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2014 (12) TMI 429

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....tions for the financial services sector. The assessee before us carries out software development services for the subsidiaries of SDS, USA which include development of software and components of software products developed as per the requirements of the Sungard group entities. For the assessment year under consideration, assessee filed its return of income declaring a total income of Rs. 49,44,080/-. On account of the assessee having undertaken international transactions with its associated enterprises abroad by way of software development services, the Assessing Officer made a reference to the Transfer Pricing Officer (in short 'TPO') u/s 92CA(1) of the Act for determination of the arm's length price of such international transactions. The TPO noticed from the Transfer Pricing Study submitted by the assessee that it had selected Transactional Net Margin Method (TNMM) as the most appropriate method in order to benchmark the international transaction relating to software development services rendered to the associated enterprises. In the TNMM analysis, the Profit Level Indicator (PLI) was taken as a ratio of Operating profits to Operating costs. On the basis of the FAR analysis,....

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....l (in short "DRP"). The DRP vide order dated 30.09.2010 disposed-off the objections filed by the assessee company. As against an adjustment of Rs. 4,17,52,924/- proposed by the TPO, the DRP directed the Assessing Officer to work out the total income of the international transaction by making an adjustment of Rs. 3,80,98,474/-. In coming to such conclusion, the DRP considered a set of 9 comparable concerns, as against 8 considered by the TPO. The arithmetic mean of the final set of 9 comparable concerns was determined at 26.78% and the working capital adjustment was determined by the DRP at 1.23% as against 1.68% determined by the TPO. Accordingly, the adjusted arithmetic mean of the final set of comparables was worked out by the DRP at 25.55% (i.e. 26.78% minus 1.23%). Consequently, the Assessing Officer has finalized the assessment u/s 143(3) r.w.s. 144C(13) of the Act dated 11.12.2010 by making an addition of Rs. 3,80,98,474/- on account of arm's length price of the international transaction of software development services rendered by assessee to its associated enterprises. The aforesaid addition is the substantive dispute raised by the assessee in its appeal before us. 5. ....

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....e. Quite clearly, the numerator considered by the TPO comprises of receipts for services rendered as also the payments made for services received meaning thereby that sales as well as expenses having a component of RPTs are included, whereas the denominator comprised of only the sales component. Ostensibly, the aforesaid formula would give a distorted picture of the ratio of RPTs to the total transactions. If total expenses incurred by the assessee by way of payments to associated enterprises is divided by the total expenses incurred, the ratio of RPTs to the total transactions exceed 25%, as per the working made by the assessee. In view of the aforesaid incorrect approach of the TPO in order to calculate the level of RPTs, Compucon Software Ltd. has been wrongly included as a comparable. Moreover, the assessee has also referred to a decision of the Pune Bench of the Tribunal in the case of Bindview India (P.) Ltd. vs. DCIT, (2013) 34 taxmann.com 164 (Pune-Trib.) relating to the assessment year 2006-07 wherein the RPTs in the case of Compucon Software Ltd. have been accepted as being in excess of 25% of the total transactions. On this basis also, we find that the plea of the assess....

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....ansfer Pricing Study or at least latest by the date of filing of the return u/s 139(1) of the Act. In our considered opinion, the plea of the appellant is quite misplaced inasmuch as rule 10D of the Rules merely seeks to require an assessee to maintain information and documents with respect to the international transactions carried out by it and in that context, it is prescribed in sub-rule (4) of rule 10D of the Rules that "as far as possible", such information and documents should be contemporaneous and should exist latest by the date specified therein i.e. due date of filing of the return u/s 139(1) of the Act. So however, there is no embargo put either in the Act or in the Rules to say that the arm's length price of an international transaction, which is required to compute the income arising from an international transaction, should be based on an information which is contemporaneous so as to exist latest by the due date of filing of the return u/s 139(1) of the Act. Thus, the aforesaid plea of the assessee is rejected. 10. Another reason advanced by the assessee to justify exclusion of Avani Cincom Technologies Ltd. as a comparable, is that the said concern is carrying o....

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.... in software development services is not denied by the authorities below. Therefore, in such a situation, only the segment relating to development of software services, which can be said to be similar to the assessee, can only be considered for the purposes of comparability analysis. The segmental data in this regard is not available and therefore in our view it would be inappropriate to consider the financial results of the concern as a whole for the purposes of carrying out comparability analysis vis-à-vis the tested transactions in the present case. Therefore, in our considered opinion, the said concern is liable to be excluded from the list of comparables and accordingly assessee succeeds on this aspect. 13. Thirdly, appellant has assailed the inclusion of SIP Technologies and Export Ltd. as a comparable by the TPO on the ground that the financial data of the said concern which has been considered does not correspond to the financial year of the assessee. It is pointed out that the financial year of the assessee under consideration is from 01.04.2005 to 31.03.2006 whereas the financial year of SIP Technologies and Export Ltd. ending on 31st March, 2006 is comprised of a....

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....ument being setup by the assessee before us. 15. In this context, we have perused the decision of the Bindview India (P.) Ltd. (supra) which also is a concern engaged in rendering of software development services to its parent company abroad. In the context of benchmarking the services rendered by Bindview India (P.) Ltd. (supra), which is similar to the services being rendered in the instant case, the Tribunal observed that KALS Information Systems Ltd. was not a functionally comparable concern. The following discussion in the order of the Bindview India (P.) Ltd. (supra) is relevant :- "16. Another issue relating to selection of comparable by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in provid....

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....ative, it is submitted that if the said concern is to be retained as a comparable, the margin should be worked-out on the basis of the Annual Report of the said concern available for the subsequent year ending 31.03.2007, which contains the previous year's figures i.e. for the year ending under consideration i.e. 31.03.2006. A copy of the Financial Report of the said concern for year ending 31.03.2007 has been placed in the Paper Book at pages 80-90. The learned counsel pointed out that if the margin based on the Previous year's figures appearing in Annual Report of March, 2007 is taken, it would be 19.59% as against the margin of 32.69% adopted by the TPO as per the data available from the Prowess Data base. 20. On this aspect, the learned CIT-DR pointed out that assessee had itself included the said concern as a comparable concern in the Transfer Pricing Study undertaken by it and therefore there cannot be now a stand taken by the assessee that the said concern is excludible on the basis of functional dissimilarities. It has also been submitted that in the Transfer Pricing Study carried out by the assessee, the margin of the said concern has been taken at 32.69% for the period e....