AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2015 (7) TMI 212
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....not in dispute that the aforesaid transaction was an international transaction with AE and therefore the price charged by the assessee has to pass the arm's length test as laid down u/s. 92 of the Act. 4. After rejecting the TP study conducted by the assessee, the TPO to whom the determination of ALP was referred to by the AO, chose 11 comparable companies, the arithmetic mean of the profit margins of those 11 companies was 22.71%. 5. The financial results of the assessee were as follows:- Rs. Operating Revenues * 18,47,25,719 Operating Expenses ** 17,26,70,219 Operating (Profit)/Loss 1,20,55,500 Op Profit on cost % 6.98% * Excluding other income ** Excluding forex & financial charges. 6. The TPO accordingly made an addition to the total income by way of adjustment to ALP after working capital adjustment as follows:- "Computation of Arms Length Price: The arithmetic mean of the Profit Level indicators is taken as the arms length margin. Please see Annexure B for details of computation of PLI of the comparables. Based on this, the arms length price of the services rendered by the tax payer to its AE(s) is computed as under: SOFTWARE DEVELOPMENT ....
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.... Rs. 2,000 crore. The Panel finds that although various studies on segmentation of the IT export industry in India are available in the public domain, the above study provides one convenient thumb measure for segmentation by size. For purposes of a rough and ready organization of companies it can be relied upon as a convenient tool and this seems to have been the guiding motive behind reliance on this study by the Hon'ble ITAT Bench. We, therefore, respectfully hold that the Dun and Bradstreet categorization on the basis of sales can be adopted for the present purpose of identifying a filter of turnover at the upper end. Although the ITAT Mumbai in the case of Capgemini India Pvt Ltd vs ACIT (ITA No. 7861/Mum/2011 for AY 2007-08) have held that the concept of economy of scale cannot be applied to service delivering companies and that there is no empirical evidence to suggest that margins are related to turnover, this Panel is bound by the decision of the jurisdictional ITAT. Going by the taxpayer's ITS revenue of Rs.l7,01 crores it would fall in the category of a 'small' sized firm as per the Dun & Brad Street categorization. Companies with a turnover higher than Rs. 200 crore,....
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....n market. Further it is also necessary to see that wherever there are some differences such differences should be capable of reasonable accurate adjustment in monetary terms to eliminate the effect of such differences. It was his submission that size was an important facet of the comparability exercise. It was submitted that significant differences in size of the companies would impact comparability. In this regard our attention was drawn to the decision of the Special Bench of the ITAT Chandigarh Bench in the case of DCIT v. Quark Systems Pvt. Ltd. 38 SOT 207, wherein the Special Bench had laid down that it is improper to proceed on the basis of lower limit of 1 crore turnover with no higher limit on turnover, as the same was not reasonable classification. Several other decisions were referred to in this regard laying down identical proposition. We are not referring to those decisions as the decision of the Special Bench on this aspect would hold the field. Reference was also made to the OECD TP Guidelines, 2010 wherein it has been observed as follows:- "Size criteria in terms of Sales, Assets or Number of Employees: The size of the transaction in absolute value or in proportion....
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.... A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which arc loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet & Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs. 1.00 crore to 200 crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpo....
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.... transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely :- (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board. (2) The most appropriate method referred to in subsection (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed: Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices: Provided further that if the variation between the arm's length price so determined and price at which the international transaction has actually been undertaken does not exceed five per cent of the latter, the price at which the international transaction has actually 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 pos....
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....e same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction. (2) For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing 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 ....