TaxTMI 
TaxTMI 
2014 (10) TMI 354
X X X X Extracts X X X X
X X X X Extracts X X X X
....udy report the Ld.CIT assumed jurisdiction u/s.263 of the I.T. Act. and set-aside the order of the Assessing Officer by directing him to pass denovo assessment. Subsequently, the AO proceeded to complete the assessment. 2.1 The assessee company, Bindview India Pvt. Ltd. is a subsidiary of Bindview Development Corporation, US (hereinafter referred to as BDC). The assessee is engaged in the export of network security and administration software solutions which are developed exclusively for BDC. The software is transmitted through dedicated satellite links leased from VSNL. The assessee carries out software development activities for AEs of BDC, USA on an exclusive basis. BIPL has entered into a consulting and development agreement with BDC which defines the scope within which BIPL will render the software development deliverables to AE's. 2.2 During the course of assessment proceedings the AO observed that the assessee has filed a report u/s.92E in Form No.3CEB in respect of international transactions entered with related parties/AE's, the details of which are as under : Sr.No. Name and address of AE Description of transaction with AE Amount received/paid as per books ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....any is concentrating largely on solutions for Municipal Corporations in the e-governance space. Apart from this in e-governance segment the company focuses on services delivery through various channels like Portals, PDAs, Mobile Phones, Citizen Facilitation Centres etc. Since this company is basically into e-governance section and as well as a product company he held that this company is not comparable with BIPL. 2.4 So far as Ace Software Exports Ltd. is concerned he observed that this company's business relates to database creation pertaining to IT enabled services. It includes creating large volume of full text and image based data etc. and therefore this is not comparable to BIPL. So far as California Software Co. Ltd. is concerned he observed that the transactions of this company are with related parties during F.Y. 2004-05. In the case of Cressanda Solutions Ltd. he observed that the company has incurred huge losses during the relevant Financial Year 2004-05 due to extraordinary reasons whereas BIPL is a cost protected company where its services are billed on cost plus margins and hence its risk profile cannot be compared with a company which can incur losses. Regarding ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....om the set of comparables. 3. Based on the arguments advanced by the assessee the TPO also excluded Zensar Technologies (Seg) and Sonata Software Ltd. The assessee accepted Orient Information Technologies Ltd. as comparable. As regards the other comparables are concerned the TPO rejected the various contentions made by the assessee and held that these are the comparables for benchmarking the international transaction. 3.1 The assessee had without prejudice basis mentioned that the risk adjustment should be performed on the final set of comparable and this should include working capital adjustments, inventory adjustments, fixed assets adjustments and any other adjustment appropriate to bring the comparable in line with BIPL. The assessee submitted the workings of the adjustments for the set of comparables it had chosen in the TP report. However, the TPO noted that the assessee company was in receipt of interest free loan of Rs. 7,30,87,350/- and that the company being a captive software supplier has little risks. He further noted that there is difference in the credit period that being 112 days for the BIPL and the inventory carrying is of 0 days. In view of the above, the request....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lowed any systematic search strategy and merely cherry picked high profit making comparables. It was argued that the TPO has been provided with adequate reasons to not select the concerned companies as comparables for BIPL for A.Y. 2004-05. It was argued that BIPL has followed a detailed search processes providing adequate reasons for selecting and thus finally accepting companies as final comparables. It was argued that the reasons provided for accepting these companies are not correct and not tenable under the law. It was argued that the TPO has rejected the comparables selected by the assessee in the transfer pricing report without any valid reasons. It was argued that suitable adjustments should be made on account of risk and functional differences. Further, benefit of 5% range as provided by proviso to section 92C(2) which was not granted should be allowed. 5. Based on the arguments advanced by the assessee the DRP directed the Assessing Officer to exclude M/s.Helios & Matheson Information Technology Ltd. and M/s. Saksoft Ltd. from the set of comparables and compute the Arm's Length Price on international transaction in respect of rendering of software development service....