TaxTMI 
TaxTMI 
2014 (4) TMI 997
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....ing less than US $ 1000 written off and claimed as revenue expenditure. However, during the course of hearing, the learned AR submitted that this ground is not urged. Accordingly, this ground is dismissed as 'not pressed.' Ground No.22 is not maintainable as charging of interest u/s 234B of the Act is mandatory and consequential in nature. The remaining grounds raised are listed out for adjudication as under: I. Grounds relating to transfer pricing - computation of ALP: 1. (Ground nos. 8 to 17) : No argument was put-forth on grounds nos. 8, 9 and 16. The remaining grounds are condensed as under:- The assessing officer [along with TPO/DRP] had erred in - - performing fresh transfer pricing analysis and adopting inappropriate filters in the fresh transfer pricing analysis; - selecting inappropriate comparables and rejecting unjustifiably the comparables selected by the assessee; - inappropriately computing the operating margins of the comparables and the assessee; - treating fore exchange gain or loss and provision for bad debts as non-operating in nature while computing operating margin of the assessee; - not ma....
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....,788. In respect of the assessee's claim for deduction of Rs. 77.12 lakhs being the prior period expenses, the AO had, after considering the assessee's contentions, rejected the same on the ground that 'since the company follows mercantile system of accounting under mercantile system of accounting, the assessee company is required to make provision for such contingencies in the relevant FY itself. Therefore, for having not made the provisions in that year, for such expenses, in the subsequent years the claim of expenses cannot be allowable. Further, as the expenditure debited are not related to relevant AY, the expenditure so debited amounting to Rs. 77,12,144/- is disallowed...' 4. Aggrieved, the assessee has come up with the present appeal. The statement of case and the written submissions made by the learned A R are summarized as under: - that the assessee rendered software development services wholly to its AE and that the assessee adopted Transactional Net Margin Method [TNMM] to justify the price charged in the international transactions; - the assessee had conducted a methodical search process on Capitaline Plus and Prowess database to identify comparabl....
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....transaction entered into by a Rs. 1000 crore company cannot be compared with the transaction entered into by a Rs. 10 crore company; and that the two most obvious reasons are the size of the two companies and the relative economies of scale under which they operate; - that the TPO's range had resulted in selection of companies like Infosys which was 277 times bigger than the assessee in the turnover; - that an appropriate turnover range should be applied in selecting comparable uncontrolled companies; - that the Bangalore Tribunal in M/s. Genisys Integrating Systems (India) Pvt. Ltd v. DCIT - ITA No.1231/Bang/2010 relying on Dun and Bradstreet's analysis had held that turnover range of Rs. 1 crore to Rs. 200 crores is appropriate; - that the said proposition has been followed by the Hon'ble earlier Benches of this Tribunal in the following cases: (i) M/s. Kodiak Networks (I) Pvt. Ltd v. ACIT - ITA No.1413/Bang/2010; (ii) M/s. Genesis Microchip (I) Pvt. Ltd v. DCIT - ITA No.1254/Bang/2010; (iii) Electronic for Imaging India Pvt. Ltd - ITA NO.1171/Bang/2010; & (iv) M/s. Trilogy E-Business Software India Pvt. Ltd ....
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....ies Ltd: The margin of this company was adopted at 52.59% in the final computation of the arm's length price. After analyzing the operating revenues, operating expenses, operating profit for the last 4 F.Ys, it has been evolved that this company has made an unusually high profit during the FY 2006-07. Thus, this company's growth rate was nearly double the industry average. The extra-ordinary circumstances warranting rejection of this company as comparable; (iii) Celestial Lab Limited: The margin of the company was adopted at 58.356% in the final computation of ALP. This company was rejected in AY 2006-07 since it was engaged in R & D activities. However, based on the reply to the notice u/s 133(6), it was contended that the company was mainly a software development service provider and, therefore, selected as comparable. After verifying the Directors' report, balance-sheet, P & L account etc., it was noticed that this company was not functionally similar to the assessee. As per the annual report, the company's employee cost was less than 25% of the revenue. Accordingly, this company needs to be rejected as comparable. (iv) KALS Information Systems Limited: The mar....
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....i Limited; (viii) Benefit of 5 per cent range: that the assessee should be given a standard deduction of 5% as provided under proviso to section 92C(2) before making adjustments for the transfer price; Relies on case laws: (a) M/s. SAP Labs India Private Ltd v. ACIT 2010-TII-44- ITAT-BANG-TP; (b) Philips Software Centre Pvt. Ltd - 26 SOT 226 (c) MSS India Pvt. Ltd 32 SOT 132 (d) Customer Services India (P) Ltd v. ACIT 30 SOT 486 4.2 It was asserted that ever after adopting the comparables as chosen by the TPO subject to rejection of some companies for justifiable reasons, the margins of the assessee were within the arm's length range of the adjusted ALP. (ix) Deduction u/s 10A: While computing deduction u/s 10A, the AO reduced Rs. 69,45,076/- from the export turnover. However, the same has not been reduced from the total turnover. It is submitted that what is reduced from export turnover should also be reduced from total turnover. Relies on the findings of the Special Bench in the case of ITO v. Sak Soft (2009) 313 ITR (AT) 353 and the Hon'ble Karnataka High Court in the case of Tata Elxsi Limited; ....
