TaxTMI 
TaxTMI 
2015 (3) TMI 448
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....4 which was reduced to Rs. 3,36,89,845/- by the CIT(A) in the appeal filed by the assessee. 3. The assessee, Novell India, is a subsidiary of Novell, USA and is a captive service provider. It is engaged in the business of providing software development and support services to Novell, USA. During the financial year 2004-05 relevant to the assessment year 2005- 06, the only international transaction that took place between Novell India and Novell US was provision of software development and support services to Novell US at a price of Rs. 55,01,62,457/-. 4. 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 for determining the ALP. Operating profits to cost was adopted as the Profit Level Indicator ("PLI"). The PLI of the assessee was arrived at as follows: Operating Revenue Rs.55,01,62,457 Operating Cost Rs 50,01,47,691 Operating Profit Rs 5,00,14,766 Op.pr/cost% 10%  ....
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....f this Hon'ble Tribunal in the case of Mentor Graphics (Noida) (P.) Ltd. vs DCIT (2007] 109 lTD 101 (Del), E-gain Communications (P.) Ltd vs. ITO, Ward 1(4), Pune[2008]- (023)- SOT-0385-TPIIN] and SAP Labs India Pvt. Ltd vs ACIT [2010] ITA No. 398 & 418 (Bang)]. (ii) One company, Satyam Computer Services Ltd (which is Sl.No.16 of the final list of comparable companies chosen by the TPO given as annexure-I to this order)selected by the TPO, was rejected for non-reliability of financial data. In doing so, the CIT(A) followed the decision of this Hon'ble Tribunal in AgnIty India Technologies v. ITO (ITA 3856/DeI/2010) and SAP India Pvt. Ltd v. ITO [ITA No. 398/8/2008]. (iii) One company, lnfosys Technologies selected by the TPO, (which is Sl.No.17 of the final list of comparable companies chosen by the TPO given as annexure-I to this order) was rejected as a comparable based on high turnover and high risk. In doing so, the CIT(A) followed the decision of this Hon'ble Tribunal in Agnity India Technologies v. ITO and Genisys Integrated Systems (India) Pvt Ltd v. ITO (supra). (iv)Nine other companies were rejected for having related party transactions (RPT filter). The CIT(A) ap....
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....he fresh comparable search undertaken by the TPO is bad in law. (4) Determination of arm's length price by the TPO. (5) Erroneous data used by the AO/TPO. (6) Non-allowance of appropriate adjustments to the comparable companies, by the TPO. (7) Confirmation of levy of interest under Section 234B and non-adjudication on the grounds raised as regards levy of penalty. 13. We have heard the rival submissions. As regards the improper application of the RPT filter by the CIT(A), it is not in dispute before us that this Tribunal, in the cases of 24/7 Customer Pvt. Ltd. (ITA No.227/Bang/2010), and Sony India Private Ltd. reported in (2009) 315 ITR (80) 150 (Del.) and various other cases has taken a view that comparables having RPT of upto 15% of total revenues can be considered. In view thereof, the Revenue's on this ground has to be allowed. It is held that the CIT(A) ought to have adopted a threshold limit of 15% of the total revenue attributable to related party transaction as ground for rejecting comparable companies. Consequently it is held that comparable companies having RPT upto 15% of the total revenues alone can be included. The Revenue's contention that comparable....
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....sen by the TPO as a comparable viz., Sankhya lnfotech Limited. He also seeks inclusion of one of its comparables in the TP study viz. Melstar Information Technologies Limited which was excluded by the TPO. Besides the above, the learned counsel for the Assessee also submitted that an adjustment for depreciation ought to be allowed. The submissions on this aspect will be set out in the later paragraphs. Sankhya Infotech Limited ('Sankhya') 18. It was submitted by the learned counsel for the Assessee that Sankhya is engaged in the business of development of software products & services and training. The company focuses on the development of niche products for the transport and aviation industry. However, segmental information in relation to the above mentioned activities is not available in public domain. Therefore, as Sankhya engages itself in products and services as well as software training, it cannot be considered as a comparable of the Appellant. The products developed and owned by Sankhya are listed below: (1) SILICONTM Training Suite of Products: The products are a comprehensive enterprise wide training platform that covers the entire spectrum of training in a paperl....
