TaxTMI 
TaxTMI 
2015 (5) TMI 648
X X X X Extracts X X X X
X X X X Extracts X X X X
....Income Tax Act, 1961 (in short 'the Act'). The return was processed under section 143(1) of the Act and the case was subsequently taken up for scrutiny. The Assessing Officer made a reference to the Transfer Pricing Officer ('TPO') under section 92CA(1) of the Act in respect of the following international transactions entered into by the assessee with its Associated Enterprises (AEs) in the year under consideration; as reported in the 3CEB report filed by the assessee :- (i) Contract Software Development Services: Rs.51,73,68,601. (ii) Reimbursement of Expenses paid / payable: Rs.25,91,064. (iii) Reimbursement of expenses received / receivable: Rs.2,04,13,805. The TPO passed an order under section 92CA of the Act dt.2.4.2008 in respect of the aforesaid international transactions entered into by the assessee with its AEs (supra), making an adjustment of Rs. 6,45,40,063 to the arms length price (ALP) of international transactions of the assessee in respect of its software development services. 2.2 After receipt of the order of the TPO under section 92CA of the Act dt.2.4.2008, the Assessing Officer completed the assessment under sect....
X X X X Extracts X X X X
X X X X Extracts X X X X
....relates to the above grounds may be reversed and that of the Assessing Officer may be restored. 7. The appellant craves leave to add, alter, amend and / or delete any of the grounds mentioned above." C.O. No.20/Bang/2012 - Assessee's C.O. for A.Y. 2005-06. 5. The assessee has also raised Cross Objections (C.O), in respect of the impugned order of the CIT (Appeals) - IV, Bangalore dt.12.9.2011 for Assessment Year 2005-06, which are as under :- "1. That the order of the learned CIT (Appeals) resulting in income of the Respondent being subject to tax, is bad in law, without application of mind and liable to be quashed. 2. That the learned CIT (Appeals) erred in not entirely deleting the adjustment to the arm's length price made by the learned Assessing Officer / Transfer Pricing Officer amounting to INR 64,540,063 in respect o the software development services. 3. That in making an adjustment to the Respondent's transfer price, on the facts and in the circumstances of the case, the learned CIT (Appeals) erred in : a) Upholding the comparability analysis performed by the learned TPO in the TP Order. b) Modifying some of the filters applied by the learned TPO....
X X X X Extracts X X X X
X X X X Extracts X X X X
....kshay Software Technologies Ltd. 3. Aviation Software Dev. Consultancy Ltd. 4. Aztecsoft Ltd. 5. Bodhtree Consulting Ltd. 6. Capricon Systems Global Solutions Ltd. 7. E.Star Infotech Ltd. 8. Gebbs Infotech Ltd. 9. Goldstone Technologies Ltd. 10. L&T Infotech Ltd. 11. Melstar Information Technologies Ltd. 12. Netvista Information Technology Ltd. 13. NIIT Ltd. (Seg.) 14. ORG Informatics Ltd. (Seg.) 15. Orient Information Technologies Ltd. 16. Rico Softech Ltd. (Seg.) 17. Satyam Computer Services Ltd. 18. Seymour Technologies Ltd. 19. Sonata Software Ltd. 20. SQL Star International Ltd. (Seg.) 21. SSI Ltd. (Seg.) 22. Transworld Infotech Ltd. 23. Visesh Infotechnics Ltd. (Seg.) 24. VJIL Consulting Ltd. 7.2 As the average profit margin of the assessee worked out at 12.5% was higher than the arithmetical mean margin of the comparables worked out @ 11% on cost, the assessee held that its international transactions were at arm's length. 8. The TPO's Approach. 8.1 The TPO, after examining the assessee's T.P. Study, rejected the same and proce....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rom the set of comparable companies and accordingly 12 of the 17 companies selected by the TPO were excluded from the set of comparable companies. As seen from the order of the learned CIT(A) in case of some of the comparable companies, the assessee had argued against their inclusion on grounds of there being functionally dissimilarity also. We find that the learned CIT(A) has not adjudicated on this aspect, as the companies had been excluded from the list of comparables on the ground of RPT. 9.3 Companies with abnormal profits Relying on the various decisions cited in the impugned order, the learned CIT(A) held that profit on cost of more than 50% is abnormal and companies showing 50% or more profit percentage on cost have to be excluded from the list of comparables. Accordingly, 2 out of the 17 companies selected by the TPO were excluded from the set of comparable companies. 