TaxTMI 
TaxTMI 
2013 (1) TMI 773
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.... the field of wireless communications, Bluetooth technology and cellular 3G protocol solutions. During the financial year relevant to the assessment year 2007-08, the assessee company had international transactions with its associated enterprises. Since the international transaction entered into by the assessee with its Associated Enterprise (AE) exceeded the prescribed limit, reference was made under the provisions of section 92CA of the Income Tax Act, 1961 by the Assessing Officer to the Transfer Pricing Officer (TPO). The TPO, after taking cognizance of various submissions made by the assessee company, made an adjustment of Rs. 3,77,22,565/- under section 92CA of the Act. Further, the Assessing Officer had re-computed the deduction under section 10A of the Act as claimed by the assessee company in its return of income. 2.1 Aggrieved by the adjustment of the Arm's Length Price (ALP) of the international transaction and the re-computation of deduction under section 10A of the Act in the draft assessment order, the assessee company had filed application before the Dispute Resolution Panel (DRP). 2.2 The assessee had filed comprehensive objections before the DRP on variou....
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....- Operating Income Rs. 28,61,70,306/- Operating Expenses Rs. 25,27,43,515/- Operating Profit (Op. Income - Op. Expenses) Rs. 3,34,26,791/- Operating/Net margin (OP/TC) 13.22% Sl. No Name of the Company 2005 2006 2007 Average 1 Akshay Software Technologies Limited 7.68% 7.07% NA 7.38% 2 BrelsInfotech Limited 2.46% NA NA 2.46% 3 Dynacons Systems 2.83% 3.17% NA 3.00% 4 MelstarInfotech -9.06% 1.39% NA -3.84% 5 Orientation Information Technology Limited 15.37% -16.66% NA -0.65% 6 Quintegra Solution Limited 12.81% 14.95% NA NA 7 RS Software (India) Limited 8.08% 15.69% 13.55% 14.44% 8 Ranklin Solution 5.80% 7.55% NA NA 9 SIP Technology & Exports Limited NA 21.99% NA 21.99% 10 Sankhya Infotech Limited 27.33% 25.81% NA 26.77% 11 Shree Tulsi Online.com Limited 1.75% 2.82% NA 2.29% 12 Systemlogic Solutions Limited 26.52% 3.94% NA 28.73% 13 Tutis Technologies Limited 7.28% 10.85% NA NA 14 V & K Softech Lim....
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....9 25 Thirdware Solutions Ltd. (Segment) 25.12 23.09 26 Wipro Ltd (Segment) 33.65 35.89 ARITHMETIC MEAN 25.14 24.71 Arm's Length Mean Margin 25.14 Less: Working Capital Adjustment 0.43 Adjusted mean margin of the comparables 24.71 Operating Cost Arms Length Margin (24.71% of Operating Cost ) 25,27,43,517/- Arms Length Price (ALP) 124.71% of Operating cost 31,51,96,440/- Price charged in international transactions* 27,74,73,875/- Short fall being adjustment u/s. 92CA 3,77,22,565/- 3.1.3 The computation made by the TPO, which was affirmed by the DRP, was incorporated in the assessment order. 3.1.4 Aggrieved by the assessment order dated 30/9/2011, the assessee has raised broadly the following issues before us:- • TPO's action in rejecting the use of multiple year' contemporaneous data due to non-availability of current year data in public domain at the time of TP study is erroneous. • TPO's action in taking recourse to Section 133(6) that too without giving an opportunity of cross-examination to the Assessee is erroneous. ....
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....,30,358/- Operating/Net margin (OP/TC) 13.22% 9.78% The TPO did the same while arriving at the final transfer pricing adjustment of Rs. 3,77,22,565/- as well (refer page 455 of the paper book). It is submitted that gains on account of foreign exchange fluctuation are an integral part of sale proceeds and cannot be excluded in computing the operating margin of the company. The Appellant places reliance on the decisions of this Hon'ble Tribunal in SAP Labs India Pvt. Ltd. and Trilogy E- Business Software India Pvt. Ltd. where foreign exchange fluctuation gains have been held to be part of sale proceeds (operating revenue). Hence, operating revenue of Rs. 28,61,70,306/- as reckoned by the Appellant is correct and in line with the legal position". C2 Submission on the comparables selected by the TPO Relying on the decisions of this Hon'ble Tribunal in the cases of Trilogy E-Business Software India Pvt. Ltd., Telcordia Technologies India Private Ltd., and 24/7 Customer Com Private Ltd., the Appellant seeks rejection of 14 of the 26 comparables selected by the TPO. The following would be the Accept / Reject matrix if the Appellant's submiss....
