TaxTMI 
TaxTMI 
2014 (2) TMI 229
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....off-the-shelf products designed for human services, health, labour, etc. The assessee is registered as a 100% Export Oriented Unit ('EOU') under the Software Technology Parks of India ('STPI') Scheme. The assessee filed its return of income for Assessment Year 2008-09 on 26.9.2008 declaring taxable income of Rs. 20,16,360 after claiming deduction under section 10A of the Act amounting to Rs. 3,40,34,542. The assessee declared taxable income of Rs. 37,15,328 under section 115JB of the Act which was offset by the available tax credit. In the period under consideration, since the assessee entered into two international transactions, the Assessing Officer made a reference under section 92CA of the Act to the Transfer Pricing Officer ('TPO') for determining the Arms' Length Price ('ALP') of these international transactions after obtaining necessary approval from the CIT, Bangalore-III. The TPO vide order under section 92CA of the Act dt.31.10.2011, proposed a T.P. adjustment of Rs. 2,45,79,840 to the ALP of international transactions. The Assessing Officer then issued a draft assessment order under section 143(3) r.w.s. 144C of the Act on 15.12.2011 - (i) pro....
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....mputing the deduction under section 10A of the Act. Transfer Pricing grounds 5. The learned Assessing Officer/Transfer Pricing Officer (TPO) erred in making an addition of Rs. 2,45,79,840, to the total income of the appellant on account of adjustment in the arm's length price with respect to the software development services transaction entered into by the appellant with its associated enterprise. 6. The learned TPO and the learned Assessing Officer have erred, in law and in facts, by not accepting the economic analysis undertaken by the appellant in accordance with the provisions of the Act read with the Rules, and conducting a fresh economic analysis for the determination of the ALP in connection with the impugned international transaction and holding that the appellant's international transaction is not at arm's length. 7. The learned TPO and the learned Assessing Officer have erred, in law and in facts, by determining the arm's length margin / price using only FY 2007-08 data which was not entirely available to the appellant at the time of complying with the transfer ....
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....he appellant vis-à-vis the comparables. 14. The learned Assessing Officer/ TPO erred in not considering the foreign exchange fluctuation gain (loss) as operating in nature while computing the operating margin of tested party and comparable companies. 15. The learned TPO and the learned Assessing Officer have erred, in law and facts, by wrongly computing the operating margins of some of the comparable companies identified in the TP order. 16. The learned TPO and the learned Assessing Officer have erred, in law and facts, in computing the ALP without giving benefit of +/- 5% under the proviso to section 92C of the Act. 17. The learned Assessing Officer has erred, in law and facts, in levying interest of Rs. 3,762,314 and Rs. 76,599 under sections 234B & 234C of the Act respectively. 18. The learned erred, in law and in facts, in initiating penalty proceedings under section 271(1)(c) of the Act." 4. The grounds raised at S.Nos.1 and 2 being general in nature and not urged before us, no adjudication, therefore, called for thereon. 5. C....
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....rpretation 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 10A, would be as under : Profits of the business x Export turnover of the undertaking &nbs....
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.... on the prices of the current financial year, we dismiss this ground of the assessee. Ground No. 8 This ground is raised in respect of the rejection of certain comparable cases by the TPO which were chosen by the assessee. As we will be considering and examining the comparability or otherwise of individual companies as raised by the assessee before us, there is no requirement for adjudication on this general ground. Further, before us, the learned Authorised Representative has specifically stated that the ground raised at 8(b) in respect of the turnover filter is not pressed and it is therefore dismissed as not pressed. Ground No. 9 This ground is raised in respect of the use of on-site filter of "on-site revenues greater than 75% of the export revenues." As the learned Authorised Representative had submitted that the assessee would not press this general ground raised, this ground requires no specific adjudication as it would be dealt with, if necessary, in the course of examination of individual comparable companies raised by the assessee in this appeal. Ground No. 10 This ground is raised in respect of the use of employee cost filter as "employee cost gre....
