TaxTMI 
TaxTMI 
2013 (11) TMI 925
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....come of Rs. 1,00,072 after claiming deduction of Rs. 1,92,58,728 under section 10B of the Act. The return was processed under section 143(1) of the Act and the case was subsequently selected for scrutiny by issue of notice under section 143(2) of the Act. As the international transactions of the assessee reported in Form 3CEB exceeded Rs. 10 Crores, a reference under section 92CA(1) of the Act was made by the Assessing Officer to the Transfer Pricing Officer (TPO) on 30.12.2008 in respect of the following international transactions entered into by the assessee with its AEs : 1. Provision of Software Development Support Services Rs. 17,40,08,906 2. Procurement of assets on loan basis Rs. 28,42,363. The TPO passed an order under section 92C r.w.s. 92CA(1) of the Act dt.26.10.2009 making an upward adjustment of Rs. 1,62,97,697 to the international transactions of the assessee in respect of provision of software development services. The arms length price (ALP) of the international transactions were determined at Rs. 19,03,06,603 as against Rs. 17,40,08,906 charged by the assessee. 2.2 After receipt of the order of the TPO under section92CA(1) r.w.s. 9....
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....sp; (a) On the facts and in the circumstances of the case, the learned A.O. has erred in proposing and the Hon'ble DRP has further erred in confirming the reduction of telecommunication expenses amounting to Rs. 14,34,270 from export turnover while computing the deduction under section 10B of the Act. (b) On the facts and in the circumstances of the case, the learned A.O. has erred in proposing and the Hon'ble DRP has further erred in confirming the reduction of foreign currency expenditure Rs. 16,39,254 from export turnover while computing the deduction under section 10B of the Act irrespective of the fact that the same are incurred for software development outside India and not for rendering of technical services outside India. (c) Without prejudice to the above, on the facts and in the circumstances of the case, the learned A.O. has erred in proposing and the Hon'ble DRP has further erred in confirming the reduction of telecommunication expenses amounting to Rs. 14,34,270 and foreign currency expenditure of Rs. 16,39,254 only from expo....
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....ransactions of the captive software services of the appellant with companies operating as full fledged entrepreneurs without considering the differences in the functions performed, assets employed and risk undertaken by the appellant vis-à-vis comparable companies. (b) The AO/TPO erred on facts in rejecting the comparable companies arrived at in the Transfer Pricing Study. (c) The Assessing Officer/TPO also erred on facts in arbitrarily filters to arrive at a fresh set of companies as comparables to the appellant, without establishing functional comparability. (d) The AO/TPO also erred on facts in arbitrarily accepting companies without considering the turnover and size of the appellant and comparables. (e) The AO/TPO grossly erred in law in deviating from the uncontrolled party transaction definition as per the Income Tax Rules and arbitrarily applying a 25% related party criteria in accepting/rejecting comparables. &nb....
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....ic mean The Assessing Officer/TPO erred in law in not granting the benefits of proviso to section 92C (2) of the Act available to the appellant. 8. Interest under section 234B of the Act The learned Assessing Officer has erred in levying interest under section 234B of the Act amounting to Rs. 30,65,040. 9. Penalty under section 271(1)(c) The learned Assessing Officer has erred in initiating penalty proceedings under section 271(1)( c ) of the Act. 10. Directions issued by the Hon'ble DRP (a) The Hon'ble DRP has erred in law and facts in not taking cognizance of the objections filed by the appellant in relation to the draft assessment order issued by the Assessing Officer/TP order. (b) The Hon'ble DRP erred in facts and law in confirming the draft order of the Assessing Officer/TPO." 4. Deduction under section 10B of the Act. 4.1 In the grounds of appeal raised at S.No.1, the assessee at Grounds 1(....
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....nd an ordinary meaning is to be attributed to the same, the said ordinary meaning to be attributed to such word is to be in conformity with the context in which it is used. When the statute prescribes a formula and in the said formula, 'export turnover' is defined, and when the 'total turnover' includes export turnover, the very same meaning given to the export turnover by the legislature is to be adopted while understanding the meaning of the total turnover, when the total turnover includes export turnover. If what is excluded in computing the export turnover is included while arriving at the total turnover, when the export turnover is a component of total turnover, such an interpretation would run counter to the legislative intent and impermissible. If that were the intention of the legislature, they would have expressly stated so. If they have not chosen to expressly define what the total turnover means, then, when the total turnover includes export turnover, the meaning assigned by the legislature to the export turnover is to be respected and given effect to, while interpreting the total turnover which is inclusive of the export turnover. Therefore, the formula ....
