TaxTMI 
TaxTMI 
2015 (5) TMI 390
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....he Act') and the case was selected for scrutiny. The Assessing Officer, observing that the assessee had entered into international transactions with its Associated Enterprises (AEs) in the year under consideration, made a reference to the Transfer Pricing Officer (TPO) on 24.10.2011, after obtaining the approval of the concerned CIT, for working out the Arm's Length Price ('ALP') of these transactions. The TPO passed an order under Section 92CA of the Act dt.8.1.2013 in respect of international transactions entered into by the assessee with its AEs and proposed an adjustment of Rs. 18,55,44,708 to the ALP of the international transactions of the assessee in respect of its provision of software development services. 2.2 On receipt of the TPO's order under Section 92CA of the Act, the Assessing Officer passed a draft order of assessment under Section 143(3) rws 144C of the Act dt.19.2.2013 incorporating, inter alia, the T.P. Adjustment of Rs. 18,55,44,708 proposed by the TPO in his order under Section 92CA of the Act. Since the assessee indicated that it seeks to file an appeal before the CIT (Appeals), the Assessing Officer passed the final order of assessment under Section 1....
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....dditional filters in determination of arm's length price. 7. The Hon'ble CIT (Appeals) has erred in contending that the upper turnover threshold should be Rs. 500 Crores in selecting / rejecting companies as comparable without taking into cognizance the turnover of the appellant and the precedence / observations of the Hon'ble ITATs inthis matter. 8. The ld. A.O., TPO and the Hon'ble CIT (Appeals) have erred in rejecting Thinksoft Global Services Ltd. and FCS Software Solutions Ltd. on the ground that the working capital adjustment for these companies are substantial. 9. The ld. A.O., TPO and the Hon'ble CIT (Appeals) have erred in restricting the working capital adjustment to the average cost of capital of the comparable companies selected instead of allowing the correct working capital adjustment in determination of arm's length price. In connection with the above, the ld. A.O. has erroneously computed the total taxable income by incorrectly computing the transfer pricing relief granted by Hon'ble CIT (Appeals) in the order dt. July 4, 2014. 10. The ld. A.O. / TPO has not shared the details of computation of average cost of capital applied in the d....
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....;s T.P. Study, rejected it and after conducting his own search for comparables, arrived at a final set of 11 comparable companies and their operating margins, the details of which are as under :- Sl.No. Name of the comparable Margin % 1 Kals Information Systems Ltd. 13.89 2 Akshay Software Technologies Ltd. 8.11 3 Bodhtree ConsultingLtd. 62.27 4 R S Software (India) Ltd. 9.97 5 Tata Elxsi Ltd. (seg) 20.28 6 Sasken Communication Technologies Ltd. 27.91 7 Persistent Systems Ltd. 41.40 8 Zylog Systems Ltd. 7.81 9 Mindtree Ltd. (seg) 5.52 10 Larsen & Toubro Infotech 24.72 11 Infosys Ltd. 45.61 Average Mean 24.32 5.2 The average mean margin of these 11 comparables was computed at 24.32%. After allowing working capital adjustment of 1.71%, the adjusted mean margin was worked out at 26.03%. The resultant shortfall in the price amounting to Rs. 18,55,44,708 was taken as the T.P. Adjustment to the ALP of the international transactions of the assessee with its AEs. The T.P. Adjustment was subsequently modified by the Assessing Officer under Section 154 rws ....
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.... above factual situation and judicial pronouncements, the seven companies listed above ought to be excluded from the list of comparables to the assessee. 7.2 Per contra, the learned Departmental Representative relied on the order of the TPO. 7.3.1 We have heard the rival contentions and perused and carefully considered the material on record. We find that in the case of Airbus India Operations Pvt. Ltd. V DCIT in IT(TP)A No. 35/Bang/14 dt.10.10.2014 for Assessment Year 2009-10, which is also the year under consideration in the case on hand, the co-ordinate bench at paras 17 & 18 of its order has held that the aforesaid seven companies (listed at S.Nos.5 to 11 in the TPO's final list of comparables) should be excluded from the list of comparables as the turnover of these companies is more than Rs. 200 Crores while that of the assessee is that case was only Rs. 31.83 Crores. 7.3.2 The relevant portion of the order in the case of Airbus India Operations Pvt. Ltd. (supra) at paras 17 & 18 thereof is extracted hereunder :- " 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. Se....
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.... been undertaken shall be deemed to be the arm's length price. (3) Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that- (a) the price charged or paid in an international transaction has not been determined in accordance with sub-sections (1) and (2); or (b) any information and document relating to an international transaction have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made in this behalf; or (c) the information or data used in computation of the arm's length price is not reliable or correct; or (d) the assessee has failed to furnish, 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 ....
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....revailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. (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 w....
