TaxTMI 
TaxTMI 
TaxTMI 
2011 (10) TMI 616
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....idering the search analysis used by the appellant (using database updated on 25 Aug. 2006) Ground No. 4: Erred in ignoring, without prejudice to above grounds, the fact that 5 companies (submitted by the appellant and also considered comparable companies by the ld. TPO ) can also be considered as final set of comparables for determining the arm's length price of the international transactions. Ground No. 5: Erred in initiating penalty proceedings u/s 271AA of the Act Ground No. 7: Erred in rejecting of all loss making companies while carrying out fresh search. Ground No. 8: Erred in considering inappropriate companies as comparable by carrying out fresh search considering non-contemporaneous data Ground No. 9: Erred in not considering multiple year data for determining the arm's length price Ground No. 10: Without prejudice to other grounds, erred in considering the incorrect margins of companies selected by the ld TPO Ground No. 11: Erred in rejecting appropriate adjustments to account for different in the level of working capital employed by the appellant vis a vis the comparable companies. Ground No. 12: Erred in comparing full-fledged rank bearing entities with t....
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....hat Annexure V of the transfer price documentation was filed by the assessee alongwith letter dated 23-03-09. As per billing agreement, the assessee company undertook the functions as mentioned in earlier paragraph and the Associated Enterprise was to pay total Revenue cost with 10% mark up. The assessee undertook T.P. Analysis in F.Y. 2004-05, according to which, margin of 3 years average NCP of 8 comparables identified in Prowess was 10.27%. The assessee's margin as per recalculated figure was 11.08%. No fresh search for comparables or analysis using contemporaneous data had been made by the assessee. The assessee charged Cost Plus Mark up of 10% from the parent company. 6.4 The TPO rejected the analysis undertaken by the assessee to determine the ALP for its international transactions pertaining to provisions of Software development services to Associated Enterprise. The assessee has relied upon the proviso to Rule 10D(4). As per this rule, it is not mandatory to maintain fresh documentation in respect of each previous year unless there is any significant change in the nature of terms of the international transaction. This contention of the assessee was rejected by the TPO and....
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....documents to be maintained by the assessee. These are useful for the purpose of ascertaining the ALP. It is nowhere mentioned in the Act that information and documents maintained by the assessee are only conclusive information and documents for the purpose of ascertaining the ALP. We therefore, hold that the Revenue authorities are justified in rejecting the analysis undertaken by the assessee to determine the ALP. Such analysis can be considered but it cannot be a binding on the Revenue authorities. 6.7 The assessee has not undertaken search process for the F.Y. 2005-06 and therefore, search process was made by the TPO for identifying all the comparables. The assessee vide show cause letter dated 20th Oct. 09 was informed of the fresh search having been undertaken by the TPO. The relevant extracts of the show cause notice are as under:- ''A fresh search was undertaken on "prowess' database by this office. The initial search itself revealed 793 companies in the Software and software service & Consultancy sector/ economic activity as opposed to the initial set of 366 companies identified by the assessee in the search for F.Y 2004-05.this shows the magnitude of difference due to u....
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....r. It was claimed that the data which was not available at the time of making the study should not be used as it may lead to anomaly. The selected by way of the above search process, for F.Y. 2005-06. This contained data of 5 companies, as the same was not available in the case of two companies, and two companies had more than 50 crore turnover during F.Y. 2005-06. 2. Objections with regard to the Comparables identified by the TPO: The assessee raised several objections in respect of the selection process undertaken by the TPO. (i) The first objection of the assessee was that search process undertaken by the TPO was non-contemporaneous. Further, it has objected to running of search on a single database. In this regard, it may be clarified that the fresh search had to be undertaken by the TPO because the assessee did not undertake a fresh search for the relevant Financial Year. As per the provisions of the law, for analyzing the international transaction, the assesswee should have undertaken a search for comparables relevant for F.Y. 2005-06, by taking data for this year, and compared the margins of these comparables (uncontrolled prices) with its margin for the relevant year. B....
