TaxTMI 
TaxTMI 
2015 (3) TMI 1024
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....ed Enterprise (AE) (2) Reimbursement of expenses received from its AE of Rs. 27,02,741/- (3) Reimbursement of expenses paid of Rs. 14,23,145/-. The Assessee provides software development services to its Associated enterprises. All the above transactions were international transactions with an Associated Enterprise (AE) and have to pass the Arm's Length Price (ALP) test as provided u/s.92 of the Income Tax Act, 1961 (Act). In this appeal the dispute is with regard to addition made consequent to determination of ALP and consequent upward revision and adjustment made to the price at which international transactions were carried out by the Assessee with its AE in respect of (1) Software development Services and (2) Reimbursement of expenses received from AE. 3. Financial Results of the Assessee for the F Y 2005-06 Description Amount Operating Revenue Rs.7,51,78,503/- Operating Cost . . . . Rs.6,75,15,662/- Operating Profit (PBIT) Rs.76,62,841/- Operating Profit to Cost Rati 11.35% International Transactions (as mentioned in the 92 CE report) : Software development Services - Rs. 7,51,78,503/- Reimbursement of expenses received - Rs. 2....
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.... Rs.8,80,74,993/- 18.7. Price received vis-à-vis the Arms Length Price: The price charged by the tax payer to its Associated Enterprises is compared to the Arms Length Price as under: Arms Length Price (ALP) At 125.43% of operating cost Rs.8,80,74,993 Price charged in the international transactions Rs.7,78,81,244 Shortfall being adjustment u/s.92CA Rs.1,01,93,749/- *Reimbursement of expense received The above shortfall of Rs. 1,01,93,749/- is treated as transfer pricing adjustment u/s 92CA." 6. 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. The adjustment confirmed by the DRP was added to the total income of the assessee by the AO in the fair order of assessment. Against the said order of the Assessing Officer, the assessee has preferred the present appeal before the Tribunal. 7. The assessee filed a chart showing how 6 out of the 20 comparable companies finally chosen by the TPO to arrive....
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....e companies have to be excluded from the final list of comparable selected by the TPO. 9. We have considered the submission of the learned counsel for the Assessee and the learned DR. In the case of Triology E-Business Software India (P) Ltd. (supra), this Tribunal on application of the turnover filter while selecting comparable companies for comparability analysis held as follows: "(1) Turnover Filter 11. The ld. counsel for the assessee submitted that the TPO has applied a lower turnover filter of Q 1 crore, but has not chosen to apply any upper turnover limit. In this regard, it was submitted by him that under rule 10B(3) to the Income-tax Rules, it was necessary for comparing an uncontrolled transaction with an international transaction that there should not be any difference between the transactions compared or the enterprises entering into such transaction, which are likely to materially affect the price or cost charged or paid or profit arising from such transaction in the open market. Further it is also necessary to see that wherever there are some differences such differences should be capable of reasonable accurate adjustment in monetary terms to eliminate the ef....
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....nover 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 Q 1 crore to Q 200 crores was held to be proper. The following relevant observations were brought to our notice:- "9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which .ire (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company ma....
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.... 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 facility provided or to be provided to any one or more of such enterprises. Sec.92-A defines what is an Associated Enterprise. In the present case there is no dispute that the transaction between the Assessee and its AE was an international transaction attracting the provisions of Sec.92 of the Act. Sec.92C provides the manner of computation of Arm's length price in an international transaction and it provides:- (1) that 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, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely :- (a)comparable uncontrolled price method....
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.... 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 or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in r....
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....on. The disputes are with regard to the comparability of the comparable relied upon by the TPO. 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 choosing the comparables. The assessee's turnover is Q 47,46,66,638. It would therefore fall within the category of companies in the range of turnover between 1 crore and 200 crores (as laid down in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010) . Thus, companies having turnover of more than 200 crores have to be eliminated from the list of comparables as laid down in several decisions referred to by the ld. counsel for the assessee. Applying those tests, the following companies will have to be excluded from the list of 26 comparables drawn by the TPO viz., Turnover Rs. (1)Flextronics Software Systems Ltd. 848.66 crores (2) iGate Global Solutions Ltd. 747.27 crores (3) Mindtree Ltd. 590.39 crores (4) Persistent Systems Ltd. 293.74 crores (5) Sasken Comm....