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....he TPO in his order and is functionally comparable. The filters applied by TPO and their satisfaction was tabulated as under: 23. It was further pointed out by him that the TPO has concluded that Melstar is not comparable on the ground that there was an extraordinary debit of Rs. 2.85 Cr and on the ground that the company's sales are diminishing. A perusal of the revenues of the previous financial years (page 81 of the TP order) demonstrates that the revenues are more or less consistent for the previous financial years and has only substantially decreased in the financial year 2004-05. The relevant extract of the Annual Report (Page 4) is reproduced below: C) Financial performance based on given indicators As per the audited financial results for the year ended 31.3.2005: If the above extraordinary expense of Rs. 2.85 Cr is excluded from the operating cost, the mark-up on the cost works out to 3.26%. The detailed working was also give as below:- 24. In view of the above, it was submitted that since Melstar is functionally comparable to the assessee and clears all the filters applied by the TPO, the same should be considered as comparable with Net Cost Plus margin of 3.2....
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....vided on straight line method on prorata basis and at the rates and manner specified in the Schedule XIV of the Companies Act, 1956. (ii) Preliminary Expenses are amortised over the period of 5 years. (iii) Public Issue Expenses are amortised over the period of 5 years. Sankhya Infotech Ltd. 5. Fixed assets Fixed assets are stated at cost, less accumulated depreciation. Direct costs are capitalized until fixed assets are ready for use. "Cost" means cost of bringing the asset to its working condition for its intended use are capitalized as per the statement issued by the Institute of Chartered Accountants of India. 6. Depreciation and amortization Depreciation on fixed assets is applied on the Written down value method based by following the rates prescribed in Schedule XIV of the Companies Act, 1956. Individual low cost assets (acquired for less than Rs. 5,000/-) are entirely depreciated in the year of acquisition. Intangible assets are amortized over their respective individual estimated useful lives on a straight-line basis, commencing from the date the asset is available to the company for its use. Visual Soft Technologies Ltd. 3. Fixed Assets: Fixe....
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....re was a need for making an adjustment on account of difference between the net margin of the assessee and that of the comparable companies. It was further pointed out by him that Rule 10B(3) of the Rules provides that an uncontrolled transaction shall be considered as a comparable if: a) none of the differences between the comparable company and the controlled transaction are likely to materially affect the profit arising from such transactions in the open market; or b) reasonably accurate adjustments can be made to eliminate the material effect of such differences. 31. The learned counsel for the Assessee placed reliance on the judgments of this Hon'ble Tribunal in E-gain Communication Pvt. Ltd. vs. ITO [2008] 23 SOT 385 (Pune) (at page 36) and Honeywell Technology Solutions Lab P. Ltd. [judgment dated 28.03.2013 in IT(TP)A No. 1344/Bang/2011 at para 5.71]. Our attention was also drawn to the fact that though the assessee urged the above ground before the CIT(A) and filed written submissions also on the same, (at page 503 of the paperbook filed before this Tribunal), the CIT(A) has not adjudicated on the said ground. It was also pointed out by him that for the assessment....
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....cular facts of the case. Hence, the additional ground raised by the assessee is as much as issue of fact as it is of principle. 19.5 Before us, the assessee has not been able to adduce any reason as to why this issue was not raised before the authorities below. It gives credence to the view of the learned Departmental Representative that this claim is only an afterthought, pursuant to the learned CIT (Appeals) confirming the adjustments proposed by the TPO. 19.6 Besides this, the adjustment for depreciation, sought for by the assessee, does not appear to be tenable even on merits. It has been stated in the additional grounds raised that while the depreciation of the assessee is 25 percent of its gross block, it is 10 percent of the gross block for the comparables. It is interesting to note that the assessee has compared the depreciation as a percentage of the gross block of the individual cases and not as a percentage to operating cost. 19.7 No case has been made out by the assessee that the difference in depreciation is due to any reason like capacity utilization, etc. The difference in depreciation could be due to many reasons as different companies have their own accoun....
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....eferred to above. We are also of the view that the Assessee should be directed to give the quantification of adjustment to be allowed, if found eligible, applying the ratio laid down in the case of 24/7 customercare.com (supra). We hold and direct accordingly. 36. According to the learned counsel for the Assessee, if the submissions of the assessee are accepted, then the arithmetic mean of the comparables retained would be within the range of +/- 5% of the Assessee's Net Margin. Therefore, the other grounds raised in the memorandum of appeal are not pressed at this stage. He has however sought liberty to urge the said grounds in any future proceeding, appellate or otherwise, and in these proceedings at a future point in time. The prayer sought by the learned counsel for the Assessee in this regard is accepted. 37. In the result the appeal by the Assessee and the Revenue are partly allowed. Pronounced in the open court on this 13th day of February, 2015. ============= Document 1 Sl. No. 1 2 3 Comparables Selected by TPO Bodhtree Consulting Ltd. Lanco Global Systems Ltd. Exensys Software Solutions Ltd. 4 Sankhya Infotech Ltd. 5 6 7 ....