TaxTMI 
TaxTMI 
2016 (2) TMI 571
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....al transactions, namely, Provision of software services and Provision of IT enabled services. The AO made reference to the Transfer Pricing Officer (TPO) for determination of the ALP of these international transactions. The TPO made transfer pricing adjustment amounting to Rs. 60,39,585/- for the international transaction of ITES. He also took up the international transaction of 'Software services' with transacted value of Rs. 128,96,15,682/-. It was noticed that the assessee selected itself as a Tested party by choosing the Transactional Net Margin Method (TNMM) as the most appropriate method. The assessee used Operating Profit/Total Cost (OP/TC) as its Profit Level Indicator (PLI) which was shown at 16.53%, calculated by taking weighted average margin of four years, being the actual figures for the financial year 2007-08 plus projected figures for the coming three years. The assessee chose 23 companies as comparable, with their average PLI at 14.43%. Thus it was demonstrated that this international transaction was at arm's length price (ALP). The TPO accepted the assessee as a tested party and also the TNMM as the most appropriate method. However, the assessee's PLI, computed on ....
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....action of the authorities below in rejecting the assessee's PLI computed by considering, inter alia, the projected figures for coming three years. It was submitted that the assessee took contracts from its AEs in earlier years, which were running beyond a particular year and, hence, the profitability for one year cannot be decisive to calculate the real profits. On being called upon to point out Agreements entered into with its AEs, the ld. AR took us through pages 213 onwards of the paper book, which is copy of an Agreement between the assessee and its AE for providing software development services. This Agreement has been entered into on 25.2.2008 w.e.f. 1.4.2007. The ld. AR candidly admitted that all other Agreements which generated revenue for the assessee during the year were effective from 1st April, 2007. As the previous year relevant to the assessment year under consideration also begins from 1.4.2007, we cannot accept the assessee's contention that the Agreements were entered in earlier years and would spill over in the subsequent years as well. On going through the assessee's Annual accounts, it emerges that under the heading 'Other current assets' as appearing in the Bal....
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....ed with any hypothetical figure by considering, inter alia, projected profits for the subsequent years. Essence of the entire transfer pricing provisions is to compare the actual price/profit realized/earned by the assessee from an international transaction with the price/profit realized/earned from comparable uncontrolled transactions. It is totally impermissible to substitute actual profit earned by the assessee from an international transaction with any other profit base, either by considering the actual profits for the earlier years as well or by taking into account the projected profits of the subsequent years, for the purposes of determining the ALP of an international transaction. Moreover, the figures taken for subsequent three years are mere projections. The correctness of these projections is mystery for us. We, therefore, jettison the view point of the assessee in calculating its PLI by considering figures for the current year and also projected figures for subsequent three years. The impugned order is, therefore, upheld on this score. (b) Foreign Exchange Fluctuation 7.1. The ld. AR contended that the adjustment on account of difference in foreign exchange rates for ....
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....hich states that for the purposes of section 92C(2), the ALP in relation to the international transaction shall be determined as under : - `(e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base ; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base ; (iii) the net profit margin referred to in sub-clause (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 s....
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....ansaction is computed, which is determined in the same way as that of the assessee as per clause (i), that is, actual figures without making any adjustment. Then sub-clause (iii) talks of adjusting the actually realized margin of comparables to bring the same at par with the international transaction undertaken by the assessee, so as to iron out the effects of differences between the international transaction and comparable uncontrolled transactions. On going through all the sub-clauses of Rule 10B(1)(e), the position which follows is that the net profit margin realized by the assessee from its international transaction is taken as such and the adjustments, if any, due to differences between the international transaction and comparable uncontrolled transactions, are given effect to in the profit margin of comparables. The viewpoint canvassed by the learned Authorized Representative that the adjustment should be carried out in the profit margin of the assessee is, ergo, devoid of merit and contrary to the legal provisions, which is hereby repelled. Our view is supported by several orders passed by the Delhi benches of the tribunal on this issue including DCIT vs. Claas India Pvt. Lt....
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.... fluctuation rate in its profit nor such an adjustment, on the facts and circumstances of the instant case, is warranted in the profit margin of comparables. (c) Revenue sharing formula 8.1. The ld. AR submitted that the assessee's AE shared 80% of total revenue from its clients with the assessee and for similar services obtained from unrelated parties, the AE shared 78.5% of the revenue with such third parties. In the light of this arrangement with the assessee for sharing higher profit percentage by its AE with it vis-à-vis the third parties, the ld. AR contended that its international transaction should be considered at ALP within the meaning of Comparable uncontrolled price (CUP) method. The ld. AR stated that such submission was made before the DRP also which has been rejected without any plausible reason. This was countered by the ld. DR, who stated that such a revenue sharing formula has no significance in so far as the assessee's operating profit margin is concerned. 8.2. We have heard the rival submissions and perused the relevant material on record. It is observed that the assessee adopted TNMM as the most appropriate method in its TP study report. The TPO acce....
