AI Drafter 
TaxTMI 
TaxTMI 
2015 (8) TMI 980
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.... by way of adjustment to the arm's length price ("ALP") to an international transaction carried out by the assessee under section 92CA of the Act. At the time of hearing of the appeal it was submitted that the comparable companies chosen by the Transfer Pricing Officer and the addition made by the Assessing Officer in the draft assessment order which was confirmed by the Dispute Resolution Panel are identical to the case decided by the Tribunal in ITA No.1054/Bang/2011 for AY 07-08 in M/S. Triology E-Business Software India Pvt.Ltd. Vs. DCIT, Circle 12(4), Bangalore and 3DPLM Software Solutions Ltd. v. Deputy CIT 42 taxmann.com 333 (Bang-Trib). It was also submitted that the business profile of the assessee and that of the assessee in the cases of 3DPLM Software Solutions Ltd. (supra) and Trilogy E-Business Software India P. Ltd. (supra) were also identical. This submission was found to be correct at the time of hearing. With this background we will now consider the factual basis of the present case and the decision rendered referred to by learned counsel for the assessee before us. 5. The assessee is a company. It rendered software development services to its associated ent....
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....'s length margin. (Please see annexure B for details of computation of profit level indicator of the comparables). Based on this, the arm's length price of the software development services rendered by you is computed as under : Arithmetic mean profit level indicator 23.65% Less : Working capital adjustment (Annexure-C) 4.59% Adj. arithmetic mean PLI 19.06% Operating cost Rs. 23,11,27,739 Arm's length margin 19.06% of the operating cost Arm's length price (ALP) at 19.06% of operating cost Rs. 27,51,80,686 Price received Rs. 25,95,25,941 Shortfall being adjustment under section 92CA Rs. 1,56,54,745 The above shortfall of Rs. 1,56,54,745 is being treated as an adjust ment to the price shown by the taxpayer in its books of account." 9. Against the said adjustment proposed by the Transfer Pricing Officer which was incorporated in the draft assessment order by the Assessing Officer, the assessee filed objections before the Dispute Resolution Panel. The Dispute Resolution Panel rejected those objections and confirmed the transfer pricing adjustment suggested by the Transfer Pric....
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....o 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 differ ences in size of the companies would impact comparability. In this regard our attention was drawn to the decision of the Special Bench of the Income-tax Appellate Tribunal Chandigarh Bench in the case of Deputy CIT v. Quark Systems P. Ltd. 38 SOT 207, wherein the Special Bench had laid down that it is improper to proceed on the basis of lower limit of Rs. 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 deci sions as the decision of the Special Bench on this aspect would hold the field. Reference was also made to the OECD Transfer Pricing 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 v....
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....o 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 are 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 and Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun and 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 crore to Rs. 200 crores have to be taken as ....
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....onal transaction attracting the provisions of section 92 of the Act. Section 92C provides the manner of computation of arm's length price in an international transaction and it provides : '92C. (1) 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 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 :....
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....saction 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 characteristics of the property transferred or services provided in either transaction ; (b) the functions performed, taking into account as....
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....or the assessee clearly lay down the principle that the turnover filter is an important criteria in choosing compara bles. The assessee's turnover is Rs. 47,46,66,638. It would therefore fall within the category of companies in the range of turnover between Rs. 1 crore and Rs. 200 crores (as laid down in the case of Genisys Integrating Systems (India) Pvt. Ltd. v. Deputy CIT ITA No.1231/Bang/2010). Thus, companies having turnover of more than Rs. 200 crores have to be eliminated from the list of comparables as laid down in several decisions referred to by learned counsel for the assessee. Applying those tests, the following companies will have to be excluded from the list of 26 comparables drawn by the Transfer Pricing Officer viz., Turnover (Rs.) (crores) (1) Flextronics Software Systems Ltd. 848.66 (2) iGate Global Solutions Ltd. 747.27 (3) Mindtree Ltd. 590.39 (4) Persistent Systems Ltd. 293.74 (5) Sasken Communication Technologies Ltd. 343.57 (6) Tata Elxsi Ltd. 262.58 (7) Wipro Ltd. 961.09 (8) Infosys Technologies Ltd. 131.49" 12. Respectfully following the....
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....lusion on the basis that functionally the company is not comparable. With reference to pages 185 and 186 of the paper book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185 and 186 of the paper book from the website of the company to establish that it is engaged in providing of information technology enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, the assessee succeeds.' Based on all the above, it was submitted on behalf of the asses see that KALS Information Systems Ltd. should be rejected as a comparable. 22. We have given a careful consideration to the submission made on behalf of the assessee. We find that the Transfer Pricing Officer has drawn conclusions on the basis of information obtained by issue of notice under section 133(6) of the Act. This information which wa....