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....ial data is not available to undertake the analysis were excluded. (ii) Companies that have ceased business operations or are currently inactive were excluded. (iii) Companies undertaking different functions compared to the tax payer were excluded. (iv) Companies that do not have significant (less than 25%) foreign exchange earnings were excluded. (v) Companies which have been making persistent operating losses were excluded. (vi) Companies that have substantial transactions with related parties (> 25%) were excluded. (vii) Companies that had exceptional year(s) of operations were excluded. (viii) Companies engaged in software development were treated as comparables in respect of their verticals of software. (ix) Companies that are duplicated in the data base with different names or engaged to form another company were excluded. 5.2 The above search yielded a set of 36 comparables which are listed as under : Margin Analysis. Unadjusted margins of compar....
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....e TPO's Approach The TPO analysed the T.P. Study of the assessee and applied the following additional filters ;- (i) Companies whose data for F.Y. 2005-06 I was not available were excluded. (ii) Companies whose software development services revenue is less than 25% were excluded. (iii) Companies whose software development services revenue (turnover) is less than Rs. 1 Crore were excluded. (iv) Companies who have less than 25% of the revenues as export sales were excluded. (v) Companies having more than 25% related party transactions (RPT) of the operating revenue were excluded. (vi) Companies whose employee cost to revenue is less than 25% of revenue were excluded. (vii) Companies having different financial year ending (i.e. not 31.3.2005) or date of the company does not fall within the 12 month period 1.4.2005 to 31.3.2006 were rejected. (viii) Companies who have diminishing revenues/persistent losses for the last 3 years up to F.Y. 2005-06 were excluded....
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....rithmetical mean margin of 20.68% on cost. After considering the objections of the assessee, the TPO used the above 20 companies as the final comparables with the arithmetical mean PLI of 20.19%, after allowing 0.49% deduction towards working capital adjustment. Based on the above arithmetical mean margin, the arms length of the services rendered for software development support by the assessee was arrived at Rs. 19,03,06,603 as against the price shown at Rs. 17,40,08,966 thereby resulting in a transfer pricing adjustment of Rs. 1,62,97,697 by the TPO vide his order under section 92A(1) r.w.s. 92C of the Act dt.26.10.2009. 6. We have heard both parties, carefully perused and considered the order of the TPO under section 92CA of the Act, the orders of assessment, the directions of the DRP, the submissions of the assessee / learned counsel for the assessee, judicial decisions relied on by the assessee. We now proceed to examine the various issues raised by the assessee. 7. Adjustments to Arms Length Margin 7.1 In the ground raised at 2(a), it is contended that the final order of the Assessing Officer is bad on facts and in law and is in violation of the principles of natural....
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....sessee, namely, (i) Whether there are Associated Enterprises (AEs), (ii) that there are international transactions and (iii) whether the aggregate value of the international transactions exceeds Rs. 5 Crores during the relevant period. 7.5 In this regard, we would like to point out that the decision of a co-ordinate bench of this Tribunal in the case of Tally solutions Pvt Ltd. v. DCIT (ITA No.1235/Bang/2010 dt.26.9.2011), it was observed that : "There is nothing in section 92CA to suggest that the Assessing Officer should hear the assessee or record reasons before making a reference to the TPO nor is there anything to suggest that the Assessing Officer should ask the assessee whether he should himself proceed to determine the arm's length price or should involve the TPO for this purpose. The reference is a step in the collection of material which might be useful for making assessments. No violation of any civil rights of the assessee is involved here. Mere reference does not tantamount to any adverse assessment or use of adverse material. Moreover, by virtue of Board Instruction No.3 of 2003 dt.20.5.2003 the CBDT decided that whenever the aggrega....