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....sentative and the learned Departmental Representative, perused and carefully considered the material on record; including the judicial decision cited and placed reliance upon by the assessee. On a perusal of the decision of the co-ordinate bench of the Tribunal in the case of Agile Software Enterprises Pvt. Ltd. (supra) for Assessment Year 2006-07, relied upon by the assessee, we find that the following three companies were excluded from the TPO's list of comparables as they were held to be functionally different from the assessee, who was into pure software development services :- i) KALS Information Systems Ltd. ii) Tata Elxsi Ltd. (Seg). iii) Accel Transmatics Ltd. (Seg.) and 8.2.2 In this context, the relevant observations and findings of the coordinate bench in the case of Agile Software Enterprises Pvt. Ltd. (supra) at para 8.7 to 8.9.3 thereof are extracted hereunder :- " 8.7 KALS Information Systems Ltd: The ld. AR submitted that this company was a software product company and could not be compared with that of the assessee. The assessee was a software services company and not a software product company. Reliance was placed on the decision of Trilogy e-busine....
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....n 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. 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 and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable." "(e) Accel Transmatic Ltd. 48. With regard to this company, the complaint of the assessee is that this company is not a pure software development service....
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....t 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." 13. 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 Triology E-Business Software India Pvt.Ltd. (supra). Respectfully following the decision of the Tribunal referred to above in the case of Triology E-Business Software India Pvt.Ltd.(supra), we direct that the following companies (listed as Sl.No.4 & 15 of the list of comparable companies chosen by the TPO and listed in para-4 of this order) be excluded from the list of 20 comparable arrived at by the TPO." 8.7.3 It might be true that a number of software development companies in their TP studies might have considered KALS Infosystems Ltd. as a comparable and not as a software product company. However this, in our opinion, will not dilute the findings in this regard given by the Tribunal. The assessee having relied on the decision of the Tribunal wherein it has been held that KALS is a software ....
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.... and submissions made by the learned AR, it is seen that the Tata Elxsi is engaged in development of niche product and development services, which is entirely different from the assessee company. We agree with the contention of the learned AR that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company fit for comparability analysis for determining 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." 18. In view of the aforesaid decision, we hold that Tata Elxsi has to be excluded from the list of comparable chosen by the TPO." 8.9.3....
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....d Authorised Representative has placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of Agile Software Enterprises Pvt. Ltd. in IT(TP)A No.1172/Bang/2010 dt.26.9.2014; which is also for Assessment Year 2006- 07; the period under consideration. The learned Authorised Representative prayed that in view of the above, these three comparables be excluded from the list of comparable companies to the assessee. 7.2 We have heard the rival contentions of both the learned Authorised Representative and learned Departmental Representative, perused and carefully considered the material on record; including the judicial decision cited and placed reliance upon by the assessee. The fact is that the RPT in the case of the above three comparable companies listed at para 7.1 (supra) exceed 15%. The co-ordinate bench of this Tribunal in the case of Agile Software Enterprises Pvt. Ltd. (supra) for Assessment Year 2006-07, as in many other decisions of this Tribunal, has held that where the RPT exceeds 15%, such companies should not be taken as comparables. The operative portion of this order of the co-ordinate bench (supra) in paras 8.11 and 8.12 at pages 16 & 17 the....
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....n the next issue in the appeal, viz., the action of the TPO in including the reimbursement of expenses of Rs. 27,02,741/- by the AE to the Assessee as part of the operating cost while working the adjustment on account of ALP. The learned counsel for the Assessee pointed out that the TPO in his order has not discussed anything about the nature of these expenses but has simply added the same to the operating cost for the purpose of working out the ALP adjustment. Though it was highlighted in the objections before the DRP that the above expenses are in the nature of travelling expenses, hotel expenses, per diems, and visa and travel insurance charges etc., and are therefore not related to the consideration received by the Assessee for services rendered and are purely in the nature of out of pocket expenses, the DRP did not choose to consider the submissions and have merely endorsed the action of the TPO. 17. The learned counsel for the Assessee drew our attention to the ledger copy of "Expenses recoverable-Apex Japan" A/C. and "Expenses Recoverable-Apex Singapore" A/C. and pointed out that the perusal of the same would show that these were out of pocket expenses incurred by the Ass....