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d that no expenditure have been incurred in providing technical services outside India. After verification of the details furnished by the assessee the Assessing Officer observed that the expenses are incurred for travelling, employee training, membership and subscription and repairs and maintenance. Therefore, exclusion of foreign currency expenditure from the export turnover is not warranted as assessee company has not rendered any technical services outside India. It was alternatively argued by the assessee that if above-mentioned expenses are excluded from the export turnover the same should be excluded from the total turnover as well. 6.4 However, the Assessing Officer did not accept the above proposition of the assessee. He noted that certain expenses such as Freight, Telecommunication charges have been specifically excluded from the export turnover under clause (iii) of the Explanation (2) to section 10B. If the legislature intent were to effect exclusion of identical amounts from "total turnover" then the same would have been specifically provided for/mandated in this section. However, this is not the case. After considering the various submissions made by the assessee the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s parent company; (9) Erred in ignoring the losses incurred by the parent company Bindview Development Corporation ("BDC"); (10) Erred in not making any adjustments for differences in functions undertaken, assets employed and risks assumed by comparable companies vis-a-vis the appellant thereby comparing the Operating profit/Total Cost ('OP/TC') of the comparable companies assuming higher business risks as compared to the appellant's captive, risk mitigated operations, without making any adjustment for differences in functions undertaken, assets employed and risk profile; (11) Erred in not granting the working capital adjustments as the same are necessary for adjusting the differences in functions (e.g., holding inventory) or terms (e.g., financing terms received from suppliers) give rise to differences in capital intensities for the comparable companies and the tested party; (12) Erred in ignoring the quantification of adjustments for the differences in risks assumed by the comparables and the appellant, as provided by the appellant and also incorrectly stating that the assessee could not produce/submit the same in the DRP directions; (13) Erred in not applying th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l for the assessee submitted that the Assessing Officer cherry picked new/additional comparables with high profits, thus, high OP/TC without providing sound/legal strategy or reasoning. She submitted that TPO is incorrect and at fault in his approach of not being transparent and not providing required data/material/search steps to shoulder the responsibility. Referring to the decision of the Delhi Bench of the Tribunal in the case of Mentor Graphics (Noida) (P.) Ltd. (supra) she submitted that the Tribunal in the said decision has held that non-application of filters as above has resulted in faulty selection of comparison. Referring to the decision of the Bangalore Bench of the Tribunal in the case of Phillips Software Centre (P.) Ltd. v. ACIT vide order dated 26-09-2008 for A.Y. 2003-04 she drew the attention of the Bench to page 26 of the order where it has been stated that if the selection process is not transparent to the taxpayer, it cannot verify whether or not the process is subjective/objective, reliable/unreliable, therefore, whether the result is right or not. Referring to the decision of the Delhi Bench of the Tribunal in the case of Toshiba India Pvt. Ltd. v. ACIT she s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n allowed. Referring to the following decisions she submitted that in the said decisions adjustment for working capital have been allowed : i. Mentor Graphics (Noida) (P.) Ltd.'s case (supra) ii. Cowi India (P.) Ltd. [IT Appeal No.5052 (Delhi) of 2010, dated 19-4-2012 iii. Demag Cranes & Components (India) (P.) Ltd. [IT Appeal No.1684/(Pune)/2011]. 9.3 She submitted that since the impugned assessment year 2005-06 being initial years of introduction of transfer pricing, therefore, the assessee should be given the benefit of downward adjustment of 5% from the Arithmetic Mean. 9.4 Coming to the various comparables taken by the TPO she submitted that those comparables differ in functions undertaken and risk assumed. Referring to the comparable Geometric Software Solutions Ltd. (segmental) she submitted that the TPO has taken the above company as a comparable on the ground that the transactions of the main company with its subsidiaries are in the vicinity of 10% of its total transaction and there are no key persons involved. He accordingly held that the company cannot be rejected on ground of RPT. She submitted that the DRP accepted the same in final set of comparables but did ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to the previous year. Further, in assessee's own case for A.Y. 2006-07 ICSA was rejected because of crossing the R&D/sales threshold of 3%. She submitted that the R&D expenses of the above company for A.Y. 2005-06 is 7%. She accordingly submitted that this company being not functionally comparable should be excluded from the comparables. 