TaxTMI 
TaxTMI 
2013 (11) TMI 925
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....n 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. 92C of the Act dt.26.10.2009, the Assessing Officer issued a dr....
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.... 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 export turnover without correspondingly reducing the aforesaid expenses from the total tur....
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....ntrepreneurs 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. (f) The AO/TPO also erred on facts and in law in arbitrarily rejecting companies with different year ending (i....
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....he 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(a) and (b) contends that the authorities below viz. the Assessing Officer and the DRP, Bangalore erred in holding that telecommunication expenses (i.e. leas....
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....t 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 for computation of the deduction under section 10-A, would be as under : Profits of the business of the undertaking x Export turnover / (Export turn over + domes....
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....uded. (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 comparable companies. Sl. No. Name of the Company Weighted Average Margins (%) 1. 3 I Infotech Limited 6.42 2. Akshay Software Technologies Limited 8.24 3. Aztech Software & Technology Services Lim....
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....s 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. (ix) Companies whose on-site revenues is more than 75% of the export revenues were excluded. (x) Companies that are functionally different from the assessee were excluded. On this basis, the TPO issued a show cause notice on 20.4.2009, proposing to reject 30 out of 36 comparables selected by the assessee and to select 14 new comparables. A second show cause notice was issued on 20.7.2009 proposin....
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.... 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 justice. Alternately, it is also contended that the Assessing Officer's order is bad in law since he did not issue any show cause notice under section 92C(3) of the Act. 7.2 We have heard both the learned counsel for the assessee and the learned Departmental Representative and carefully perused the record. After due consideration, we find no merit in the claim of the assessee that adequate opportunity of being heard was not afforded to it thereby violating the principles of natural justice. Except for making this claim, no evidence has been brought on record before us by the assessee to establish this claim. We find from the record that show cause notices were issued to the assessee by the TPO at least on two occasions; ....
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....ed 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 aggregate value of international transactions exceeds Rs. 5 Crores, the case should be picked up for scrutiny and reference under section 92CA be made to the TPO. Thus, it is mandatory for the Assessing Officer to refer all the cases whenever the aggregate value of international transactions is more than Rs. 5 Crores. These instructions are binding on all Assessing Officers. In these cases, there is no need for the Assessing Officer to make a prima facie opinion, except that he/she needs to examine the 3CEB Report to see the aggregate value of international transactions. In the instant case, as the aggregate value of international transactions based on 3CEB Report filed by the taxpayer before the Assessing Officer, exce....
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....as 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 the matter of anti-avoidance and T.P. in detail and held that it is not necessary for the Assessing Officer/TPO to demonstrate that profits are shifted out of India in order to determine the arm's length nature of any international transaction. In para 52 of the judgment their Lordships have held that - "...... The income arising from international transactions is to be computed having regard to arm's length price as per the guidelines laid down in section 92C of the Act by adopting one of the laid down methods, at the discretion of the competent authority...." In para 53 of the said judgment their Lordships have held that : "53. We do not find any ambiguity or absurd consequence of....
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....m 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 right in rejecting the T.P. Study submitted by the assessee. Comparables in Distpute 9.3 The assessee as per its T.P. Study / Documentation selected 36 comparables. Out of these, the TPO in this T.P. Audit rejected 29 of these comparables and accepted only the remaining six of them as acceptable comparables. The TPO as per his T.P. Study/Audit selected 14 new companies. Therefore, the TPO finally selected a list of 20 comparables in the T.P. order. Before us, the assessee has raised objections to the following six comparables selected by the T.P.O. (i) Infosys Technology Limited. ('Infosys') (ii) Accel Transmatic Limited ('Accel') (iii) Tata Elxsi Limited ('Tata Elxsi'....
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.... 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 counsel for the assessee argued that size is an important facet of an enterprise - level difference and submitted that size as one of the selection criteria for comparables has been approved by various Benches of the ITAT, and also recommended by the OECD in its T.P. Guidelines. Hence, the learned counsel for the assessee contended that an appropriate turnover range should be applied in selecting a comparable as has been held by the co-ordinate bench of this Tribunal in the case of M/s. Genysys Integrating Systems India (P) Ltd v. DCIT in ITA No.1231/Bang/2010 dt.5.8.2010 wherein the Bench was of the view that size matters in business and pointed out that at para 9 on page 32 thereof held that : "9. Having heard both the parties and having considered the rival contentions and also the ju....
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....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 of Genysys Integrating Systems (India) P. Ltd (supra), we direct the Assessing Officer/TPO that in the instant case only those companies having turnover of between Rs. 1 Crore to Rs. 200 Crores be considered for being taken as comparable and consequently to exclude Infosys Technologies Ltd form the set of comparables in the instant case. 9.5.1 Accel Transmatics Ltd ('Accel') The assessee objected to this company being taken as a comparable in the instant case on the following grounds : (a) Erroneous margin computation by the TPO. It is the contention of the assessee that the TPO computed the margins of this comparable on the basis of the reply furnished by the said company under section 133 (6) of the Act and did not consider the figu....
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....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) Ltd which has been noted by the Tribunal. The Tribunal has not given any specific finding in regard to this comparable, leave alone any general proposition that 'Accel' cannot be taken as a comparable for any software service provider. The only conclusion that can be drawn from the decision in the case of Capgemini India (P) Ltd is that 'Accel' is not a comparable for Capgemini. No general proposition can be made out that 'Accel' cannot be a comparable for any software service provider. After all, the data base relied upon by both the assessee and the TPO has categorized this company as a 'software service provider' as this company was thrown up as a comparable in the search process of the TPO with the key words being 'computer software'. The contention that 'Accel' cannot be taken as a comparab....