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....siness of the assessee in this case and that of three case laws (Trilogy, Telecordia & 24/7 Customer) are similar, namely, development of software and the size/turnover was also similar to that of the assessee in the instant case. Moreover, the assessment year 2007-08 was subject matter of consideration in the case of Trilogy E-Business Software India Pvt. Ltd. and Telcordia Technologies India Private Ltd. and the comparables selected by the TPO in those cases are identical to that of the instant case. Now we shall proceed to dispose of the issues as under:- (i) Turnover Filter 3.3. We have heard the rival submissions and perused the materials on record. The TPO had, while selecting the above 26 comparables, applied a lower turnover filter of Rs. 1 crore but preferred not to apply any upper turnover limit. The size of the comparable is an important factor in comparability. The ICAI TP guidance note has observed that the transaction entered into by a Rs. 1000 crores company cannot be compared with the transaction entered into by a Rs. 10 crores company and the two most obvious reasons are the size of the two companies and related economies of scale under which they operate. Th....
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....nies which also have turnover of 1.00 to 200 crores only should be taken into consideration for the purpose of making TP Study." 3.3.2 The above view has been followed in the recent order of the Tribunal in the case of Trilogy E -Business (supra). The relevant findings of the Tribunal are extracted as under: "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, companies having turnover of more than 200 crores have to be eliminated from the list of comparables as laid down in several decisions referred to by the ld. counsel for the assessee. Applying those tests, the following companies will have to be excluded from the list of 26 comparables drawn by the TPO viz. &nb....
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....be accepted. The reasons given by the Assessee for excluding this company as comparable are found to be acceptable. The decision of ITAT (Mumbai) in the case of Telcordia Technologies Pvt. Ltd. v. ACIT (supra) also supports the plea of the assessee. We therefore accept the plea of the Assessee to reject this company as a comparable". C. Celestial Labs. Ltd: This Company was also selected by the TPO as comparable. However, on due consideration of the issue, the earlier Bench of this Tribunal in Trilogy E- Business had opined that this company cannot be as comparable on the ground that - "45. ........................................................................................................... We are of the view that in the light of the submissions made by the Assessee and the fact that this company was basically/admittedly in clinical research and manufacture of bio products and other products, there is no clear basis on which the TPO concluded that this company was mainly in the business of providing software development services. We therefore accept the plea of the Assessee that this company ought not to have been considered as comparable". D.....
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....oftware 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 serve sector. Therefore, this company cannot be treated as having same function and profitability ratio. In our view, due to non-availability of full information about the segmental details as to how much is....
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....is that if at all this company is considered as a comparable then the segmental margin of 23.11% (which is the margin for software service segment) alone should be considered for comparability. On the above submission, we find that the TPO considered the segmental margin (Software service segment) in the case of Geometric, Kals Info systems, R Systems, Sasken Communication and Tata Elxsi. Before DRP the Assessee pointed out that the segmental margin of 23.11% alone should be taken for comparability. The DRP has not given any specific finding on the above plea of the Assessee. Perusal of the order of the TPO shows that the TPO relied on information which was given by this company in which this company had explained that it has two divisions viz., BLUEALLY DIVISION and XIUS-BCGI DIVISION. Xius-BCGI Division does the business of product software (developing software). This company develops packaged products for the wireless and convergent telecom industry. These products are sold as packaged products to customers. While implementing these standardized products, customers may request the company to customize products or reconfigure products to fit into their business environment. There....
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....11% for comparability. It is ordered accordingly. (iii) Related party transaction: 3.5 Ishir Infotech Limited: The assessee had objected to the inclusion of Ishir Infotech Limited as a comparable being related party transaction in excess of 15% of total sales/revenue. The TPO had set a limit of 25% on the related party transaction. According to the assessee, the recent order of the Tribunal in the case of 24/7 Customer Com Private Ltd. had held that if comparable company has related party transaction exceeded 15% of the total sales/revenue, the same should not be comparable. 3.5.1 The learned DR present was duly heard. 3.5.2 The Tribunal in the case of 24/7 Customer Com Private Ltd. had held that if the related party transaction exceeded 15% of the total sales/revenue, the same cannot be taken as a comparable. The relevant contention that was raised and the finding of the Tribunal read as follows:- "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 st....
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....argin of the asssessee as well as the comparable. The relevant finding of the Tribunal read as follows: "79............................................................................................................ (B) .............................................................................................. As far as foreign exchange gain/loss being considered as not forming part of the operating cost, the reasoning of the srevenue is that such loss or gain cannot be said to be one realized from international transaction though they may form part of the gain/loss of the enterprise and therefore they should be excluded while determining operating cost. On the above issue we find that the Bangalore Bench of ITAT in the case of Sap Labs India (P) Ltd. Vs. ACIT (2011) 44 SOT 156 (Bang.) has taken the view that Foreign Exchange Fluctuation gains are required to be added to operating revenue. Following the same, the AO is directed to accept the claim of the Assessee in this regard.....................". 3.6.1 In conformity with the above finding, we direct the AO/TPO to consider the foreign exchange gain or loss as part of the operating cost or revenue....