TaxTMI 
TaxTMI 
2014 (10) TMI 354
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....stant case had passed the order before obtaining the TP study 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 Des....
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....tware products such as ABM MOIS 2000TM, ABM CareTM, ABM MAINETTM. Solutions for Municipal Corporations have turned out to be a strength of the company. He observed that this company 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....
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....ted party transaction and since California Software has been proposed to be rejected, therefore for the same reasons in the show cause notice, this company also should be excluded. Since the objection of the assessee was accepted by the Assessing Officer he excluded this company from 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 ....
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....5/-. After deducting the value of international transaction of Rs. 20,03,98,553/- as per books the TPO determined the addition of Rs. 2,73,94,482/- to the total income of the assessee. 4. The Assessing Officer passed the draft assessment order on the basis of the addition suggested by the TPO. The assessee approached the DRP. It was submitted that the TPO has not followed 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 9....
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....recovered from BDC) 4,261,829 Expenses in Foreign Currency Travelling 1,073,451 Employee Training 2,925,222 Membership & Subscription 2,31,100 Repairs and Maintenance 2,25,502 TOTAL 34,55,275 GRAND TOTAL 77,17,104 6.3 It was explained that the Internet access charges are incurred to have access to the internet services which is not exclusively used towards the delivery of computer software outside India. It was further explained 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 pro....
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....appellant; (6) Erred in rejecting comparables selected in TP study report, for FY 04-05 without sound and logical reasons. (7) Erred in rejecting comparables selected in TP study report, on account of loss reported by concerned comparable in a single year i.e. for FY 04-05 and also erred by not excluding companies reporting very high profits after excluding TP report comparable reflecting a loss for a single year; (8) Erred in ignoring the fact that BIPL has been given an interest free loan by its 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 a....
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....hat since rectification orders u/s.154 was passed by the TPO on 02-03-2012 as per the directions of the DRP, therefore, she is not pressing grounds of appeal Nos. 1 and 2 for which the Ld. Departmental Representative has no objection. Accordingly, the above 2 grounds by the assessee are dismissed as 'not pressed'. 9. Ground of appeal Nos. 3 to 18 by the assessee relates to addition of Rs. 2,09,61,689/- on account of adjustment of Arm's Length Price on international transaction by the Assessing Officer. 9.1 The Ld. Counsel 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....
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....rtaken, assets employed and risk profile. She submitted that the TPO further did not grant the working capital adjustment as the same are necessary for adjusting the difference in functions or terms which give rise to difference in capital intensities for the comparable companies and the tested party. She submitted that working capital adjustments have been allowed by the DRP and the CIT(A) in other cases. Referring to the order of the Tribunal in assessee's own case for A.Y. 2006-07 she submitted that working capital adjustment has been 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....
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.... R&D is carried out for products, embedded solutions, which is a part of software segment, cannot be considered as comparable. She submitted that the above company has developed products that find applications in Energy Management in addition to audit and control solutions with compliant data acquisition systems for power utilities using the GSM network. ICSA has also developed technology solutions for the power sector to identify transmission and distribution losses and major power consumption via GSM. It has abnormal revenue growth of 356% as compared 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 su....
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....the business of CAD CAM then Geometric Software Solutions Ltd. also should be rejected since it is on the same line of business. She submitted that this company was accepted as a comparable in the preceding A.Y. 2004-05. The business activity of the company has not changed since then. Therefore, this company should be accepted in the final set of comparables. 9.9 As regards the deletion of Cressanda Solutions is concerned she submitted that the TPO excluded the same from the comparables on the ground that the company has incurred losses in the relevant year 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 pro....
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....velopment would be major source of business. She submitted that the company plans to set up BPO operations in the domains of Finance, Customer support, HR and legal services, Consulting services, Managed services, Testing services can be classified as IT services. For the F.Y. 2004-05 the company is engaged in providing only software services. Referring to page 28 of the Annual report she submitted that revenue recognition confirms that it is into Software Development (Page 32 of the AR). Further, this company was accepted as comparable in the previous assessment 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 ....
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....ferring to page 31 of the Annual report she submitted that the company recognises income from software sale, software consultancy and software system services. The company is developing software for marketing in domestic and international markets, therefore, the same should not have been excluded. 9.13 As regards the inclusion of SIP Technologies and Exports Ltd. is concerned she submitted that although the assessee has taken this company as a comparable, however, it was submitted before the DRP that if Cressanda Solutions is not accepted then SIP Technologies & Exports 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)....
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....is is itself a cherry picking approach. The new comparables selected by the TPO are based on contemporaneous data available in public domain at the time of TP audit report. Referring to the decision of the Bangalore Bench of the Tribunal in the case of Kodiak Networks India (P.) Ltd. vide ITA No.1413/Bang/2010 order dated 27-01-2012 he submitted that there is no bar in law for the TPO to utilise the updated data at the time of T.P. proceedings. Further, the TPO has given detailed reasonings for selection of the comparables. He submitted that out of the 11 comparables selected by the 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 t....
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....al intensities for the comparable companies and the tested party, he submitted that this issue was also not raised before the TPO/Assessing Officer or DRP. He submitted that the working capital adjustments cannot be provided automatically. The assessee is required to point out the differences which are likely to materially affect the price or cost charged or paid in or the profit arising from such transactions in the open market and then the computation of reasonably accurate adjustment is to be furnished to eliminate the material effects of such differences. However, in the instant case, the assessee 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....
