TaxTMI 
TaxTMI 
TaxTMI 
2015 (10) TMI 484
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....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 application for admission of additional ground that the ap....
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....g 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 wrongly been taken as comparable. While admitting additional ground of a....
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....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 Persistent Systems Ltd. 5,19,69,10,000 3,67,52,70,000 27.91% 8 Zylog Systems Ltd. 7,34,93,51,475 7.81% 9 Mindtree Ltd. (seg) 7,93,22,79,326 5,74,06,73,058 5.52% 10 Larsen and ....
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....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 that he has provided a working capital adjustment on the basis of the detailed working as per Annexure-C of his order. Recently, the Mumbai Bench of the Hon'ble Tribunal in Exxon Mobil Company India P. Ltd. v. Deputy Commissioner of Income-tax (15 ITR (Trib) 353) has observed :- "The other issue is....
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.... 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 Pvt. Ltd. (supra). In the aforesaid decision, this Tribunal has taken the following view:- "(1) Turnover Filter 11. The ld. counsel for the assessee submitted that the TPO has applied a lower turnover filter of Rs. 1 crore, but has not chosen to apply any upper turnover limit. In this regard, it was submitted....
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....o 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 analysis, the turnover of Rs. 1 crore to Rs. 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....
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.... 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 apportionment of, 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 ....
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....n 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 to costs incurred or sales effected or assets employed or to be employed by the enterprise 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 subclause (ii) arising in comparable uncontrolled transactions is adjusted to take into....
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....ore 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. 20. In this regard we find that the provisions of law pointed out by the ld. counsel for the assessee as well as the decisions referred to by the ld. counsel 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 Rs. 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, compan....
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....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 Tribunal followed the decision rendered by the Mumbai Bench of the Tribunal in the case of Wills Processing Services (I) P. Ltd., ITA No.4547/Mum/2012. In the aforesaid decisions, the Tribunal has taken the view that Bodhtree Consulting Ltd. is in the business of software products and was engaged in providing open & end to end web solutions software consultancy and design & development of software using latest technology. The decision rendered by the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. (supra) is in relation to A.Y. 2008- 09. It was affirmed by the learned counsel for the Assessee that the....
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....t 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. 47. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software de....
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....PO 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 are, therefore, of the view that the order of CIT(Appeals) on this issue should be set aside and the AO/TPO should be directed to examine the details and arrive at the correct working capital adjustment. We hold and direct accordingly. 27. As far as grievance of the Revenue in its appeal is concerned, ground No.2 is with regard to treating the expenses incurred in foreign currency towards telecommunication expenses and other expenses as part of total turnover and export turnover. 28. According to the AO, as per the definition of export turnover given in clause (iv) to Explanation 2, the expenses incurred for freight expenses attributable to the delivery of the produc....
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....s 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 not be considered as part of operating cost of the Assessee. We hold accordingly and direct the AO to compute the operating cost of the Assessee." 33. In view of the aforesaid decision, we do not find any merit in grounds No. 3 to 5 raised by the Revenue and they are dismissed as such. 34. As far as ground No.6 is concerned, the same reads as follows:- "6. In so far as the issue of working capital adjustment is concerned, the learned CIT(A) erred in holding that working capital adjustment has not been provided as it has negative impact. This is because working capital adjustment is given to increase comparability on the uncontrolled comparables with tested party and not to provide be....