TaxTMI 
TaxTMI 
2013 (11) TMI 967
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.... issue relating to the non-consideration of additional companies offered by the assessee as comparables was not adjudicated by the DRP. Therefore, the same is required to be remanded to the files of the DRP / TPO / AO for fresh adjudication with a direction to pass a speaking order. Considering the said prayer of the Ld Counsel and considering the no objection from the Ld DR, we remand the said ground 9 to the DRP/TPO/AO with a direction to adjudicate the same by passing a speaking order after giving requisite analysis / reasons for non-consideration or rejection, if any. Accordingly, ground no.9 is allowed for statistical purposes. Referring to ground no.13, Ld Counsel mentioned that the issues raised in this ground relate to levy of interest u/s 234B and 234D of the Act, which required to be allowed as consequential. Ld Counsel also mentioned that the issues raised relating to the initiation of penalty proceedings u/s 271(1)(c) of the Act, the issue becomes in fructuous in view of its very nature. Accordingly, the issue relating to levy of interest are allowed as consequential and the issue relating to penalty proceedings is dismissed as infructuous. 3. Eventually, the grounds....
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..../TC) as the Profit Level Indicator (PLI). Accordingly, assessee benchmarked the transactions at OP of 11.90% over the total cost. PLI at 11.90% is higher than the margins reported by the comparable companies considered in the TP study of the assessee. Thus, the impugned international transactions are at Arm's Length as per the assessee. This decision of the TPO is now final, since the assessee's representative has not pressed the ground no.1 and others before the Tribunal. Then, the TPO invoked the provisions of section 92C(3) of the Act and proceeded to determine the ALP. Accordingly, TPO conducted his search for suitable comparables on the data available in Prowess and Capitaline Databases and applied the following filters. Companies whose data is not available for AY 2007-2008 were excluded.  Companies whose software development service's revenue is <Rs. 1cr were excluded.  Companies whose Software development service revenue is less than 75% of the total operating revenues were excluded. Companies who have more than 25% related party transactions (income as well as expenditure combined) of the operating revenues were excluded. Companies who have less th....
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.... Arithmetic Mean Margin @ 24.99% against the assessee's margin of 11.90%. TPO issued a show cause notice and in reply, the assessee filed objections vide its letter dated 14.10.2011. In the said reply, the assessee justified the TP study report prepared by him which is a non issue now and further, assessee provided written explanation to the defects in the report picked up by the TPO. TPO rejected the objections raised by the assessee and proceeded to determine Arm's Length Mean Margin (ALM) as per the table given below. Operating cost Rs. 14,00,22,902/- Arm's Length Mean Margin 24.99% of the Operating cost Price charged Rs. 17,50,14,625/- Shortfall being adjustment u/s 92CA Rs.2,26,55,705/- 105% of International transaction Rs. 15,99,76,866/- 95% of international transaction Rs. 14,47,40,974/- Whether the shortfall falling within +/- 5% range No "Considering the above the Arm's Length Price of provision of software development service is determined as Rs. 17,50,14,625/-. However, the assessee has charged only 15,23,58,920/-which is Rs. 2,26,55,705/- lesser than the ALP of international transaction determined. Since, the shortfall is not....
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....y the Department, where the said additional comparables pertaining to AY 07-08 were considered for the purpose of arriving at the ALP. In this regard, Ld counsel mentioned that the AY 2008-2009 is the relevant AY and happened to be the first assessment year of the assessee. Therefore the question of considering any companies as comparables for the AY 2007-2008 is patently wrong and therefore, the TPO's TP study suffers from fatal defects and therefore, self destructive. Therefore, it is the contention of the Ld Counsel that the said 5 additional comparable companies namely (1) Avani Cimeon Technologies Ltd (2) Celestial Labs Ltd (3) LGS Global Ltd (Lanco Global Solutions Ltd) (4) Tata Elxi Ltd (segment) and (5) Wipro Ltd (segment) should be excluded from the gross list of 23 final comparable companies short listed by the TPO for ALP purpose. 10. On the other hand, Sri Jain Ld CIT- DR accepted to the fact that AY 2008-09 is undisputedly the first year of the assessment and the present TP study was done for the first time. However, he is critical of the aforementioned argument of the Sri Lohia and proceeded to clarify that the said 5 additional companies were part of the 26 other ....
