TaxTMI 
TaxTMI 
2015 (7) TMI 491
X X X X Extracts X X X X
X X X X Extracts X X X X
....ansactions with its Associated Enterprises (AE) for providing software development services for a sum of Rs. 18,27,80,431/-. He therefore, referred the matter to the Transfer Pricing Officer (TPO) for determination of the ALP u/s 92CA of the Act. The TPO accepted the 'TNMM' selected by the assessee as the Most Appropriate Method (MAP) and proceeded to consider the comparables adopted by the assessee. The assessee had adopted 9 companies as comparables which were rejected by the TPO and the TPO adopted 20 companies as comparables and arrived at the average margin of the comparable companies at 20.68% and determined the transfer pricing adjustment of Rs. 1,26,15,950/-. The AO passed the draft assessment order pursuant to the order u/s 92CA of the Act. The assessee filed objections to the draft assessment order before the DRP, which confirmed the draft assessment order and consequent thereto, AO passed the final assessment order against which the assessee is in appeal before this Tribunal. 3. Though the assessee has raised as many as 9 grounds of appeal, it is stated by the learned counsel for the assessee that the issues raised in ground No.4 are all settled against the assessee i....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 35.63 19 Megasoft Ltd 52.74 56.15 20 iGate Global solutions Ltd.(Seg.) 15.61 527.91 Arithmetic Mean 20.68% 5. The assessee had challenged before the DRP the comparability of the companies taken by the TPO before the DRP. However, the TPO as well as the DRP have not accepted the assessee's objections and have taken the said companies as comparables. The assessee is however, now accepting the following companies to be comparable to the assessee: i) Bodhtree Consulting Ltd. ii) Lanco Global Solutions iii) Mediasoft Solutions P.Ltd. iv) R Systems International Ltd. v) R S Software (India) Ltd. vi) SIP Technologies & Exports Ltd. vii) Synfosys Business Solutions Ltd. Viii) Lucid Software Ltd. 6. As regards other companies are concerned, the assessee is challenging them on the turnover filter and RPT filter and also on functional dissimilarity. In support of exclusion of these companies, the assessee is relying upon the decision of the coordinate bench of the Tribunal in the case of M/s.Ariba Technologies India Pvt. Ltd., for assessment year 2006-07 in IT(TP)A No.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bunal on application of the turnover filter while selecting comparable companies for comparability analysis held as follows: "(1) Turnover Filter 11. The ld. counsel for the assessee submitted that the TPO has applied a lower turnover filter of Q 1 crore, but has not chosen to apply any upper turnover limit. In this regard, it was submitted by him that under rule 10B(3) to the Income-tax Rules, it was necessary for comparing an uncontrolled transaction with an international transaction that there should not be any difference between the transactions compared or the enterprises entering into such transaction, which are likely to materially affect the price or cost charged or paid or profit arising from such transaction in the open 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... on Dun and Bradstreet's analysis, the turnover of Q 1 crore to Q 200 crores was held to be proper. The following relevant observations were brought to our notice:- "9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which .ire (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. 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 compa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. Sec.92-A defines what is an Associated Enterprise. In the present case there is no dispute that the transaction between the Assessee and its AE was an international transaction attracting the provisions of Sec.92 of the Act. Sec.92C provides the manner of computation of Arm's length price in an international transaction and it provides:- (1) that the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of 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 sub-section (1) shall be a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii)the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv)the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the 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 character....