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.... 92C(4), deduction under Chapter VIA is not available on most of the transfer pricing adjustment. Motive of shifting of profits or actual shifting of profits are not necessary criteria for application of the transfer pricing provisions. Further, it is not only the matter of profit only but of assets also because if correct amount of profit would have come, it could have increased the assets. He accordingly submitted that the order of the TPO/Assessing Officer/DRP being in accordance with law should be upheld. 10.7 So far as the argument of the Ld. Counsel for the assessee that related party transactions 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 contenti....
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....under quantitative and qualitative criteria. Further, the assessee had also furnished the detailed accept-reject matrix for 90 companies. He submitted that if the TPO rejects companies on his own using RPT/Sales criteria, he should have rejected Compucom along with California Software. Referring to the decision of the Mumbai Bench of the Tribunal in the case of Frost & Sullivan India (P.) Ltd. (supra) vide ITA No.2073/Mum/2010 she submitted that the Tribunal in the said decision has held that there is no basis for only excluding the loss making companies and not excluding the high profit making companies or companies 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 docu....
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....e assessee being in accordance with law should be upheld and the adjustment made by the Assessing Officer to the ALP of the international transaction should be deleted. 12. We have considered the rival arguments made by both the sides, perused the orders of the TPO/AO/DRP and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find in the instant case the assessee is engaged in the export of network security and administrative software solutions which are developed exclusively for the parent company BDC. We find for the purpose of determining the Arm'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 p....
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....TPO has included the said company on the ground that it is in the business of software and embedded system development activity and such type of service is what is provided by the assessee company also. In this case, the summary of search strategy reveals that assessee has excluded comparables wherein the sales are less than Rs One crore and also where the sale are in excess of Rs. 50 crores. The filters so set-up by the assessee are sought to be justified n the ground that the turnover of the assessee is Rs. 24.48 crores from software development services. We have examined the case set-up by the assessee and find that no 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, ....
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....intain separate accounts for the period March 31, 2004. The taxpayer did try to work out the alleged losses of the concern for the period ending March 31, 2004 on some basis by taking average of profits but was unable to show to the revenue authorities that figures so arrived at were correct and reliable for comparison. During the course of hearing of the appeal, we had also asked the ld. Counsel to give working of results of the concern for the relevant period on some sound basis, but the ld. Counsel showed his inability to do so. He conceded that results of the concern are not available in the public domain. If that is the position, 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 t....
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.... opinion similar view should be taken for both the comparables. 12.8 We find the Delhi Bench of the Tribunal in the case of Sapient Corpn. (P.) Ltd. (supra) at para 8.1 of the order has observed as under : "8.1 Now it is the contention of the assessee that when loss making companies were taken out from the comparables by the TPO, the super profit earning company, Zenith Infotech Ltd. should also be removed from the comparables. Ld. counsel of the assessee further claimed that this company does not satisfy TPO's own additional filters. It has been submitted that Zenith Infotech Ltd. has shown abnormal high profit margin. It has been 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 shoul....
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....ted as comparable by the tax authorities, they also have to consider that the Datamatics has earned extraordinary profit and has a huge turnover. Besides differences in assets and other characteristics referred to by Shri Aggarwal. The Income-tax Appellate Tribunal is a fact-finding body and, therefore, has to take into account all the relevant material and determine the question as per the statutory regulations.' 12.11 Similar view has been taken by the Mumbai Bench of the Tribunal in the case of Frost & Sullivan India (P.) Ltd. (supra) where it has been held that if abnormal loss making companies are excluded abnormal profit making companies 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 ....
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....t during A.Y. 2006-07 the AO himself has allowed working capital adjustment to the assessee could not be controverted by the Ld. Departmental Representative. Considering the above and considering the fact that the Arithmetic Mean of the assessee shown at 12.40% is near to the Arithmetic Mean determined at 14.69% as per Para 12.15 above we are of the considered opinion that no adjustment is required to the international transaction of the assessee as the assessee would be at arm's length from the Indian Transfer Pricing perspective. We, therefore, do not dwell upon the other aspects raised by the assessee as it gets necessary relief. 13. So far as grounds of appeal No.19 is concerned the same relates to charging of interest 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 expo....
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....d insurance charges are liable to be excluded in computing export turnover, a similar exclusion has not been provided in regard to total turnover. The submission of the Revenue, however, misses the point that the expression 'total turnover' has not been defined at all by Parliament for the purposes of s.10A. However, the expression 'export turnover' has been defined. The definition of 'export turnover' excludes freight and insurance. Since export turnover has been defined by Parliament and there is a specific exclusion of freight and insurance, the expression 'export turnover' cannot have a different meaning when it forms a constituent part of the total turnover for the purposes of the application of the formula. Undoubtedly, it was open to Parliament to make a provision to the contrary. However, no such provision having been made, the principle which has been enunciated earlier must prevail as a matter of correct statutory interpretation. Any other interpretation would lead to an absurdity. If the contention of the Revenue were to be accepted, the same expression viz. 'export turnover' would have a different connotation in the application of....