TaxTMI 
TaxTMI 
2015 (5) TMI 648
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....;). 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 section 143(3) of the Act vide order dt.27.11.2008 determining the income o....
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....d. 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 in the TP Order, without providing an opportunity of being heard to the appellant. c) Arbitrarily arriving ....
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....ons 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 proceeded to conduct his own fresh search for comparables using Prowess and Capitaline. The TPO accepted this assessee's adoption of TNMM as the MAM. The TPO adopted the following IT Companies as comparable companies :- S.No. Name of the comparable company ....
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....s 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 ITAT in the case of Sak Soft Ltd. (313 ITR 353), directed the Assessing Officer to recompute the same by reducing from the "total turnover", the same amount by which the "export turnover" has been reduced. 10.1 In the proceedings before us, the learned Departmental Representative challenged the impugned order of the learned CIT(A) on the issue of RPT and abnormal profit, placing reliance ....
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.... 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 learned Authorised Representative, that the Hon'ble High Court of Karnataka in the case of Tata Elxsi Ltd. (supra) has held that while computing the deduction under section 10A of the Act, if the export turnover in the numerator is to be arrived at after excluding certain expenditure, then the same expenditure should also be excluded from the total turnover also. Respectfully following the same, we dismiss this ground of revenue and direct the Assessing Officer to exclude the....
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....nsactions 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 year 2003-04." 13.2.2 In the light of the above decision of the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (supra), we find that the decision of the learned CIT (Appeals) in excluding those companies with any RPT is not in keeping with the above decision of the coordinate bench of this Tribunal. Respectfully following the above decision, we hold that the learned CIT (Appeals) was not correct in holding that companies with any RPT have to be excluded fr....
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....e, 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), the Bangalore Bench of this Tribunal considered the relevant OECD guidelines in this respect and held that the exclusion of companies with abnormal profits from the comparables may be in line with the principles enumerated in the OECD guidelines, but the same cannot be said to be in tune with the Indian TP Regulations. The Tribunal noted that there was a deviation in the TP Rules specifically from OECD guidelines by specifying the arithmetic mean for determining the ALP as against the quartile method....
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.... 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 profit reflects a normal business condition or whether it is the result of some abnormal conditions prevailing in the relevant year. The profit margin earned by such entity in the immediately preceding year/s may also be taken into consideration to find out whether the high profit margin represents the normal business trend. The FAR analysis in such case may be reviewed to ensure that the potential comparable earning high profit satisfies the comparability conditions. If it is found on such investigation ....
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....e 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 section 92C(2) of the Act, which was granted by the learned CIT (Appeals) citing several judicial decisions in support of this proposition. Prior to the amendment made by Finance (No.2) Act, 2009 and Finance Act, 2012, the proviso to section 92C(2) of the Act provided that the ALP would be taken to be the Arithmetic Mean ('AM') or at the option of the assessee, a price which may vary from the AM by an amount not exceeding 5% of such AM. Thus, the ALP was + / - 5% of such AM. 15.2.2 This issue is now more of acade....
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....he 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 the TPO were not comparable to the assessee on several grounds and that the CIT (Appeals) has adjudicated on the comparability by only considering the RPT filter and abnormal profit margin. The assessee also submitted notes detailing the reasons as to why the 11 companies require to be excluded from the set of comparables and has cited and placed reliance upon several decisions of various Tribunals on each of the same. We have heard the rival contentions and perused and carefully considered the material on record. 18.3 Ground No.....
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....rised 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 record, including the judicial decisions cited and placed reliance upon. We find that a coordinate bench of this Tribunal in the case of Genisys Integrating Systems (India) Pvt. Ltd. (supra) has held that turnover is an important filter of comparability which has to be adopted for determination of ALP and has determined the upper limit of the turnover filter to be applied at Rs. 200 Crores in cases where the turnover of the assessee is less than Rs. 200 Crores. In the case on hand, the turnover of the assessee being approx. Rs. 51 Crores only, following the decision of the co-ordinate ben....
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.... 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. The assessee contends that this company is to be excluded from the list of comparables since it is functionally different, being into product design, industrial design, design & engineering services, visual computable labs, systems integration, apart from pure software development services which the assessee offers. In support of its contentions, for exclusion of this company from the list of comparables, the assessee placed reliance on the decisions in the following decision of the ITAT in EMC Data Storage Systems (India) Pvt. Ltd. in IT(TP)A No.1274/Bang/2010 dt.18.7.2014 for Assessment Year 2006-07 and ....
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....anges 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 restored to the file of the TPO for fresh examination in the light of the submissions made and a fresh FAR analysis carried out to decide factually whether these five companies ought to be excluded from the list of comparables. 22.3 We have heard the rival contention of both parties and perused and carefully considered the material on record, including the judicial decisions cited by the assessee (supra). On a perusal of the impugned order of the learned CIT(A), we find the learned CIT(A) has not considered and adjudicated on the issues raised by the assessee and the submissions made by the assessee in this regard are not ex....
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.... 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 requirement of law to utilise data of the current financial year to conduct the comparability analysis at the time of T.P. proceedings, the TPO is not only empowered but is also duty bound to determine the ALP using such contemporaneous data for this purpose even if such data was not available to the assessee in the public data bases at the time of preparation of its report on the T.P. Study. Further, we are also of the view that the TPO rightly rejected the use of earlier year's data by the assessee, as the assessee failed to establish before the TPO, CIT (Appeals) or before us as to how such earlier years data had an influence on the prices....
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....missed 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 para 15.2 of the order under section 92CA of the Act and rightly rejected the claim, as the assessee failed to quantify its claim of risk adjustment. 26.3 We have heard the rival contentions and perused the material on record. On a perusal of the TPO's order under section 92CA of the Act, we find that the TPO has considered this issue at para 15.2 thereof. The TPO observes that the primary burden when making a claim is on the tax payer and he has not provided any quantification of its risk adjustment claim. In this view of the matter, the TPO did not allow the assessee risk adjustment. We are in agreement with the observation of the TPO. We find that the ....