TaxTMI 
TaxTMI 
TaxTMI 
2013 (11) TMI 190
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....ware designing research and development activities for development of software, software quality assistance, testing, software maintenance and support function (which includes technical support, documentation, it integration, configuration management) for WSI. During the previous year, the assessee received the following amounts from its AE for the various services that it provided to the AE. RECEIPTS Rs. Software designing and development charges 22,07,76,898/- PAYMENTS Rs. Purchase of computer hardware and software 1,55,39,781/- Unsecured loans 28,69,890/- 4. In this appeal, we are concerned only with transfer pricing adjustment made by the TPO in respect of the receipts by the assessee for providing software designing and development services. The assessee filed transfer pricing analysis justifying the payment that it had received from its AE as at arm's length. It is not in dispute that the most appropriate method for computation of ALP is the Transactional Net Margin Method (TNMM). The net margin to cost was chosen as the Profit Level Indicator (PLI) for the purpose of comparison. The assessee's PLI was computed as follows:- A.1. Net margin on cost earned b....
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....One more company was rejected for the reason that it was functionally not comparable. Thus, out of 11 comparables chosen by the assessee, only two comparables were accepted by the TPO as comparable with that of the assessee viz., M/s. Quintegra Solutions Ltd. and S I P Technologies & Exports Ltd. The TPO adopted his own filters and while doing so, arrived at 26 comparables including the two comparables chosen by the assessee. The 26 comparables chosen by the TPO were as follows:- A.6. Comparables selected by TPO and their arithmetic mean: Sl. No. Name of the Company Unadjusted WC adjusted 1 Accel Transmatic Ltd.(Segment) 21.11 19.61 2 Avani Cimcom Technologies Ltd 52.59 50.85 3 Celestial Labs Ltd. 58.35 53.96 4 Datamatics Ltd 1.38 -1.23 5 E-Zest Solutions Ltd. 36.12 35.64 6 Flextronics Software Systems Ltd. (Segment) 25.31 24.57 7 Geometric Ltd. (Segment) 10.71 9.06 8 Helio & Matheson Information Technology Ltd. 36.63 34.01 9 iGate Global Solutions Ltd 7.49 5.03 10 Infosys Technologies Ltd 40.30 38.57 11 Ishir Infotech Ltd. 30.12 29.96 12 KALS Information Systems Ltd. 30.55 22.94 13 LGS Global Ltd. 15.75 14.62 14 Lucid Soft....
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....s to what will be the comparables that can be considered for the purpose of determining the ALP. 11. As far as the comparables chosen by the TPO at Sl. Nos. 6,9,10,17,18, 22, 24 & 26 are concerned, it is not in dispute that the turnover of these companies are more than Rs. 200 crores. The turnover of the assessee in the present case is Rs. 22.08 crores (approx.). It has been held by this Tribunal in the case of Trilogy E-Business Software India (P.) Ltd. (supra) that companies with a turnover of more than Rs. 200 crores cannot be taken as comparables while determining the ALP in the case of companies having turnover of less than Rs. 200 crores. The following are the relevant observations of the Tribunal in this regard:- "(1) Turnover Filter 11. The ld. counsel for the assessee submitted that the TPO has applied a lower turnover filter of Rs. 1 crore, but has not chosen to apply any upper turnover limit. In this regard, it was submitted by him that under rule 10B(3) to the Income-tax Rules, it was necessary for comparing an uncontrolled transaction with an international transaction that there should not be any difference between t....
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....on entered into by a Rs. 10 crore company. The two most obvious reasons are the size of the two companies and the relative economies of scale under which they operate." 13. It was further submitted that the TPO's range (Rs. 1 crore to infinity) has resulted in selection of companies like Infosys which is 277 times bigger than the Assessee (turnover of Rs. 13,149 crores as compared to Rs. 47.47 crores of Assessee). It was submitted that an appropriate turnover range should be applied in selecting comparable uncontrolled companies. 14. Reference was made to the decision of the ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010, wherein relying on Dun and Bradstreet's analysis, the turnover of Rs. 1 crore to Rs. 200 crores was held to be proper. The following relevant observations were brought to our notice:- "9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which are (sic) making losses as comparables. This sh....
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....ken companies having turnover of more than Rs. 200 crores as comparables. In these circumstances, it was submitted by him that the assessee cannot have any grievance in this regard. 17. We have considered the rival submissions. The provisions of the Act and the Rules that are relevant for deciding the issue have to be first seen. Sec.92. of the Act provides that any income arising from an international transaction shall be computed having regard to the arm's length price. Sec.92-B provides that "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or m....
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....l transaction has not been determined in accordance with sub-sections (1) and (2); or (b) any information and document relating to an international transaction have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made in this behalf; or (c) the information or data used in computation of the arm's length price is not reliable or correct; or (d) the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D, the Assessing Officer may proceed to determine the arm's length price in relation to the said international transaction in accordance with sub-sections (1) and (2), on the basis of such material or information or document available with him: 18. Rule 10B of the IT Rules, 1962 prescribes rules for Determination of arm's length price under section 92C:- &nbs....
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....an arm's length price in relation to the international transaction. (2) For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely: - (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets,....