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....S. No. 3(a) challenging the fresh benchmarking analysis by the TPO was not agitated before us and nothing more was brought on record by the assessee in addition to the ground raised. In this view of the matter, no adjudication is called for therein and this ground is dismissed as infructuous. 8.2.2 As regards the ground raised at S.No.3 (b), we have perused the decision of the ITAT, Pune Bench in the case of ACIT v. MSS India Pvt Ltd (2009-TIOL-416-ITAT-PUNE) wherein the Tribunal discussed both the decisions of the co-ordinate benches of the Bangalore Bench in the cases of - (i) Aztech Software Technology Services Ltd reported in 107 ITD 141 (Bang) (SB) and (ii) Phillips Software Centre Pvt Ltd reported in (2008-TIOL-471-ITAT-BANG). The Tribunal was of the view that the decision of the Special Bench of the Tribunal in the case of Aztech Software Technology Services Ltd (supra) would prevail and held that it is not necessary for the TPO to demonstrate tax avoidance and diversion of income for invoking the provisions of section 92C and 92CA of the Act. In the case of Coca Cola India Inc v. ACIT reported in 309 ITR 194 (P & H), the Hon'ble Punjab & Haryana High Court dealt with....
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.... challenged the rejection of its T.P. Study and the comparables selected by it by the TPO by applying various arbitrary filters to arrive at a fresh set of comparables. 9.2 This ground of appeal has been perused and we find it to be general in nature as far as 4(a), (b), (h) and (k) are concerned. The other sub-grounds of ground No.4 are addressed at various parts of this order when dealing with the acceptability or otherwise of comparable companies at paras 9.3 to 12.3 of this order. The TPO's examination of the TP documentation has been done in detail giving elaborate reasons for rejection of the assessee's T.P. Study, rejection of filters applied by the assessee, data utilized by assessee, reasons and requirement for adoption of additional filters, etc from page 11 onwards of his order dt.26.10.2009 warranting a fresh search for comparables and culminating in the T.P. adjustment for ALP of international transactions for the relevant period. The assessee / learned counsel for the assessee have failed to put forward any specific arguments to establish that the TPO's action were baseless as alleged. In this view of the matter, we are of the opinion that the TPO was r....
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.... ACIT [2012] 15 ITR AT 610 (iii) Telecordia Technologies India Pvt. Ltd. v. ACIT (2012) 137 ITD 1. (b) Significant brand related profits : It was submitted that this comparable company has substantial brand profits, quantified at Rs. 1,866 Crores in the relevant period. Per contra, the learned Departmental Representative argued that brand or size per se does not affect the margins and though brand names may set higher turnovers, it does not necessarily generate higher margins. The learned Departmental Representative also stated that the assessee had failed to demonstrate that Infosys had charged a premium over the market and earned higher profits due to its brand name. (c) Owns significant intangibles It was also submitted that being a market leader, Infosys enjoys significant benefits on account of marketing intangibles and intellectual property rights owned by it, filing over 20 patents and generating over 82 invention disclosures during F.Y. 2005-06. The learned co....
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....s which also have turnover of 1.00 to 200.00 Cores only should be taken into consideration for the purpose of making TP Study." In these circumstances, the learned counsel for the assessee submitted that Infosys Technologies Ltd having a turnover of Rs. 9,028 Crores be excluded as a comparable as it falls outside the range of Rs. 1 Crore to 200 Crores laid down in the cited case. 9.4.2 Per contra, the learned Departmental Representative supported the orders of the authorities below. 9.4.3 We have heard both parties, perused and carefully considered the submissions made, the material on record and the judicial decisions cited. The co-ordinate Bench of this Tribunal in the case of Genysys Integrating Systems (India) P. Ltd (supra) held that only companies within the range of Rs. 1 Crore to Rs. 200 Crores should be taken into account as comparables when the turnover of the assessee concerned falls within the range of Rs. 1 Crore to Rs. 200 Crores and we find that this filter is squarely applicable to the case on hand since the assessee's turnover is Rs. 17.40 Crores only. Therefore, respectfully following the decision of the co-ordinate Bench of this Tribunal in the case ....
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....hich was rejected by the DRP. 9.5.3 Before us, the learned counsel for the assessee brought to our attention that in the case of Capgemini India (P.) Ltd., a software provider, it was held by the Mumbai Tribunal in the decision reported in 12 Taxman.com 51 that 'Accel' is not functionally comparable because it was engaged in the services in the form of ACCEL-IT and ACCEL animation services for 2D and 3D animation. It was urged by the learned counsel for the assessee that since 'Accel' was held as not comparable to a software service provider like Capgemini, it cannot be held as a comparable to the assessee also, who is categorized as a software service provider. 9.5.4 We have heard both parties and carefully considered the material on record, the decision of the Mumbai Tribunal in the case of Capgemini India (P) Ltd. (supra). At the outset, it may be mentioned that the Mumbai Tribunal has not examined the comparability of 'Accel' with Capgemini India (P.) Ltd. (supra) nor has it given any specific finding in this regard. It is the DRP that had given a finding that 'Accel' has to be excluded from the set of comparables for Capgemini India (P) Lt....