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....ding the aforesaid companies from the list of comparable." 7.3.3 Following the aforesaid decision of the co-ordinate bench of this Tribunal in the case of Airbus India Operations Pvt. Ltd. (supra) for Assessment Year 2009-10, we hold that the aforesaid seven companies (listed at S.Nos.5 to 11 of the TPO's final list of comparables in the order under Section 92CA of the Act) and also listed out at para 7.1.1 of this order (supra), should be excluded from the list of comparable companies as the turnover of these companies is in excess of Rs. 200 Crores compared to that of the assessee which is below Rs. 200 Crores (i.e. Rs. 196.67 Crores) COMPANIES SOUGHT TO BE EXCLUDED FROM FINAL LIST OF COMPARABLES BY THE ASSESSEE ON GROUNDS OF BEING FUNCTIONALLY DIFFERENT. 8. Bodhtree Consulting Ltd. 8.1 This company is listed at S.No.4 of the TPO's list of comparables extracted at paras 4.2 of this order (supra). The comparability of this company with a software development services company, such as the assessee in the case on hand, for Assessment Year 2009-10 was considered by a co-ordinate bench of this Tribunal in the case of Airbus India Operations Pvt. Ltd. (supra) wherein, follo....
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....) Margin 1 Kals Information Systems Ltd 2,14,04,686 1,87.93,813 l3.89% 2 Akshay Software Technologies Ltd. 12,23,21,483 11,31,49,350 8.11% 3 Bodhtree Consulting Ltd 16,05,75,212 9,89,56,821 62.27% 4 R S Software (India) Ltd 1,49,57,12,634 1,36,01,02,589 9.97% 5 Tata Elxsi Ltd. (segmental) 3,78,43,03,000 3,14,63,15,000 20.28% 6 Sasken Communication Technologies Ltd 4,05,31,20,000 3,18,69,97,000 27.91% 7 Persistent Systems Ltd. 5,19,69,10,000 3,67,52,70,000 41.40% 8 Zylog Systems Ltd 7,34,93,51,475 6,81,69,98,160 7.81% 9 Mindtree Ltd. (seg) 7,93,22,79,326 5,74,06,73,058 5.52% 10 Larsen and Toubro Infotech 19,50,83,81,374 15,64,12,76,626 24.72% 11 Infosys Ltd. 2,02,64,00,00,000 1,39,17,00,00,000 45.61% Average Mean 24.32%" 8.2 Following the decision of the co-ordinate bench of this Tribunal in the case of Airbus India Operations Pvt. Ltd. (supra), and after taking note that the facts and circumstances under which the aforesaid company was considered by the TPO as comparable to a softwa....
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.... Vs. DCI, ITA No. ITA No 1386/PN/1O wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows: "16. Another issue relating to selection of comparables 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 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 Li....
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....rbus India Operations Pvt. Ltd. (supra) for Assessment Year 2009- 10. The learned Authorised Representative submits that in the factual matrix of the case and in view of the aforesaid decisions of the co-ordinate benches of this Tribunal (supra), these two companies sought to be excluded from the final list of comparables. 10.2.1 We have heard both the learned Authorised Representative and the learned Departmental Representative and have perused and carefully considered the material on record; including the judicial pronouncements cited and placed reliance upon. We find that the co-ordinate bench of this Tribunal in the case of Airbus India Operations Pvt. Ltd. (supra) excluded these two companies as comparable to an assessee who is purely a software development service provider, holding as under at paras 19 & 20 thereof :- " 19. The next submission of the learned Counsel for the Assessee was that though, Infosys Technologies Ltd., & Tata Elxsi Ltd. (seg.) have to be excluded by applying the Turnover filter, they are also additionally functionally not comparable as held by this Tribunal in the case of Genisys Integrating Systems (India) Ltd. (supra) and Cisco Systems (India) (su....
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.... does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee ; (ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856 (Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk ; (iii) the company has generated several inventions and filed for many patents in India and USA ; (iv) the company has substantial revenues from software products and the break up of such revenues is not available ; (v) the company has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in 'AUTOLAY', a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded form the list of comparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmenta....
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....llowing reasons : (i) Tata Elxsi Ltd., : The company operates in the segments of software development services which comprises of embedded product design services, industrial design and engineering services and visual computing labs and system integration services segment. There is no sub-services break up/information provided in the annual report or the databases based on which the margin from software services activity only could be computed. The company has also in its response to the notice u/s.133(6) stated that it cannot be considered as comparable to any other software services company because of its complex nature. Hence, Tata Elxsi Ltd., is to be excluded from the list of comparables. (ii) Flextronics Software Systems Ltd. : The learned TPO has considered this company as a comparable based on 133(6) reply wherein this company reflected its software development services revenues to be more than 75% of the "software products and services" segment revenues. Flextronics has a hybrid revenue model and hence should be rejected as functionally different. Based on the information provided under "Revenue recognition" in its annual report, it can be inferred that the software ....
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.... earlier FY 2005-06, there is no reason why the taxpayer is objecting to it. How the company is functionally similar in the earlier FY 2005-06 but the same is not functionally similar for the subsequent FY 2006-07 even when no facts have been changed from the preceding year. Thus the taxpayer is arguing against this comparable as the company was not considered as a comparable by the taxpayer for the present FY 2006-07." 21. We have heard the rival submissions and considered the facts and materials on record. After considering the submissions, we find that Tata Elxsi and Flextronics are functionally different from that of the assessee and hence they deserve to be deleted from the list of six comparables and hence there remains only four companies as comparables, as listed below:" 26.5. Following the aforesaid decision of the Tribunal, we hold that M/S.Tata Elxsi Ltd. should not be regarded as a comparable." 20. Respectfully following the decision of the Tribunal referred to above and taking note of the fact that the facts and circumstances under which the aforesaid company was considered by the TPO as comparable with a software development service provider such as the Assessee....