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....ethod in the facts and circumstances of the instant case is TNMM, which was originally adopted by the assessee and also approved by the TPO. 9. To sum up the above discussion, we hold that the assessee was not right in working out its PLI by also considering projected profits for the three subsequent years; no deduction on account of foreign exchange fluctuations can be allowed in the facts and circumstances of the instant case; and the revenue sharing formula as put forth by the assessee as relevant under the CUP method for determining the ALP, is not correct. Consequently, it is held that the calculation of PLI of the assessee done by the TPO under TNMM is correct, which does not warrant any interference. We, therefore, countenance the same. The assessee fails on this issue. B. SELECTION OF COMPARABLES. 10. The assessee agitated inclusion of certain companies by the TPO in the final list of comparables and also exclusion of certain companies which, in its opinion, ought to have been included in such list. 11. Before going into the question of comparability of the companies assailed before us, it is relevant to understand the nature of business carried out by the assessee. We ....
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....though functionally similar to company 'B', but has related party transactions (RPTs) breaching a particular level, then, such company cannot be considered as comparable to company 'A' in the year in which the RPTs breach such a level. If, however, in the subsequent year, the related party transactions fall below that limit, then such company would again become comparable. To put it simply, if company 'A' has been held to be incomparable vis-a-vis company 'B', then it is not essential that company 'A' would be incomparable to company 'C' also. What is relevant to consider is, firstly, the functional profile of company 'A' vis-a-vis company 'C'. If both are functionally similar, then notwithstanding the fact that company 'A' was held to be incomparable to company 'B', it may still be comparable to company 'C'. Despite the fact that company 'A' is functionally similar to company 'B', it may still have been declared as incomparable to company 'B' because of other relevant reasons. If company 'A' passes the same reasons vis-a-vis company 'C', then company 'A' will find its place in the list of comparables of company 'C', notwithstanding the fact that it was held to be incomparable to c....
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....85/Del/2012). Vide its order dated 20.9.2013, the tribunal considered the functional profile of this company by noticing it to be a Product company owning software products like Dxchange, Travel Solutions, Insurance Solutions, Customer Appreciation, etc. Similar view has been taken by the Mumbai Bench of the Tribunal in the case of NetHawk Networks India Pvt. Ltd. Vs. ITO (ITA No.7633/N/2012). Vide its order dated 6.11.2013, the Tribunal for the assessment year 2008-09 has noticed Avani Cimcon Ltd. to be a Product company. No contrary material has been placed before us by the ld. DR to show the functional profile of this company matching with the assessee. When contrasted with the assessee company, which is engaged in providing software development services to its group concerns, we fail to see as to how a software product company like Avani Cimcon Ltd., having intellectual property rights over some of the products developed by it, can be compared with the assessee on an entity level. We, therefore, order for the elimination of this company from the list of comparables. (ii) Bodhtree Consulting, Persistent Systems Ltd., Quintegra Solutions Ltd., Tata Elxsi, Thirdware Solutions Ltd....
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....ns 16.1. The TPO included this company in the list of comparables after collecting information u/s 133(6) which disclosed that it was engaged in rendering software development services only. The assessee's objections about the unreliable information and non-availability of information in public domain, were rejected by the TPO. 16.2. We have heard the rival submissions and perused the Annual report of this company, which is available on page 1 onwards of the paper book. Page 6 of the Annual report, being an annexure to the Auditor's report, clearly indicates under (ii) that: 'there is no inventory with the company since it is engaged in software development.' From the balance sheet of this company, it is noticeable that there is no closing stock of any software products. Since the assessee is also engaged in rendering software development services and this company is also doing the same business, we are of the considered opinion that this company was rightly included in the list of comparables. 16.3. The ld. AR's contention this company, being in KPO business as against the assessee's BPO business, is unsubstantiated. Neither it has been shown that the assessee is rendering BPO ....
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....ty India (supra), we hold that Infosys Technologies Ltd. cannot be treated as comparable to the assessee company. This company is, therefore, directed to be excluded from the list of comparables. (v) KALS Information Systems Ltd. (Seg.) 18.1. This company was not chosen by the assessee as a comparable. However, the TPO included it in the final list. The sum and substance of the reasoning adopted by the TPO for considering this company as comparable is that it is also a software development and consulting company, meeting the filters adopted by him. 18.2. We have gone through the Annual accounts of this company, a copy of which is available in the paper book. Schedule no. 16 comprising Notes to the Financial Statements gives background of this company to be 'engaged in development of software and software products since its inception.' This company consists of STPI unit engaged in development of software and software products. Segmental information of this company is available in the paper book which has been divided into two parts, namely, `Application software segment' and `Training segment'. It is the `Application software segment' of this company, which has been adopted by t....
