TaxTMI 
TaxTMI 
2016 (5) TMI 402
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....m's length price by the Transfer Pricing Officer and the addition on account of the transfer pricing adjustment was a sum of Rs. 27,88,16,211 which was reduced pursuant to the directions of the Dispute Resolution Panel ("the DRP") pursuant to the objections filed against the order of the Transfer Pricing Officer ("the TPO") under section 92CA of the Act to Rs. 26,58,66,665. To the extent the transfer pricing adjustment survives pursuant to the impugned directions of the Dispute Resolution Panel, the assessee is in appeal before the Tribunal. The Revenue is in appeal before the Tribunal challenging the reliefs allowed pursuant to the directions of the Dispute Resolution Panel. 3. The assessee is a private limited company incorporated under the Companies Act, 1956. It is engaged in two distinct business segments-(1) development and delivery of domain specific software for Obapay Inc., U.S.A., and (2) establishing, deploying and maintaining a platform for making mobile payments and facilitating related services for users in India. The assessee has a single software development centre at Bangalore, India. The assessee is a 100 per cent. subsidiary of Obopay Inc., Mauritius. M/s. O....
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.... appear to explain the submissions made before the undersigned on the dates given for hearing on November 20, 2013. Hence, in view of the same, the details available on record are examined. In respect of the seconded employees, it is seen that they have been seconded from Obopay Inc., U.S.A. Their details are as under : Name of the employee Term Position Raj Aji 18 months VP Business development and legal affairs Gurpreet (Gary) Singh 18 months VP channels and global relationship The Vice-President for business development and legal affairs and the Vice-President for channels and global relationship have been appointed by the Chief Financial Officer of Obopay, U.S.A, to work for Obopay, U.S.A. The offer letters are dated April 23, 2009, and May 6, 2009 (revised agreement May 12, 2009). The secondment agreement is dated October 1, 2009. Other than these, the taxpayer has not furnished any information regarding the nature of functions performed by these two seconded employees. As reproduced above, all that the taxpayer has offered as an explanation is that these employees function in line with their designation. The market in which they were to perform was local market....
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....the paper book-1) 7. The assessee chose 14 comparable companies in its transfer pricing study whose arithmetic mean of operating margin on cost was 6.63 per cent. The assessee claimed that its operating margin on cost was 12 per cent. (page-28 of the transfer pricing study of the assessee) and the same was arrived at by the assessee as follows : (Rs.) Operating income 19,49,40,972 Operating expenses claimed 17,40,41,219 Operating profit 2,08,90,169 OP/OC 12% 8. The assessee claimed that its operating profit to the operating cost was within the permissible range of plus or minus variation to the arithmetic mean of operating margin on cost of comparable companies chosen by it, as provided in the second proviso to section 92CA of the Act. Therefore, the same was at the arm's length hence there was no necessity for making any addition to the total income of the assessee by way of adjustment to the arm's length price. 9. The Transfer Pricing Officer accepted two of the comparable companies out of the 14 comparable companies proposed by the assessee in its transfer pricing study, viz., R. S. Software (India) Ltd., and Thinksoft Global Services Ltd., and reject....
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....Rs. 20 crores. The Dispute Resolution Panel also held that the foreign exchange flotation gain had to be regarded as part of the operating profit of the assessee and the profits margins of the assessee had to be reckoned accordingly. The Dispute Resolution Panel also held that risk adjustment had to be provided to the assessee and gave directions to the Transfer Pricing Officer in this regard. The other aspects with regard to the determination of arm's length price by the Transfer Pricing Officer were held to be correct by the Dispute Resolution Panel. The six final comparable companies that remain after the order of the Dispute Resolution Panel are ICRA Techno Analytics Ltd., Kals Information Systems Ltd., Persistent Systems and Solutions Ltd., R. S. Software (India) Ltd., and Thinksoft Global Services Ltd. 13. The Assessing Officer incorporated the directions of the Dispute Resolution Panel in his fair order of assessment. Aggrieved by the reliefs allowed by the Dispute Resolution Panel, the Revenue has filed an appeal before the Tribunal. The substantial grounds raised by the Revenue in this regard are as follows : "1. Turnover filter (i) The hon'ble Dispute Resolut....
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....ve relied on the order of the Transfer Pricing Officer. We shall deal with these argument by taking up individual companies chosen by the Transfer Pricing Officer and excluded by the Dispute Resolution Panel. 16. As far as the Revenue's grievance in its appeal are concerned, the first grievance of the Revenue as projected in ground No. 1 of its appeal is that the Commissioner of Income-tax (Appeals) was not right in applying the turnover filter and excluding six companies chosen as comparable by the Transfer Pricing Officer. The Bangalore Bench of the Income-tax Appellate Tribunal has been consistently following the decision rendered in the case of Trilogy E-Business Software India P. Ltd. v. Deputy CIT [2013] 23 ITR (Trib) 464 (Bang) (I. T. A. No. 1054/Bang/2011, dated November 23, 2012), wherein a view has been taken that huge turnover makes a company not comparable with a company having smaller turnover. For the sake of reference, we may refer to the decision of this Bench in the case of Trilogy E-Business Software India P. Ltd. v. Deputy CIT (I. T. A. No. 1054/Bang/ 2011, dated November 23, 2012), the relevant observations therein are as follows (page 477) : "(1) Turnove....
