TaxTMI 
TaxTMI 
TaxTMI 
2015 (10) TMI 2242
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....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 issued u/s.144C(5) rws 144C(8) of the Act dt.17.9....
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....ile 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 case, the learned A.O. and the learned Panel, erred in assuming that the communication expenses of INR 80,91,499 have been incurr....
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.... 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 transactions :- Contract Software Development Services Rs.70,26,88,856 Reimbursement of expenses paid Rs.67,45,015 Reimbursement of expenses received Rs.95,45,517. 4.3 The financial result....
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.... 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 assessment dt.18.10.2010 for Assessment Year 2006-07, the assessee is before the Tribunal in appeal. 4.8 We have heard the rival contentions and perused and carefully considered the material on record including the impugned order of assessment for Assessment Year 2006-07, the directions of the DRP, the submissions put forth by both the learned Authorised Representative for the assessee and the learned Departme....
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....ced 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 Tribunal in the case of Huawei Technologies India Pvt. Ltd. for Assessment Year 2006-07 (supra). 6.4 Per contra, the learned Departmental Representative supported the order of the TPO including these three companies in the list of comparables to the assessee. 6.5.1 We have heard the rival contentions and have perused and carefully considered the material on record, including the judicial decision relied on by the assessee. We find that....
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....ase 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 Ltd. shall be excluded from the set of comparables for the software development services segment of the assessee. 7.1 (4) KALS Infosystems Ltd. This company was selected as a comparable by the TPO and was retained as a comparable even though the assessee objected to its inclusion before the DRP. It is the contention of the assessee that this company is into software products, and training apart from provision of software development services and therefore being functional....
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....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 the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual repot, the salary cost debited under the software development expenditure was Rs. 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal's decision of the ....
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....l 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 (iii) Accel IT Academy (the net stop for engineers)- training services in hardware and networking, enterprise system management, embedded system, VLSI designs, CAD/CAM/BPO (iv) Accel Animation Studies software services for 2D/3D animation, special effect, erection, game asset development. 4.3 On careful perusal of the business activities of Accel Transmatic Ltd. DRP agreed with the assessee that the company was functionally different from the assessee company as it was engaged in the services in the form of ACCEL IT and ACCEL animation services for 2....
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....ly 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 different from the assessee in the case on hand who is merely providing software development services to its AEs. 8.1.2 In respect of Tata Elxsi Ltd., the learned A.R. submitted that this company is engaged in development of niche products and development services and also in research and development activities which has resulted in the creation and ownership of IPRs. In view of the above activities of this company i.e. Tata Elxsi Ltd., the ld. A.R. submits that this company is functionally different and ought to be excluded from the list of comparables to the assessee who is into only the business p....
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....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 function and profitability ratio. In our view, due to non-availability of full information abut the segmental details as to how much is the sale of product and how much is from the services, therefore, this entity cannot be taken into account for comparability analysis for determining arm's length price in the case of the assessee." 15. In view of the aforesaid decision of the Mumbai Bench of the Tribunal, which is in relation to A.Y. 2006-07, we are of the view that Lucid Software Ltd. and Tata Elxsi Ltd. are also to be excluded as comparables while determining the ALP of the international transaction impugned in this appeal.....
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....ee. 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 Rs. 200 Crores. The turnover of the assessee in the present case is 114.13 Crores (Approx.). It has beenheld by this Tribunal in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) that companies with a turnover of more thn Rs. 200 Crores cannot be taken as comparables while determining the ALP in the case of companies having turnover of less than Rs. 200 Crores. The following are the relevant observations of the Tribunal in this regard :- " (1) Turnover Filter 11. The ld. counsel for the assessee submitted that the TPO has applied a lower turnover filter of Q 1 crore, but has not chosen to apply any upper turnover limit. In this regard, i....
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....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 analysis, the turnover of Q 1 crore to Q 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 ....
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.... 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 non-residents, 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 ....
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....e 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) 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 sub-clause (ii) arising in compara....
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....tered 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. 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 Q 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 Sys....