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....rch process at the time of making T.P.Study only. (ii) The assessee has objected to removal of loss-making companies : In this regard it is clarified that the assessee itself had taken out loss-making companies. The margin of loss-making companies shows that the company is not in its normal business cycle, and hence, these are not representatives of normal business concerns. (iii) With regard to the 8 comparables identified in the search process, the assessee raised various objections. The same are examined in detail as below :- I. Avani Cimcon Technologies Ltd: The assessee has claimed that this comparable was not thrown up in the search process undertaken by it. However, the objection of the assessee is not valid, as this has been selected by the TPO by using the same search process as that of the assessee. The assessee also claimed that this company is engaged in software development which is different from the assessee which is in software service. This objection is not valid as the assessee is also in the same field of software development and service. II. Cambridge Technology Enterprises Ltd: This company is in Software service. The assessee's only objection that the r....
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....lter applied by the assessee itself (according to the assessee these had more than 50 crore turnover in 2005-06) and 2 did not have data available for 2005-06. The balance 5 companies were analyzed. It was seen that M/s.Goldstone Technologies had been selected by the TPO as well as the assessee. The other 4 companies were evaluated and it was found that there is similarity of functions. These companies largely satisfied the filters applied by the TPO (except SIP Technologies & Exports Ltd. Which had Wages/Cost of 52.36%, but considering that it is greater than 50%, the same was accepted.) Accordingly, these 4 companies are also considered to be included in the final set of comparables identified by the assessee.'' 6.10 Before us, the ld.AR has filed the detailed submissions and these submissions are summarized as under: ''Our detailed submission with respect to key grounds is as follows: 1). 5 companies can also be considered as final set of comparables for determining the arm's length price of the international transaction (Ground No 4 of Grounds of Appeal) * The Appellant highlights before your Honors that the learned TPO has....
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....ed one comparable only. But that is not the only basis on which the Tribunal has rested its decision. The other case of similar nature is Parrot Systems TSI India Ltd. vs. DCIT (supra). Moreover, the comparable which has been left was selected by the assessee itself in its TP study and no reason whatsoever is given that how the said comparable could not be taken to compute arm length price of the assessee. Therefore, we reject the submission of the assessee that on the basis of one comparable, the arm length price could not be determined and fresh search was required to be taken as per submissions made before DRP. The facts of the present case do not warrant the fresh search to be taken into consideration as there is no valid reason to do so." Based on the above, the Appellant submits that the search process carried out by the Appellant to identify the comparable companies was bonafide and carried out in accordance with the provisions of the law and the companies remaining after the rejection of companies by the learned TPO (5 companies) should be used for determining the arm's length price instead of considering the results of fresh search which is unjustified and inappropriate ....
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.... of the companies selected as comparables by the learned TPO. The correct operating margins of all the 12 companies selected as comparable by the learned TPO as compared to the margins considered by the learned TPO are summarized as below: Sr No Name of the Company Margin as given by learned TPO and learned AO in the draft order (%) Correct margins (%) 1 Avani Cimcon Technologies Limited 32.12 32.55 2 Cambridge Technology Enterprises Ltd. 26.46 25.93 3 Exensys Software Solutions Ltd. 25.8 25.88 4 Fortune Infotech Ltd. 17.79 16.94 5 Goldstone Technologies Ltd. 2.47 3.08 6 Indium Software (India) Ltd. 27.09 26.51 7 Maveric Systems Ltd. 42.76 19.06 8 Sankhya Infotech Ltd. 25.58 25.94 9 Akshay Software Technologies Limited 7.07 7.40 10 Lanco Global Systems Limited 5.38 5.94 11 Quintegra Solutions Limited 15.21 10.73 12 SIP Technologies Limited 21.75 21.09 Arm's length Price 20.79 18.42 * The Hon'ble DRP has inappropriately rejected to consider the correct margins of the comparable companies stating that the detailed working was not provided by the Appellant which was a mistake apparent from record, sin....