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....essee using TNMM as the Most Appropriate Method (MAM), the list of 23 comparable companies chosen by the assessee are as under : Sl.No. Name of the Company Weighted average of operating profits on operating costs (%) 1 Akshay Software Technologies Limited 6.60 2 Aztecsoft Limited 18.16 3 Goldstone Technologies Limited 11.50 4 Helios & Matheson Information Technology Ltd 38.40 5 Indium Software (India) Limited 11.09 6 Infosys Technologies Limited 39.96 7 KPIT Cummins Infosystems Limited 13.20 8 Lanco Global Systems Limited 13.28 9 Larsen & Toubro Infotech Limited 11.35 10 Maars Software International Limited 15.58 11 Metstar InformationTechnologies Limited 3.46 12 Mindtree Limited 16.98 13 Persistent Systems Private Limtied 24.34 14 Quintegra Solutions Limited 15.18 15 R S Software (India) Limited 14.11 16 SIP Technologies and Exports Limited 18.37 17 Sasken Communication Technologies Limited 17.88 18 Satyam Computers Services Limited 29.43 19 TVS Infotech Limited -21.27 20 VJIL Consulting Limited ....
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....s, which in his opinion, are incorrectly included by the TPO in the set of comparable companies, or are incorrectly excluded by the TPO from out of the set of comparable companies chosen by the assessee in its TP Study. The learned Authorised Representative also submitted a chart, schematically explaining the assessee's position regarding the acceptability or otherwise of each of the companies selected or rejected by the TPO as comparable companies to the assessee. We now proceed to examine and consider each of the comparable companies so highlighted by the assessee in its chart. A. Companies incorrectly adopted by the TPO as per the contentions of the assessee. 9. (1) Avani Cimcon Technologies Ltd. 9.1 This company was selected by the TPO as a comparable. The assessee objects to the inclusion of this company as a comparable on the ground that this company is not functionally comparable to the assessee as it is into software products whereas the assessee offers software development services to its AEs. The TPO had rejected the objections of the assessee on the ground that this comparable company has categorized itself as a pure software developer, just like the assessee....
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....nctionally different. The learned Authorised Representative also reiterated the submissions made earlier that the Annual Report of the comparable company in the public domain was not complete and that the information received by the TPO under section 133(6) of the Act has not been shared with the assessee. 9.5.1 We have heard both parties and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the final set of comparables only on the basis of information obtained under section 133(6) of the Act. In these circumstances, it was the duty of the TPO to have necessarily furnished the information so gathered to the assessee and taken its submissions thereon into consideration before deciding to include this company in its final list of comparables. Non-furnishing the information obtained under section 133(6) of the Act to the assessee has vitiated the selection of this company as a comparable. 9.5.2 As regards the submission of the learned Authorised Representative, we are unable to agree that this company has to be deleted from the list of comparables only because it has been deleted from the set of comparab....
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....observations. The TPO is directed to make available to the assessee information obtained under section 133(6) of the Act and to afford the assessee adequate opportunity of being heard and to make its submissions in the matter, which shall be duly considered before passing orders thereon. It is ordered accordingly. 10. (2) Celestial Biolabs Ltd. 10.1 This comparable was selected by the TPO for inclusion in the final list of comparables. Before the TPO, the assessee had objected to the inclusion of this company in the list of comparables for the reasons that it is functionally different form the assessee and that it fails the employee cost filter. The TPO, however, brushed aside the objections raised by the assessee by stating that the objections of functional dissimilarity has been dealt with in detail in the T.P. order for Assessment Year 2007-08. As regards the objection raised in respect of the employee cost filter issue, the TPO rejected the objections by observing that the employee cost filter is only a trigger to know the functionality of the company. 10.2.1 Before us, the learned Authorised Representative contended that this company is not functionally comparable to ....