9.7 So far as the exclusion of ABM Knoweldgeware Ltd. is concerned she submitted that the TPO rejected the same on the ground that the company is basically into e-governance section and as well as product company. It holds intellectual property rights for several products and solutions, as such the functions of ABM Knoweldgeware Ltd. are not found comparable with that of BIPL. She submitted that the assessee has considered IT services segment for the purpose of its TP analysis. As per page 26 of the Annual Report of the company AMB Knowledgeware Ltd. (seg.) has discontinued its sale of IT products division. This clearly demonstrates that the company is into IT services. Referring to Paper Book page 1005 she submitted that it was very clearly brought to the notice of the TPO that the company is in software services whereas according to TPO, ass....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... due to extraordinary reasons like winding up of relationship with clients, filing of bankruptcy by some clients, higher depreciation and finance charges due to infrastructure expansion whereas BIPL is a cost protected company where its services are billed on cost plus margins and hence its risk profile cannot be compared with a company which can incur losses. She submitted that in every industry there would be a mix of profitable and non-profitable ventures. It is the endeavour of every company to maximise on profits based on the risks assumed. However, it is too idealistic to presume that all companies should always earn profit. It is the facts and circumstances surrounding the company in question that should determine its status as a comparable and not its financial results. She submitted that losses are a normal part of business. The company Cressanda Solutions incurred losses in F.Y. 2004-05. She submitted that the company was included in the previous assessment year 2003-04 but then it was not into losses. According to her excluding a company based on one year's loss would not be appropriate. The company was in activities for the F.Y. ending March 2004 and March 2003. Acc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t year 2004-05. She accordingly submitted that this company should not be excluded from the final list of comparables. 9.11 As regards the exclusion of Ontrack Systems Ltd is concerned she submitted that the TPO excluded the same from the comparables on the ground that the company is engaged in providing services for the I.T. and ITES market. It is engaged in offshore product Development, SMS/MMS, collaborative software, mobile games, SMS platform, BPO offering in technical help desk using ITIL model etc. The company also runs tender portal "tendertimes.com" for securing bid documents and online submission of tenders and "Indiaonestop.com" for merchant explorers. She submitted that this action of the TPO is not correct. She submitted that during the F.Y. 2004-05 the company was engaged in providing IT solutions and services through its Global Delivery Center, Online Web based portal. IT services, Support and Technology Solutions, Multimedia and Web Services. The company offers networking solutions in the Local Area and Wide Area Networking, Intranet/Extranet, Internet Based Solutions, Messaging Solutions, Security Solutions and Wireless Solutions. She submitted that the Networking....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ports Ltd. should also be deleted from the list of comparables considered. She submitted that no relevant data for F.Y. 2004-05 of the company is available. The company had closed its books of account for the year ending September 2004 and subsequently closed its books of accounts only for the year ended 31-03-2006 which is for a period of 18 months. She submitted that using data for the year ended September 2004 is not correct and not as per law. Therefore, the company should be rejected. For the above proposition, she relied on the following decisions: i. Honeywell Automation Ltd. v. Dy. CIT [IT Appeal No.4 (Pune) of 2008 ii. Sandstone Capital Advisors (P.) Ltd. v. Asstt. CIT [IT Appeal No.6315 (Mum) of 2012] iii. PTC Software (India) (P.) Ltd. v. Asstt. CIT [IT Appeal No.1605 (Pune) 2011] iv. Cummins Turbo Technologies Ltd. - ITA No.118/PN/2011 9.14 As regard exclusion of the company VMF Soft Tech Ltd. is concerned she submitted that although assessee had taken this as a comparable, however, the Annual report of the said company was not available at that time. Further, the above company undertakes e-governance projects, i.e. Government projects. The activities of the compan....
