TaxTMI 
TaxTMI 
2012 (12) TMI 1018
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....rovision of software design and development services on the basis of the order passed under section 92CA(3) of the Act by the Transfer Pricing Officer ("the TPO"). 3. That the assessing officer/the TPO erred on facts and in law in considering the current year data only of the comparable companies disregarding the multiple year data used by the appellant. 3.1 That the assessing officer/the TPO erred on facts and in law in not appreciating that use of single year data of the comparable companies may not adequately capture the market and business cycle reflected in the industry. 4. That the assessing officer/the TPO erred on facts and in law in applying additional filters of percentage of wages to sale, declining sales, NFA/Sales ratio, without appreciating that the 'selection or rejection' should be based on FAR analysis and not merely on financial results. 4.1 That the assessing officer/the TPO erred on facts and in law in considering (i) Saksoft Limited, (ii) Datamatics Technologies Ltd. and (iii) 3D PLM Software Ltd. having abnormally high profit margin as comparable companies for undertaking benchmarking analysis applying TNMM. 4.2 That the assessing office....
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....ect of the companies proposed to be selected as comparable by the TPO. 9. Without prejudice the assessing officer/the TPO erred on facts in considering the total operating cost of the appellant at Rs. 49,40,57,000 as against the actual operating cost of Rs. 48,26,77,000. 10. Without prejudice, that the assessing officer/the TPO erred in law in not allowing variation to the extent of (+/:-)5%, while determining the arm's length price of the 'international transactions', in terms of proviso to section 92CA(2) of the Act. 11. That the assessing officer erred on facts and in law in reducing the communication expenses to the extent of Rs. 1,79,10,869 from the export turnover for computation in terms of clause (iv) of Explanation 2 of section 10A of the Act while computing deduction under that section. 11.1 That the assessing officer erred on facts and in law in not appreciating that only 5% internet charges of the communication expenses is attributable to the export of software outside India. 11.2 Without prejudice that the assessing officer erred on facts and in law in making the adjustment of communication expenses, viz., link charges of Rs. 1,79,10,869 attr....
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.... PSI Data Systems Ltd. NFA/Sales and functionally different 3 Blue Star Infotech Ltd. Declining sales and functionally different 3.5 The TPO, accordingly, benchmarked the operating profit margin (OP/OC%) of the appellant company with the margin of the remaining comparable companies as follows: Sl. No. Name of the company Financial Year OP/TC 1 California Software Co. Ltd. 2006-07 22.36% 2 Neilsoft Ltd. 2006-07 14.69% 3 NSEIT Ltd. 2006-07 13.66% 4 Applabs Technologies Pvt. Ltd. 2006-07 18.17% 5 Kale Consultants Ltd. 2006-07 13.15% 6 Saksoft Ltd. 2006-07 51.10% 7 Datamatics Technologies Ltd. 2006-07 39.83% 8 3D PLM Software Ltd. 2006-07 48.46% Average Mean 27.67% 3.6 Accordingly, the TPO in the order passed under section 92CA(3) of the Act had computed an adjustment of Rs. 78,794,571/- on account of the difference in the margin of the comparable companies and the appellant company, as under: Total cost incurred by assessee 494,058,000 Is a [email protected]% 630,762,571 Revenue shown 551,968,000 Di....
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....bal Logic India Pvt. Ltd. 14.36% 4.6 Ld. Counsel of the assessee submitted that since, the operating profit margin (OP/OC%) of the appellant at 14.36% is within safe harbor range of +/- 5% of the average of (OP/OC%) of comparable companies at 14.92%, the international transaction undertaken by the assessee should be considered at arm's length and the adjustment proposed by the TPO should be deleted for this reason alone. 5. On the other hand Ld. Departmental Representative principally did not have any serious objection to the proposition as above. 5.1 Ld. Departmental Representative referred to the decision of the Tribunal in the case of M/s. American Express India (P) Lt., ITA No. 4240/D/2009, A.Y. 2003-04, dated 18-05-2012. The relevant para of the tribunal's order is as under:- "16. From the above, it is evident that learned CIT(A) has totalled up the amount received from the related parties for rendering of services together with the payments made to related parties which became Rs. 323.23 lakhs. He compared the same with the total operating expenses which were Rs. 4448.71 lakhs. If the total operating expenses are being compared, then the....
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....in TNMM and treatment of partial controlled transactions are reproduced below: "3.42 An analysis under the transactional net margin method should consider only the profits of the associated enterprise that are attributable to particular controlled transactions. Therefore, it would be inappropriate to apply the transactional net margin method on a company-wide basis if the company engages in a variety of different controlled transactions that cannot be appropriately compared on an aggregate basis with those of an independent enterprise. Similarly, when analysing the transactions between the independent enterprises to the extent they are needed profits attributable to transactions that are not similar to the controlled transactions under examination should be excluded from the comparison. Finally, when profit margins of an independent enterprise are used the profits attributable to the transactions of the independent enterprise must not be distorted by controlled transactions of that enterprise." 5.6 It was further submitted that the OECD Transfer Pricing guidelines further in para 2.79 provides in this regard as under: 2.79 Similarly, when analysing the transact....