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.... and the relative economies of scale under which they operate. The fact that they operate in the same market may not make them comparable enterprises. The relevant extract is as follows on rule 10B(3) : 'Clause (i) lays down that if the differences are not material, the transactions would be comparable. These differences could either be with reference to the transaction or with reference to the enterprise. For instance, a transaction entered into by a Rs. 1,000 crores company cannot be compared with the transaction entered into by a Rs. 10 crores company. The two most obvious reasons are the size of the two companies and the relative economies of scale under which they operate.' 12. It was further submitted that the Transfer Pricing Officer's range (Rs. 1 crore to infinity) has resulted in selection of companies like Infosys which is 277 times bigger than the assessee (turnover of Rs. 13,149 crores as compared to Rs. 47.47 crores of the assessee). It was submitted that an appropriate turnover range should be applied in selecting comparable uncontrolled companies. 13. Reference was made to the decision of the Income-tax Appellate Tribunal, Bangalore Bench, in the c....
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.... ; (I. T. A. No. 1413/Bang/2010 ; 2. Genesis Microchip (I) Private Limited v. Deputy CIT [2012] 135 ITD 533 (Bang) ; and 3. Electronic for Imaging India P. Ltd. (I. T. A. No. 1171/Bang/ 2010). 15. It was finally submitted that companies having turnover more than Rs. 200 crores ought to be rejected as not comparable with the assessee. 16. The learned Departmental representative, on the other hand, pointed out that even the assessee in its own transfer pricing study has taken companies having turnover of more than Rs. 200 crores as comparables. In these circumstances, it was submitted by him that the assessee cannot have any grievance in this regard. 17. We have considered the rival submissions. The provisions of the Act and the Rules that are relevant for deciding the issue have to be first seen. Section 92 of the Act provides that any income arising from an international transaction shall be computed having regard to the arm's length price. Section 92B provides that "international trans action" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible pro....
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.... transaction has not been determined in accordance with sub-sections (1) and (2) ; or (b) any information and document relating to an international transaction have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made in this behalf ; or (c) the information or data used in computation of the arm's length price is not reliable or correct ; or (d) the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D, the Assessing Officer may proceed to determine the arm's length price in relation to the said international transaction in accordance with sub-sections (1) and (2), on the basis of such material or information or document available with him.' 18. Rule 10B of the Income-tax Rules, 1962, prescribes rules for determination of arm's length price under section 92C : '10B.(1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, bei....
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..... (3) An uncontrolled transaction shall be comparable to an international transaction if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market ; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. (4) The data to be used in analysing the comparability of an uncon trolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into : Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared.' 19. A reading of the provisions of rule 10B(2) of the Rules shows that uncontrolled transaction has to be compared with international transaction having regard to the factors set out therein. Before us there is n....
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....uch differences has to be made. Learned counsel for the assessee, however, submitted that the hon'ble court was only by way of an obiter dictum and the hon'ble court was concerned only with the issue of excluding high profit making or abnormally loss making companies from being regarded as comparable companies. He pointed out that in any event the earlier decision of the hon'ble Delhi High Court in the case of CIT v. Agnity India Technologies P. Ltd. (I.T.A. No. 1204/2011 dated July 10, 2013), had taken the view that turnover was a relevant criteria in choosing comparable companies. 18. We have considered the rival submissions. The substantial question of law (questions Nos. 1 to 3) which was framed by the hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt. Ltd. (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the assessee in transfer pricing analysis. Therefore, as rightly submitted by learned counsel for the assessee the observations of the hon'ble High Court, in so far as it refers to turnover, were in the n....
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.... are required to be added to operating revenue. Following the same, the Assessing Officer is directed to accept the claim of the assessee in this regard. As far as the provision for bad debts are concerned, the Transfer Pricing Officer has accepted that the same would be part of operating expenses provided the same is incurred every year for at least three years and the manner in which provision is made is consistent. The assessee in reply to the query of the Transfer Pricing Officer on the above aspect has not furnished any details. We are of the view that the assessee should be afforded opportunity to explain its position on the above and the Assessing Officer is directed to consider the same in accordance with law. As far as fringe benefit tax (FBT) is concerned, the same was not considered by the Transfer Pricing Officer as part of operating cost in the case of comparables and therefore the same should also not be considered as part of operating cost of the asses see. We hold, accordingly, and direct the Assessing Officer to compute the operating cost of the assessee." 20. In view of the aforesaid decision, we do not find any merit in ground No. 2 raised by the Revenue and the....