X X X X Extracts X X X X
X X X X Extracts X X X X
....assessee for benchmarking the ALP of software development service transaction, the TPO had rejected 7 comparables giving valid reasons. All the comparables are rejected either due to functional difference or consequent related party transaction, i.e. exceeding 25%. Therefore, the submission of the Ld. Counsel for the assessee that comparables were rejected without sound and logical reason cannot be accepted as correct. He submitted that the TPO had rejected one of the comparables selected by the assessee namely Cressanda Solutions due to incurring of huge losses during F.Y. 2004-05 which was due to ending up of relationship with clients and filing of bankruptcy by some clients, higher depreciation and finance charges due to infrastructure expansion etc. Because of these extraordinary events during the year under consideration the company cannot be taken as comparable doing business in ordinary course. 10.1 So far as the argument of the Ld. Counsel for the assessee that the Assessing Officer has ignored the losses incurred by the parent company Bindview Development Corporation is concerned, he submitted that the same is not relevant for determination of ALP when the assessee is tak....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sessee never furnished the computation of reasonably accurate adjustment. Since the assessee was already having sufficient funds and no debtors were locked, therefore, there is no justification in allowing for working capital adjustment. As regards the argument of the Ld. Counsel for the assessee that the difference in risk assumed by the comparables and the assessee has not been considered, he submitted that there is no unanimity among various institutions as to how to work out risk adjustment because it is not possible to quantify the risk and numerically establish the relationship of risk with the profits margin. Relying on various decisions he submitted that the assessee has not furnished reliable working with respect to the risk adjustment, vis-a-vis the comparable companies. He submitted that by applying the qualitative and quantitative filters the impact of risk factors between the taxpayers and comparables can be neutralised. 10.4 As regards the ground relating to non application of proviso to section 92C(2A) is concerned which refers to granting relief for the downward adjustment of 5% from the Arithmetic Mean he submitted that the issue now stands settled after the intro....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ons in the case of Compucom Software Ltd. for the A.Y. 2004-05 are 58.40% and hence this is not a comparable case he submitted that this comparable was selected by the assessee itself. The assessee never raised this issue before the TPO/Assessing Officer/DRP. Further, the assessee has not furnished the copy of the annual report before the DRP. The single page paper submitted before the Tribunal in the paper book does not contain the details of total sales and total expenses of this comparable. Since the assessee has not furnished reliable information of the above company the contention of the Ld. Counsel for the assessee that the same should be excluded cannot be accepted. 10.8 As regards the submission of the Ld. Counsel for the assessee that SIP Technologies and Exports Ltd. should be excluded on the ground of functional differences he submitted that there is no violation in spirit of the Rule merely because data for the 6 months have been used. The assessee has never objected to the selection of the company as comparable in the final set of comparables either before the TPO or Assessing Officer or DRP. Thus, the act of the assessee is against the principle of estoppels. 10.9 A....
X X X X Extracts X X X X
X X X X Extracts X X X X
....panies which are not at all comparable considering their size, volume of turnover and other factors. Similar view has been taken in the case of Cummins Turbo Technologies Ltd. (supra) and Quark Systems (P.) Ltd. (supra). 11.1 As regards the argument of the Ld. Departmental Representative that the assessee has not raised the ground relating to risk adjustment before the TPO/Assessing Officer but was raised before the DRP and that the assessee has not provided the details for such risk analysis she submitted that the assessee has documented the filters in risk in the TP documentation as well as in its submission after quantifying the adjustments before the TPO as well as the DRP on various stages. So far as the argument of the Ld. Departmental Representative that the assessee has not raised the issue relating to working capital adjustments either before the TPO/AO nor before the DRP she submitted that working capital adjustment quantification was submitted before the TPO and the DRP. For this purpose, she referred to page 244 of the paper book wherein the balance sheet of BIPL has been provided according to which the amount of debtors is Rs. 7.69 crores and cash and bank balances is....
X X X X Extracts X X X X
X X X X Extracts X X X X
....9;s Length Price the assessee benchmarked 11 comparables and determined the Average Arithmetic Mean at 10.30%. Since the mean operating profit/Total cost of comparable companies was less than the OP/TC of 12.90% of the assessee it was contended that its international transaction relating to software development services is at Arm's Length Price. We find the TPO did not accept the comparables given by the assessee and made further search to find more comparables to broadbase the data and arrive at proper benchmarking of the international transactions. For the above purpose he considered 14 companies as comparables. When the matter went to the DRP it directed the TPO to consider 11 companies as comparables which includes 4 companies originally selected by the assessee. As per the direction of the DRP, the mean of margin earned by the final set of comparables comes to 26.07% as against the margin earned by the assessee at 12.40%. Accordingly, the addition of Rs. 2,09,61,689/- was made to the total income of the assessee being the difference in the ALP. It is the submission of the Ld. Counsel for the assessee that the Assessing Officer has cherry picked new/additional comparables w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....reasons have been advanced by the TPO to do away with the filter adopted by the assessee on the basis of the turnover of the comparables. Without rejecting the merits of the filters so adopted, the TPO is not justified, on a selective basis, to ignore such filter and adopt a comparable company such as ICSA (India) Ltd. for the purposes of comparing international transaction in question which falls outside the search matrix. Even with regard to the filter applied by the assessee on the basis of the level of R & D expenses the situation remains the same. Therefore, once the TPO has accepted such filters in principle, clearly its application is unjustly ignored by him while including ICSA (India) Ltd. as a comparable company. We, therefore, direct the TPO to exclude ICSA (India) Ltd. from the final set of comparables." 