TaxTMI 
TaxTMI 
2015 (11) TMI 66
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....143(1) of the Income Tax Act, 1961 (in short 'the Act') and the case was subsequently taken up for scrutiny. Since the assessee reported that in the period under consideration it had entered into international transactions with its AE viz. transactions of rendering software development services, to the extent of Rs. 5,95,41,473, the Assessing Officer made a reference under Section 92CA of the Act to the Transfer Pricing Officer ('TPO') for determining the Arm's Length Price ('ALP') of these international transactions, after obtaining approval from the CIT - III, Bangalore. 2.2 In its T.P. Study, the assessee adopted the Cost Plus Method (CPM) to justify the price charged by the assessee to its AE in respect of the international transactions between them. The TPO in the order passed under Section 92CA of the Act dt.30.6.2004, rejected the CPM adopted by the assessee stating that it does not satisfy the principles laid down in Rule 10C of the Income Tax Rules, 1962 ('the Rules'). The TPO adopted the CUP Method as the Most Appropriate Method ('MAM'). The TPO compared the industry average at US $ 144 per man day based on NASSCOM with the rate charged by the assessee. The ALP....
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....rs and proposed the following three comparables :- S. No. Name of the company Margin % 1. Lanco Global Systems Ltd. 17.92 2. Motherson Sumi Infotech Designs (-) 10.12 3. Cherry Soft Technologies Ltd. 3.11 Average Mean Margin 3.64 The TPO filed a remand report thereon and proposed that the following companies may be taken as comparables. 1. Lanco Global Systems Ltd. 2. Geometric Software Solutions Ltd. 3. Infosys Technologies Ltd. 4. Mphasis BFL Ltd. 5. Visualsoft Technologies Ltd. 6. Kshema Technologies Ltd. 3.2.2 The learned CIT (Appeals) disposed off the assessee's appeal vide order dt.21.3.2012 allowing the assessee partial relief and finally adopted the following companies as comparable to the assessee :- S. No. Name of the Company Margin % 1. Lanco Global Systems Ltd. 23.01 2. Xcel Vision Technologies. 36.68 3. Kshema Technologies Ltd. 23.06 Average Margin 27.58 3.2.3 In his order, the learned CIT (Appeals) has rendered the following findings :- (a) Applying the Related Party Transactio....
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....ar as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case. 2. The learned CIT (Appeals) was not justified in allowing relief to the assessee out of the additions made by the Assessing Officer in terms of 92CA of the I.T. Act, 1961, without appreciating the facts and circumstances under which the adjustment was made by the Assessing Officer based on the TPO's order. 3. The learned CIT (Appeals) has erred in rejecting seven comparable companies in the transfer pricing study as against nine comparables recommended by the TPO. 4. The learned CIT (Appeals) has erred in holding that the size, turnover and brand of the company are deciding factors for treating a company as comparable, and accordingly erred in excluding M/s. Flextronics Software Systems Ltd., M/s. Infosys Technologies Ltd. M/s. L&T Infotech Ltd., M/s. Satyam Computer Services Ltd. and M/s. iFlex Solution Ltd. as a comparable in software development segment. 5. The learned CIT (Appeals) has erred in holding that the TPO should not include uncontrolled comparables having any related party transactions even upto 25%. 6. The le....
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.... transfer pricing analysis of the appellant under Cost Plus Method on unjustifiable grounds. 6. The learned Commissioner of Income Tax (Appeals) - IV has erred in: a. Performing fresh transfer pricing analysis and adopting inappropriate filters in doing fresh transfer pricing analysis. b. selecting TNMM as the most appropriate method. c. adopting companies as comparables even though they are not comparable to the appellant. d. Not appreciating that the law does not compel adopting many (or any minimum) companies as comparables and that the appellant could justify the price paid/charged on the basis of any one comparable only. e. not making proper adjustment for enterprise level and transactional level differences between the appellant and the comparable companies. f. not making proper adjustment for risk differences between the appellant and the comparable companies. 7. The learned Commissioner of Income Tax (Appeals) - IV, while passing the Order, has erred in a. changing the filters proposed in his own notice without giving an opportunity of being heard to the appellant. b. not appreciating that insi....
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....i. ACI Worldwide Solutions Pvt. Ltd. in ITA No.1276/Bang/2012 for Assessment Year 2003-04. iii. Phillips Software Centre Pvt. Ltd. in ITA No.218/Bang/2008 for Assessment Year 2003-04. In the light of the above observations, we proceed to examine the grounds raised by the assessee at S.Nos.5 to 8 on T.P. issues. 7.2 Ground No.5(a) & (b) are raised with respect to the rejection of the Cost Plus Method adopted by the assessee in its T.P. Study as the MAM and the rejection of the T.P. analysis carried out thereunder. As these grounds have not been urged before us, they are rendered infructuous and are accordingly dismissed. 7.3 Ground No.6(1) to (f) are raised with respect to the action of the learned CIT (Appeals) in conducting a fresh T.P. analysis under TNMM and comparables selected thereunder. The assessee, we find, has not disputed before us the selection of TNMM as the MAM. With respect to the assessee's submissions on comparables and risk adjustment, the same are specifically examined and considered later. 7.4 Ground No.7(a) to (d) are raised in respect of the inclusion of certain companies as comparables by the TPO and exclusion of certain other compara....