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....ejection of this company as a comparable to software service providers has been upheld by the co-ordinate Benches of this Tribunal in the cases of LG Soft India P. Ltd. (I. T. A. No. 1121/Bang/ 2011) and CSR India P. Ltd. v. ITO in IT(TP)A No. 1119/Bang/2011 and by the Delhi Bench of the Tribunal in the case of Transwitch India P. Ltd. (I. T. A. No. 6083/ Del/2010). (iv) The factual position and circumstances pertaining to this company has not changed from the earlier assessment year 2007-08 to the period under consideration, i.e., assessment year 2008-09 and therefore on this basis, this company cannot be considered as a comparable in the case on hand. (v) The relevant portion of the annual report of this company evidences that it is in the business of product development. The learned authorised representative prays that in view of the factual position as laid out above and the decisions of the co-ordinate Benches of the Tribunal in the assessee's own case for the assessment year 2007-08 and other cases cited above, it is clear that this company being into product development cannot be considered as a comparable to the assessee in the case on h....
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.... v. Deputy CIT [2014] 3 ITR (Trib)-OL 305 (Bang) held that this company is not functionally comparable with a software development service provider. The following were the relevant observations of the Tribunal in this regard (page 316) : "7.0. Avani Cincom Technologies Ltd. 7.1. This company was selected by the Transfer Pricing Officer as a comparable. The assessee objects to the inclusion of this company as a comparable on the ground that this company is not functionally comparable to the assessee as it is into software products whereas the assessee offers software development services to its associated enterprises. The Transfer Pricing Officer had rejected the objections of the assessee on the ground that this comparable company has categorised itself as a pure software developer, just like the assessee, and hence selected this company as a comparable. For this purpose, the Transfer Pricing Officer had relied on the information submitted by this company in response to enquiries carried out under section133(6) of the Act for collecting information about the company directly. 7.2. Before us, the learned authorised representative reiterated the assessee....
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....f the learned authorised representative, we are unable to agree that this company has to be deleted from the list of comparables only because it has been deleted from the set of comparables in the case of Trilogy E-Business Software India P. Ltd. v. Deputy CIT [2013] 23 ITR (Trib) 464 (Bang). No doubt this company has been deleted as a comparable in the case of Trilogy EBusiness Software India P. Ltd. and this can be a good guidance to decide on the comparability in the case on hand also. This alone, however, will not suffice for the following reasons : (i) The assessee needs to demonstrate that the FAR analysis and other relevant facts of the Trilogy E-Business Software India P. Ltd. v. Deputy CIT's case are equally applicable to the facts of the assessee's case also. Unless the facts and the FAR analysis of Trilogy's case is comparable to that of the asses see in the case on hand, comparison between the two is not tenable. (ii) After demonstrating the similarity and the comparability between the assessee and the Triology case, the assessee also needs to demonstrate that the facts applicable to the assessment year 2007- 08, the year for which the deci....
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....t and the show cause notices for both earlier year, i.e., assessment year 2007-08 and for this year and contended that the selection of this company as a comparable violates the principle enunciated in Curam Software International P. Ltd. (supra) that a company can be selected as a comparable only on the basis of FAR analysis conducted for that year and therefore pleaded for its exclusion. The learned authorised representative also submitted that he has brought on record sufficient evidence to show that the functional profile of this company remains unchanged from the earlier year and hence the findings rendered by the co-ordinate Benches of the Tribunal in the assessee's own case for the assessment year 2007-08 (supra) and in other cases like Trilogy E-Business Software India P. Ltd. v. Deputy CIT (supra) are applicable to the year under consideration as well. 7.5. Per contra, the learned Departmental representative supported the order of the Transfer Pricing Officer/Dispute Resolution Panel for inclusion of this company Avani Cincom Technologies Ltd. in the final set of comparables. 7.6.1. We have heard both parties and perused and carefully considered the m....
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....Pricing Officer viz., M/s. Celestial Biolabs Ltd., is concerned, this Tribunal in the case of 3DPLM Software Solutions Ltd. v. Deputy CIT [2014] 3 ITR (Trib)-OL 305 (Bang) held that this company is not functionally comparable with a software development service providers. The following were the relevant observations of the Tribunal in this regard (page 321) : 9. Celestial Biolabs Ltd. 9.1. This comparable was selected by the Transfer Pricing Officer for inclusion in the final list of comparables. Before the Transfer Pricing Officer, the assessee had objected to the inclusion of this company in the list of comparables for the reasons that it is functionally different from the assessee and that it fails the employee cost filter. The Transfer Pricing Officer, however, brushed aside the objections raised by the assessee by stating that the objections of functional dissimilarity has been dealt with in detail in the transfer pricing order for the assessment year 2007-08. As regards the objection raised in respect of the employee cost filter issue, the Transfer Pricing Officer rejected the objections by observing that the employee cost filter is only a trigger to know th....
