TaxTMI 
TaxTMI 
2015 (8) TMI 712
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....ubsequently taken up for scrutiny. The Assessing Officer observed from the Form No.3CEB that the assessee had reportedly entered into international transactions with its Associated Enterprises ('AEs') in the year under consideration and made a reference to the Transfer Pricing Officer ( 'TPO') under Section 92CA of the Act for determination of the Arm's Length Price ('ALP') thereof, the details of which are as under :- (1) Export of Software Development Services : Rs.4,99,98,250. (2) Reimbursement of Expenses : Rs.1,59,320. The TPO passed an order under Section 92CA of the Act dt.31.10.2008 in respect of the aforesaid international transactions, proposing an adjustment of Rs. 42,81,608 to the ALP of the 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, the Assessing Officer completed the assessment under Section 143(3) of the Act vide order dt.16.12.2008 wherein the income of the assessee was determined at Rs. 76,39,441 as against the returned income of Rs. 24,93,540 by making the following additions/disallowances thereto :- (i) ....
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....end and / or delete any of the grounds mentioned above." IT(T.P)A No.73/Bang/2012 - Assessee's appeal for A.Y. 2005-06. 5. In the assessee's appeal in respect of the order of the CIT (Appeals) - IV, Bangalore dt.30.11.2011 for Assessment Year 2005-06, the following grounds have been raised :- " 1. The order of the CIT (Appeals) IV, Bangalore-560 001 dt.30.11.2011 in ITA No.04/Range-12/10-11, for the above mentioned assessment year is contrary to law, facts, and in the circumstances of the case. 2. The CIT (Appeals) IV erred in excluding the comparables which were showing operating profit lesser than the margin shown by the appellant in the determination of ALP without assigning proper reasons and justification. 3. The CIT (Appeals) IV in not allowing marketing expenses to the appellant in the determination of ALP without assigning proper reasons and justification. 4. The CIT (Appeals) IV ought to have considered the submission made by the appellant in this regard for allowing the marketing expenditure as per the percentage of expenses met by the comparables in the determination of ALP. 5. The CIT (Appeals) IV erred in disallowing the miscellaneous incom....
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....imbursement of expenses : Rs.1,59,320. The assessee in its T.P. Study has adopted CUP Method as the Most Appropriate Method (MAM) and compared the price charged by it to its AEs with the price charged by it to third parties to justify the ALP of its international transactions. As the assessee had selected CUP Method by considering the price charged by it to its AEs vis-à-vis the price charged to unrelated parties, there was no search process involved. 8. The TPO's Approach. 8.1 The TPO, rejected the methodology adopted by the assessee, for justifying ALP of its international transactions, adopted TNMM as the MAM and proceeded to conduct his own fresh search for comparables using Prowess and Capitaline. The TPO adopted TNMM as the MAM. The TPO adopted the following 17 Companies as comparable companies :- S.No. Name of the comparable company OP/OC (%) 1. Bodhtree Consulting Ltd. 24.85 2. Lanco Global Systems Ltd. 13.65 3. Exensys Software Solutions Ltd. 70.67 4. Sankhya Infotech Ltd. 27.38 5. Sasken Network Systems Ltd. 16.63 6. Four Soft Ltd. 22.98 7. Thirdware Solution Ltd. 66.09 ....
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....T(A) held that companies showing extra-ordinary profits have to be excluded from the list of comparables. Accordingly, the learned CIT (Appeals) excluded two companies, namely (i) Exensys Software Solutions Ltd. and (ii) Thirdware Solutions Ltd. showing profits of 70.68% and 66.09% from the set of comparable companies chosen by the TPO. 9.4 Companies with High Turnover. Relying on the decision of the co-ordinate bench of this Tribunal in the case of Genisys Integrating Systems (India) P. Ltd. V DCIT (2011) TaxCorp (TP) 3848, in which it was held that the turnover range of Rs. 1 Crore to Rs. 200 Crore was to be applied, the learned CIT (Appeals) held that companies having turnover exceeding Rs. 200 Crores should be excluded from the final set of comparable and thereby excluded the following companies form the list of comparables :- 1. iGate Global Solutions Ltd. 2. Flextronics Software Solutions Ltd. (Seg) 3. L&T Infotech Ltd. 4. Satyam Services Ltd. 5. Infosys Technologies Ltd. The learned CIT (Appeals) also held that Satyam Computer Services Ltd. should be excluded on grounds of unreliable financial results. The learned CIT (Appeals) further held that Lanco....