9.4 Computation of Deduction u/s.10A of the Act. In respect of the assessee's claim for deduction u/s.10A of the Act, the learned CIT(A) relying on the decision of the Hon'ble High Court of Karnataka in the case of Tata Elxsi Ltd. (349 ITR 98) and of the Special Bench of the Chennai ITA....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ral in nature and no adjudication being called for thereon, are dismissed as infructuous. 12. Ground No.2 : Computation of Deduction u/s.10A of the Act. 12.1 Revenue challenges the order of the learned CIT(A) in directing the Assessing Officer to recompute the eligible deduction to the assessee u/s.10A of the Act by reducing the expenditure incurred in foreign currency amounting to Rs. 2,12,28,101 towards daily allowance, and Rs. 24,28,828 towards support allowance and Rs. 30,75,083 towards miscellaneous expenditure, from both 'export turnover' as well as 'total turnover'. The learned Departmental Representative was heard in support of the ground raised. 12.2 Per contra, the learned Authorised Representative supported the impugned order of the learned CIT(A) on this issue, submitting that the issue is now covered in favour of the assessee by the decision of the Hon'ble High Court of Karnataka in the case of Tata Elxsi Ltd. (supra). The learned A.R. contends in view of this, Revenue's appeal on this Ground is liable to be dismissed. 12.3 We have heard the rival submissions and perused and carefully considered the material on record. We find, as submitted by the learn....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of 15% of sales / revenue. In support of this proposition, the learned counsel for the assessee placed reliance on the decision of the Hon'ble Bench of the ITAT, Delhi in the case of Sony India (P) Ltd. reported in 2008-TIOL-439-ITAT-Delhi dt.23.12.2008. The learned counsel for the assessee drew our attention to para 115.3 of the order wherein the Tribunal has held that - " ...........We are further of the view that an entity can be taken as uncontrolled if its related party transactions do not exceed 10 to 15% of total revenue. Within the above limit, transactions cannot be held to be significant to influence the profitability of the comparables. For the purpose of comparison what is to be judged is the impact of the related party transactions vis-à-vis sales and not profit since profit of an enterprise is influenced by large number of other factors ...." Respectfully following the decision of the Tribunal in the case of Sony India (P) Ltd (supra), the Assessing Officer / TPO are directed to exclude after due verification those comparables from the list with related party transactions or controlled transactions in excess of 15% of total revenues for the financial....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... TP Regulations in India. It is observed that the decision initially taken in one case without much meaningful discussion has been invariably followed by the Tribunal in other cases decided thereafter. On the other hand, it is observed that the Tribunal, in some of the cases cited by Shri Ajeet Kumar Jain, the ld. CIT DR, has passed well discussed and well reasoned orders after taking into consideration not only the relevant TP regulations in India but even the relevant OECD guidelines. For instance, in the case of BP India Services Private Limited (supra), it was held by the Mumbai Bench that the very rationale of having average in case of more than one comparables is to iron out the effect of extreme cases and find the profit margin as a representative of the whole lot. It was also held by the Tribunal that the higher or lower profit rate has not been prescribed as the determinative factor in the relevant Rules i.e. Rule 10B(2) and 10B(3) to make a case incomparable. The Tribunal observed that the profit rate in any case cannot be such determinative factor in itself as it is a consequence of the effect of the various factors. In the case of 24/7 Customer.Com Pvt. Ltd. (supra), th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... merely on the ground that their profit is abnormally high. In our opinion, the matter in such case would require further investigation to ascertain the reasons for unusual high profit and in order to establish whether the entities with such high profit can be taken as comparables or not. 99. The question No. 2 referred to this Special Bench is as to whether, in the facts and circumstances of the case, companies earning abnormally high profit margin should be included in the list of comparable cases for the purpose of determining arm's length price of an international transaction. As already observed, the issue involved in this question has become infructuous in so far as the case of the assessee before the Special Bench is concerned and the same therefore no more survives for consideration in the present case. In generality, we are of the view that the answer to this question will depend on the facts and circumstances of each case inasmuch as potential comparable earning abnormally high profit margin should trigger further investigation in order to establish whether it can be taken as comparable or not. such investigation should be to ascertain as to whether earning of high pro....