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....ed v. DCIT (ITA No.1054/Bang/2011 dated 23.11.2012) herein referred to Trilogy E - Business. In the said case, the assessee was engaged in the business of rendering software development business, just like the assessee in the instant case. The comparables selected by the TPO in the case of Trilogy E- Business Software and the assessee of this case are identical. They are as follows: (1) Accel Transmatic Ltd (Seg.); (2) Avani Cimcon Technologies Ltd. (3) Celestial Labs Ltd. (4) Datamatics Ltd (5) E-Zest Solutions Ltd. (6) Flextronics Software Systems Ltd. (7) Geometric Ltd. (Seg.) (8) Helios & Matheson Information Technology Ltd (9) iGate Global Solutions Ltd. (10) Infosys Technologies Ltd. (11) Ishir Infotech Ltd (12) KALS Information Systems Ltd.(Seg.) (13) LGS Global Ltd. (Lanco Global Solutions Ltd.) (14) Lucid Software Ltd (15) Mediasoft Solutions Pvt. Ltd (16) Megasoft Ltd.(Seg.) (17) Mindtree Ltd. (18) Persistent Systems Ltd. (19) Quintegra Solutions Ltd (20) R.S. Software (India) Ltd (21) ....
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.... himself has rejected the companies which are making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. 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 comparables, 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 is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having ....
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....improper selection of comparables by the TPO for the reasons that they were functionally different as observed by the earlier Bench in the case of Trilogy E-Business. A. Accel Transmatic Ltd. (Seg): The selection of this company as comparable by the TPO was duly considered by the Tribunal in the case of Trilogy E-Business and reason recorded in its finding is extracted as under: "50. We have considered the submissions and are of the view that the plea of the assessee that the aforesaid company should not be treated as comparables was considered by the Tribunal in Capgemini India Ltd (supra) where the assessee was software developer. The Tribunal, in the said decision referred to by the ld. counsel for the assessee, has accepted that this company was not comparable in the case of the assessees engaged in software development services business. Accepting the argument of the ld. counsel for the assessee, we hold that the aforesaid company should be excluded as comparables". B. Avani Cimcon Technologies Ltd: The selection of this company as comparable by the TPO was rejected by the earlier Bench of the Tribunal in Trilogy E-Business for the reasons that- "....
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....ice provider. We therefore accept the plea of the Assessee that this company is not comparable". 5.2.1 In conformity with the findings of the coordinate bench of the Tribunal in the case of Trilogy E-Business, we are of the considered view that (i) Accel Transmatic Ltd (Seg); (ii) Avani cimcon Technologies Ltd; (iii) Celestial Labs. Ltd., & (iv) KALS Information Systems Ltd (seg) cannot qualify as comparables in the case of the assessee under consideration. It is ordered accordingly. 5.2.2 After excluding from the TPO list of comparables, the companies having turnover exceeding Rs. 200 crores and four companies which are functional dissimilar to that of the assessee, the following fourteen companies in TPO list are retained as comparables:- Sl. No. Name of the company 1. Datamatics Limited 2. E Zest Solutions Limited 3. Geometric Ltd. (seg) 4. Helios & Matheson Information Technology Ltd 5. Ishir Infotech Ltd 6. LGS Global Ltd (Lanco Global Solutions Ltd) 7. Lucid Software Ltd 8. Mediasoft Solutions Pvt. Ltd 9. Megasoft Ltd (Seg) 10. Quintegra Solutions Ltd 11. R S Software (India) Ltd 12. R Systems....
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....expenses related to travelling, boarding and lodging expense. Based on the above reply, the TPO proceeded to hold that the comparable company was mainly into customization of software products developed (which was akin to software development) internally and that the portion of the revenue from development of software sold and used for customization was less than 25% of the overall revenues. The TPO therefore held that less than 25% of the revenues of the comparable are from software products and therefore the comparable satisfied TPO's filter of more than 75% of revenues from software development services. Having drawn the above conclusion, the TPO did not bother to quantify the revenues which can be attributed to software product development and software development service but adopted the margin of this company at the entity level. In terms of Rule 10B(3)(b) of the Rules, an uncontrolled transaction shall be comparable to an international transaction if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profi....
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....y be. Since the TPO had computed the margin without considering the foreign gain or loss, the assessee had tabulated revise margins of comparables after considering the foreign exchange gain or loss as operating in nature. The tabulated revised margin of comparable after considering the foreign exchange gain or loss is made as Annexure A to this order. The Assessing Officer/TPO is directed to verify the correctness of the working/computation of Annexure A. Working capital adjustment: 5.4 With regard to the working capital adjustment, the assessee submitted that the computation of the TPO was erroneous. It is seen that the TPO had worked out the working capital adjustment at -1.27 % [Working at Annexure C of the order of TPO]. 5.4.1 In this regard, the assessee has submitted that in arriving at the total amount of trade payables, the TPO had considered only sundry creditors for expenses and not the inter company payables which are actually trade payables of the assessee company [source: page 6 of PB-I]. 5.4.2 We have duly considered the rival submissions. If the above contention of the assessee is to be taken into account, the revised working capital adjustment comes to ....
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..................". 5.5.2 In conformity with the findings of the earlier Bench (supra), we direct the AO/TPO to work out suitable risk adjustment and compute the ALP accordingly. 5.5.3 It is to be noted that no submissions/arguments were raised in course of hearing with regard to the other issue of TP adjustment, apart from above discussed issue and hence, ground nos.8, 9, 16 and part of ground no.11 relating to the assessee's objection that its comparables are unjustifiably rejected is not considered/adjudicated. 5.5.4 In conclusion, the AO/TPO is directed to work out the ALP of the assessee in accordance with directions of this Bench (supra). It is the claim of the assessee its margin after considering foreign exchange loss is at 14.14%, where margin of the comparable after work capital adjustment is 15.89% and after risk adjustment, the adjusted average margin of comparable is 15.16%. The assessee's tabulation of comparable operating margin on cost and margin after working capital adjusted is made as Annexure B to this order. Further, the learned AR's computation portraying the assessee's margin (after giving effect to impact of forex gain or loss) and margin of comparable....