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....tion is available for the company. b) This Company was not thrown up in the search analysis carried out at the time of complying with the transfer pricing regulations by the Appellant. Additional argument of the Appellant The Annual report of the company for FY 2005-06 is not available in any of the publicly available sources and therefore the same cannot be considered as comparable based on insufficient financial information. * 'The objection of the Assessee is not valid' Search process applied by the learned TPO is same as that of Assessee, therefore claim of the Assessee is not tenable. * No basis / evidence / comparability analysis has been provided by the learned TPO in rejecting the claim of the Appellant and the learned TPO has merely rejected the observations submitted by the Appellant by making a generalized statement. * The search process conducted by the learned TPO is based on data available during the year 2009, however the same was not available, at time when Assessee conducted the initial search ....
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.... Factual Paperbook-I) 3 Fortune Infotech Ltd ('Fortune') Related party transactions for the nine months ended 31 December 2005 are 95.70% of the total revenue which is very significant. In FY 2005- 06, there were minimal related party transaction. * The accounting period used by Fortune and which is relevant for comparing FY 2005-06 is nine months ended 31 December 2005. * During this period, Fortune has entered into substantial related party transactions to the tune of 95.70%. * The learned TPO while claiming that 'in FY 2005- 06, there were minimal related party transaction', has not provided any basis / evidence / computation. * Please refer page no13 of the annual report of the company (disclosing related party transactions) * Computation of percentage of related party transactions is enclosed in Exhibit 32 of the DRP Submission (Page No. 302 of Factual Paperbook-I 4 Maveric Systems Ltd. ('Maveric') a) Wages / cost rati....
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....lant. * Please refer page nos.12and 16 of the manual report of the company * The computation of wages/ cost ratio of Maveric is enclosed in Exhibit 33 of the DRP Submission (Page No.303 of Factual 5 Sankhya Infotech Ltd. ('Sankhya') a) Page 10 of the Annual Report- Para 1 of the Management discussion and analysis: "... Sankhya's strategy to remain focused and serve knowledge market segments with specific products and services has begun to yield excellent results...." The growth in future is expected to be robust and rapid as products and services of Sankhya are fully stabilized and are implemented at various customer locations." "* We have focused on implementation of some of our products during this current year. * We have won several repeat contracts from existing customers. * SILICON(tm) suite of training and simulation products have now begun fully operational in Indian Navy, Emirates Airlines and would become an excellent examples for repeat business." b) The fixed asset schedule on page 24 ....
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....p; The learned TPO has ignored the fact that the company is operating in a very niche segment, which is not comparable to a competitive segment of software development * The learned TPO has completely disregarded the importance of segmental information which would be required for computing the margins from comparable activity. * As can be observed the fixed assets schedule of the company, the company's software products are - Silicon LMS/QT, Flight Dispatcher and Silicon ATHENA. Such software are nothing but intangibles developed by the company itself. * Therefore, based on the above reasons, the company should not be considered as comparable to the Appellant. * Please refer nos. 10,24, & 28 of the annual report of the company * The relevant extracts of the article issued by the Ministry of External Affairs on India Perspective in Oct.2004 (www.mea.go v.in/indiapersp ective/2004/10 2004. pdf) is ....
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....s taken by the TPO are not to be considered for the comparables. If the information is not available or if the comparable of the company does not fit into the filter to be applied then such company cannot be considered to determine ALP of international transactions with Associated Enterprise and then AO should workout the profit disclosed by the assessee and compare the result with comparable of independent cases who have carried out similar international transactions with independent parties. Reference is made in the case of DCIT vs Stratex Networks (India) (P) Ltd. 133 TTJ 365 and in the case of Fortune Infotec Ltd., the transactions are with related parties and therefore, the same cannot be considered as a comparable case We have considered the explanation furnished by the assessee before us and before lower authorities and that following companies cannot be considered as inappropriate companies as comparables 1. Avani Cimcon Technologies Ltd. 2. Exensys Sfotware Solutions Ltd. 3. Fortune Infotech Ltd. 4. Maveric Systems Ltd. 5. Sankhya Infotech Ltd. 6.14 The TPO has considered the main operating profits/ other costs at 20.79% by considering 12 companies. The chart as made....