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.... Copyright / Patent Act (Appraised and funded by Department of Scientific & Industrial Research.) The company has developed an ERP product "CELL VISION" using Microsoft Technologies. Cell Vision is a custom implemented product which caters to the needs of many industrial segments. The company is foreseeing good reserves during the years to come. Your company also developed a portal called Sanjeevani India.Com." (vi) Schedule 7 of the financial statements on page 25 of the Annual Report indicates that the company has significant product development expenditure pertaining to Drug Molecule and Celsuite. (vii) "Turnover" under "Notes on Accounts" for financial statements on page 35 of the Annual Report states that the turnover from "bio informatics services, data warehousing and mixing, software development, products and services" for F.Y. 2007-08 is 2021.12 lakhs. 10.2.2 The assessee also placed reliance in support of its stand that this company be excluded from the list of comparable companies on the following decisions of the co-ordinate benches of this Tribunal :-  ....
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....any, it is functionally different from the assessee. In view of the fact that the financial profile and other parameters of this company have not changed during the year under consideration, which fact has been demonstrated by the assessee, following the decision of the co-ordinate bench of this Tribunal in the case of Triology E-Business Software India (P.) Ltd. (supra), we hold that the company ought to be excluded from the list of comparables. It is ordered accordingly. 11. (3) KALS Information Systems Ltd. 11.1 This was a comparable selected by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the set of comparables on the grounds of functional differences and that the segmental details have not been provided in the Annual Report of the company with respect to software services revenue and software products revenue. The TPO, however, rejected the objections of the assessee observing that the software products and training constitutes only 4.24% of total revenues and the revenue from software development services constitutes more than 75% of the total operating revenues for the F.Y. 2007-08 and qualifies as a comparable by the service i....
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....see also placed reliance on the judicial decisions rendered in the following cases : (a) Triology E-Business Software India (P.) Ltd. (supra) (b) Mercedes Benz Research & Development India (P.) Ltd. (supra). 11.3 Per contra, the learned Departmental Representative contended that the decision of the co-ordinate bench of the Tribunal in the case of Triology E-Business Software India (P.) Ltd. (supra) was rendered with respect to F.Y.2006-07 and therefore there cannot be an assumption that it would continue to be applicable to the year under consideration i.e. A.Y. 2008-09. To this, the counter argument of the learned Authorised Representative is that the functional profile of this company continues to remain the same for the year under consideration also and the same is evident from the details called out from the Annual Report and quoted above (supra). 11.4 We have heard both parties and perused and carefully considered the material on record including the judicial decisions cited. As discussed earlier in this order, there is merit in the contention of the learne....
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....n 2008, this company generated over 102 invention disclosures and filed an aggregate 10 patents in India and the USA. Till date this company has filed an aggregate of 119 patent applications (pending) in India and USA out of which 2 have been granted in the US. (ii) This company has substantial revenues from software products and the break-up of the software product revenues is not available. (iii) This company has incurred huge research and development expenditure to the tune of approximately Rs. 200 Crores. (iv) This company has a revenue sharing agreement towards acquisition of IPR in AUTOLAY, a commercial software product used in designing high performance structural systems. (v) The assessee also placed reliance on the following judicial decisions :- (a) ITAT, Delhi Bench decision in the case of Agnity India Technologies India (P.) Ltd. v. ITO [IT Appeal No. 3856 (Delhi) of 2010, dated 4-11-2010] and (b) Trilogy E-Business Software India (P.) Ltd. (supra) 12.3 P....
