TaxTMI 
TaxTMI 
2015 (10) TMI 484
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....nue also in its appeal in grounds No.3 to 6 has challenged the order of the CIT(Appeals) insofar it is against the Revenue in the matter of determination of ALP of an international transaction entered into with its AE under the provisions of section 92 of the Act. 3. We shall first take up for consideration the appeal of the assessee. The assessee has before the Tribunal sought to press adjudication of only grounds No.6 & 7 which read as follows:- "6. The learned CIT(A) has erred, in law and in facts, by upholding the action of AO/TPO in accepting/rejecting certain comparables based on unreasonable comparability criteria. 7. The learned CIT(A) has erred, in law and in facts, by not adjudicating the Appellant's plea on the computational errors in the working capital adjustment performed by the learned TPO." 4. The assessee has also filed an application seeking adjudication of an additional ground, which reads as follows:- "The learned TPO and the learned AO have erred, in law and in facts, by applying only the lower turnover filter as a comparability criterion and accepting companies having turnover greater than Rs. 200 crores." 5. It has been submitted in the appl....
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.... by tax administrations or taxpayers as a justification for making groundless or unverifiable assertions about transfer pricing. A tax administration should be prepared to make good faith showing that its determination of transfer pricing is consistent with the arm's length principle even where the burden of proof is on the taxpayer, and the taxpayers similarly should be prepared to make good faith showing that their transfer pricing is consistent with the arm's length principle regardless of where the burden of proof lies." 36. The aforesaid decisions and guidelines may not be exactly on identical facts before us but they emphatically show that taxpayer is not estopped from pointing out a mistake in the assessment though such mistake is the result of evidence adduced by the taxpayer. 37. When substantial justice and technical considerations are pitted against each other, the cause of substantial justice deserves to be preferred. For the other side cannot claim to have a vested right in injustice being done due to some mistakes on its part. 38. Accordingly, on facts and circumstances of the case, we hold that taxpayer is not estopped from pointing out that Datamatics has w....
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.... by the taxpayer (as arrived at by the taxpayer) at 14.72% on the total cost was treated as being at arm's length. 11. Out of 21 comparables chosen by the assessee in its TP study, the TPO accepted the companies as comparables viz., Akshay Software Technologies Ltd., Infosys Technologies Ltd., L&T Infotech Ltd., Mind Tree Ltd., Persistent Systems Pvt. Ltd., R S Software (India) Ltd., Sasken Communication Technologies Ltd., and Zylog Systems Ltd. The TPO on a search of database chose 3 more companies as comparable companies and finally arrived at a set of 11 comparable companies, which were as follows:- Sl No Name of the Comparable Sales (in Rs.) Cost (in Rs.) Margin 1 KALS Information Systems Ltd. 2,14,04,686 1,87,93813 13.89% 2 Akshay Software Technologies Ltd. 12,23,21,483 11,31,49,350 8.11% 3 Bodhtree Consulting Ltd. 16,05,75,212 9,89,56,821 62.27% 4 R S Software (India) Ltd. 1,49,57,12,634 1,36,01,02,589 9.97% 5 Tata Elxsi Ltd. (segmental) 3,78,43,03,000 3,14,63,15,000 27.91% 6 Sasken Communication Technologies Ltd. (seg) 4,05,31,20,000 3,18,69,97,000 27.91% 7 Persi....
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....as part of the operating profits of the assessee, the CIT(Appeals) following the decision of the Tribunal in the Trilogy e-business Software India Pvt. Ltd. [23 ITR (Trib.) 464], held that gain foreign exchange fluctuation had to be treated as part of the operating revenue for the purpose of working out the profit margins. Following were the relevant observations of the CIT(Appeals):- "10.5.3 Thus, the fundamental principle, emerging is that if an expense has direct nexus with the revenues, it has to be taken as operating cost. Moereover, if foreign exchange gain is considered as a part of operating revenue, it naturally follows that foreign exchange losses have to be considered a part of operating costs. On applying the principles emerging from the orders of the Delhi & Bangalore Benches of the Hon'ble Tribunal, the TPO is directed to accept the claim of the assessee with respect to forex gain/losses. It is ordered accordingly." 16. Insofar as the challenge to computation of risk adjustment and working capital adjustment is concerned, the CIT(Appeals) held as follows:- "10.4.(iv) Risk adjustment / working capital : 10.4.1. I have examined the TPO's working and find tha....
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.... positive sense. Hence, the Hon'ble Tribunal's ruling will not apply in the instant case. Therefore, in my view, the appellant is entitled to risk adjustment as per prevailing norms which shall be worked out by the TPO and granted to the appellant. It is ordered accordingly." 17. Aggrieved by the order of CIT(Appeals) in not computing working capital adjustment as required by the assessee and upholding the comparability criteria adopted by the TPO, the assessee has preferred the present appeal before the Tribunal. 18. Aggrieved by the order of CIT(Appeals) holding that gain foreign exchange fluctuation should be treated as operating revenue of the assessee and the direction of the CIT(Appeals) to allow risk adjustment because of negative working capital adjustment given by the assessee, the Revenue has preferred the present appeal before the Tribunal. 19. As far as appeal of the assessee is concerned, it would be appropriate to adjudicate only the additional ground of appeal. It has been the stand of the assessee that turnover filter is an accepted filter and in this regard drew our attention to the decision of the Tribunal in the case of Trilogy e-business Software India ....