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.... Infosys Technologies Ltd and Wipro Ltd, Ld Counsel mentioned that these companies have turnovers of Rs. 15,653 Crs and Rs. 11,276 Crs respectively as against the assessee's turnover of Rs. 15 Crs, approximately. Prima facie, they are incomparable. By not filtering out these cases of extremely high turnovers, the TPO made an error in selection process of comparables. In this regard, Ld Counsel relied on the decision of Delhi High Court in the case of Agnity India Technologies P Ltd, supra and other orders of the Tribunal. The assessee also filed copies of other decisions of the Tribunal to suggest that Infosys Technologies Ltd and Wipro Ltd are not good comparable cases in view of the huge turnover with the diversified area of operations. Sri Lohia fairly submitted that the issue of turnover was referred to Special Bench but only to be withdrawn considering the judgment of the Hon'ble High court in the case of Agnity India Technologies P Ltd, supra. However, he agreed that the turnover' is one of the factors that contribute to the giantness of the company and other factors can be many ie geographic locations, branches, employee numbers, diverse functions etc. Further, referring to ....
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....ver limit is proscribed, the comparables Infosys Technologies Ltd and Wipro Ltd are the target companies and we find the issue is not adjudicated by revenue authorities meaningfully. It is the objections of the assessee that the TPO should have provided maximum limits too and he should not have pickup up the comparable such as Infosys and Wipro Ltd which are giants with huge turnovers. Regarding these two companies with high turnovers, we find this issue is linked to the one specially being adjudicated while dealing with the ground 7 below relating to accepting of certain companies as good comparables. It is the submission of the assessee's counsel that the if these two companies with high turnover and margins are excluded, the assessee PLI is at arm's length and consequently, the TP adjustments are uncalled for. Since, the AR has raised these objections, the onus on the assessee to demonstrate before the revenue authorities in the remand proceeding. Accordingly, we direct the AO/TPO/DRP to all the submissions/objections raised by the assessee by passing a speaking order and of course after granting reasonable opportunity to the assessee. 15. Regarding the correctness of the oth....
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....rent being operating in software development & services of different category. The comparables case of Wipro Limited has been disputed on account of high turnover and functional difference.‖ 17. From the above, it is evident that the assessee is critical of the fact that the some of the companies are functionally different in view of the fact that they are engaged in the products also. Further, it is the case of Acropetal Technologies Limited (Seg.), which has not met the filter relating to the employee cost as well as on-site revenue filters. Further, it is the assessee objected to the fact that certain companies information is not available on the public domain. In this regard, the direction of the DRP is that the TPO has undertaken FAR analysis by examining the Annual Reports and other documents before rejecting the incomparable cases. The assessee is aggrieved with such direction and raised the present appeal vide ground no.7. 18. Before us, Ld Counsel pickup of each of the said comparables and proceeded to submit how they are not good comparables. Comparable wise submissions are discussed in the following paragraphs. A. Acropetal Technologies Limited (Seg.): Ref....
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....the development services. Therefore, we agree with the arguments of Sri Lohia, Ld Counsel's for the assessee. Therefore, considering the FAR analysis in favour of the assessee, we direct the TPO to exclude the same for the purpose of working out the Arithmetic Mean of the operating margins. C. Bodhtree Consulting Limited 21. On this comparable, case of the assessee is that the company is not a good comparable in view of the software products produced by the company. As such, no segmental data is adequately available too. 22. On the other hand, Ld DR filed a copy of the financial statement and argued vehemently stating that this company is not engaged in the software products. In this regard, Ld DR relied on the note no.3, relating to the relating to the revenue recommendation in Schedule 12, note no.5 relating to the segmental information etc to mention that the company is engaged in the software development only. However, the assessee argued vehemently stating that this company is engaged in the software based products. Further, Ld Counsel mentioned that the said company was already examined and was held as product based company by the TPO in the TP study of other case an....