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....uding this company in the set of comparables. 13.4.1 We have heard both parties and carefully perused and considered the material on record. We find merit in the contentions of the assessee for exclusion of this company from the set of comparables. It is seen that this company is engaged both in software development and product development services. There is no information on the segmental bifurcation of revenue from sale of product and software services. The TPO appears to have adopted this company as a comparable without demonstrating how the company satisfies the software development sales 75% of the total revenue filter adopted by him. Another major flaw in the comparability analysis carried out by the TPO is that he adopted comparison of the consolidated financial statements of Wipro with the stand alone financials of the assessee; which is not an appropriate comparison. 13.4.2 We also find that this company owns intellectual property in the form of registered patents and several pending applications for grant of patents. In this regard, the co-ordinate bench of this Tribunal in the case of 24/7 Customer.com (P.) Ltd. v. Dy. CIT [2013] 140 ITD 344 has held that a company....
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.... and therefore it is not functionally comparable. In this context the relevant portion of this order is extracted and reproduced below :- " .... Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of the learned Authorised Representative that the nature of product developed and services provided by this company are different from the assessee 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 as fit for comparability analysis for determining the arm's length price for the assessee, hence, should be excluded from the list of comparable portion." As can be seen from the extracts of the Annual Report of this company produced before us, the facts pertaining to Tata Elxsi (supra) have not changed from Assessment Year 2007-08 to Assessment Year 2008-09. We, therefore, hold that this company is not to be considered for inclus....
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.... is ordered accordingly. 17. (9) KPIT Cummins Infosystems Ltd. 17.1 This company was selected by the assessee as a comparable but was rejected by the TPO on the ground that it fails the RPT filter on a stand alone basis, as consolidated financials cannot be accepted. 17.2 Before us, the assessee contended that the TPO has erred in computing the RPT filter. It was submitted that the company did not fail the RPT filters, if the computation is done on a consolidated basis. The assessee submitted that the TPO has done the computation on a consolidated basis in the case of Wipro Ltd. and hence should have adopted the same basis in the case of this company also. 17.3 We have heard the submissions of both the learned Departmental Representative for revenue and the learned Authorised Representative for the assessee. We find from the record that the TPO has neither explained the computation in the order nor has the TPO explained how the RPT filter fails in this case. However, we do not find the contention of the assessee, that the computation has to be done on a consolidated basis, to be acceptable. This is for the reason that when he comparability is between the specific segmen....
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....PT filter should be taken as 25%. 19.3.2 We, however, find that the TPO has not explained in his order as to how this company fails the RPT filter and has neither given the computation nor explained the same. On the other hand, the assessee has computed the RPT of this company at 19.7%. In view of the above, we deem it to be in the fitness of things to restore the issue back to the file of the Assessing Officer/TPO to compute the RPT correctly, taking into account the submissions of the assessee in this regard and to then decide the comparability of this company in the light of the decisions rendered by the co-ordinate benches of this Tribunal in this regard. 20. (12) SIP Technologies Exports Ltd. 20.1 This company was selected as a comparable by the assessee but was rejected by the TPO on the ground of abnormal activity. The TPO in his order has recorded that this company has made an investment of Rs. 5 Crores in SIP Solutions, which is more than twice the total revenue and 76% of the share capital of the company and that this affects the working capital resulting in abnormal margin / losses. Before us, the assessee submitted that the company does not have abnormal busine....
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....to the remand report, the assessee had submitted that the assessee receives remuneration from its AEs for rendering of services in foreign currency. The foreign exchange gain / loss relates entirely to the rendering of services and there is no speculative hedging activity. 21.2.2 Before us, it was reiterated that the foreign exchange gain should be considered as an operating income while computing the operating margins of the assessee and the comparable companies. We have carefully considered the submissions made. From the reasons given by the TPO in the remand report, it is clear that the TPO has considered the foreign exchange income as non-operating income based on assumptions and surmises. As pointed out by the assessee, there are several decisions of this and other Tribunals which hold that foreign exchange gain related to business activities are to be treated as operating income. In this view of the matter, we hold that foreign exchange gain is to be treated as operating income in the view of the facts in the case on hand and the margins are to be computed accordingly. 22. Working Capital Adjustment and Risk Adjustment (Ground of Appeal No. 13) 22.1 The assessee subm....