TaxTMI 
TaxTMI 
2014 (5) TMI 889
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.... filed its return of income for Assessment Year 2008-09 on 26.9.2008 declaring taxable income of Rs. 32,480 after claiming deduction under section 10B of the Act amounting to Rs. 2,66,31,061. The assessee declared taxable income of Rs. 33,01,431 under section 115JB of the Act. In the period under consideration, since the assessee entered into international transactions of three types, 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-I. The international transactions entered into by the assessee in the relevant period are as under :- S. No. Type of transaction Amount paid (Rs.) Amount received (Rs.) 1. Software Services 25,07,61,728 2. Reimbursement of expenses. 74,58,039 3. Reimbursement of expenses. 21,02,620 The TPO vide order under section 92CA of the Act dt.31.10.2011, proposed a T.P. adjustment of Rs.2,34,27,201 to the ALP of international transactions. The Assessing Offic....
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....ricing study and the documentation of the Appellant without substantiating as to how and why the Appellant's data are not reliable or correct, particularly when he has himself accepted the search process of the Appellant, 6 filters out of 7 filters chosen by the Appellant and 4 companies out of 12 companies selected by the Appellant. 6. The Honourable DRP has failed to appreciate that the Learned TPO having accepted four companies out of the twelve companies selected by the Appellant, ought to have directed the Learned TPO to determine the arm's length price on the basis of those accepted comparable companies. 7. The Honourable DRP is not justified in upholding the action of the Learned TPO in carrying out a fresh TP study and wholly substituting the comparable companies selected by the Appellant with a new set of comparable companies, without successfully disregarding the manner of application of TNM method by the Appellant. 8. Without prejudice to the above, the Learned DRP has failed to appreciate that the Learned TPO unjustly left out 5 out of 6 companies selected by the Appellant which are to be taken as comparable companies according to his own reasoning in t....
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....ied in upholding the exclusion of sum of Rs. 2,17,32,445/- from export turnover for the purpose of computation of deduction under section 10B of the IT Act, based on frivolous/extraneous reasons of the Learned ITO. Further, the Honourable DRP is not justified in upholding the exclusion of sum of Rs. 2,17,32,445/- from export turnover for the purpose of computation of deduction under section 10B of the IT Act, for the reason that same was incurred in foreign currency by rejecting the contention of the Appellant that it is not engaged in providing technical services but is engaged in development and export of computer software. 18. The Honourable DRP is not justified in upholding the action of the Learned ITO in reducing the telecommunication charges of Rs. 24,50,957/- from the export turnover when such expenditure is incurred in respect of a standard facility and the same cannot be wholly attributable to delivery of computer software outside India. 19. Without prejudice to the above, the Honourable DRP is not justified in failing to appreciate that the question of deduction of telecommunication charges of Rs. 24,50,957/- would arise only if the same has been incurred in foreig....
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....ating profits on operating costs (%) 1 Akshay Software Technologies Limited 9.21 2 Birla Technologies Ltd. 3.83 3 Birlasoft Ltd. 3.62 4 Bodhtree Consulting Ltd. 21.00 5 E-Infochips Ltd. 35.33 6 ICRA Techno Analytics Ltd. 7.92 7 PSI Data Systems Ltd. 5.94 8 Quinnox Consultancy Services Ltd. 9.68 9 Quintegra Solutions Ltd. 19.00 10 R S Software (India) Ltd. 6.30 11 Sonata Software Ltd. 14.39 12 VGL Software Ltd. 20.80 Arithmetic Mean 12.50 The margin earned by the assessee, as per its TP Study, was 13.09% and since this was in excess of the average profit margin of the 12 comparable companies at 12.50% on cost, the assessee treated the international transactions entered into by it as being at arms length. 5.2 The TPO observed that the assessee has characterized itself as a provider of software development services to its Associated Enterprises (AE) and that the assessee used TNMM as the MAM. While accepting the TNMM as the MAM, the TPO rejected the assessee's TP Study for various reasons set out in the show cause notice issued and embarked on a fres....
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....7.1 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, and hence selected this company as a comparable. For this purpose, the TPO had relied on information submitted by this company in response to enquiries carried out under section 133(6) of the Act for collecting information about the company directly. 7.2 Before us, the learned Authorised Representative reiterated the assessee's objections for the inclusion of this company from the list of comparable companies on the ground that this company is not functionally comparable to the assessee as it is into software products whereas the assessee is into providing software development services. It is also submitted that the segmental details of this company are not available and the Annual Report available in t....
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....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. 7.5.2 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 comparables in the case of Triology E-Business Software India (P.) Ltd. (supra). No doubt this company has been deleted as a comparable in the case of Triology E-Business Software India (P.) Ltd. (supra) and this can be a good guidance to decide on the comparability in the case on hand also. This alone, however, will not suffice for the following reasons :- (i) The assessee needs to demonstrate that the FAR analysis and other relevant facts of the Triology case are equally applicable to the facts of the assessee's case also. Unless the facts and the FAR analysi....
