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2015 (7) TMI 566
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....ated Enterprises (AE) for software development services. Therefore, the said transaction was referred to the Transfer Pricing Officer (TPO) u/s 92CA of the Act for determination of the arms' length price (ALP) of the international transaction. Consequently, the TPO, examined the financial results of the assessee and after determining the most appropriate method and after taking into consideration various margins of the various comparable companies, has arrived at the transfer pricing adjustment of Rs. 5,32,53,612/- vide order dated 16/02/2013. Based on the adjustment proposed by the TPO, the AO passed the draft assessment order against which the assessee preferred objections before the Disputes Resolution Panel (DRP). The DRP confirmed the adjustment proposed by the TPO as incorporated by the AO in the draft assessment order. Consequent thereto, the AO passed the final assessment order against which the assessee is in appeal before us. 3. The learned counsel for the assessee, at the time of hearing, submitted that though the assessee has raised as many as 7 grounds of appeal, the assessee does not wish to press grounds No.1 to 3, 4.1 to 4.4, 4.11 and 5 to 7. These grounds are ac....
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....erefore, in our opinion, assessee is now precluded from challenging the same before us without cogent and reasonable cause. Therefore, we refuse to interfere with the orders of the authorities below on the comparability of KALS Information Systems Ltd. The other comparable companies which are being challenged by the assessee are as under: i) Bodhtree Consulting Ltd. ii) Tata Elxsi Ltd. iii) Sasken Communication Technologies Ltd. iv) Persistent Systems Ltd. v) Zylog System Ltd. vi) Mindtree Ltd. vii) Larsen and Turbo Infotech viii) Infosys Technologies Ltd. Amongst these companies, the assessee is seeking exclusion of Tata Elxsi Ltd., Sasken Communication Technologies Ltd., Persistent Systems Ltd., Zylog System Ltd. Mindtree Ltd., Larsen & Turbo Infotech, Infosys Technologies Ltd., on the ground that the turnover of these companies is more than Rs. 200 crores. He submitted that the turnover of the international transaction of the assessee is only Rs. 68,00,66,852/- whereas the turnover of all the above companies was more than Rs. 200 crores. Therefore, as held by the Hon'ble ITAT in the case of Airbus India Operations Pvt. Ltd., in IT(TP)A No.35/Bang/2014,....
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....e TP order which is reproduced hereunder for ready reference: 1 Akshay Software Technologies Ltd. Sales 122321483 cost 113149350 op profit 91,72,133 op/cost% 8.11% 2 Bodhtree Consulting Ltd. sales 160575212 cost 102646525 less forex loss 3689704 cost 98956821 op profit 61618391 op/oc 62.27% 3 Infosys Ltd. sales 202640000000 total cost 1450 cr 11145+933+1280+694=14052 cr Less provisions 114 cr donations 21 cr cost 139170000000 op profit 63470000000 op/oc 45.61% 4 Kals Inf....
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....p; 9 Sasken Communication Technologies Ltd.(seg) sales 4053120000 *Please refer to the segmental financials as is available in the website of the company. Details are discussed in Annexure-D Segment result (PBIT) 1357043000 cost 2696077000 proportionate allocation (84.48%) of unallocated cost(Rs.5594 lakh) 472581000 op cost 3168658000 op profit 884462000 op/oc 27.91% 10 Tata Elsxi Ltd. (segmental) sales 3784303000 segment revenue (software development services) 3784303000 segment result 3476378000 segment cost 307925000 unallocated cost 67065000 total cost 3146315000 op cost 3146315000 op profit 6379....
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....imilarity of facts and circumstances is established. In the case before us, the assessee is seeking exclusion of Bodhtree Consulting Ltd., and Tata Elxsi Ltd., on the ground of functional dissimilarity and Sasken Communication Technologies Ltd., Persistent Systems Ltd., Zylog System Ltd., Mindtree Ltd., Larsen and Turbo Infotech and Infosys Technologies Ltd., on the ground of turnover filter of ≥200 crores. The learned counsel for the assessee has relied upon the decision of this Tribunal in the case of Airbus India Operations Pvt. Ltd., (cited supra) in support of exclusion of the above companies from the list of comparables. 11. Let us now consider the comparability of the above companies to the assessee. We find that this Tribunal in the case of Airbus India Operations Pvt. Ltd., (cited supra) has considered the comparability of Bothdreee as under: "15. BODHTREE CONSULTING LTD.: This company is listed at Sl.No.3 in the final list of comparables chosen by the TPO which is set out in para-4 of this order. The comparability of this company with a software development services company such as the Assessee for AY 09-10 was considered by this Tribunal in the case of M/s. Cisc....
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....from the list of comparable companies for the purpose of computation of ALP." Respectfully following the decision of the co-ordinate bench of the Tribunal in similar set of facts, we direct the AO/TPO to exclude the said company from the final list of comparable companies on the ground of functional dissimilarity. 12. As regards the application of the turnover filter of more than Rs. 200 crores, the assessee wants the following companies to be excluded: i. Mindtree Ltd ii. Persistent Systems Ltd. iii. Sasken Communication Technologies Ltd. iv. Infosys Technologies Ltd. v. Tata Elxsi Ltd. vi. Larsen & Toubro Infotech vii. Zylog System Ltd. We find that this issue also was considered by the co-ordinate bench of this Tribunal in the case of Airbus India Operations Pvt. Ltd., (cited supra) wherein it was held as under: "17. The ld. counsel for the assessee brought to our notice that out of the 11 comparable companies chosen by the TPO, the following companies will have to be excluded as the turnover of these companies are more than Rs. 200 crores and cannot be compared with the Assessee whose turnover is less than Rs. 200 crores: (1) Mindtree Ltd. ....
