TaxTMI 
TaxTMI 
2015 (1) TMI 838
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....Tribunal project the grievance of the Assessee regarding the action of the learned Assessing Officer and Honorable Dispute Resolution Panel making an addition to the total income by way of adjustment to the Arms' Length Price ("ALP") to an international transaction carried out by the assessee u/s. 92CA of the Act. At the time of hearing of the appeal it was submitted that the comparable companies chosen by the TPO and the addition made by the AO in the draft assessment order which was confirmed by the DRP are identical to the case decided by the Tribunal in ITA No.1054/Bang/2011 for AY 07-08 in M/s. Trilogy E-Business Software India Pvt. Ltd. Vs. DCIT, Circle 12(4), Bangalore, Logica Pvt. Ltd., 36 Taxmann.com 374 (Bang-Trib), 3DPLM Software Solutions Ltd. Vs. DCIT 42 taxmann.com 333 (Bang-Trib). It was also submitted that the business profile of the Assessee and that of the Assessee in the case of M/s. Trilogy E-Business Software India Pvt.Ltd. (supra) and Logica Pvt.Ltd.(supra) and 3DPLM Software Solutions Ltd. (supra) were also identical. This submission was found to be correct at the time of hearing. With this background we will now consider the factual basis of the present case....
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.... of the software development services rendered by you is computed as under : Arithmetic mean PLI 21.72% Less: Working capital Adjustment (Annexure-C) 0.51% Adj.Arithmetic mean PLU 21.21% Operating Cost Rs.15,26,41,104 Arms Length Margin 21.21% of the operating cost Arms Length Price (ALP) At 119.17% of operating cost Rs.18,50,16,278/- Price Received Rs.17,14,54,932 Shortfall being adjustment u/s.92CA Rs.1,35,61,346 The above shortfall of Rs. 1,35,61,346/- is being treated as an adjustment to the price shown by the tax payer in its books of account." 7. Against the said adjustment proposed by the TPO which was incorporated in the draft assessment order by the AO, the assessee filed objections before the DRP. The DRP rejected those objections and confirmed the transfer pricing adjustment suggested by the TPO except one modification viz., PLI of M/s. Megasoft Ltd. whose profit margin was adopted by the TPO at 52.74% was directed to be adopted at 51.73% and consequential relief if any in working capital adjustment was also directed to be given. The adjustment confirmed by the DRP was added to the tot....
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....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 providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds." Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. 11. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products a....
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....he 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." 10. The facts and circumstances under which the aforesaid companies were considered as comparable is identical in the case of the Assessee as well as in the case of Trilogy E-Business Software India Pvt.Ltd. (supra). Respectfully following the decision of the Tribunal referred to above in the case of Trilogy E-Business Software India Pvt.Ltd.(supra), we direct that the following companies be excluded from the list of 14 comparable arrived at by the TPO. a) KALS Information Systems Limited b) Accel Transmatic 11. As far as the comparable chosen by the TPO viz., TATA Elxsi(Seg.) (Sl.No.8 of the final list of comparable chosen by TPO) is concern....
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....etermining the arms length price for the assessee, hence, should be excluded from the list of comparable parties." 15. In view of the above, the ld. counsel for the assessee fairly admitted that comparable company at Sl.No.6 viz., Flextronics Software Systems Pvt. Ltd. should be taken as a comparable, while comparable at Sl.No.24 viz., Tata Elxsi Ltd. should be rejected as a comparable. 16. On the above submissions of the ld. counsel for the assessee, the ld. DR submitted that as far as functional comparability is concerned, it is not enough only to look at the fact that in the decisions relied upon by the ld. counsel for the assessee, also dealt with the case of software development and the assessee is also a software developer rendering software development services. It was his submission that the aforesaid companies even if they are engaged in providing software services, can be engaged in different sectors to which they cater, like software development in telecommunication, automobile manufacturing sector, etc. It was his submission that it was also necessary to consider as to whether the sectors in which the comparable chosen by the TPO belong and the sector to which the....
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....nch of the Tribunal in the assessee's own case for Assessment Year 2007-08 (IT(TP)A No.845/Bang/2011), following the decision of Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. (ITA No.7821/Mum/2011). (iii) The rejection of this company as a comparable to software service providers has been upheld by the co-ordinate benches of this Tribunal in the cases of LG Soft India Pvt. Ltd. (ITA No.1121/Bang/2011) and CSR India Pvt. Ltd. [ IT(TP)A No.1119/Bang/2011 ] and by the Delhi Bench of the Tribunal in the case of Transwitch India Pvt. Ltd. (ITA No.6083/Del/2010). (iv) The factual position and circumstances pertaining to this company has not changed from the earlier Assessment Year 2007-08 to the period under consideration i.e. Assessment Year 2008-09 and therefore on this basis, this company cannot be considered as a comparable in the case on hand. (v) The relevant portion of the Annual Report of this company evidences that it is in the business of product development. The learned Authorised Representative prays that in view of the factual position as laid out above and the decisions of the co-ordinate benches of the Tribunal in the assessee's....