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....i.e. it is into clinical research and manufacture of bio-products 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. 8.2.1 Before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee as it is into bio-informatics, software product/services and the segmental break up is not provided. The assessee has extensively quoted from various parts of the Annual Report of the company, which states as under : (i) "Mission Statement" on page 2 of the Annual Report states that the company is also into bio-informatics products, ITES, Etc., "Celestial is committed to be a technology company respected globally for its software development, products, services in the area of Bio-informatics, Enterprise Resources Planning, Inf....
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....g, software development, products and services" for F.Y. 2007-08 is 2021.12 lakhs. 8.2.2 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 :- (i) Triology E-Business Software India (P.) Ltd. (supra) (ii) Mercedes Benz Research & Development India (P.) Ltd. v. Dy. CIT [IT (T.P.) A No. 1222 (Bang.) of 2011, dated 22-2-2013] (iii) Curam Software International (P.) Ltd. (supra). 8.3 Per contra, the learned Departmental Representative contended that the ruling in the case of Triology E-Business Software India (P.) Ltd. (supra) was rendered with respect to F.Y. 2006-07 and there cannot be an assumption or presumption that it would continue to be applicable to F.Y. 2007-08 as well. 8.4 To this, the learned Authorised Representative countered that the functional profile of this company continues to remain the same for F.Y. 2007-08 as it was in F.Y. 2006-07 and the same is evident from the Annual Report quoted extensively above at para 8.2.1 (supra). 8.5.1 We have heard both parties and carefully perused and considered the ma....
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....t materially relevant in the software development segment. 9.2 Before us, the assessee contended that this company is not functionally comparable to the assessee and in this context has cited various portions of the Annual Report of this company to this effect which is as under :- (i) The company has an Intellectual Property (IP) Cell to guide its employees to leverage the power of IP for their growth. In 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....
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....ware 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 income filter. 10.2 Before us, the assessee contended that this company is not functionally comparable, as it is into development of software products. The assessee had also submitted that :- (i) this company has two segments namely ; Application Software Segment which includes software product revenues, while the 'Training Segment' does not have any product revenue. (ii) from the Annual Report of KALS for the year ended 31.3.2008; i.e. the year under consideration, it is observed that the company is into provision of software development services as well as sale of software products. "Inventories" under schedule to the financial statements on page 16 of the Annual Report discloses "Software Development" as inventory and work-in-progress. It is to be noted that a pure software development service provider would not be able to disclose such details as it does not carry any such inventory or work-in-progress. &nb....
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....partmental Representative that the ruling rendered in the case of Triology E-Business India (P.) Ltd. (supra) was with respect to an earlier period i.e. F.Y. 2006-07 and there cannot be an assumption or presumption that it is applicable for the year under consideration as well. At the same time, we find that the TPO has drawn conclusions on the basis of information obtained under section 133(6) of the Act, which was not in the public domain and could not have been used by the TPO, when the same is contrary to the Annual Report of the company as has been highlighted by the assessee in its submissions. We also find that the co-ordinate bench of this Tribunal in the case of Trilogy E-Business Software India (P.) Ltd. (supra) has held that this company was developing software products and was not purely or mainly a software development service provider. Further, apart from relying on the decision of Trilogy E-Business Software India (P.) Ltd. (supra), the assessee has brought on record substantial evidence quoting from various portions of the Annual Report of that this company is functionally dis-similar and different from the assessee and hence is not comparable and therefore the find....
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....ontext 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 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 inclusion in the set of comp....
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....ajor 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. 12.4.2 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. (supra) has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any such intangible and hence does not have an additional advantage in the market. As the assessee in the case on hand does not own any intangibles, following the aforesaid decision of the co-ordinate bench of the Tribunal i.e. 24/7 Customer.Com (P.) Ltd. (supra), we hold that this company cannot be considered as a comparable to the assessee. We, therefore, direct the Assessing Officer/TPO to omit this company from the set of comparable companies in the case on hand for the year under consideration. B. Companies chosen as comparable by the assessee rejected by the TPO. 13. (....
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....entative that current data was available and that the TPO has wrongly rejected this company as a comparable without considering the data available. Since the Assessing Officer has not considered the current year's data which was actually available, while rejecting the company, the learned Authorised Representative pleaded that the issue of the comparability or otherwise of this company may be restored to the file of the TPO for fresh examination in the light of the current data available. 14.2 Per contra, the learned Departmental Representative supported the action of the TPO in excluding this company from the final list of comparables. 14.3 We have heard the rival submissions and perused and carefully considered the material on record. Admittedly there appear to be contrasting claims; of the TPO that this company cannot be taken as a comparable as current year's data pertaining to it is not available and that of the learned Authorised Representative that current year's data is available. We have had occasion to peruse the show cause notice dt.27.9.2011 issued by the TPO to the assessee listing out the reasons for the rejection 10 companies of the 12 comparable co....
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....turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover in the denominator also. The reason being that the total turnover includes export turnover. The components of the export turnover in the numerator and denominator cannot be different. Therefore, though there is no definition of the term 'total turnover' in section 10-A, there is nothing in the said section to mandate that, what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. Though when a particular word is not defined by the legislature and 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', in....