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....76 of the assessee's paper book (paragraph 5.156) wherein the relevant details were given. The financials of this company are also placed at pages 619 to 622 of the assessee's paper book. We have considered the submissions. It is not in dispute before us that this Tribunal, in the cases of 24/7 Customer.Com.Pvt. Ltd. [2013] 21 ITR (Trib) 514 (Bang) (I.T.A. No. 227/ Bang/2010), Sony India P. Ltd. reported in [2009] 315 ITR (AT) 150 (Delhi) and various other cases has taken a view that comparables having related party transaction of up to 15 per cent. of the total revenues can be considered. In view thereof, the assessee's grievance on this issue as projected in its grounds requires to be accepted. The Transfer Pricing Officer/Assessing Officer are directed to examine the financials of this company and adopt a threshold limit of 15 per cent. of the total revenue attributable to related party transaction as ground for rejecting comparable companies. Consequently it is held that comparable companies having related party transaction up to 15 per cent. of the total revenues can be excluded. 25. As far as the exclusion of M/s. Kals Information Systems Ltd. is concerned, we fi....
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....ns are accepted and the Assessing Officer is directed to exclude the company." 26. We now take up for consideration the grievance of the assessee as projected in ground No. 9 of its appeal which reads as follows : "9. The lower authorities have erred in : (a) Not restricting the transfer pricing adjustment to associated enterprise transactions only and thereby making an adjustment in respect of transactions with non-associated enterprise also ; (b) not appreciating that the appellant renders mobile payment platform services to third parties and the costs relating to mobile payment platform segment cannot be considered for computing the arm's length price of the software development services rendered to associated enterprise ; (c) Concluding that the appellant is engaged in the marketing of the products of the associated enterprise ; and (d) Adopting entity wide operating cost and operating revenue of the appellant without giving an opportunity of hearing to the appellant." 27. A ground similar to ground No. 9 was raised by the assessee before the Dispute Resolution Panel but the same was not adjudicated by the Dispute Resolution Panel. The submission of learned coun....
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....en done without providing any opportunity of hearing to the assessee. 29. It was further contended that while computing the arm's length price only revenues and costs relating to the associated enterprise segment need to be considered. The transactions with non-associated enterprise are not international transactions. It is only with reference to the transactions with related parties (AE) it could be alleged that the prices are manipulated to result in a flight of profit from India. It is only such "flight" of profits that needs correction. It was contended that the Transfer Pricing Officer concluded that the reimbursements of Rs. 3,88,63,270 is not attributable to assessee's business and proceeded with the determination of arm's length price of the international transactions conducted by taxpayer by aggregating both the segments. The relevant extract from the transfer pricing order is already given in the earlier part of this order (vide paragraph 5 of this order) and is not being repeated. It is the stand of the assessee that the above queries were raised for the first time in the final order. These queries were not raised during the proceedings under section 92CA. T....
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..... 32. It was argued that the Transfer Pricing Officer has contended that since the associated enterprise is into development of mobile payment platform, the product developed by associated enterprise is just marketed by the assessee in India. Further, the Transfer Pricing Officer has stated that the assessee has earned very less income as against the expenditure in the mobile payment platform segment. It was submitted that this contention of the Transfer Pricing Officer is incorrect. The assessee submitted that associated enterprise renders mobile payment platform services in the U.S.A. and Kenya whereas the assessee renders such services in India. The assessee submitted that in December, 2008, it signed an agreement with Yes Bank Ltd. to provide mobile payment services in India and agreed for revenue structure that would be effective post launch. The Revenue comprised of integration fee, set-up fee and transaction based fees, the assessee had projection of getting substantial revenue in future as this was new product and had growth prospects. In the financial year 2008-09, the assessee received Rs. 2,00,000 as integration fees from Yes Bank. A copy of the Yes Bank agreement and c....
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....from the Nokia deal. A copy of financial statement for the financial year 2011-12 was filed before the Dispute Resolution Panel. It was pointed out that the assessee has subsequently earned revenue from the mobile payment platform segment. The year under consideration was first year of operation for mobile payment platform segment. The product itself was launched in February 2010. Therefore, the revenue earned during the year under consideration was not much. The assessee was carrying on the business activity independently for the third parties. These activities have generated revenues in the subsequent years. Therefore, the Transfer Pricing Officer's contention that the assessee is having huge costs against the revenue earned in mobile payment platform segment because it is bearing the marketing burden of the associated enterprise is incorrect. The learned Transfer Pricing Officer has not appreciated the business and commercial realities and has unilaterally rejected the segmental profit and loss account. 37. Learned counsel also filed before us a copy of the Transfer Pricing Officer's order for the subsequent assessment year, i.e., 2011-12 wherein the Transfer Pricing Of....