TaxTMI 
TaxTMI 
TaxTMI 
2015 (11) TMI 66
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....#39;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 was determined at Rs. 8,28,77,500 and the T.P. ....
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....hnologies 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 Transaction ('RPT') filter in excess of 0 %, the learned CIT (Appeals) directed the exclusion of the following companies from the list of comparables :- S. No. Name of the Company RPT % 1. Geometric Software Solutions Company Ltd. 16.25 2. Mphasis BFL Ltd. 13.78 3. Orient Information Technologies Ltd. ....
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....ppeals) 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 learned CIT (Appeals) has erred in holding that M/s. Geometric Software Solutions Ltd. cannot be taken as comparable, being functionally different. 7. The learned CIT (Appeals) has erred in holding that the comparable M/s. Visual Soft Technologies Ltd. is predominantly engaged in the onsite development of software. 8. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT (Appeals) be reversed in so far as t....
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.... 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 insignificant related party transaction cannot be held to have significant influence on profitability of comparable companies. c. Adopting Kshema Technologies and Xcel Vision Technologies Limited as comparable. d. rejecting Cherry Soft Technologies Limited, which was proposed as comparable by the appellant under TNMM, on unjustifiable grounds. 8. Without prejudice to the above, the benefit of the +/-5% range as per the proviso to section 92C (2) should be given. PRAYER 9. On an overall consideration of the facts of the case, and the law applicable, the ALP as determined by the Transfer Pricing....
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....ised 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 comparables and the application of certain filters. As we will be examining and considering the comparability or otherwise of the individual companies as raised by the assessee before us, the same would address and dispose off this ground. 7.5 Ground No.8 - this ground is raised regarding the non-allowance of benefit of + / - 5% as per the proviso to Section 92C(2) of the Act. This ground is now more of an academic nature, as subsequent to the amendment of the Income Tax Act, 1961 w.r.e.f. 1.4.2002 by the introduction of the clarificatory amendment by way of insertion of Section 92C(2A) by Finance Act, 2012, the assessee is not entitled to the benefit of 5%. In this view of the....
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....aced 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 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." 8.4 The above decisions holding that companies having RPT in excess of 15% should....
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.... 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 CIT (Appeals) although factually accepting that the company fails the employee cost filter of 25% applied by him, states that it should be accepted as a comparable as salary cost is almost 25%. The learned Authorised Representative submitted that as this company fails the employee cost filter of 25% applied by the learned CIT (Appeals), this company ought to be excluded from the list of comparables. 9.2 Per contra, the learned Departmental Representative supported the orders of the learned CIT (Appeals) in including this company in the list of comparables to the assessee. 9.3.1 We have heard the rival contentions and perused and carefully considered the material on record. On a perusal of the impugned order, we find at page 12 thereof in para 7 of the show cause notice, the filter clearly stated is tha....
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....es 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 learned Departmental Representative supported the order of the learned CIT (Appeals) in rejecting this company as a comparable. 10.4 We have heard the rival contentions and perused and carefully considered the material on record. As seen from the record, the learned CIT (Appeals) applied the on-site revenue filter of 75%. According to the assessee, the company is export oriented and has export turnover in excess of 75% of sales, its foreign currency expenses are less than 50% of sales and therefore the conclusion of the learned CIT (Appeals) to exclude this company by applying the on-site was incorrect. From the record it appears that these submissions/arguments put forth by the assessee have not been examined by the learned CIT (Appeals) and therefore, in the interest of justice and equity, we deem it fit to restore the matter to the file....
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.... 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 us, no adjudication is called for thereon. 14. Ground No.4 : Turnover Filter. 14.1 Revenue contends that size, turnover and brand of the company are not deciding factors for treating companies as comparables as they do not follow a definite plan. In this regard, the learned Departmental Representative placed reliance on the decision of Capgemini India Pvt. Ltd. V ACIT in ITA No.786/Bang/2011 and sought the reinstatement of the following companies, which had turnover in excess of Rs. 200 Crores, in the list of comparables :- Turnover (Rs. in Crores) (i) M/s. Flextronics Software Systems Ltd. Rs.234.88 (ii) Infosys Technologies Ltd. Rs.2,603.59 (iii) L&T Infotech Ltd. Rs.266.69. (iv) Satyam Computer Services Ltd. Rs.1,731.94 (v) iFlex Solutions Ltd. Rs.415.03. 14.2.1 Per contra, the learned Authorised Representative pray....
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....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-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2012 :- (i) Geometric Software Solutions Ltd. 16.25%. (ii) Quinnox Consulting Services Ltd. 88.12% (iii) Motherson Sumi Infotech and Designs Ltd. 87. 51% Consequently, Revenue's Ground No.5 is partly allowed. 16. Ground No.6 : Geometric Software Solutions Ltd. 16.1 In this Ground, Revenue presses for the inclusion of this company as a comparable, contending that the learned CIT (Appeals) has wrongly excluded this company i.e. Geometric Software Solutions Ltd. on grounds of being functionally different from the assessee. It is submitted by the learned Departmental Representative that this company being functionally similar to the assessee, it ought to be included in the list of comparables. 16.2 Per contra, the learned Authorised Representative submitted that the learned CIT (Appeals) has correc....
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....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 learned CIT (Appeals) has observed that since this company has incurred 56% of its expenditure as onsite software development, it is clear that this company, i.e. Visual Soft Technologies Ltd. is predominantly engaged in on-site development of software and also observed that the assessee is also into R&D activities. It was submitted by the learned Authorised Representative that the learned CIT (Appeals) had correctly excluded this company from the list of comparables on the grounds of being functionally different due to on-site development and R & D activities. 17.3 We have heard the rival contentions and perused and carefully considered the material on record; we find from the show cause notice issued by the CIT (Appeals) to the assessee with regard to the proposal for final selection of comparables, and particularly at para 7 on page 12 of the impugned order, that the learned CIT (Appeals) had applied the on-site filter at 75% o....