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.... margin of the Assessee would be well within the (+) (-) 5% range of the arithmetic mean of the remaining comparable companies and therefore the price received by the Assessee would be considered as at Arms Length. He prayed for a limited direction to the TPO on the lines set out above and determine the ALP. It also submitted that the other issues raised by the Assessee in the grounds of appeal need not be gone into. 16. We are of the view that the prayer sought for by the learned counsel for the Assessee is acceptable and accordingly, the TPO is directed to compute ALP after excluding the 8 comparable companies dealt with in this order. 17. The learned counsel for the Assessee filed before us an application for raising additional ground of appeal. The Assessee was entitled to claim deduction u/s.10A of the Act. While computing deduction u/s.10A of the Act, the AO excluded softlink & internet charges amounting to Rs. 5,52,456/- being telecommunication expenses from export turnover on the ground that these expenses are incurred in rendering technical services rendered to clients outside India and therefore to be excluded from the export turnover while computing deduction under....
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....eived within the period specified in sub-section (2). (4) The Assessing Officer shall, notwithstanding anything contained in section 153 or section 153B, pass the assessment order under sub-section (3) within one month from the end of the month in which,- (a) the acceptance is received; or (b) the period of filing of objections under sub-section (2) expires. (5) The Dispute Resolution Panel shall, in a case where any objection is received under sub-section (2), issue such directions, as it thinks fit, for the guidance of the Assessing Officer to enable him to complete the assessment. (6) The Dispute Resolution Panel shall issue the directions referred to in sub-section (5), after considering the following, namely:- (a) draft order; (b) objections filed by the assessee; (c) evidence furnished by the assessee; (d) report, if any, of the Assessing Officer, Valuation Officer or Transfer Pricing Officer or any other authority; (e) records relating to the draft order; (f) evidence collected by, or caused to be collected by, it; and (g) result of any enquiry made by, or caused to be made by, it. (7) ....... (8) The Dispute Resolution Panel may con....
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.... the statement of facts by reference. The facts and circumstances are identical to the facts and circumstances as it prevailed in AY 06-07 which we have discussed in the earlier paragraphs of this order. 22. There is no dispute that the transaction of rendering software development services rendered by the Assessee to M/S. Pivotal Corporation of Canada was an international transaction with an AE and therefore the price receive by the Assessee for rendering such services has to pass the Arm's Length price (ALP) test as laid down in Sec.92 of the Act. During the financial year 2005-06, the assessee provided software development services to its AE and was remunerated on a 'cost plus' basis. The total value of international transaction with respect to the provision of software development services by the assessee to its AE was Rs. 29,03,80,299. 23. In support of the assessee's claim that the price charged by it for services rendered to its AE was at arms' length, the assessee filed a report as required by the provisions of section 92E of the Act in Form 3EB together with detailed analysis. The assessee adopted Transaction Net Margin Method (TNMM) as the most appropriate method fo....
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.... 200 crores and cannot be compared with the Assessee whose turnover is less than Rs. 30 crores: (1) Tata Elxsi (Seg.) 378.43 Crores (2) Zylog Systems Ltd. 734.93 Crores (3) Larsen & Toubro Infotech 1950.83Crores (4) Mindtree Ltd. (seg.) 793.22Crores (5) Persistent Systems Ltd. 519.69 Crores (6) Sasken Communication Technologies Ltd. 405.31crores (7) Infosys Technologies Ltd. 20264 crores. The above companies are listed at Sl.No.5 to 11 of the final list of comparables chosen by the TPO. 28. Our attention was drawn to the observations of the Tribunal in the case of Trilogy E-Business Software India Pvt.Ltd. (supra) on the application of turnover filter and it was submitted that the aforesaid comparable companies have to be excluded from the final list of comparables selected by the TPO. The learned DR relied on the order of the DRP. 29. We have considered the submission of the learned counsel for the Assessee and the learned DR. In the case of Trilogy E-Business Software India (P) Ltd. (supra), this Tribunal on application of the turnover filter while selecting comparable companies for comparability analysis held as follow....
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....extract is as follows [on Rule 10B(3)]: "Clause (i) lays down that if the differences are not material, the transactions would be comparable. These differences could either be with reference to the transaction or with reference to the enterprise. For instance, a transaction entered into by a Rs. 1,000 crore company cannot be compared with the transaction entered into by a Rs. 10 crore company. The two most obvious reasons are the size of the two companies and the relative economies of scale under which they operate." 13. It was further submitted that the TPO's range (Rs. 1 crore to infinity) has resulted in selection of companies like Infosys which is 277 times bigger than the Assessee (turnover of Rs. 13,149 crores as compared to Rs. 47.47 crores of Assessee). It was submitted that an appropriate turnover range should be applied in selecting comparable uncontrolled companies. 14. Reference was made to the decision of the ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010, wherein relying on Dun and Bradstreet's analysis, the turnover of Rs. 1 crore to Rs. 200 crores was held to be proper. The following relevant....