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rsk Global Centres (India) Pvt. Ltd.(supra), we hold that the learned CIT (Appeals) was wrong in excluding the companies with profit margins of 50% or more merely because of high profit margins and reverse his finding in the matter and restore the matter to the file of the TPO. The TPO is directed to re-examine and decide on the comparability of the companies excluded by the learned CIT (Appeals) on grounds of abnormal profit in the light of our observations in para 14.2.2 of this order after affording the assessee adequate opportunity of being heard and filing details in the matter. Consequently, Ground No.4 of Revenue's appeal is allowed as indicated above. 15. Ground No.5 : Standard deduction 5%. 15.1 Ground No.5 of revenue's appeal contends that the impugned order of the learned CIT (Appeals) is erroneous in granting standard deduction of 5% under the proviso to section 92C(2) of the Act. 15.2.1 We have heard the rival contentions of both the learned Departmental Representative for revenue and the learned Authorised Representative of the assessee. The fact of the matter is that the assessee sought for the benefit of + / - 5% standard deduction as per the proviso to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ctive amendment w.e.f. 1.4.2002 brought about by the insertion of Section 92C(2A) of the Act by Finance Act, 2012. Consequently, we allow the ground raised by revenue at S.No.3. 16. In the result, revenue's appeal for Assessment Year 2005-06 is partly allowed. Assessee's Cross Objection in C.O. No.20/Bang/2012. 17. Ground Nos.1 and 2 raised in the assessee's C.O. are general in nature and no adjudication being called for thereon, are dismissed as infructuous. 18.1 In Ground No.3 of the assessee's C.O., the assessee has assailed the decision of the TPO in making the TP Adjustment and the decision of the learned CIT (Appeals) in partially confirming the same. The assessee has raised objections on several grounds, 3(a) to (f), in this regard. 18.2 Further, in the course of proceedings before us, the assessee has made detailed submissions as to why 11 of the 17 comparables chosen by the TPO need to be excluded on various reasons / grounds, application of filters like the upper limit of turnover filter, RPT filter, extraordinary events, non-comparability of the comparable being product companies, etc. It was submitted that the comparable companies chosen by th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as furnished a chart wherein the names of the 5 companies which have turnovers in excess of Rs. 200 Crores in the relevant period are indicated. It is submitted that in the relevant period, the assessee's turnover is approximately Rs. 51 Crores only. It was contended that these companies with turnover in excess of Rs. 200 Crores ought to be excluded from the list of comparables as held by the co-ordinate bench of this Tribunal in the case of Genisys Integrating Systems (India) Pvt. Ltd. reported in 152 TTJ 215. According to the learned Authorised Representative, the following companies fail the turnover filter of Rs. 200 Crores :- Sl. No. Name of the company Turnover in Crores (Rs.) 1. IGate Global Solutions Ltd. (Seg) 406.00 2. Flextronics Software Systems Ltd. 457.45 3. L&T Infotech Ltd. 562.45 4. Satyam Computer Services Ltd. 3,464.20 5. Infosys Technologies Ltd. 6,859.70 19.2 The learned Departmental Representative supported the orders of the TPO in including these companies in the set of comparable companies. 19.3 We have heard the rival contentions and perused and carefully considered the material on re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ally different from the assessee. 