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.... 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 to the activities of the parties might affect the relative competitive positions of the buyer and seller and therefore comparability." 12. The ICAI TP Guidelines note on this aspect lay down in para 15.4 that a transaction entered into by a Rs. 1,000 crore company cannot be compared with the transaction entered into by a Rs. 10 crore company. The two most obvious reasons are the size of the two companies and the relative economies of scale under which they operate. The fact that they operate in the same market may not make them comparable enterprises. The relevant extract is as follows [on Rule 10B(3)]: "Clause (i) lays down that if the differences are not material, the transactions would be comparable. These differenc....
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....eration, 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 purpose of making TP study." 15. It was brought to our notice that the above proposition has also been followed by the Honourable Bangalore ITAT in the following cases: 1. M/s Kodiak Networks (India) Private Limited Vs. ACIT (ITA No.1413/Bang/2010) 2. M/s Genesis Microchip (I) Private Limited Vs. DCIT (ITA No.1254/Bang/20l0). 3. Electronic for Imaging India Private Limited (ITA No. 1171/Bang/2010). It was finally submitted that companies having turnover more than Rs. 200 crores ought to be rejected as not comparable with the Assessee. 16. The ld. DR, on the other hand pointed out that even the assessee in its own TP study has taken companies having turnover of more than Rs. 200 crores as comparables. In these circ....
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.... 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 possession, of the opinion that- (a) the price charged or paid in an international transaction has not been determined in accordance with sub-sections (1) and (2); or (b) any information and document relating to an international transaction have not been kept and maintained by the assessee in accordance with the provisions contained in subsection (1) of section 92D and the rules made in this behalf; or (c) the information or data used in computation of the arm's length price is not reliable or correct; or (d) the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D, the Assess....
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....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 level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. (4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating ....
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....xcluded from the list of comparable companies as the turnover of these companies are more than Rs. 200 Crores compared to the turnover of the Assessee which is only Rs. 31.83 Crores. The AO is directed to compute the Arithmetic mean by excluding the aforesaid companies from the list of comparable." Respectfully following the decision of the co-ordinate bench of this Tribunal, we direct the AO/TPO to exclude these 7 companies from the final list of comparables on the ground of turnover filter of the ≥Rs.200/- crores. 13. In addition to the above, the assessee is also seeking exclusion of Infosys Ltd., & Tata Elxi from the list of comparables on the ground of functional dissimilarity and placed reliance upon the decision of this Tribunal in the case of Airbus India Operations Pvt. Ltd., (cited supra). We find that in Airbus India Operations Pvt. Ltd., (cited supra), this Tribunal has held as under: "19. The next submission of the learned Counsel for the Assessee was that though, Infosys Technologies Ltd., & Tata Elxsi Ltd. (seg.) have to be excluded by applying the Turnover filter, they are also additionally functionally not comparable as held by this Tribunal in the case....
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....itted that this decision is applicable to the assessee's case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee ; (ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856 (Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk ; (iii) the company has generated several inventions and filed for many patents in India and USA ; (iv) the company has substantial revenues from software products and the breakup of such revenues is not available ; (v) the company has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in 'AUTOLAY', a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded from the list of comparable companies. 1....
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....M/s. Flextronics Software Systems Ltd., deserve to be eliminated for the following reasons : (i) Tata Elxsi Ltd., : The company operates in the segments of software development services which comprises of embedded product design services, industrial design and engineering services and visual computing labs and system integration services segment. There is no sub-services break up/information provided in the annual report or the databases based on which the margin from software services activity only could be computed. The company has also in its response to the notice u/s.133(6) stated that it cannot be considered as comparable to any other software services company because of its complex nature. Hence, Tata Elxsi Ltd., is to be excluded from the list of comparables. (ii) Flextronics Software Systems Ltd. : The learned TPO has considered this company as a comparable based on 133(6) reply wherein this company reflected its software development services revenues to be more than 75% of the "software products and services" segment revenues. Flextronics has a hybrid revenue model and hence should be rejected as functionally different. Based on the information provided under "Reven....
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.... the facts mentioned by the taxpayer are the same and these were there in the earlier FY 2005-06, there is no reason why the taxpayer is objecting to it. How the company is functionally similar in the earlier FY 2005-06 but the same is not functionally similar for the subsequent FY 2006- 07 even when no facts have been changed from the preceding year. Thus the taxpayer is arguing against this comparable as the company was not considered as a comparable by the taxpayer for the present FY 2006-07." 21. We have heard the rival submissions and considered the facts and materials on record. After considering the submissions, we find that Tata Elxsi and Flextronics are functionally different from that of the assessee and hence they deserve to be deleted from the list of six comparables and hence there remains only four companies as comparables, as listed below:" 26.5. Following the aforesaid decision of the Tribunal, we hold that M/S.Tata Elxsi Ltd. should not be regarded as a comparable." 20. Respectfully following the decision of the Tribunal referred to above and taking note of the fact that the facts and circumstances under which the aforesaid company was considered by the TP....