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....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 is no bar to considering companies either with abnormal profits or abnormal losses as comparables as long as they are functionally comparable. At para 35 of the said order the Tribunal held that "..... a general rule that companies with abnormal profits should be excluded may be in tune with the principles of enunciated in OECD Guidelines but cannot be said to be in tune with Indian T.P. Regulations. However, if there are specific reasons for abnormal profits or losses or other general reasons as to why they should not be regarded as comparables, then they can be excluded for comparability. It is for the assessee to demonstrate existence of abnormal factors." A similar view has been upheld by another co-ordinate bench of this Tribunal in the case of 24/7 Customer Care Pvt. Ltd. in ITA No.227/Bang/2012 at para 17.8 thereof. In the instant case, the assessee ....
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....t 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 :- ".... it is seen that this company is engaged in the development of niche product and development services, which is entirely different from the appellant. We agree with the contention of the learned counsel for the assessee that the nature of the product developed and the services provided by the company are different from the appellant as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company fit for comparability analysis for determining the arms length price for the appellant, hence, should be excluded from the list of comparable parties." 9.6.2 We have heard both parties, have perused and carefully considered the materi....
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.... 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 contends that 'KALS' is a product development company basing his assessment on the details, which he claims were culled out of the Annual Report of 'KALS'. As per the extract submitted by the assessee, there is mention in the Annual Report of 'KALS' that it is into development of software and software products. Since as per these extracts of the Annual Report, 'KALS' does software development services, the view of the TPO that it qualifies to be a comparable cannot be dismissed off hand. On a specific reference by the TPO, 'KALS' has clarified that it is in the business of software development. Therefore, the contention of the assessee that 'KALS' be excluded from the list of comparables cannot be accepted. At the same time, the issue as to whether the business of the 'KALS' is predominantly software development or development of soft....
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....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 services that support and supplement Yodlee, US product offerings in the account aggregation industry. As per the Master Services Agreement (MSA) signed between the assessee and Yodlee, US. (i) Yodlee, USA has engaged the assessee for the provision of software development, implementation and maintenance of computer software programme's . (ii) Yodlee, USA would be the exclusive owner of all the Intellectual Property Rights (IPRs)of the software products (including any product developed in connection with the performance of software services under the MSA). Therefore, from the assessee'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 pro....
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....evel 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 substantiate its case, including the filing of fresh evidence, if necessary, before deciding on the issue on hand. 9.9.1 Flextronics Software Systems Ltd ('Flextronics') The assessee objects to the inclusion of this company as a comparable on the ground that it is not functionally comparable. It is also contended that the company is engaged in both development of software products and software consulting services and the same has been reported in a single segment which has been adopted by the TPO. It is the contention of the assessee that 'Flexitronics' develops software products and provide software consulting services for use in the telecommunication industry and also sells telecommunication equipment and provides services on business process outsourcing (BPO) and therefore derives revenue from sale of products (developed software) services (IT and BPO) and commission on sale of telecommunication equipment. It ....
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....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 use of data of the current financial year (i.e. of the financial year in which the transaction was actually entered into) is a mandatory requirement of law in the comparability analysis to be undertaken as per Indian T.P. Regulations. It is only the proviso to Rule 10B(4) that makes an exception in allowing the use of data of the two preceding years, if and only if it is established that the data reveals facts which could have an influence on the determination of transfer price. The mandatory requirement of law for the use of data of the current financial year cannot be dispensed with. ERRONEOUS DATA USED BY A.O/T.P.O 10.1.1 In the ground raised at S.No.5(a), the assessee contends that the TPO has erred in using data that was not contemporaneous and which was not available in the public domain when the assessee did its T.P. Study. 10.1.2 The ground raised has been carefully perused. As regards the data used by the TPO while determining the ALP, we fin....
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....ng 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 relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared." 10.2.3 The use of the word "shall" in the main provision of the Rule makes it abundantly clear that the use of data of the current financial year (i.e. of the financial year in which the international transaction was actually entered into) is a mandatory requirement of law in the comparability analysis to be undertaken as per Indian T.P. Regulations. It is only the proviso to Rule 10B(4) that makes an exception in allowing the use of data of the two preceding years, if and only, if it is established that the data reveals facts which could have an influence on the determination of transfer price. The mandatory requirement of law for the use of data of the current financial year cannot be dispensed with even if the relevant ....
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....ven 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 pages 154 to 184 of the T.P. order. No evidence has been brought on record by the assessee before us, to controvert or to demonstrate that the findings of the TPO were incorrect and that the assessee had a case either for risk adjustment, or for that matter for adjustments for accounting practices, research and development expenditure or marketing expenditure. No case has been made out by the assessee by virtue raising this ground that any of the adjustments sought for are warranted. It cannot be anybody's case that an adjustment has to be necessarily granted whenever or wherever there is difference between the tested party and the comparables. An adjustment for risks etc is a valid principle for comparability, but whether this case entails such an adjustment would depend on the facts of the case. However, in the instant case mere claim for adjustments for risks, research and development expenditure, market expenditure etc serves no purpose as it is not backed by any cogent o....