22.1.1 The assessee has sought the exclusion of the following five companies from the list of comparables in respect of which detailed arguments were put forth before us :- 22.1.2 (1) Exensys Software Solutions Ltd. In respect of this company, the assessee submitted that - a) It has diversified operations like, product development, consultancy and ERP implementation, whereas the assessee is only into provision of software development services; b) In the period under consideration, M/s. Holool India Ltd. was amalgamated with this company and its accounts are also amalgamated. This distorts the comparability of this company as its activities have become diversified. In support of its arguments for excluding this company as a comparable, since the assessee in the case on hand is purely a software development service provider, the assessee placed reliance on the decision of the co-ordinate bench in the case of Mindtree (India) Ltd. in IT(TP)A No.70/Bang/2011 dt.21.8.2014 for Assessment Year 2009-10 and Symphony Marketing Solutions (India) Pvt. Ltd. in IT (TP)A No.1316/Bang/2012 for Assessment Year 2008-09. 22.1.3 (2) Tata Elxsi Ltd. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ware development services. In support of its contentions for exclusion of this company from the list of comparables, the assessee placed reliance on the decision of the Pune Bench in the case of E-gain Communication Pvt. Ltd. in ITA No.1685/PN/2007 dt.10.6.2008 for Assessment Year 2004-05. 22.2 Per contra, the learned Departmental Representative contended that the issues raised by the assessee for the exclusion of the above five companies from the list of comparables, such as functional differences are matters of fact that could differ from year to year, from one comparable company to another and also there could be changes in the profile and operations of the assessee in the case on hand. It was further submitted by the learned Departmental Representative that most of the judicial decisions relied on by the assessee for exclusion of the aforesaid five companies cannot be applied across the board as they pertained to different assessment periods than Assessment Year 2005-06 which is before the Tribunal in the case on hand. The learned Departmental Representative submitted that, in these circumstances, the issue of the comparability of the above five companies requires to be rest....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ule makes it abundantly clear that the use of data of the current financial year (i.e. of the financial year in which the international transaction was actually entered into) is a mandatory requirement of law in the comparability anlaysis to be undertaken. The exception is in allowing the use of data of the two preceding years, if and only, if it is established that the data reveals facts which could have an influence on the determination of transfer price. The data of the current financial year cannot be dispensed with even if the relevant data was not available to the assessee in the public data base at the time of the preparation of the T.P. Report. Non-availability of information in the public data base, at best can be relevant to explain the discharge of the assessee's obligation of maintaining the prescribed documentation under section 92D(i) of the Act r.w. Rule 10D of the IT Rules, 1962. However, such non-availability will not dispense with the mandatory requirement of Rule 10B(4) for using current financial year data in conducting comparability analysis and in determining the ALP in accordance with section 92(1) and 92C(2) of the Act. 23.4 As it is a mandatory requi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... are, therefore, of the view that there is no infirmity in the action of the TPO in using contemporaneous data at the time of T.P. Audit, though the same may not have been available to the assessee at the time of preparation of the T.P. Study / documentation. In view of the above, Ground No.3(e) of the assessee's C.O. is dismissed. 25. Ground No. 3(f) Information collection u/s. 133(6) of the Act. 25.1 Ground No. 3(f) of the assessee's C.O. is regarding the use of information collected u/s.133(6) of the Act by the TPO. 25.2 Before us, in appellate proceedings, this issue was not urged. In this view of the matter, this objection is dismissed as not pressed. 26. Ground No. 3(g) - Risk Adjustment. 26.1 Ground No.3(g) of the assessee's C.O. is regarding the action of the TPO & CIT (Appeals) in not granting adjustment towards the difference in risk profile between the assessee and the comparable companies chosen by the TPO to bring them on par with the assessee. The plea was reiterated before us. 26.2 In respect of the assessee's claim for risk adjustment, the learned Departmental Representative submitted that the TPO has elaborately discussed the matter at....