AI Drafter 
TaxTMI 
TaxTMI 
2011 (10) TMI 616
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.... prejdudice to above, the ld AO has erred in not considering 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....
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....on and documents maintained u/s 92D(1) of the Act read with I.T. Rules 10D(1) and (3). The TPO in his order has mentioned that 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 signific....
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....assessee to have the material on record that exception is available. As already pointed out, this is with reference to information and 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....
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....ngth. (iii) Updated margins of the Comparables for F.Y. 2005-06: The assessee objected to use of single year data, and further opposed to using of updated data of comparables for the relevant year. 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 ....
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....the provisions of section 92C(1) and (2). Hence, the fresh search undertaken by the TPO is in accordance with the provisions of the Act. However, the scope of this is not available to the assessee. It has to undertake the search 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 softw....
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.... reply dated 26.10.09, the assessee has informed that it has identified 9 comparables on the basis of search process. The process of search, filters applied and functional analysis was annexed with this letter. It was seen that out of 9 comparables, 2 did not satisfy the filter 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). ....
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....mean margin was worked out at 16.585% and out of those only one comparable was left namely Sophia Software Ltd. on the basis of which the arm length price was determined. Here, it is the case of ld. AR that the said case is not applicable to assessee's case as in that case both the parties had accepted 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 bon....
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....cantly different functions * The Appellant strongly contends not to consider the inappropriate companies as comparables for the reasons as detailed in Annexure A to this submission. 3. Considering the incorrect margins of companies selected by the learned TPO (Ground No 10 of the Grounds of Appeal) * The learned TPO/ AO have considered inappropriate margins 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 Aks....
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....t is engaged in providing software products (based on the following contents mentioned in website of the company): "DXchange is an innovative product of the company. It is an XML web services based, fully scalable, easily configurable Data Exchange Middleware Server." * It clearly shows that the company is also engaged in development and sale of software products. * Moreover, for FY 2005-06, no segmental information 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....
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....; No basis / evidence / comparability analysis has been provided by the learned TPO in rejecting the claim of the Appellant. * Accordingly, the company should be rejected as "functionally different". * Please refer page nos 8, 12 and 33 of the Annual report of the company for FY 2005-06. * Please refer Exhibit 30 of the DRP Submission for the relevant extract from the website of Exensys. (Page Nos 299 and 300 of 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%. * &....
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...., nor the same was available at the time of search process (submitted to the learned TPO vide submission dated 26 October 2009) which was based on database updated as on 25 August 2006. * The database keeps adding companies as and when data are available relating to the companies. Accordingly, it is unfair to consider the search analysis undertaken during the assessment proceedings using noncontemporaneous data. * Therefore, based on the above reasons, the company should not be considered as comparable to the Appellant. * 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 segmen....
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....rely claimed that Training component pertains to software based simulation services for pilots * Even though Training component pertains to the software based simulation services, same cannot be compared as a part of software development services since the functions performed under training activities does not pertain to the core activity of development of software but pertains to providing training to users of the software. * The evidences submitted by the Appellant clearly substantiates that it is mainly engaged into development of software products. * 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 comp....
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.... compared than other datas for period not more than two years prior to such financial year may be used. Hence, the TPO was justified in directing the assessee company to conduct first search of the comparables during the transfer pricing proceedings as the Rule 0B(4) of the IT Rules require used of current year data for the purpose of comparability analysis. 6.13 We have noticed that TPO has rejected two comparables shown by the assessee on the ground that these did not specify the filter applied by the assessee itself. These two companies were not having the data available for the assessment year 2005-06. The TPO cannot blow hot and blow cold. The assessee has given reasons as to why 05 companies 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 pa....
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.... 11.85% Lower 5% Margin 9.31% 8.66% 6.26% Appellant's margin 11.08% 6.16 In respect of applicability of the price transferred by the assessee and if the ALP debited by the AO is less than 5% then no adjustment could be made to ALP. This has been held by the Jaipur bench in the case of Shankar Exports vs Addl. CIT, 132 TTJ 107 and in the case of Ravi Kumar Rawat vs ITO 134 TTJ 634. It will be useful to reproduce para 15 from the order of the Tribunal in the case of Shankar Exports (supra) as under: . ''15. The ld. D/R has vehemently argued there was an amendment to the provisions of sub-section (2) of section 92C by which it was provided that where more than one price is determined by the most appropriate method, the Arm's length price shall be taken to be the arithmetical mean of such prices, or at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five percent of such arithmetical mean. As per amended provision to section (2) of section 92C, it does not say that Board's circular has been withdrawn. The Board's circular issued in 2001 is still applicable a....