X X X X Extracts X X X X
X X X X Extracts X X X X
....for the assessee clearly lay down the principle that the turnover filter is an important criteria in choosing the comparables. The assessee's turnover is Q 47,46,66,638. It would therefore fall within the category of companies in the range of turnover between 1 crore and 200 crores (as laid down in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010) . Thus, companies having turnover of more than 200 crores have to be eliminated from the list of comparables as laid down in several decisions referred to by the ld. counsel for the assessee. Applying those tests, the following companies will have to be excluded from the list of 26 comparables drawn by the TPO viz., Turnover Q (1)Flextronics Software Systems Ltd. 848.66 crores (2) iGate Global Solutions Ltd. 747.27 crores (3)Mindtree Ltd. 590.39 crores (4) Persistent Systems Ltd. 293.74 crores (5) Sasken Communication Technologies Ltd. 343.57 crores (6) Tata Elxsi Ltd. 262.58 crores (7) Wipro Ltd. 961.09crores (8) Infosys Technologies Ltd. 13149 crores" 10. Respectfully following the aforesaid decision of the Tribunal in the....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... sale ratio was between 30% to 60%. By applying this filter, several companies were excluded. This is correct as it is recorded in para 3.1.2 of the order passed by the TPO. TPO, as noted above, however had taken three companies, namely, Satyam Computer Service Ltd., L&T Infotech Ltd. and Infosys Technologies as comparable to work out the mean. 8. It is a common case that Satyam Computer Services Ltd. should not be taken into consideration. The tribunal for valid and good reasons has pointed out that Infosys Technologies Ltd. cannot be taken as a comparable in the present case. This leaves L&T Infotech Ltd. which gives us the figure of 11.11 %, which is less than the figure of 17% margin as declared by the respondent-assessee. This is the finding recorded by the tribunal. The tribunal in the impugned order has also observed that the assessee had furnished details of workables in respect of 23 companies and the mean of the comparables worked out to 10%, as against the margin of 17% shown by the assessee. Details of these companies are mentioned in para 5 of the impugned order." Respectfully following the same, we direct the AO to exclude Infosys Ltd., from the final list of co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er where this fact is recorded by the TPO. 13. Having regard to the rival contentions and the material on record, we find that being the very same assessment year viz., 2006-07 in the case of M/s.Ariba Technologies India Pvt. Ltd. this Tribunal had occasion to go into the comparability of these companies with the said company and the Tribunal has held it to be functionally dissimilar from the similar activity of software development service. We find that the Tribunal, at para.12 & 13 of its order, has held as under: "12. The following were the relevant observations of the Tribunal on the aforesaid comparable companies in the case of Triology E-Business Software India Pvt.Ltd.(supra): "(d) KALS Information Systems Ltd. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual report, the salary cost debited under the software development expenditure was Q 45,93,351. The same was less than 25% of the software services revenue and....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ision of Capgemini India (F) Ltd v Ad. CIT 12 Taxman.com 51, the DRP accepted the contention of the assessee that Accel Transmatic should be rejected as comparable. The relevant observations of DRP as extracted by the ITAT in its order are as follows: "In regard to Accel Transmatics Ltd. the assessee submitted the company profile and its annual report for financial year 2005-06 from which the DRP noted that the business activities of the company were as under. (i) Transmatic system - design, development and manufacture of multi function kiosks Queue management system, ticket vending system (ii) Ushus Technologies - offshore development centre for embedded software, net work system, imaging technologies, outsourced product development (iii) Accel IT Academy (the net stop for engineers)- training services in hardware and networking, enterprise system management, embedded system, VLSI designs, CAD/CAM/BPO (iv) Accel Animation Studies software services for 2D/3D animation, special effect, erection, game asset development. 4.3 On careful perusal of the business activities of Accel Transmatic Ltd. DRP agreed with the assessee that the company was functionally different ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d two companies with that of the software service provider was considered by the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India Private Ltd. (supra) wherein on the aforesaid two companies, the Tribunal held as follows:- "7.7.Tata Elxsi Limited.: From the facts and material on record and submissions made by the learned AR, it is seen that the Tata Elxsi is engaged in development of niche product and development services, which is entirely different from the assessee company. We agree with the contention of the learned AR that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company fit for comparability analysis for determining the arms length price for the assessee, hence, should be excluded from the list of comparable parties." 15. In view of the above, the ld. counsel for the assessee fairly admitted that comparable company at ....