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....;s T.P. Study and the MSA, it is clear that the assessee group deals with both product development and professional services and the assessee renders services to both the divisions, including product development. The MSA between Yodlee, USA and the assessee envisages product development by the assessee and this aspect does not appear to have been examined by the TPO. 9.5.6 As has been observed in the Tribunal's order in the case of Capgemini (India) P. Ltd (supra), the services rendered by "Accel' are in the form of I.T. and animation services. Similarly, from the business profile of the assessee, it is seen that the services rendered by the assessee include IT services and as such, there appears to be similarities in the functional profiles of "Accel' and the assessee. This issue too does not appear to have been examined by the TPO. 9.5.7 As regards the issue of 'abnormal profits' of 'Accel' raised by the assessee in written submissions, the co-ordinate bench of this Tribunal in the case of Triology E-Business Software India Pvt Ltd in ITA No.1054/Bang/2011, a decision heavily relied on by the learned counsel for the assessee, has ruled that there....
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....p; (i) Whether this company is "functionally comparable", taking into account the functional profile as decided in the T.P. Study submitted by the assessee ? (ii) Whether the "revenue filter" adopted by the TPO is satisfied in this case, after reconciling the figures adopted by the TPO and the assessee. The Assessing Officer/TPO is directed to afford the assessee adequate opportunity of being heard to substantiate its case, with the right to file fresh evidence in the matter, if necessary, before deciding this issue. 9.6.1 Tata Elxsi Ltd. ('Tata Elxsi') The assessee has objected to this company being taken as a comparable for T.P. Audit on the ground that this company is functionally not comparable and also that the computation of the margin by the TPO is erroneous. In this regard to support the contention that the activities of Tata Elxsi cannot be compared to the software development services of the assessee, the assessee relied on the decision of the Mumbai Tribunal in the case of Telecordia Technologies India P. Ltd. v. ACIT [2012] 137 ITD 1 wherein at para 7.7 thereof the Tribunal has observed about Tata Elxsi that....
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.... conclusion that KALS is into software product development as well as software development services. It is also contended that since the marketing expenses as a percentage of sales of KALS being substantial, it indicates a functional profile different from that of the assessee. The learned counsel for the assessee for the proposition that KALS should be excluded from the list of comparables in this case, relied on the decision of the Pune Tribunal in the case of Bindview India P. Ltd. v. DCIT (ITA No.1386/PN/2010) wherein it was held that KALS is a product development company. 9.7.2 Per contra, the learned Departmental Representative contended that since 'KALS' derived 97.54% of its revenue from software development services, the TPO was justified in including this company as a comparable in his T.P. Audit. 9.7.3 We have considered the rival submissions and have carefully perused and considered the material on record. We find that while the TPO is of the view that 'KALS' is a software services provider like the assessee, based on information submitted by 'KALS' under section 133(6) of the Act. The learned counsel for the assessee on the other hand cont....
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....TA No.1054/Bang/2011) wherein it was held that Megasoft was to be taken as a comparable but directed that segmental margins only need be considered. In effect, this endorses that the assessee has accepted Megasoft as a comparable but only wants segmental margins to be adopted. While it is true that in the case of Triology E-Business Software India Pvt Ltd ('Triology') the co-ordinate bench of this Tribunal held that only the segmental profit of Megasoft is to be considered for comparability in that case, this was based on the finding that there is bound to be difference between 'Triology' and Megasoft due to the profit arising to Megasoft as a result of the existence of the software product segment which was unique and specific to the facts of the case of 'Triology'. 9.8.4 As per the assessee's T.P. Study, the assessee's principal Yodlee, USA is organized into two divisions : (iii) Product Development Division and (iv) Professional Services Division. Yodlee Infotech (i.e. the assessee) operates as a dedicated development centre for Yodlee, US, providing it software development support serv....
