TaxTMI 
TaxTMI 
2015 (10) TMI 2242
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.... Assessment Year 2006-07, the assessee filed its return of income on 27.11.2006 declaring income of Rs. 3,800 after claiming deduction under Section 10A of the Act. The return was processed under Section 143(1) and subsequently the case was taken up for scrutiny. A reference under Section 92CA of the Act was made by the Assessing Officer to the Transfer Pricing Officer ('TPO') in respect of determination of the Arm's Length Price (ALP) of the international transactions entered into by the assessee with its Associated Enterprises (AEs). The TPO passed an order under Section 92CA of the Act dt.26.10.2009 making an adjustment of Rs. 4,25,58,502 to the international transactions of the assessee in respect of its software development services. 2.2 After receipt of the order of the TPO u/s.92CA of the Act, the Assessing Officer passed the draft assessment order under Section 143(3) of the Act, incorporating the T.P. Adjustment of Rs. 4,25,58,502 proposed by the TPO. Aggrieved by the draft order of assessment dt.21.12.2009 for Assessment Year 2006-07, the assessee filed its objections thereto before the DRP, Bangalore, which disposed off the assessee's objections vide directions is....
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....O erred in rejecting companies similar to the appellant in functions, asset base and risk profile hwile performing comparability analysis. 3.6 That the learned TPO erred in not allowing the benefit of range of +/- 5% as provided in proviso to section 92C(2) of the Act, while determining the ALP. 3.7 That the learned TPO erred in upholding the erroneous actions of the learned TPO as stated in Grounds 3.1 to 3.6 above. 4. That on the facts and in the circumstances of the case the learned A.O. has wrongly computed the adjustment in ALP post receipt of the directions from the learned Panel, and it is a mistake apparent from record. The total adjustment determined by the learned Panel with regards to the ALP is Rs. 42,176,329 instead of Rs. 42,240,024 as determined by the learned A.O., thereby increasing the adjustment by Rs. 63,695. Other than Transfer pricing Related. 5.1 That the learned A.O. and the learned Panel, erred in law and facts in reducing an adhoc amount of communication expenses of INR 80,91,499 from export turnover while computing the deduction under Section 10A of the Act. 5.2 That on the facts and in the circumstances of the....
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....e learned A.O. and the learned Panel, erred in consequently levying interest under Section 234B of the Act." 3.2 Grounds No. 1 to 4 - pertain to the Transfer Pricing Adjustment made. Grounds No.5 to 8 - pertain to the computation of the deduction u/s. 10A of the Act. Ground No.9 - relates to the charge of interest u/s.234B of the Act. TRANSFER PRICING ISSUES (Grounds 1 to 4) 4.1 In the course of proceedings before us, the learned Authorised Representative for the assessee that the assessee wishes to press only the grounds related to the comparability of the companies raised in Ground No. 3.4 and is not pressing any other issue related to the Transfer Pricing issues. In view of the Grounds at S.Nos. 1 to 3.3, 3.5 to 3.7 and 4 not being pressed by the assessee, they are rendered infructuous and are accordingly dismissed. Before proceeding to deal with the ground of appeal No. 3.4, the brief facts relating to the T.P. issues are summarized hereunder :- 4.2 The assessee is engaged in the provision of software development and product support services to its group companies. For the year under consideration, the assessee has reported the following international transact....
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....te Global Solutions Ltd. (Seg.) 527.91 15.61 Average 20.68% 4.6 The TPO thereafter proceeded to determine the Arm's Length Price ('ALP') of the international transactions by applying the arithmetic mean margin of 20.68% of the final list of comparables chosen by him. After allowing for working capital adjustment of 2.18%, the TPO completed the ALP as follows :- Particulars Amount (Rs.) Arm's Length Mean Margin 20.68% Less : Working Capital Adjustment 2.18% Adjusted Mean Margin 18.50% Operating Cost 63,69,56,013 ALP 118.50% of OC 75,47,92,875 Price Shown as received 71,22,34,373 Shortfall being the T. P. Adjustment u/s.92CA 4,25,58,502 4.7 Based on the above computation, the TPO proposed an adjustment of Rs. 4,25,58,502 to the software development services segment of the assessee which was incorporated by the Assessing Officer in the draft order of assessment. The objections filed by the assessee before the DRP regarding the comparability of the companies selected by the TPO were rejected and subsequent thereto the Assessing Officer passed the impugned assessment order. Aggrieved by the final order of assessmen....
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....(Seg.) - The assessee objected to the inclusion of this company in the final set of comparables before the authorities below on the ground that this company had RPT of 19.34%, which is above the limit of 15% specified as the yardstick by different co-ordinate benches of this Tribunal in various cases. In support of the above contention, for exclusion of Geometric Software Ltd., the learned Authorised Representative for the assessee placed reliance on the decision of a co-ordinate bench of this Tribunal in the case of Huawei Technologies India Pvt. Ltd. for Assessment Year 2006-07 (supra). 6.3 Megasoft Ltd. - This company was chosen as a comparable by the assessee itself in its T.P. Study. The assessee, however, objected to the inclusion of this company in the final list of comparables before the DRP on the ground that the RPT in this case in 17.08% which is above the limit of 15% specified as the yardstick by different co-ordinate benches of this Tribunal in various cases. In support of its contention, for exclusion of this company from the list of comparables, the learned Authorised Representative of the assessee placed reliance on the decision of the co-ordinate bench of this ....
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....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 revenues for the financial year 2003-04." 17. In view of the above, the aforesaid comparable should also be excluded for the purpose of comparison while determining the ALP of the international transaction in question." 6.5.2 Following the aforesaid decision of the co-ordinate bench of this Tribunal in the case of Huawei Technologies India Pvt. Ltd. for Assessment Year 2006-07 (supra), we hold that these three companies, namely Aztec Software Ltd., Geometric Software Ltd. and Megasoft L....