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....t 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 differences could either be with reference to the transaction or with reference to the enterprise. For instance, 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." 13. It was further submitted that the TPO's range (Rs. 1 crore to infinity) has resulted in selection of companies like Infosys which is 277 times bigger than the Assessee (turnover of Rs. 13,149 crores as compared to Rs. 47.47 crores of Assessee). It was submitted that an appropriate turnover range should be applied in selecting comparable uncontrolled companies. 14. Reference was made to the decision of the ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010, wherein relying on Dun and Bradstreet's a....
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....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 circumstances, it was submitted by him that the assessee cannot have any grievance in this regard. 17. We have considered the rival submissions. The provisions of the Act and the Rules that are relevant for deciding the issue have to be first seen. Sec.92. of the Act provides that any income arising from an international transaction shall be computed having regard to the arm's length price. Sec.92-B provides that "international transaction" means a transaction between two or more associated enterprises, either or both of whom are nonresidents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionmen....
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....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 Assessing Officer may proceed to determine the arm's length price in relation to the said international transaction in accordance with sub-sections (1) and (2), on the basis of such material or information or document available with him:" 18. Rule 10B of the IT Rules, 1962 prescribes rules for Determination of arm's length price under section 92C:- "10B. (1) For the purposes of sub-section (2) of section 92C, 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, in the following manner, namely :- (a)....... to (d)........ (e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation ....
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....o 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 to the financial year in which the international transaction has been entered into : Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared." 19. A reading of the provisions of Rule 10B(2) of the Rules shows that uncontrolled transaction has to be compared with international transaction having regard to the factors set out therein. Before us there is no dispute that the TNMM is the most appropriate method for determining the ALP of the international transaction. The disputes are with regard to the comparability of the comparable relied upon by the TPO. ....
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....ssee, which is purely a software development service provider. In this regard, the ld. counsel for the assessee drew our attention to the ITAT Bangalore Bench decision in the case of CISCO Systems India Pvt. Ltd., IT(TP)A No.271/Bang/2014, order dated 14.8.2014. In this case for the AY 2009-10, the Tribunal considered the comparability of Bodhtree Consulting Ltd. as well as KALS Information Systems Ltd. with a company engaged in the business of software development services. Following were the relevant observations of the Tribunal:- "26.1 Bodhtree Consulting Ltd.:- As far as this company is concerned, it is not in dispute that in the list of comparables chosen by the assessee, this company was also included by the assessee. The assessee, however, submits before us that later on it came to the assessee's notice that this company is not being considered as a comparable company in the case of companies rendering software development services. In this regard, the ld. counsel for the assessee has brought to our notice the decision of the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. v. ITO, ITA No.7633/Mum/2012, order dated 6.11.2013. In this case, the Tribun....
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....mparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows: "16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 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 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T 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, assessee succeeds." Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. ....
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....rement nor paid any interest. 37. The Appellant wishes to submit that in the circumstances and facts of the case no negative working capital adjustment is warranted as Appellant functions in a risk mitigated environment and is reimbursed on cost plus model by the AEs and is fully funded by the AEs for its working capital requirements." 25. The detailed working capital adjustment is annexed as Annexure-I to this order. It is the limited prayer of the ld. counsel for the assessee that the CIT(Appeals) has not considered the aforesaid claim made by the assessee and therefore the proper computation of working capital adjustment should be directed to be done by the TPO afresh. 26. We have considered the submissions of the ld. counsel for the assessee. We find that in ground No.15 raised before the CIT(Appeals), the assessee has taken a specific plea that the TPO has used incorrect value of receivables and payables for comparable companies. In Annexure-II to the submissions before the CIT(Appeals), the assessee has also given the details which are enclosed to this order. Perusal of the order of the CIT(Appeals) shows that none of these contentions have been considered by him. We....
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....e one realized from international transaction though they may form part of the gain/loss of the enterprise and therefore they should be excluded while determining operating cost. On the above issue we find that the Bangalore Bench of ITAT in the case of Sap Labs India (P) Ltd. Vs. ACIT (2011) 44 SOT 156 (Bang.) has taken the view that Foreign Exchange Fluctuation gains are required to be added to operating revenue. Following the same, the AO is directed to accept the claim of the Assessee in this regard. As far as provision for bad debts are concerned, the TPO has accepted that the same would be part of operating expenses provided the same is incurred every year for at least three years and the manner in which provision is made is consistent. The Assessee in reply to the query of the TPO on the above aspect has not furnished any details. We are of the view that the Assessee should be afforded opportunity to explain its position on the above and the AO is directed to consider the same in accordance with law. As far as Fringe Benefit Tax (FBT) is concerned, the same was not considered by the TPO as part of operating cost in the case of comparables and therefore the same should also n....