TaxTMI 
TaxTMI 
2014 (9) TMI 1001
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....( hereinafter referred to as 'the Act'). The case was taken up for scrutiny and the Assessing Officer on noticing that in the period under consideration, the assessee had entered into international transactions of providing software development services to its AE amounting to Rs. 11,31,34,171 made a reference u/s.92CA of the Act to the Transfer Pricing Officer (TPO) for determining the Arms Length Price ('ALP') of these international transactions after obtaining the necessary approval of the CIT, Bangalore-1. 2.2 In the year under consideration, the assessee had rendered software development services to its AE to the extent of Rs. 11,31,74,171. The assessee adopted Transactional Net Margin Method ('TNMM') as the Most Appropriate Method ('MAM') for its T.P. Study / documentation and after carrying out search on the Prowess database selected 24 companies as comparables. The assessee's list of comparables are as under :- Company Margin % 1. Ace Software Exports Ltd. 11 2. Orient InformationTechnology Ltd. 13 3. Asia J H Technologies Ltd. 06 4. Bangalore Softsell Ltd. 13 5. C S Software Enterprise Ltd. 10 6.....
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.... R S Software (India) Ltd. 8.07 9. Geometric Software Solutions Co. Ltd. 20.34 10. Tata Elxsi Limited (Seg) 24.35 11. Visual Soft Technologies Ltd. (Seg) 23.52 12. Sasken Communication Technologies Ltd. (Seg) 14.42 13. I-gate (Seg) 4.32 14. Flextronics (Seg) 32.19 15 L & T Infotech 10.33 16. Satyam 29.44 17. Infosys 42.83 Average 26.59% The average margin of the 17 comparable companies adopted by the TPO was 26.59% and after allowing a downward adjustment of 2.28% for working capital adjustment, the arithmetic mean margin was computed at 24.31%. Based on the above margins, the TPO vide order under section 92CA of the Act dt.6.10.2008 proposed a TP adjustment of Rs. 1,63,08,116 to the ALP of the international transactions. 2.4 The Assessing Officer completed the assessment under section 143(3) of the Act vide order dt.17.12.2008 determining the total income of the assessee at Rs. 1,63,15,559 as against the returned income of Rs. 6,179 in view of the following additions / disallowances, etc. thereto :- 1) T.P. Adjustment : Rs. 1,63,08,....
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.... of 5%, the revenue is in appeal before this Tribunal raising the following grounds :- "1. The order of the learned CIT (Appeals) in so far as it relates to the following grounds is opposed to law and facts of the case. 2. On the facts and in the circumstances of the case, the learned CIT (Appeals) erred in holding that the TPO ought to have excluded all companies having any related party transactions as comparables. 3. The learned CIT (Appeals) erred in holding that the size & turnover of the company are deciding factors for treating a company as a comparable, and accordingly erred in excluding iGate Global Solutions Ltd., Flextronics Software Systems Ltd., L&T Infotech and Satyam Software Services and M/s. Infosys Technologies Ltd. as comparables. 4. The learned CIT (Appeals) erred in holding that profit on cost of the comparable companies, (70.68% & 66.09% in cases of M/s. Exensys Software Solutions Ltd. & Thirdware Solutions Ltd. respectively) is abnormal without giving reasons how functions discharged, assets deployed and risks assumed of such companies were different from that of the appellant company. 5. The learned CIT (Appeals) erred in holding that the asse....
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....ing the companies with onsite revenues greater than 75% of the export revenues. c. performing the transfer pricing analysis without making proper adjustment for enterprise level and transactional level differences between the respondent and the comparable companies. d. Not granting adjustment for under-utilisation of facility as well as employees while computing the arm's length price. 6. The learned CIT (Appeals) - IV, Bangalore has erred in a. rejecting companies having related party transactions without appreciating that insignificant related party transaction cannot have significant influence on profitability of comparable companies and that such companies atleast ought to be retained as comparables. b. confirming Sankhya Infotech Limited as a comparable. c. not appreciating that Tata Elxsi Limited deserves to rejected as a comparable on the ground that it is functionally different from the respondent. PRAYER 7. On an overall consideration of the facts of the case, and the law applicable, the ALP as determined by the Transfer Pricing Officer, as adopted by the Assessing Officer and as modified by the CIT (Appeals) to the extent being prejudicial to the resp....