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....e AO/TPO is directed to exclude the same from the list of final comparables for working out the arithmetic mean. D. E-infochip Limited 24. In this regard, it is the submission of the assessee that this company is not a good comparable as it is engaged in software services and IT enabled services. Accepting the fact that this is a IT product based company, Ld AR mentioned that the segmental information suggests that the revenues earned is below 25%, therefore, it fulfills the relevant filter specified by the TPO. In this regard, Ld DR filed a copy of the financial statement and read out the following. "The company is engaged in the development and maintenance of computer software and also manufacturing EVM and VDB electronic Board (Hardware Division). The production and sales of software cannot be expressed in any generic unit. Hence, it is not possible to give the quantitative details of sales and certain other information as required under paragraph 3, 4C and 4D of Part-II of Schedule VI to the Companies Act, 1956." 25. Referring to Schedule-7, Ld DR mentioned that the income from software services for the relevant year is Rs. 21.03 Crs (rounded up) and the software se....
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....vision of product engineering services which broadly falls under the ambit of ITES. Based on the above, it is submitted that the software development & services‖ segment of the company comprises of design and development of hardware, software and IT enabled services/activities. Also, there is no sub services break up/ information provided in the annual report or the databases. Accordingly, the company cannot be taken as comparable to the Appellant. 29. On the other hand, Ld DR brought our attention to the segmental reporting data at page 374 and 375 of the paper book and mentioned that the segmental data relating to software development services was alone considered by the TPO. Therefore, the orders of the DRP / TPO do not call any change. 30. We have heard both the parties and perused the said pages 374 & 375 of the paper book and found that the order of the DRP is reasonable and does not call for any interference. Accordingly, we dismiss the submission of the Ld AR. G. Infosys Technologies & Wipro Limited 31. On the TPO's selection of the these two companies as good comparables, the case of the assessee is that the Infosys Ltd, being is a giant company with huge....
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....iant company like the Infosys Technologies, Satyam Computers, L & T Infotech etc, he relied on a Delhi Bench judgment in the case of Agnity India Technologies P Ltd vide IT 1204/2011 for the AY 2006-07 to support his case. To support his line of arguments, Ld Counsel furnished copies of certain documents. Further, he also filed first time a chart showing how these two companies are functionally different vide the FAR analysis. 33. Per contra, Ld DR did not agree with the arguments of the Ld Counsel by stating that Infosys Technologies is a good comparable considering the availability of segmental data. He filed a copies of the financial statement and brought our attention to page 52 of the annual reports and demonstrated that the software services were 96.2% and the products is only 3.8% in the ratio of Rs. 15,051 Crs and Rs. 597 Crs respectively. The data on products segment of the company suggest that its segment is far below the 25% filter applied by the TPO. Therefore, this company with segmental data is very comparable considering the filters applied by the TPO. Further, Ld DR filed a chart showing the operating profit ratios over the period since 1997-2010 and reasoned tha....
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....therefore, this company cannot be treated as a comparable. The reliance was placed on the decision of the Hyderabad Benches of this Tribunal in case of Capital IQ Information (supra) as well as in the case of Agnity India Technologies (supra) 47.1 We note that in the case of Capital IQ Information (supra) the Tribunal has relied upon the decision in the case of Agnity India Technologies (supra) as well as in the case of Triniti Advanced Software Labs P Ltd (supra). We further note that all these decisions have primarily relied upon the decision of Bangalore Benches of this Tribunal in the case of Genesys Integrating Systems India P Ltd(supra) which has been relied upon by the Tribunal in case of Capital IQ Information in para 21 as under: "21. On considering the submissions of the assessee in relation to these three companies, we find that the TPO has excluded the companies whose turnover is less than Rs. One Crore, on the ground that they may not be representing the industry trend. That very logic also applies to the companies having highJLlr over of over Rs.200 crores as against the assessee's turnover of only Rs. 60 crores, and therefore, it would be fair enough to exclude....
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....s. 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 cam parables, 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 and NASSCOM has given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by 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. 1.00 crore to 200 crores have to be taken as a particular range and the assessee being in the range having turnover of 8. 15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study. In view of the aforesaid consistent decisions of the Tribunal, we accept the ....
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....evenues, ownership of intangibles, onsite vs offshore works, expenditure on advertising, sales promotion and R& D developments etc. He also mentioned that the turnover constitutes one of the contributors of the giantness of a company. Assessee relies on the judgment of the Delhi High court in the case of Agnity India Technologies P Ltd, supra. On the other hand, the case of the revenue is that the said judgment of the Delhi High court do not refers to the turnover function in the order. Further, Ld DR for the revenue is of the firm opinion that the turnover and intangibles do not contribute to the operating profits' of a company. It is the argument of the Ld DR that when assessee contends that a comparable is not good one for any reasons, the onus is on the assessee to demonstrate that the turnover' factor has impact on the operating profits' of the company and relies on various orders of the tribunal cited above. Regarding the delhi high court's judgment in the case of the Agnity India Technologies P Ltd, supra, it is the contention of the Ld DR that the giantness' is different from the turnover' of the company. Considering the absence of proper discussion in the orders by the TPO....