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.... other hand pointed out that even the assessee in its own TP study has taken companies having turnover of more than Rs. 200 crores as comparables. In these circumstances, it was submitted by him that the assessee cannot have any grievance in this regard. 17. We have considered the rival submissions. The provisions of the Act and the Rules that are relevant for deciding the issue have to be first seen. Sec.92. of the Act provides that any income arising from an international transaction shall be computed having regard to the arm's length price. Sec.92-B provides that "international transaction" means a transaction between two or more associated enterprises, either or both of whom are nonresidents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facili....
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....h, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D, the Assessing Officer may proceed to determine the arm's length price in relation to the said international transaction in accordance with sub-sections (1) and (2), on the basis of such material or information or document available with him:" 18. Rule 10B of the IT Rules, 1962 prescribes rules for Determination of arm's length price under section 92C:- "10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (a)....... to (d)........ (e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise ....
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....ferences. (4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into : Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared." 19. A reading of the provisions of Rule 10B(2) of the Rules shows that uncontrolled transaction has to be compared with international transaction having regard to the factors set out therein. Before us there is no dispute that the TNMM is the most appropriate method for determining the ALP of the international transaction. The disputes are with regard to the comparability of the comparable relied upon by the TPO. 20. In this regard we find that the provisions of law pointed out by the ld. counsel for the assessee as well as the decisions referred to by the ld. counsel for the assessee clearly lay down the principle that the turnover filter is an important criteria in ch....
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....re us that Bodhtree Consulting Ltd., which was considered as a comparable by the TPO in the final list of comparables should not be regarded as comparable for the reason that it has been held to be not comparable by the ITAT Bangalore Bench in the case of Mindteck (India) Ltd. Vs. DCIT IT(TP)A.No.70/Bang/2014 order dated 21.8.2014 for AY 09-10. We have considered the submission and we find that this tribunal in the case of Mindtech (India) Ltd. (supra) has held as follows on the comparability of Bodhtree Consulting Ltd. with a software development service provider: "14. The next aspect that was canvassed by the learned counsel for the assessee was with regard to the exclusion of the following comparables from the list of final comparables chosen by the TPO : 1. Bodhtree Consulting Ltd : As far as this company is concerned, the submission of the learned counsel for the assessee was that this company made extra ordinary profits during the previous year. Our attention was drawn to the fact that the operating profit / operating cost of this company jumped from 17% for F Y 2007-08 to 56% in FY 2008- 09. It dipped in FY 2009-10 to 40% and in FY 2010-11 it became (-) 2% and 5% in....
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....rlier or subsequent year. Therefore, it is but natural that there is some fluctuation in the profitability margin of such entity. Merely because of such fluctuations, an entity engaged in the development of software, being functionally comparable to the assessee, cannot be rejected only on this ground." 14. The learned counsel for the assessee drew our attention to the fact that Bodhtree Consulting admittedly follows a fixed price project model whereby revenues from software development is recognized based on software and billed to clients. In such business model expenditure for developing software would be billed in an earlier year but the revenue would be recognized in a subsequent year. It was his submission that this fact is recognized by the DRP in its order. According to him this circumstance would be sufficient to show that the margin reflected of this company does not reflect the normal business condition. 15. The learned DR placed reliance on the reason given by the DRP in its order. 16. We have considered the rival submissions. The Special Bench of the ITAT in the case of Maersk Global Centres (supra) had an occasion to deal with the question as to whether high p....
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.... the revenue having chosen a company as comparable is entitled to seek exclusion of the very same company before the Tribunal. The Special Bench held as follows: "Contention that DM was taken as one of the comparables by the taxpayer and no objection to its inclusion was raised before the TPO or before the CIT(A) in appeal and therefore, the taxpayer should not be permitted to raise additional ground and ask for exclusion of the above enterprise in the determination of the average margins is not sustainable. In the first place, these are initial years of implementation of transfer pricing legislation in India and taxpayers as well as tax consultants were not fully conversant, with this new branch of law when proceedings were initiated or even at appellate stage. Besides, Revenue authorities, including TPO were required to apply statutory provisions and consider for purposes of comparison functions, assets and risks (turnover), profit and technology employed by the tested party and other enterprises taken as comparable. Statutory duty is cast on them to undertake above exercise. This has not been done in this case. Prima facie, as per the material, DM does not appear to be compar....