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....-Gate Global Solutions Ltd. (Seg) 406.04 4. L&T Infotech Ltd. 562.45 5. Satyam Computer Services Ltd. 3,464.2 9.7.2 As per the profit and loss account of the assessee, its turnover in the relevant period is Rs. 11,31,75,171. We find that the co-ordinate bench of this Tribunal in the case of Genisys Integrating Systems (India) Pvt. Ltd. in its order in ITA No.1231/Bang/2010 dt.5.8.2011 held that companies having turnover of more than Rs. 200 Crores should not be considered as a comparables in respect of an assessee having turnover of less than Rs. 200 Crores holding at para 9 of this order as under :- 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 companies which are making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in busi....
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....excluding the above 5 companies, having turnovers in excess of Rs. 200 Crores, we consequently dismiss ground at S. No.3 of revenue's appeal. 10. As per the chart furnished by the learned Authorised Representative, the assessee accepts that the following companies are correctly taken as comparables by the TPO / CIT(Appeals) :- i) Bodhtree Consulting Ltd. and ii) Lanco Global Systems Ltd. In this view of the matter, the action of the TPO and CIT(Appeals) in including and retaining these two companies as comparables is not challenged and has attained finality. 11.1 The ground No.2 of revenue's appeal and ground No.6(a) of the assessee's C.O. challenge the order of the learned CIT (Appeals) in directing the Assessing Officer / TPO to exclude the following companies from the list of comparables by applying the RPT filter of more than 0%; as he was of the view that even a single instance of RPT should lead to their rejection from the list of comparables :- i) Geometric Software Solutions Co. Ltd. ii) Sasken Network Systems Ltd. iii) Four Soft Ltd. iv) R.S. Software (India) Ltd. v) Thirdware Solutions Ltd. vi) Tata Elxsi Ltd. (Seg) and vii) ....
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....owing 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. " 11.3 The above decisions acknowledge that RPT upto a certain limit should not lead to the rejection of a company as a comparable. The above decision was followed in the decision of another co-ordinate bench in the case of 3DPLM Software Solutions Ltd. in IT(TP)A No.1303/Bang/2013 dt.28.11.2013 holding that companies having RPT in excess of 15% of total revenues should be excluded from the list of comparables. Other decisions that have upheld the application of RPT filter of 15% are :- i) ITO V CRM Services India (P) Ltd. (2011) 14 Taxman.Com 96 (Del) ii) Logica Pvt. Ltd. (TS-131-ITAT-Bang-TP). iii) CSR India (P) Ltd. (2013) 31 Taxmann.Com 265 (Bang) iv) Huawei Technologies India P. Ltd. IT(TP)A No.1338/Bang/2010 v) Wills Processing Services (India) P. Ltd. [TS-49-ITAT-2013 (Mum)] vi) Sakata Inx (India) Ltd. (2012) 21 Taxmann.Com 37 (JP) 11.4 Fo....
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.... impugned order of the learned CIT (Appeals), that the assessee had never challenged the finding of the TPO on the ground that the RPT of this assessee was 11.89% of sales before the lower authorities, but on other gorunds. It is only before us that this aspect has been urged i.e. that the assessee's RPT was 24.11% of total sales. In this being the factual matrix, we set aside the issue of examination of the comparability of Geometric Software Solutions Ltd. to the file of the TPO for fresh examination in the light of the submissions of the assessee before us on the application of the RPT filter of 15% of sales and to decide the matter after affording the assessee adequate opportunity of being heard and to file details required. It is ordered accordingly. 11.8 Exensys Software Solutions Ltd. (Revenue's appeal - Ground No.4) 11.8.1 This company selected by the TPO was excluded from the list of comparables by the learned CIT (Appeals) for the reason that it was a super profit company having a margin of 70.68% on costs. The learned Authorised Representative further submitted that the above company is also functionally different as it is engaged both in providing software ser....