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.... process. Hence, this Panel is of the opinion that the claim of the assessee for inclusion of certain comparable' entities handpicked by it is not feasible. So far as plea of taking correct updated margin is concerned, the AO/TPO is directed to verify the same & corrected / updated margins be taken while re-computing ALP.‖ 36. From the above, it is evident that the DRP rejected the claim of the assessee stating that there will be no end to ALP computation and updation process, if the said comparables are accepted at this stage. 37. Before us, Ld Counsel is critical of the said directions of the DRP. Per contra, Ld DR mentioned that the DRP is correct in rejecting the same. Referring to the profit percentages of three companies of the list under consideration, Mr Jain mentioned that they are not the choices of the assessee initially. They are furnished by the assessee at the later stages of the assessment, considering the timing, the said comparables should not be permitted. Referring to the profit percentages of at least three of such companies, Ld DR mentioned that they are loss companies, and such loss making ones should not be deemed as good comparable considering th....
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.... the contention that foreign exchange loss pertaining to interest payments needs to be considered non-operating in nature while computing the operating margins of the Assessee. The revised margin of the Appellant as per the directions of the Hon‟ble DRP works out to be 9.23% as against 11.22% claimed by the Assessee before the Hon‟ble DRP. In the profit and loss account of the Appellant for FY 2007-08 (Schedule 12 --Other Income) the Exchange Gain' amounting to Rs 1,064,713 consists of foreign exchange gain on sales amounting to Rs 3,840,402 and foreign exchange loss on interest on loan payables amounting to Rs 2,775,689 (3,840,402 minus 2,775,689 equals to 1,064,713. The foreign exchange loss on interest on loan payables being non- operating in nature should be excluded from the computation of the operating margin of the Appellant. The learned TPO has rightly considered interest on term loan as a non-operating expense and the foreign exchange loss on interest on loan warrants a similar treatment. Taking the same into consideration the Appellant has submitted the correct operating margin vide Paper book-l dated 6 May 2013 (page 283 to 288). The approach adopted by....
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....ry relevant because the assessee belonging to the renowned Nethawk group has a brand value and prestige in the global LT. market including India. The assessee or its Group is not a common LT. firm in the market due to its past reputation and global recognition and acceptability. Therefore, the loading of huge costs in terms of economic adjustments (Working capital adjustment of 1.56% and risk adjustment of 7.00%) as made by the assessee is unnatural and unacceptable. Further, this Panel holds that the claim of the assessee for working capital and risk adjustment for the difference between the comparables and tested party is not tenable since it has failed to produce any evidence supporting the workings of any such adjustment. We agree with the T.P.O. that the data used by the assessee in the workings are not reliable and therefore, liable to rejection. Also that, the assessee has made adjustments on its own will without collecting any information regarding comparables. However, the law permits adjustments only to comparables and not on the basis of whims of assessee. The assessee has failed to furnish data regarding comparable economic costs and adjustments made in similar line ....
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....ttention to the said paragraphs of the Tribunal's order (supra), Ld DR mentioned that assessee is required to demonstrate the existence of risk before the revenue authorities. As per these decisions, granting adjustments to WC and Risk factors is not an automatic process and like granting a standard deduction. There are no safe harbors specified on these adjustments. He relied on another order of the Tribunal in the case of decision of the Tribunal in the case of M/s. Premier Exploration Services Pvt. Ltd vs. ITO vide ITA No.4935/Del/2011 (AY: 2007-2008), order dated 31.5.2013 for the proposition that the risk adjustments cannot be allowed as a general rule and the assessee is under obligation to demonstrate the existence of risk with the help of data and they are materially affect their margins. The tax payer needs to demonstrate that the risk is translated into charging a higher margin in comparable companies. In these circumstances, the Tribunal has considered the fact of single customer like assessee, a service provider. 44. We have heard both the parties and perused the cited decisions as well as the contents of page 297 and 298 of the paper book which provides for method o....