TaxTMI 
TaxTMI 
2015 (5) TMI 720
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....ed under the Income Tax Act, 19661 („the Act') and in doing so, the Ld. CIT(A) has grossly erred in confirming/upholding the ld. AO's action of: 1.1 Disregarding the Arms Length Price („ALP"), as determined by the appellant in the Transfer Pricing ("TP") documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income Tax Rules, 1962 ('the Rules') as well as fresh search; 1.2 Including companies having high margin/volatile operating profit margins in the final comparables' for benchmarking a low risk captive nit such as the appellant (disregarding judicial pronouncements on the issue); 1.3 Modifying the results of economic analysis carried out by the appellant in the TP documentation by conducting a further analysis on the 17 comparables given in the TP documentation based on application of the following additional/revised filters (applied by the TPO in the immediately preceding year) in determining the ALP: &....
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....aking entrepreneurs, and by not allowing a risk adjustment to the appellant on account of this fact. 4 The Ld. CIT(A) has grossly erred both on facts and in law in confirming/upholding the Ld. AO's action of disallowing Rs. 30,946/- under section 14A of the Act. 5 The ld. CIT(A) erred on facts and in law in charging interest under section 234B of the Act." 3. Further the grounds raised by the revenue read as under: "a) Whether the ld. CIT(A) has erred on facts and in law in restricting the enhancement of Rs. 1,72,01,288/- by the Assessing Officer to Rs. 93,58,086/- on account of determination of ALP b) Whether the ld. CIT(A) has erred on facts and in law in holding that Larsen and Toubro Infotech Ltd., Persistent Systems Ld. and Mind Tree Ltd. should be excluded from the list of comparables c) Whether the ld. CIT(A) has erred on facts and in law ....
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....etairos Technologies Ltd. 26.10% xiv) Computech International Ltd. (seg) -74.31% xv) Techprocess Solutions Ltd. (seg) 18.67% xvi) Ezest Solutions Ltd. Data not available xvii) HS India Ltd. (seg) No revenue from software development segment in FY 2008-09 Arithmetic Mean 8.84% 7. The AO employed export sales to sales, diminishing revenue, employee cost to sales ratio less than 25% and related party transactions (RPT) above 25% filters and rejected 11 comparables out of 17. The final set of comparables and the margin calculated against the assessee are as follows: Sr. No. Company Name OP/TC Margin using data for FY 2008-09 i) Akshay Software Technologies Ltd. 8.23% ii) Bodhtree Consulting Ltd. 64.04% iii) LGS Global Ltd. 18.88% iv) Larsen & Toubro Infotech Ltd. 20.50% v) Mindtree Ltd. 27.60% vi) Persistent Systems Ltd. 37.55% Arithmetic Mean 29.47% 8. On appeal the CIT(A) rejected the objections of the assessee vis-à-vis the 4 fil....
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....9, it has a turnover of approx. Rs. 14.45 crores which cannot be compared with certain companies having turnover of more than 200 crores. Support was drawn from the following decisions: a) Decision of ITAT in the case of appellant for A.Y. 2006-07 ITA No. 3856/D/2010 A.Y. 2006-07; b) Genisys Integrating Systems (India) Pvt.Ltd. ITA No. 1231/Bang/2010 c) Centilium India Pvt. Ltd. vs. DCIT ITA NO. 1354/Bang/2010 d) Kodiak Networks (India) Pvt. Ltd. vs. ACIT ITA No. 1413/Bang/2010 e) Actis Advisers Pvt. Ltd. ITA No. 5277/D/2011 12. Having regard to the above the CIT(A) held as under: "5.6 I have carefully considered the submission of the appellant. The Ho'ble ITAT in the case of the appellant itself has held that high turnover companies should not be included in the list of comparables. Larsen & Toubro Infotech Ltd., Persistent Systems Ltd. and Mindtree Ltd. are certainly high turnover companies as can be seen from the above table. Respectfully following the order of the ITAT in the appellant's case, I hold that these three companies should be excluded from the list of comparables." 13. Ha....
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....able in the list of comparable. 16. When considering the exclusion of persistant system Ltd, we find no need to interfere in the order of the Ld CIT(A) because it is engaged in development of software product; and this company was excluded by the Tribunal in assessment year 2006-2007, which has been up held by the Hon'ble High Court, thus the issue about exclusion of persistent system Ltd, while making TP adjustments in it's case stands settled in view of these decisions in its own case. Therefore we do not find any necessity to interfere this company's exclusion. 17. Having regard to the factual position and respectfully following the judgment of the Hon'ble High Court we partly allow the ground raised by the revenue and uphold the exclusion of persistent system Ltd, and direct inclusion of Larsen & Toubro Infotech Ltd and Mind tree Ltd. 18. As regards inclusion of the comparables namely ICRA Techno Analytic Ltd. and E2E Infotech Ltd. are concerned it is noted that CIT(A) has included the same by observing as under: "ICRA Techno Analytics Ltd. &nb....
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....it has not disclosed RPT computation, where turnover is less than Rs. 50 crores. 20. Having considered the rival submissions, we agree in principle with the proposition laid down by the ld CIT(A), in excluding such companies from the list of comparables in which RPT are more than 25%. However we find no discussion in the assessment order about the determination of the percentage of RPT in the case of ICRA Techno Analytic Ltd. Under such circumstances we direct the AO to determine the RPT percentage of this company afresh as per law after giving opportunity to the assessee. In case if the RPT margin is less than 25%, the ICRA should be included and if it is more than 25% RPT it should be excluded. 21. Also, it is not disputed that turnover of E2E Infotech Ltd. was 5.69 crores which is less than 50 crores and therefore there was no disclosure requirement of RPT under AS-18. 22. Thus in light of the above we find no infirmity in the conclusion of the CIT(A) and reject the ground raised by the revenue. 23. Taking up assessee appeal in ITA No. 1780/D/2013, the ld. counsel contended vis-à-vis Ground No. 1, 2, 3 that out of the set of five comparables selected by the CI....
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....anies would tantamount to a travesty of the concept of arm's length principle Therefore, Bodhtree (which is making supernormal growth and earning abnormally high profits during the FY 2008-09) is not an appropriate comparable and should be excluded from the final set of comparable companies." 25. However the CIT(A) has rejected the contention of appellant by observing as under: "The appellant has pleaded that Bodhtree consulting Ltd. is a comparable having 4.04% margin which is an extraordinary profitability company which should not be compared to the case of the appellant. The appellant has relied on various decisions of the ITAT. I have considered the argument of the appellant but cannot agree with the contention. Under the TNMM the arithmetical mean is used as against an intermediate/interquartile range. These two are separate average concepts commonly used in mathematics and statistics. The argument of the appellant confuses these two mathematical tools. The Indian Transfer Pricing Law does not recognize the intermediate/inter quartile range. The margin of the comparables is the end product and not the starting point ....