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.... It was also contended that this company is functionally different from the assessee, as apart from provision of software services, it also into other varied activities. In view of the above, the ld. D.R. pleaded for upholding the exclusion of this company from the list of comparables on grounds of being functionally different. 11.9.2 This company selected by the TPO as a comparable was excluded by the learned CIT (Appeals) on grounds of it being a company having extra-ordinary or abnormal profits of 66.09% during the year under consideration. It was also contended by the assessee that this company was functionally different from the assessee since it was into software products apart from provision of software services. This claim of functional difference of this company vis-à-vis the assessee will be dealt with subsequently in this order. 11.9.3 We have carefully considered the submissions made by the assessee seeking the exclusion of this company as a comparable for the reason that it has high profits of 66.09% during the year under consideration. A similar matter of ' super profits ' was considered by a co-ordinate bench of this Tribunal in the case of 24/7 Customer....
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.... comparable has incurred loss or made abnormal profits." Further, India TP Rules specifically deviate from OECD guidelines in this aspect and specify the Arithmetic Mean for determining ALP. In the Quartile Method, the companies that fall in the extreme quartiles get excluded and only those that fall in the middle quartile are retained for comparability thereby automatically eliminating outliners whereas in the Arithmetic Mean Method all companies that are in the sample are considered, without exception, and the average of all the companies are considered as ALP. Therefore as a general rule that companies with abnormal profits should be excluded may be in line with the principles enumerated in the OECD guidelines, but cannot be said to be in tune with Indian TP regulations. The assessee has not been able to establish or demonstrate with any evidence any reason to support the proposition that the profit of the comparable company was abnormally high. It must not be overlooked that high profits reflect better business sense and practices also. The net Arithmetic Mean margin of 36.49% was arrived at after taking into account both 63.27% and also 3.44% which is the lowest in the rele....
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....rding the assessee adequate opportunity of being heard and to file details in this regard. It is ordered accordingly. 11.10 Tata Elxsi Ltd. (Segmental) [Assessee's C.O. No.6( c )] 11.10.1 This company was included in the list of comparables by the TPO, after considering its software development services segment in the company's Annual Report. The learned CIT (Appeals) excluded this company from the list of comparables for the reason that it had RPT transactions in excess of 0%. This finding of the learned CIT (Appeals) has been considered at paras 11.1 to 11.4 of this order and reversed by us following the decisions of the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (supra) and in the light of many other decisions of various benches of Tribunals across India as listed out at para 11.3 of this order (supra) wherein the RPT filter has been applied at 15%. 11.10.2 On appeal before the learned CIT (Appeals), the assessee had also put forth the submission that even in the software development segment, Tata Elxsi Ltd. is engaged in diverse activities such as software development and services and Systems Integration and Support. It ....
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....Ground No.6(b)] 11.11.1 This company was selected by the TPO as a comparable to the assessee. On appeal, the assessee in submissions before the learned CIT (Appeals) contended that this company is functionally dissimilar for the reason that this company is engaged in diverse business activities from provision of software development services, to product development and is not a pure software development service company like the assessee. It is submitted by the learned Authorised Representative that this company was rejected as a comparable to a software service provider for being functionally dissimilar by the decision of the ITAT, Delhi in the case of Colt Technology Services India Pvt. Ltd. in ITA No.609/Bang/2011 & C.O. No.81/Bang/2011 dt.23.10.2012 for Assessment Year 2005-06 since it was found from a review of schedule 4 of its books of accounts on fixed assets that it owned its own IPR's in respect of software products developed by it and focused on development of niche products in the transportation and aviation industry etc. 11.11.2 We have heard both parties and perused and carefully considered the material on record. In the case on hand, it is seen from the TPO's or....