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....f the computation adopted by the assessee. It would therefore be in the fitness of things to restore this issue to the file of the Assessing Officer/TPO to examine the computation made by the assessee to determine whether the company Megasoft satisfies the filter adopted by the TPO. 9.8.7 In these circumstances, we are of the considered view that the question of comparability of Megasoft be restored to the file of the Assessing Officer/TPO for fresh consideration based on the discussions in the above paragraphs, in the light of the following : (i) Whether the assessee and Megasoft are 'functionally comparable', taking into account the functional profile of the assessee in its own T.P. Study ? (ii) Whether the assessee is a pure software development service provider or is also involved in product development activities may be examined by the TPO before deciding whether the margins at entity level or segmental level are to be considered. (iiii) Whether the 'onsite filter' is satisfied in this case, after reconciling the figures adopted by the TPO and the assessee. The Assessing Officer/TPO shall afford the assessee adequate opportunity of being heard to su....
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....roducts. In these circumstances, we are of the opinion that it will be in the fitness of things, if this issue of examining this company for inclusion as a comparable be restored back to the file of the Assessing Officer/TPO to examine the following: (i) Whether the segment included by the TPO in his T.P. Audit for inclusion of 'Flextronics' as a comparable includes revenue from products also or comprises of only revenue from software development ? (ii) The computation of segmental results, including the allocation of expenses between the different segments. In this regard, we direct the Assessing Officer to afford adequate opportunity of being heard to the assessee to substantiate its case, with the right to file fresh evidence, if necessary, before the issue is decided by the TPO. 9.10.1 In the grounds at S.No.4(f), the assessee has objected to the action of the TPO in excluding companies with different year ending (i.e. up to 31.3.2006) from the list of comparable companies. 9.10.2 We have heard both parties in the matter. As per the provisions of Rule 10B(4) of the I.T. Rules, 1962, it is clear that the us....
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....ity in the action of the TPO in using contemporaneous data at the time of transfer pricing audit, though the same may not have been available to the assessee at the time of preparation of statutory transfer pricing study/documentation. 10.2.1 In support of the grounds raised at S.No.5(b) and 4(f), the assessee contends that the TPO erred in not applying the multiple year data while computing the margin of comparable companies and in rejecting comparison which had a year ending other than 31.3.2006. 10.2.2 This ground was not argued before us in appellate proceedings and consequently it is dismissed as infructuous. Even otherwise, this ground of the assessee is liable to be dismissed. Rule 10B (4) of the IT Rules, 1962 specifies the requirement regarding data to be used for analyzing the comparability of an uncontrolled transaction with an international transaction which reads as under : "Rule 10 B(4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into : Provided that data re....
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.... 11.1 In the ground of appeal at S.No.6, the assessee has objected to the action of the TPO in not allowing appropriate adjustments under Rule 10B of the I.T. Rules, 1962 to account for differences in (a) accounting practices, (b) marketing expenditure, (c) research and development expenditure and (d) risk profile between the assessee and the comparable companies. 11.2 We have perused this ground and find that it has been raised in a general manner, without bringing on record evidence to demonstrate how these factors affect the profitability of the assessee, thereby affecting its comparability. As far as risk factors are concerned, we find that the assessee has not demonstrated as to how the risk profiles are different and that it affects comparability. At para 18.2 on page 154 of the TPO's order it has been pointed out that the assessee did not provide any quantification of risk adjustment but merely mentioned various risks. We find that inspite this the TPO has given a detailed disposition on each of the risk involved in the risk profile and his detailed reasons as to why no adjustment is tenable in the case of the assessee find mention at paras 18.2.1 to 18.4.6 at page....
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....ment by Finance (No.2) Act, 2009 (33 of 2009), is applicable in respect of international transactions from an assessment year and the variation between the arithmetical mean referred to in the said proviso and the price at which such transaction has actually been undertaken exceeds five per cent of the arithmetical mean, then, the assessee shall not be entitled to exercise the option as referred to in the said proviso." 12.3 The new section 92C(2A) mandates that if the arithmetical mean price falls beyond +/ - 5% from the price charged in the international transactions, then the assessee does not have any option referred to in section 92C(2). Thus, as per the above amendment, it is clear that the +/ - 5% variation is allowed only to justify the price charged in the international transactions and not for adjustment purposes. The aforesaid amendment has settled the issue and accordingly the 5% benefit is not allowable in the assessee's case. The various judicial decisions cited pertain to the period prior to the retrospective amendment in section 92C(2A) of the Act and are not applicable to the facts of the assessee's case. In view of the amendment brought about therein by....