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....he case of Actis Advisors Pvt Ltd vs. DCIT (ITA No. 5277/Del/2011). 5.11 It was further submitted that the decision of the Hon'ble Tribunal in the case of DCIT vs. American Express India Pvt. Ltd. (ITA No. 1338/Del/2009), it was rendered on its own facts wherein the aforesaid contentions were not canvassed and the ratio of the aforesaid decisions were not brought to the notice of the Hon'ble Tribunal. 5.12 Ld. Counsel of the assessee accordingly submitted that an enterprise is to be considered as uncontrolled for the purpose of benchmarking analysis, if the ratio of related party transactions (i.e. transactions of sales and purchase on revenue as well as capital account having a bearing on profitability of the enterprise) to relevant base, i.e. sales or cost does not exceed the limit of 25%. Hence, he submitted that Saksoft limited, Datamatics Technologies Limited, 3DPLM Software Solutions Ltd. and California Software Limited, considered as the comparable companies by the TPO in the assessee's case have related party transactions exceeding 25% the same are to be excluded from the set of comparable companies for applying TNMM. 5.13 We have carefully considered t....
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....use (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction. 5.16 A reading of the above clearly shows that under the said Rules the net margin of the assessee required to be compared to an unrelated enterprise from a comparable uncontrolled transaction. Thus it follows that comparables having high ratio of related party transaction cannot be taken a comparable. This proposition is also supported by the following case laws:- i) Sony India Pvt. Ltd. vs. DCIT 114 ITD wherein the tribunal has held as under:- We are further of view that an entity can be ....
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....pra), it was held by the Tribunal that comparables having RPT in the range of 10 to 15% of total revenue cannot be taken or considered as controlled. No specific percentage of RPT had been pointed out by the Tribunal in this case which will render the comparable as controlled comparable. Still, if it is found that RPT is 97% as has been claimed by the assessee before us, it has to be accepted that this comparable is not un-controlled and therefore, the same has to be excluded from the list of com parables adopted by the TPO. Even if the percentage of RPT to total revenue is not 97% but is more than 25%, even then, this comparable cannot be considered as un-controlled comparable and the same has to be excluded from the list of comparables finally selected by the TPO. But for the same, the factual aspect has to be examined as to how much percentage of RPT to total revenue is there in the case of this comparable i.e. 3D PLM Software Ltd. Hence, we set aside the assessment order and restore the entire matter to the file of the Assessing Officer for a fresh decision after examining the factual aspect of this claim of the assessee and after obtaining fresh directions from DRP. If it is f....
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.... Name Related party transaction/Total income 1 California Software Co. Ltd. 71.53% 2 Saksoft Ltd. 67.81% 3 Datamatics Technologies Ltd. 44.86% 4 3D PLM Software Ltd. 118.04% 5.19 After exclusion of the above companies the operating profit margin (OP/OC) of the remaining companies works out to 14.92% as under:- Sl. No. Name of the company OP/OC% 1 Neilsoft Ltd. 14.69% 2 N.S.E.LT. Ltd. 13,66% 3 Applabs Technologies Pvt Ltd. 18.17% 4 Kale Consultants Ltd. 13.15% Average 14.92% Global Logic India Pvt. Ltd. 14.36% 5.20 From the above, we hold that since the operating profit margin (OP/OC%) of the assessee at 14.36% is within the safe harbor range of +/- 5% of the average of (OP/OC) of comparable companies at 14.92% the international transaction undertaken by the assessee should be considered at arm's length, and the adjustment proposed by the TPO is unwarranted. 6. Ground No. 11 to 11.2 On these issues Assessing Officer referred to the definition of export turnover as per explanation 2(iv) of section 10A. Export turnover means that the&#....
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....s. 1,79,10,869 as communication expenses and the same were debited to the PandL account as part of operating expenses. The break-up of these expenses are as follows: Description Amount Telephone expense 1,31,48,431 Internet expenses 43,97,525 Postage and courier charges 3,64,913 Total Communication Expenses 1,79,10,869 In relation to said communication expenses, it is submitted that 5% of the total life cycle of software is used for transmission of software to clients on estimated basis. Further, it is also submitted that the persons employed for a software product are divided as onshore team and offshore team. One of the team gets in touch with the client to understand customer's need through site visit, video/voice conferencing and emails. They also get in touch with the clients, when the software is developed and transmitted to the customers. Therefore, admittedly, only 5% of the internet charges i.e. Rs. 2,19,867 (5% of 43,97,525) is attributable to the delivery of software outside India. Further, it is also submitted that no insurance expense are attributable to the delivery of software as seen from the above table. 8.1 L....
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....It was submitted that it would further be appreciated that the Assessing Officer has accepted the contentions of the appellant in the AY 2007-08 and had accordingly reduced freight, telecommunication or insurance expense from total turnover of the assessee while reducing such sum from export turnover. 8.6 Ld. Counsel of the assessee submitted that Delhi Bench of ITAT in the assessee's own case for the assessment year 2005-06, relying on the aforesaid decision of Special Bench of Tribunal in the case of Saksoft India Limited, has allowed the appeal of the appellant and directed the assessing officer to re-compute deduction under section 10A after reducing communication expense from export turnover as well as total turnover. 9. Ld. Departmental Representative relied upon the order of the Assessing Officer in this regard. 10. We have carefully considered the submissions and perused the records. We note that it is the contention of the assessee company that only 5% of the internet charges are attributable to the delivery of software to client, hence, full amount of the above expenses should not be taken into consideration for calculating the export turnover as per Explanat....