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.... the co-ordinate bench held as under :- "13.0 RELATED PARTY TRANSACTIONS In respect of the ground raised at S.No.1 regarding acceptance of comparable companies having related party transactions as proposed by the TPO, the learned counsel for the assessee argued that the transfer pricing regulations do not stipulate any minimum limit of related party transactions which form the threshold for exclusion as a comparable. In this regard, the learned counsel for the assessee objected to the TPO's setting a limit of 25% on related party transactions. He objected to the inclusion of comparables being related party transactions in excess of 15% of sales / revenue. In support of this proposition, the learned counsel for the assessee placed reliance on the decision of the Hon'ble Bench of the ITAT, Delhi in the case of Sony India (P) Ltd. reported in 2008-TIOL-439-ITAT-Delhi dt.23.12.2008. The learned counsel for the assessee drew our attention to para 115.3 of the order wherein the Tribunal has held that - " ...........We are further of the view that an entity can be taken as uncontrolled if its related party transactions do not exceed 10 to 15% of total revenu....
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....ify the details of RPT from the Annual Report of this company and if need be call for information under Section 133(6) of the Act so that a decision in this regard can be taken, after affording the assessee adequate opportunity of being heard. 9. Xcel Vision Technologies (Ground No.7C) 9.1.1 The contention of the assessee is that this company Xcel Vision Technologies should not have been included in the final list of comparables by the learned CIT (Appeals) as it fails the employee cost filter of 25% applied by the CIT (Appeals) himself. It was submitted that the factual position as per the company's profit and loss account for F.Y. 2001-02 was that the revenue from software service was Rs. 2,36,70,748 while the salary cost was Rs. 58,48,177 which constituted 24.70% of the turnover and therefore failed the salary cost filter of 25% adopted by the learned CIT (Appeals) himself. 9.1.2 It was submitted that the salary cost of the assessee in the case on hand was more than 60% of turnover and hence a company having 24.70% of salary cost is not comparable and ought to be excluded from the list of comparables. It was sub mitted that at para 7 of the impugned order, the learned C....
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....tted a fresh T.P. Study taking TNMM as the MAM and proposed the following three companies as comparables to the assessee :- (i) Lanco Global Systems Ltd.; (ii) Cherry Soft Technologies Ltd. and (iii) Motherson Sumi Infotech & Design Ltd. Out of the above three companies, Lanco Global Systems Ltd. found a place in the comparables selected by the learned CIT (Appeals) and the other two were rejected. 10.2 It is submitted that the learned CIT (Appeals) on the basis of figures in the Annual Report; that the assessee has domestic income to the extent of 23.35% as against total export receipts of Rs. 4.31 Crores concluded that the major revenue of this company is from on-site revenue operations and rejected this company as a comparable. The assessee submits that the export revenue of Cherry Soft Technologies Ltd. is in excess of 75%, foreign currency expenses at Rs. 2.11 Crores are less than 50% of sales and therefore logically the on-site revenue cannot be more than 75% of sales. In view of this, applying the learned CIT (Appeals)'s on-site revenue filter of 75%, this company ought to be included in the list of comparables. 10.3 Per contra, the learne....
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....ed by the assessee the co-ordinate bench of the Tribunal in the assessee's own case has granted an adhoc deduction/adjustment of 2% towards working capital and risk differential based on the facts of the case. Keeping in mind the order of the co-ordinate bench of this Tribunal granting the assessee an adhoc 2% adjustment towards working capital and risk differentials, in its order in the assessee's own case for Assessment Year 2003-04, we restore this matter to the file of the Assessing Officer / TPO and direct them to examine and de novo adjudicate on the assessee's claim for grant of working capital and risk adjustment, taking into account the facts of the case for the year under consideration in the light of the Tribunal's order for Assessment Year 2003-04 (supra) after affording the assessee adequate opportunity of being heard and file details/submissions in this regard. It is ordered accordingly. 12. In the result, the assessee's appeal for Assessment Year 2002-03 is partly allowed. Revenue's Appeal in IT(TP)A No.782/Bang/2012 for A.Y. 2002-03 13. The Grounds raised at S.Nos.1 to 3, 8 and 9 are general in nature and not being specifically urged before ....
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....re being functionally different; (iv) Satyam Computer Services Ltd.; for the reason that its financials are not reliable. (v) Infosys Technologies Ltd.; on the grounds that it is functionally different and dissimilar as it owns IPRs, has brand value attributable to profits etc. whereas the assessee is mere provider of software development services. 14.3.1 We have heard the rival submissions and perused and carefully considered the material on record, including the judicial decisions cited. Following the decision of the coordinate bench in the case of Genesys Integrating Systems (India) Pvt. Ltd. (supra), we hold and direct that the above 5 companies, listed at para 14.1 of this order, having turnover of more than Rs. 200 Crores, should be excluded from the list of comparable companies. Consequently, Ground No.4 raised by Revenue stands dismissed. 15.0 Ground No.5 - RPT Filter. 15.1 This Ground already stands disposed off along with the assessee's ground at S.No.7(b) at para 8.3 to 8.5 of this order, wherein the following companies have been excluded from the set of comparable companies as they have RPT in excess of 15%, by following the decision of the co-ordinat....
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....011, we hold and direct that this company, having RPT of 16.25% fails the RPT filter of 15% applied and followed by other co-ordinate benches of this Tribunal, is to be excluded from the list of comparables. Even otherwise from the observations of the learned CIT (Appeals) from the Annual Report of this company as laid out in para 16.2 of this order, it is evident from its diversified activities that this company is functionally different and dis-similar from the assessee in the case on hand, who is a mere provider of software development services. Consequently, Ground No.6 raised by Revenue is dismissed. 17. Ground No.7 : Visualsoft Technologies Ltd. 17.1 In this Ground, Revenue contends that this company ought to be included in the list of comparables as it passes the on-site revenue filter of 75% applied by the learned CIT (Appeals). 17.2 Per contra, the learned Authorised Representative for the assessee supported the impugned order of the learned CIT (Appeals) in rejecting / excluding this company from the list of comparables to the assessee. The learned Authorised Representative drew the attention of the bench to para 3 on page 20 of the impugned order where the learn....