TaxTMI 
TaxTMI 
2015 (5) TMI 365
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....tment was a sum of Rs. 2,43,93,255. The CIT(A) gave partial relief to the Assessee. Aggrieved by the relief allowed by the CIT(A), the revenue is in appeal before the Tribunal. Apart from the transfer pricing adjustment, the AO also excluded telecommunication expenses and travel expenses from the total turnover without excluding the same from the Export turnover also while computing deduction u/s.10A of the Act. The CIT(A) directed the AO to exclude telecommunication expenses and travel expenses both from the total turnover and export turnover while computing deduction u/s.10A of the Act. The revenue has challenged the said action of the CIT(A) also. Aggrieved by the order of CIT(A) in not applying certain filters while choosing comparable companies the Assessee has filed appeal before the Tribunal. 3. The assessee is a company incorporated on 12th May, 2000 under the Companies Act, 1956. The Assessee is a wholly owned subsidiary of Symbol Technologies Inc. USA. The Assessee provides software development service to its holding company Symbol Technologies Inc. USA. 4. During the financial year 2004-05 relevant to the assessment year 2005-06, one of the international transactio....
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....,960 Price charged in the international transactions Rs.21,61,03,704 Shortfall being adjustment u/s.92CA Rs. 2,43,93,255 The above shortfall of Rs. 2,43,93,255/- is treated as transfer pricing adjustment u/s 92CA." 8. On appeal by the Assessee, the CIT(A) partly allowed the appeal of the Assessee. The following were the key findings of the CIT(A):- (i) Out of the 17 companies chosen by the TPO as the final set of comparable companies, the CIT(A) excluded 12 companies for the reason that these companies had related party transaction. The CIT(A) applied the filter of related party transaction by holding that to be chosen as a comparable company, the comparable companies should not have any related party transaction. Therefore even if there is a single related party transaction, the said companies were excluded from the list of comparable companies. By doing so, the CIT(A) could retain only 5 out of the final 17 comparable companies chosen by the TPO, viz., Bodhtree Consulting Ltd., Lanco Global System Ltd., Sankhya Infotech Ltd., Exensys Software Solution Ltd., and Visual Soft Technology Ltd. In coming to the above conclusion, the CIT(A) followed the de....
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....han 50% of the comparable company(ies) is abnormal without giving reasons how functions discharged, assets deployed and risks assumed of such companies were different from that of the appellant company; and (4) The CIT(A) erred in holding that the Assessee is eligible for a standard deduction of 5% from the arm's length price under the proviso to Section 92C(2) of the Income-tax Act, 1961. 12. The grounds raised by the Assessee in its grounds of appeal are:- (a) Arbitrarily rejecting filters applied by the Respondent while undertaking the TP Study. (b) Modifying filters applied by the learned TPO in the TP order, without providing an opportunity of being heard to the appellant. (c) Disregarding application of multiple year/prior year data for comparability. (d) Upholding the learned TPO's approach of using data available at the time of assessment proceedings. (e) Upholding the approach adopted by the learned TPO of collecting selecting information of the companies exercising power granted to him under Section 133(6) of the Income Tax Act, 1961 ("Act"). (f) Not providing appropriate adjustment towards the risk differential between the Respondent and the....
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.... ground No.5 by the Revenue before the Tribunal, it is not in dispute before us that in view of the substitution of the Second proviso to Section 92C(2) of the Income-tax Act by the Finance (No.2) Act, 2009, the second ground of appeal (Ground No.3 in the appeal filed by the Revenue) may have to be allowed. Consequently it is held that if the difference between the arithmetic mean of the profit margins comparable companies ultimately retained and the profit margin of the Assessee is more than 5% than no deduction under the proviso to Sec.92C(2) of the Act could be allowed to an Assessee. 16. In view of the conclusion above that exclusion of comparable companies with RPT of less than zero percent is not valid, and that companies where RPT is less than 15% alone can be considered, then the comparable rejected by the CIT(A) on the basis of the said filter will have to be included along with the four comparable retained by the CIT(A). Although 12 comparable which were rejected on the basis of RPT being more than zero percent, one comparable viz., Four Soft Ltd., will have to be excluded since the RPT is at 19.89% and thus in excess of 15%. Sathyam Computers Ltd., will get excluded f....
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....t dated 23.10.2012 in ITA No. 609I/Del/2011 for the assessment year 2005-06) has held that the said company is not a comparable to the assessee therein which was also in the business of software development. 20. The submissions made by the learned counsel for the Assessee are considered. The activities set out above and the decision of the Delhi ITAT rendered in the context of a software development company such as the Assessee makes it amply clear that this company Sankhya cannot be regarded as a comparable. The same is directed to be excluded from the list of comparable companies. 21. The learned counsel for the Assessee submitted before us that two of the comparable companies out of the 12 excluded by the CIT(A) by applying RPT filter and which gets included in the comparable companies because of 15% RPT being adopted as threshold limit for excluding companies for the purpose of comparability , viz., Four Soft Ltd., and Thirdware Solutions Ltd., will have to be excluded as these companies are not functionally comparable. These companies according to him, will however, have to be excluded as these two companies were held to be not comparable with an Assessee such as the Ass....