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....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 Communication Technologies Ltd. 343.57 crores (6) Tata Elxsi Ltd. 262.58 crores (7) Wipro Ltd. 961.09 crores. (8) Infosys Technologies Ltd. 13149 crores." 12. Respectfully following the decision of the Tribunal referred to above, we hold that the comparables chosen by the TPO at Sl.Nos. 6,9,10,17,18, 22, 24 & 26 have to be excluded as comparables for the purpose of determining the ALP of the impugned transaction in this appeal. 13. As far as comparables at Sl.Nos.1, 2 & 3 of the list ....
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.... Particulars FYs 05-06 06-07 07-08 08-09 Operating Revenue 21761611 35477523 29342809 28039851 Operating Expns. 16417661 23249646 23359186 31108949 Operating Profit 5343950 12227877 5983623 (3069098) Operating Margin 32.55% 52.59% 25.62% - 9.87% 40. It was submitted that this company has made unusually high profit during the financial year 06-07. The operating revenues increased 63.03% which indicates that it was an extraordinary year for this company. Even the growth of software industry for the previous year as per NASSCOM was 32%. The growth rate of this company was double the industry average. In view of the above, it was argued that this company ought to have been rejected as a comparable. 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 Telcordia Technologies Pvt. Ltd. v. ACIT (supra) also supports the plea of the assessee. We therefore ....
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....eloped a molecule to treat Leucoderma and multiple cancer and protected the IPR by filing the patent. The patent details have been discussed with Patent officials and the response is very favorable. The cloning and purification under wet lab procedures are under progress with our collaborative Institute, Department of Microbiology, Osmania University, Hyderabad. In the industrial biotechnology area, the company has signed the Technology transfer agreement with IMTECH CHANDIGARH (a very reputed CSIR organization) to manufacture and market initially two Enzymes, Alpha Amylase and Alkaline Protease in India and overseas. The company is planning to set up a biotechnology facility to manufacture industrial enzymes. This facility would also include the research laboratories for carrying out further R & D activities to develop new candidates' drug molecules and license them to Interested Pharma and Bio Companies across the GLOBE. The proposed Facility will be set up in Genome Valley at Hyderabad in Andhra Pradesh.' According to the learned D.R. celestial labs is also in the field of research in pharmaceutical products and should be considered as comparabl....
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....ble. Besides the above, the Assessee has point out to several references in the annual report for 31.3.2007 highlighting the fact that this company was develops biotechnology products and provides related software development services. The TPO called for segmental data at the entity level from this company. The TPO also called for description of software development process. In response to the request of the TPO this company in its reply dated 29.3.2010 has given details of employees working in software development but it is not clear as to whether any segmental data was given or not. Besides the above there is no other detail in the TPO's order as to the nature of software development services performed by the Assessee. Celestial labs had come out with a public issue of shares and in that connection issued Draft Red Herring Prospectus (DRHP) in which the business of this company was explained as to clinical research. The TPO wanted to know as to whether the primary business of this company is software development services as indicated in the annual report for FY 06-07 or clinical research and manufacture of bio products and other products as stated in the DRHP. There is no ref....
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....nabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds." Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. 47. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the 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 c....
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....ssee was that if the above company should not be considered as comparable. The ld. DR, on the other hand, relied on the order of the TPO. 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." 14. In view of the aforesaid decision of the Tribunal, comparables at Sl.Nos.1, 2 & 3 of the list of comparables chosen by the TPO have to be excluded for the purpose of comparison while determining the ALP of the impugned transaction in this appeal. 15. As far as comparable at Sl.No.14 viz., Lucid Software Ltd. from the list of comparables chosen by the TPO is concerned, we find that the Mumbai Bench of the Tribunal in the cas....
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.... 2007-08, we are of the view that the said company is to be excluded as a comparable while determining the ALP of the international transaction impugned in this appeal. 17. As far as companies at Sl.No.7 & 11 of the list of comparables chosen by the TPO are concerned, it is not in dispute that the related party transaction of these comparable companies was more than 15%. This Tribunal in the case of 24/7 Customer Com (P.) Ltd. (supra), had held that where comparables have related party transactions which are in excess of 15% of its total receipts, then such companies cannot be chosen for the purpose of comparison. Following are the relevant observations of the Tribunal:- "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....
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....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 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 so....
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....aphs, the comparable companies that would remain for comparison and the arithmetic mean of the remaining comparables would be as follows:- C.2. Computation of arithmetic mean of the 11 remaining comparables: If the above argument of the Appellant is accepted, the arithmetic mean of 11 remaining of the 26 comparables would be as follows: SI. No. Name of the Company Operating Revenues Unadjusted WC adjusted 1 Datamatics Ltd 54,50,88,027 1.38 -1.23 2 E-Zest Solutions Ltd. 6,25,94,544 36.12 35.64 3 Helio & Matheson Information Technology Ltd. 178,63,80,304 36.63 34.01 4 LGS Global Ltd. 45,38,93,898 15.75 14.62 5 Media Soft Solutions Pvt. Ltd. 1,85,08,785 3.66 0.97 6 Megasoft Ltd. 63,71,32,545 23.11 15.93 7 Quintegra Solutions Ltd. 62,72,16,924 12.56 8.67 8 R S Software (India) Ltd. 101,04,49,441 13.47 12.59 9 R Systems International Ltd. (Segment) 112,01,72,651 15.07 12.70 10 S I P Technologies & Exports Ltd. 3,79,80,955 13.90 10.14 11 Thirdware Solutions Ltd. (Segment) 36,08,50,000 25.12 21.03 ARITHMETIC MEAN 17.88 15.01 22. After giving due adjustment to the +/- 5% net margin under second proviso to s....