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....e supported the orders of the TPO in including these two companies as comparables to the assessee in the case on hand. 7.4.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial pronouncement relied on by the assessee. We find that the coordinate bench of this Tribunal in the case of Huawei Technologies India Pvt. Ltd. for Assessment Year 2006-07 (supra) has excluded these two companies from the list of comparables to assessee's engaged in the software development services as they are functionally different. At paras 12 and 13 of its order, the co-ordinate bench has held as under :- "12. In so far Kals Info Systems Ltd., and Accel Transmatics Ltd. chosen by the TPO as comparables, this Tribunal in the case of Triology E-Business Software India Pvt. Ltd. (supra) has taken a view that these companies are not comparable to the software service provider companies as they are functionally different. The following are the relevant observationsof the Tribunal in this regard :- (d) KALS Information Systems Ltd. 46. As far as this company is concerned, the contention of the assessee is that ....
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.... this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable. (e) Accel Transmatic Ltd. 48. With regard to this company, the complaint of the assessee is that this company is not a pure software development service company. It is further submitted that in a Mumbai Tribunal Decision of Capgemini India (F) Ltd v Ad. CIT 12 Taxman.com 51, the DRP accepted the contention of the assessee that Accel Transmatic should be rejected as comparable. The relevant observations of DRP as extracted by the ITAT in its order are as follows: "In regard to Accel Transmatics Ltd. the assessee submitted the company profile and its annual report for financial year 2005-06 from which the DRP noted that the business activities of the company were as under. (i) Transmatic system - design, development and manufacture of multi function kiosks Queue management system, ticket vending system (ii) Ushus Technologies - offshore development centre for embedded software, net work system, imaging technologies, outsourced product development ....
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....m the set of comparable companies for the software development services segment of the assessee. 8. (6) Tata Elxsi Ltd. (7) Lucid Software Ltd. 8.1 Both the above companies were selected as comparables by the TPO. Tata Elxsi Ltd. was retained as comparable inspite of the assessee's objection to its inclusion before the DRP. It is the contention of the assessee that these two companies are functionally different from companies engaged in the business of providing software development services and therefore ought to be excluded as comparables to the assessee in the case on hand who is only providing software development services to its AEs. 8.1.1 In respect of Lucid Software Ltd., it was submitted by the learned Authorised Representative that this company apart from providing software development services was also into development of software products such as 'Muulam' which is used for civil engineering structures. It was further submitted that a substantial portion of its capital i.e. upto 39% was employed as product development expenditure. The learned A.R. submitted that in view of the above activities of this company i.e. Lucid Software Ltd., it was functionally d....
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....ion received in response to notice under Section 133(6), the company has described its business as software development company or pure software development service provider. This information itself is very vague as the segmental details of operating revenue has not been made available to examine how much is the ratio of sale from software product and sale of software service and development. Looking to the fact that it has developed a software product named as "Muulam" which is used for civil engineering structures and the product development expenditure itself is substantial vis-à-vis the capital employed by the said company, this criteria for being taken as comparable party, gets vitiated. For the purpose of comparability analysis, it is essential that the characteristics and the functions are by and large similar as that of the assessee company and T.P. analysis/study can be made with fewest and most reliable adjustment. If a company has employed heavy capital in development of a product then profitability in the sale of product would be entirely different from the company, who is involved in service sector. Therefore, this company cannot be treated as having same functi....
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....tware development services to its AEs, as is the assessee in the case on hand. In support of this contention, the learned Authorised Representative of the assessee placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of Huawei Technologies India Pvt. Ltd. for Assessment Year 2006-07 (supra). 9.2 Per contra, the learned Departmental Representative supported the order of the TPO in including this company as a comparable to the assessee in the case on hand. 9.3.1 We have heard both parties and perused and carefully considered the material on record; including the judicial decision cited and relied on by the assessee. We find that a coordinate bench of this Tribunal in the case of Huawei Technologies India Pvt. Ltd. for Assessment Year 2006-07 (supra) has, inter alia, excluded this company from the list of comparables holding as under at paras 10 & 11 thereof :- "10. Insofar as Infosys Ltd., Flextronics Software Systems Ltd., iGate Global Solutions Ltd., Mindtree Consulting Ltd., Persistent Systems Ltd., and Sasken Communication Ltd. chosen by the TPO as comparables, it is not in dispute that the turnover of these companies is more than R....
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....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 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....
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....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 Q 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 enterprise....
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....terial 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 Assessing Officer may proceed to determine the arm's length price in relation to the said international transaction in accordance with subsections (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) o....
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.... 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 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 t....
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....foreign currency and communication expenses from export turnover while computing the deduction under Section 10A of the Act. Without prejudice to its above contention that the aforesaid sums should not be excluded from the export turnover, while computing the deduction under Section 10A of the Act, the assessee in Ground No.8 has also made an alternate plea that the expenses that are reduced from export turnover should also be reduced from total turnover, placing reliance on the decision of the Hon'ble Karnataka High Court in the case of CIT V Tata Elxsi Ltd. (2012) 349 ITR 98 (Kar). 10.2 We have heard both the learned Authorised Representative and the learned Departmental Representative in the matter. Taking into consideration the decision rendered by the Hon'ble High Court of Karnataka in the case of Tata Elxsi Ltd. (supra), we are of the view that it would be just and appropriate to direct the Assessing Officer that communication charges and expenses incurred in foreign currency are to be excluded from both export turnover as well as total turnover while computing the deduction under Section 10A of the Act, as has been prayed by the assessee in its alternate plea at G....