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....he various issues raised by Revenue and the assessee. Revenue's appeal in IT(TP)A No.175/Bang/2011 for A.Y. 2005-06. 11. The Grounds raised by Revenue at S.Nos.1, 7 & 8 are general in nature and no adjudication being called for thereon, are dismissed as infructuous. 12. Ground No.2 : Computation of Deduction u/s.10A of the Act. 12.1 Revenue challenges the order of the learned CIT(A) in directing the Assessing Officer to recompute the eligible deduction to the assessee u/s.10A of the Act by reducing the expenditure incurred in foreign currency towards communication expenses 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 consid....
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.... party transactions in excess of 15% of sales / revenue. In support of this proposition, the learned counsel for the assessee placed reliance on the decision of the Hon'ble Bench of the ITAT, Delhi in the case of Sony India (P) Ltd. reported in 2008-TIOL-439- ITAT-Delhi dt.23.12.2008. The learned counsel for the assessee drew our attention to para 115.3 of the order wherein the Tribunal has held that - " ...........We are further of the view that an entity can be taken as uncontrolled if its related party transactions 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....
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....companies were excluded from the TPO's list of comparables :- 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 14.2 The learned Departmental Representative for Revenue has challenged the decision of the learned CIT (Appeals) in holding that size and turnover are deciding factors for treating a company as a comparable. 14.3 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 co-ordinate 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 ....
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....es decided thereafter. On the other hand, it is observed that the Tribunal, in some of the cases cited by Shri Ajeet Kumar Jain, the ld. CIT DR, has passed well discussed and well reasoned orders after taking into consideration not only the relevant TP regulations in India but even the relevant OECD guidelines. For instance, 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 ....
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....igh profit and in order to establish whether the entities with such high profit can be taken as comparables or not. 99. The question No. 2 referred to this Special Bench is as to whether, in the facts and circumstances of the case, companies earning abnormally high profit margin should be included in the list of comparable cases 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 t....
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....s finding in the matter and restore the matter to the file of the TPO. The TPO is directed to re-examine and decide on the comparability of the companies excluded by the learned CIT (Appeals) on grounds of abnormal profit in the light of our observations in this order after affording the assessee adequate opportunity of being heard and filing details in the matter. Consequently, Ground No.5 of Revenue's appeal is allowed as indicated above. 16. Ground No.6 : Standard deduction 5%. 16.1 Ground No.6 of revenue's appeal contends that the impugned order of the learned CIT (Appeals) is erroneous in granting standard deduction of 5% in computing the ALP of the international transactions, by citing various judicial pronouncements. 16.2.1 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 Fina....
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....6. 17. In the result, revenue's appeal for Assessment Year 2005-06 is partly allowed. Assessee's appeal for A.Y. 2005-06 in IT(TP)A No.74/Bang/2012. 18. The Grounds raised at S.Nos.10 & 11 of the assessee's appeal are general in nature and not being urged before us in the course of appeal hearings, are dismissed as infructuous. 19. The Grounds raised at S.Nos.1 to 4 : In the course of appeal proceedings, the learned Authorised Representative of the assessee submitted that these grounds are not being pressed. In view of these grounds not being pressed, they are rendered infructuous and are accordingly dismissed. 20.1 Grounds No.5 & 6 are related to Miscellaneous Income. In Ground No.5, the assessee has assailed the decision of the authorities below in excluding miscellaneous income for arriving at the operating margin without granting the assessee opportunity to present its case and also in holding so, without assigning any reasons whatsoever for their decisions in the matter. In Ground No.6, the assessee contends that miscellaneous income should be considered for arriving at the operating margin in the determination of ALP of international transactions. 20....
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....me of the companies chosen by the TPO as comparables are claimed to be functionally not comparable to the assessee. 22.2 Before us, the assessee had submitted a chart explaining its stand on each of the companies which as per the assessee are required to be excluded from the set of 17 comparable companies adopted by the TPO. The learned Authorised Representative submitted that the assessee accepts 9 of the comparable companies adopted by the TPO at S.Nos.1, 2, 4, 5, 8, 9, 10, 11 and 12 of the TPO's list of 17 comparable companies. The assessee has filed a chart giving the reasons why the other 8 companies are required to be excluded and the judicial decisions of various Tribunals in support of its contentions. 23.0 Turnover Filter of Rs. 200 Crores. 23.1 The learned Authorised Representative of the assessee has furnished a chart wherein the names of the 5 companies which have turnovers in excess of Rs. 200 Crores in the relevant period are indicated. It is submitted that in the relevant period, the assessee's turnover is approximately Rs. 7.97 Crores only. It was contended that these companies with turnover in excess of Rs. 200 Crores ought to be excluded from the list....