12.3 Since in the impugned assessment year R&D/sales threshold comes to 7%, therefore, in view of the order of the Tribunal in assessee's own case in the subsequent year ICSA(India) Ltd in our opinion cannot be considered as a comparable. We accordingly hold that this cannot be considered as a comparable for determining the Arm's Length Price. 12.4 So far as i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion, we see no force in the objection of the taxpayer to non inclusion of Wellwin Industry Ltd. in the list comparables for working mean margin of operating profit under TNM Method." 12.6 Similar view has been taken by the Pune Bench of the Tribunal in the case of PTC Software (India) (P.) Ltd. (supra) and has observed has under : "23. The next point made by the assessee is with regard to inclusion of Transworld Infotech Ltd., appearing at item (10) in the Tabulation in para 10, as a comparable case. The TPO, as per his discussion in para 6.3.22 of the order, has included the said concern in the list of comparables on the ground that it was functionally similar to the assessee's IT-services segment. The short point made by the assessee before us is to the effect that the said concern was not includible because the assessee's financial period is from 1.4.2006 to 31.3.2007, whereas the relevant data of the said concern which has been considered is for the period 1.7.2006 to 30.06.2007. It was therefore pointed out that since the data of the comparable concern does not correspond to the financial year of the assessee, the said concern is incomparable. Factually, the aforesai....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n submitted that Zenith Infotech Ltd. is predominantly software product company, while the assessee is engaged in rendering software development services. It has been submitted that software product company ends up earning higher margin as they are engaged in the selling of software products owned by them. Upon careful consideration, we find ourselves in agreement with the assessee's contention that when the loss making companies have been taken out from the list of comparables by the TPO. Zenith Infotech Ltd. which showed super profits should also be excluded". 12.9 We find the Pune Bench of the Tribunal in the case of Cummins Turbo Technologies Ltd.'s case (supra) at para 14 of the order has held that as the super profit company should not be included the same way super loss making company should also be excluded. 12.10 We find the Chandigarh Special Bench of the Tribunal in the case of Quark Systems' (P.) Ltd. (supra) has held that if abnormal loss making companies are excluded then abnormal profit making companies are also to be excluded. The assessee cannot be estopped from rejecting the comparables accepted by itself in the study. The relevant observation of the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es are also to be excluded. 12.12 Respectfully following the above decisions of the various Benches of the Tribunal we find merit in the submission of the Ld. Counsel for the assessee that if Cressanda Solutions Ltd. is excluded as a comparable then VMF Soft Tech Ltd. which shows the profit margin of 35.70% also should be excluded from the list of comparables. 12.13 Now coming to the exclusion of ABM Knowledgeware Ltd. we find it was taken by the assessee and rejected by the TPO/DRP as a comparable. We find the same was rejected by the Revenue authorities on the ground that the company is basically into e-governance section and as well as the product company. Further, the company holds intellectual property rights for several products and solutions and therefore the functions of ABM Knoweldgeware Ltd. are not comparable with that of BIPL. From the various details furnished by the assessee we find the assessee had very clearly brought out that the company is in software services. Page 26 of the annual report shows that the company has discontinued its sale of IT products Division which clearly demonstrates that the company is into IT services and not sale of IT products. We agree ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t u/s.234 of the I.T. Act. 13.1 After hearing both the sides, we find charging of interest u/s.234B is mandatory and consequential in nature. Therefore, this ground by the assessee is dismissed. 14. Grounds of appeal No. 20 to 22 by the assessee relates to adjustment of excess deduction u/s.10B of Rs. 6,50,0 37/- we find the Assessing Officer made the adjustment on account of deduction u/s.10B by reducing the IAC/telecommunication charges from the export turnover of the company. It is the submission of the Ld. counsel for the assessee that in view of the decision of the Hon'ble jurisdictional High Court in the case of CIT Vs. Gem Plus Jewellery India Ltd. reported in 330 ITR 175 if the telecommunication charges are reduced from the export turnover, the same should also be reduced from the total turnover. We find merit in the above argument of the Ld. Counsel for the assessee. We find the Pune Bench of the Tribunal in the case of ACIT Vs. Symen tex Software India Pvt. Ltd. vide ITA No.787/PN/2009 order dated 30-11-2011 for A.Y.2004-05 following the decision of Hon'ble Bombay High Court in the case of Gem Plus Jewellery India Ltd. (Supra) has directed to exclude Telecommunication c....