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....e companies. The learned Departmental representative submitted that the decisions cited and relied on by the assessee are for the assessment year 2007- 08 and therefore there cannot be an assumption that it would continue to be applicable for the period under consideration, i.e., assessment year 2008-09. 9.4.1. We have heard both parties and perused and carefully consid ered the material on record. While it is true that the decisions cited and relied on by the assessee were with respect to the immediately previous assessment year, and there cannot be an assumption that it would continue to be applicable for this year as well, the same parity of reasoning is applicable to the Transfer Pricing Officer as well who seems to have selected this company as a comparable based on the reasoning given in the Transfer Pricing Officer's order for the earlier year. It is evidently clear from this, that the Transfer Pricing Officer has not carried out any independent FAR analysis for this company for this year, viz., assessment year 2008-09. To that extent, in our considered view, the selection process adopted by the Transfer Pricing Officer for inclusion of this company in the list of com....
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....ctionally different from the assessee. The Transfer Pricing Officer had rejected the objections raised by the assessee on the ground that as per the information received in response to notice under section 133(6) of the Act, this company is engaged in software development services and satisfies all the filters. 14.2. Before us, the learned authorised representative contended that this company ought to be excluded from the list of comparables on the ground that it is functionally different to the assessee. It is submitted by the learned authorised representative that this company is engaged in 'e-Business consulting services', consisting of web strategy services, information technology design services and in technology consulting services including product development consulting services. These services, the learned authorised representative contends, are high end information technology enabled services normally categorised as knowledge process outsourcing ('KPO') services. It is further submitted that this company has not provided segmental data in its annual report. The learned authorised representative submits that since the annual report of the company d....
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....olutions Ltd. be omitted from the set of comparables for the period under consideration in the case on hand. The Assessing Officer/Transfer Pricing Officer is accordingly directed. 15. Thirdware Solutions Ltd. (Segment) 15.1. This company was proposed for inclusion in the list of comparables by the Transfer Pricing Officer. Before the Transfer Pricing Officer, the assessee objected to the inclusion of this company in the list of comparables on the ground that its turnover was in excess of Rs. 500 crores. Before us, the assessee has objected to the inclusion of this company as a comparable for the reason that apart from software development services, it is in the business of product development and trading in software and giving licences for use of software. In this regard, the learned authorised representative submitted that : (i) This company is engaged in product development and earns revenue from sale of licences and subscription. It has been pointed out from the annual report that the company has not provided any separate segmental profit and loss account for software development services and product development services. (ii) In the case of E-Gain Communications P.....
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....he grounds that this company is functionally different and dis-similar from it. The Transfer Pricing Officer rejected the assessee's objections on the ground that as per the company's reply to the notice under section 133(6) of the Act, the company has categorised itself as a pure software developer and therefore included this company as a comparable as the assessee was also a provider of software development services. Before us, in addition to the plea that the company was functionally different, the assessee submitted that this company was excluded from the list of comparables by the order of the co-ordinate Bench of this Tribunal in the assessee's own case for the assessment year 2007-08 (I. T. A. No. 845/Bang/2011) on the ground that the 'related party transactions' (RPT) is in excess of 15 per cent. The learned authorised representative submitted that for the current period under consideration, the related party transactions is 18.3 per cent. and therefore this company requires to be omitted from the list of comparables. 19.2. Per contra, the learned Departmental representative supported the action of the Transfer Pricing Officer in including this ....
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....ternet charges amounting to Rs. 49,69,407 being telecommunication expenses and another sum of Rs. 29,13,578 being expenditure incurred in foreign currency towards travelling totalling in all Rs. 78,82,985 from export turnover on the ground that these expenses are incurred in rendering technical services rendered to clients outside India and therefore to be excluded from the export turnover while computing deduction under section 10A. The assessee prayed that the aforesaid expenditure are not of the nature set out in Explanation 2(iv) to section 10A of the Act which defines "export turnover". The assessee also made an alternate prayer that expenses that are reduced from the export turnover should also be reduced from the total turnover and in this regard has placed reliance on the decision of the hon'ble Karnataka High Court in the case of CIT v. Tata Elxsi Ltd. [2012] 349 ITR 98 (Karn) wherein the hon'ble court held that whatever is excluded from the export turnover should also be excluded from the total turnover for the purpose of computing deduction under section 10A of the Act. The main prayer as well as the alternate prayer was rejected by the Assessing Officer as well ....
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....proposal to disallow the sum for non-deduction of tax at source. The assessee did not prefer any objection on this proposed addition before the Dispute Resolution Panel. Section 144C reads as under : Reference to Dispute Resolution Panel.-(1) The Assessing Officer shall, notwithstanding anything to the contrary contained in this Act, in the first instance, forward a draft of the proposed order of assessment (hereafter in this section referred to as the draft order) to the eligible assessee if he proposes to make, on or after the 1st day of October, 2009, any variation in the income or loss returned which is prejudicial to the interest of such assessee. (2) On receipt of the draft order, the eligible assessee shall, within thirty days of the receipt by him of the draft order,- (a) file his acceptance of the variations to the Assessing Officer ; or (b) file his objections, if any, to such variation with,- (i) the Dispute Resolution Panel ; and (ii) the Assessing Officer. (3) The Assessing Officer shall complete the assessment on the basis of the draft order, if- (a) the assessee intimates to the Assessing Officer....