis sales and not profit since profit of an enterprise is influenced by large number of other factors ...." Respectfully following the decision of the Tribunal in the case of Sony India (P) Ltd. (supra), the Assessing Officer/TPO are directed to exclude after due verification those comparables from the list with related party transactions or controlled transactions in excess of 15% of total revenues for the financial year 2003-04". 3.5.3 Following the Coordinate Bench order 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 ....