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..... The learned Counsel submitted that the functions of these companies are different from the assessee who was into sole activity of software development for its associated enterprise. He submitted that the TPO has allocated the expenditure in the proportion of the revenue of these companies from software services and software products and has adopted the figure as segmental margin of the company and has taken these companies as comparables. He submitted that by taking the proportionate expenditure, the correct financial results would not emerge. He submitted that nothing prevented the Assessing Officer/TPO from obtaining the segmental details from the respective comparable companies before adopting them as comparable companies and before taking the operating margin for arriving at the arms length price. He submitted that wherever the segmental details are not available, then the said companies should not be taken as comparables. For this purpose, he placed reliance upon the decision of the Bangalore Tribunal in the case of First Advantage Offshore Services Pvt. Ltd. vs. The DCIT in ITA.No.1252/Bang/2010 wherein these companies were directed to be excluded from the list of comparabl....
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....ssimilarity between the assessee and these companies and without making adjustment for the dissimilarities brought out by the TPO himself, these companies cannot be taken as comparable companies. The method adopted by the TPO to allocate expenditure proportionately to the software development services and software product activity cannot be said to be correct and reasonable. Wherever, the Assessing Officer/TPO cannot make suitable adjustment to the financial results of the comparable companies with the assessee company to bring them on par with the assessee, these companies are to be excluded from the list of comparables. Therefore, we direct the Assessing Officer/TPO to exclude these three companies from the list of comparables". Respectfully, following the same, we accept the assessee's objections and direct the TPO to exclude the above three companies from the list of comparables." 23. In view of the aforesaid decision rendered on identical facts and circumstances, we are of the view that Foursoft Ltd., and Thirdware Solutions Ltd., should be excluded from the list of comparable companies. 24. The learned counsel for the Assessee submitted before us that TATA Elxsi Ltd.....
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....ns of Tata Elxsi Limited. In view of this, Tata Elxsi Limited has informed that it is not fair to use its financial numbers to compare it with any other company. The communication dated 25th August, 2009 to the TPO is placed before us. As this communication was not before the TPO at the time of transfer pricing adjustment we deem it fit and proper to remand this issue also to the file of the TPO to reconsider adopting this company as the comparable in the light of observations of this company to the TPO in the case of another assessee. In the result, the Assessing Officer/TPO is directed to reconsider the issue in accordance with law, after affording a reasonable opportunity of being heard to the assessee." Keeping the assessee's objections and the decisions of the Coordinate Bench, prima facie, we are of the view that TATA Elxsi Limited is functionally different and has incomparable size to that of the assessee. Further, we are unable to verify whether the segmental profits adopted by the TPO pertain to entire software development services or pertain to limited service akin to assessee services. Since, these aspects are not clear from the data furnished before us, we direct the....
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....entage to the total revenue is 34% which is more than the accept/reject matrix of more than 25% fixed by the TPO. It is to be noted that in final filters adopted by the TPO in para 8.7 of his order he himself has excluded companies having RPT of more than 25%. We, therefore, direct the AO to examine this aspect and exclude it from the list of comparables if the assessee's contention is found to be correct. In course of hearing the learned DR has contended that the decisions relied upon by the assessee will not apply to the facts of the present case as they relate to different assessment years. However, on perusal of the orders cited before us, we find many of them to be relating to the impugned assessment year. Hence, contention of the learned DR is not acceptable." (d) Infosys Technologies Ltd..: The learned AR objected to the aforesaid company being treated as a comparable in view of its extraordinary high turnover of about Rs. 6,859 crores compared to the total turnover of about Rs. 66 crores of the assessee from both the segments and it was contended by the learned AR that under no circumstances Infosys Technologies Ltd. and WIPRO can be treated as comparable to the a....
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....be excluded from the list of comparable companies for the purpose of determining the ALP. 30. The learned counsel for the Assessee submitted that Geometric Software Solutions Ltd., should be excluded as it has RPT of 22%. In this regard our attention was drawn to the decision of the ITAT Bangalore in the case of EMC Data Storage Systems (India) Pvt. Ltd. IT(TP)A.No.1274/Bang/2010 for AY 06-07. It is seen that the aforesaid decision relates to AY 06-07 and we do not know the details of the RPT in AY 05-06. We therefore deem it fit and proper to remand the question of excluding this company as a comparable to the TPO. If the RPT is more than 15% of the total revenues than this company should be excluded from the list of comparable companies. We hold and direct accordingly. 31. 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 ....
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....e by the Assessee regarding non utilization of the advances received for acquiring fixed capital. Before us the Assessee did not demonstrate regarding the utilization of advances from the AE. In our view the submissions made by the Assessee that the advance received from the AE should be considered while working out the working capital adjustment deserves to be accepted, if the Assessee demonstrates that such advances were not utilized for acquisition of fixed assets. If it is so demonstrated, these advances need to be included for working out the working capital of the Assessee while computing adjustment towards working capital. The issue is accordingly remanded to the AO/TPO and the Assessee is directed to file the necessary details to demonstrate its case regarding advances not having been utilized for acquiring fixed assets. The AO/TPO will afford opportunity of being heard to the Assessee and decide the issue in accordance with law. 35. The AO/TPO is accordingly directed to work out the profit margins and working capital adjustment in the light of the directions given above. 36. The Revenue in the grounds of appeal before the Tribunal (Ground No.2 & 3) has also projected....