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....s. (vii) Softsol India Ltd. 20.1. This company was included by the TPO in the list of comparables. Though the ld. AR initially challenged its inclusion, however, later on, the comparability of this company was accepted. We, therefore, approve the impugned order in including this company in the list of comparables. 21. Now, we will take up certain comparables which have been excluded by the TPO and the assessee intends their inclusion. (i) Aditya Birla Minacs IT Services Ltd. (formerly known as PSI Data Systems); and Aditya Birla Minacs Tech. Ltd. (Birla Technologies Ltd.) 22.1. These two companies were initially proposed as comparable by the TPO. However, subsequently, it was realized that the same were not comparable. The TPO noticed that the ratio of related party transactions (RPT) to sales of these companies was 33.65% and 94.09%, respectively, which made them controlled transactions and hence incomparable. The assessee is aggrieved against the non-inclusion of these companies in the final list of comparables. 22.2. We have heard the rival submissions and perused the relevant material on record. It is found that the predominant view of the Tribunal in several cases is t....
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....mpany, apart from rendering software services, is also engaged in 'Sale of software.' In addition to that, this company has also income from `Training services'. Even though the amount of revenue from training services is less, still one cannot anticipate the impact of revenue from `Training' in the overall profitability of this company. We, therefore, hold this company to be incomparable and approve the view taken by the authorities in its exclusion. (iii) SIP Technologies and Exports Ltd. 24.1. This company was originally the assessee's comparable which was excluded by the TPO. The assessee wants inclusion of this company in the final tally of comparables. 24.2. We have gone through the Annual accounts of this company, a copy of which has been placed on record. The TPO excluded this company from the list of comparables by holding that it made an investment of Rs. 5 crore in SIP Solutions Ltd., which was more than twice of the total revenue, thereby affecting the working capital and causing abnormal margin/loss. When we go through the Schedule of Investments of this company, which is available at page 608 of the paper book, it transpires that Investment of Rs. 5 crore in Sipte....
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....tion of Chapter- VIA of the Act. Section 92(1) clearly provides that any income arising from an international transaction is required to be computed having regard to its arm's length price. There is no provision exempting the computation of total income arising from an international transaction having regard to its ALP, in the case of an assessee entitled to deduction u/s 10A or 10B or any other relevant provision. Section 92C dealing with computation of ALP clearly provides that the ALP in relation to an international transaction shall be determined by one of the methods given in this provision. This section also does not immune an international transaction from the computation of its ALP when income is otherwise eligible for deduction. On the contrary, we find that subsection (4) of section 92C plainly stipulates that where an ALP is determined, the AO may compute the total income of the assessee having regard to the ALP so determined. This shows that the total income of an assessee entering into an international transaction, is required to be necessarily computed having regard to its ALP without any exception. Thus, the ld. AR's argument that since its income is subject to deduc....
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....angalore) in which similar issue has been decided by the Special Bench by holding that availability of exemption u/s 10A to the assessee is no bar to applicability of sections 92C and 92CA. Similar view has been taken by Pune Bench of the Tribunal in the case of ACIT vs. MSS India (P) Ltd. (2009) 123 TTJ 657 (Pune) and several other orders referred to on page 5 of the TPO's order. The reliance of the ld. AR on the order of the Mumbai Bench of the Tribunal in the case of DCIT vs. Tata Consultants Services Ltd. (ITA No. 7513/M/2010) dated 4.11.2015, in our considered opinion is misconceived, because, in that case, the Tribunal primarily found that the AO erred in not himself examining the issue of TP and failed to apply his mind to the TP report filed by the assessee. The last sentence in para 54 of the order upholding the assessee's contention that no TP adjustment can be made where the assessee enjoys benefit of deduction u/s 10A or 80HHE, etc., is only obiter dicta inasmuch as the addition was found to be not sustainable on the other main grounds as discussed in the body of the order. On the contrary, we find that the decision of the Special bench in Aztech Software (supra) permit....
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.... the eligible profit of unit D-4 (Noida). The assessee is aggrieved against this decision of the AO. 28.3. After considering the rival submissions and perusing the relevant material on record, we find that a sum of Rs. 1,22,342/- has been apportioned by the AO himself as relatable to the eligible unit D-4, Noida. This apportionment has been done of sum of two items, namely, Rs. 1,48,180/- which was claimed as deduction by the assessee in earlier years and a sum of Rs. 1,93,018/- which is the amount of bank charges refunded during the year. These two items were claimed as deduction in the earlier years from the eligible income and these have turned out to be excessive to this extent, either because of the excess provision created in the earlier year which has been now reversed or the excess bank charges claimed which have been refunded in the instant year. Since these expenses at the time of their incurring in the earlier years went on to reduce the eligible income of the Noida unit, in our considered opinion, when the excess amount is reversed in the current year, the same should also be made eligible for the benefit of deduction u/s 10A of the Act. We, therefore, overturn the ass....