TaxTMI 
TaxTMI 
2016 (5) TMI 402
X X X X Extracts X X X X
X X X X Extracts X X X X
....ade consequent to the determination of the arm'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 cen....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... observations of the Transfer Pricing Officer in this regard : "The taxpayer did not 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....41,06,107 20,83,01,489 Operating profit 1,08,25,281 -20,82,91,905 Operating profit/cost 5.88% -99.995% (Refer pages 326 and 444 of 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 c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sken Communication Technologies Ltd. and Tata Elxsi Ltd. had to be excluded from the list of comparable companies as their turnover was in excess of Rs. 200 crores whereas the turnover of the assessee was less than 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Panel, viz., ICRA Techno Analytics Ltd., and Kals Information Systems Ltd., had to be one of the companies, comparable companies chosen by the Transfer Pricing Officer which was retained by the Dispute Resolution Panel, had to be excluded. The learned Departmental representative 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 turno....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Chartered Accountants of India transfer pricing guidelines note on this aspect lay down in para 15.4 that 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. 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... taken into consider ation for the purpose of making transfer pricing study." 14. It was brought to our notice that the above proposition has also been followed by the honourable Bangalore Income-tax Appellate Tribunal in the following cases : 1. Kodiak Networks (India) Private Limited v. Asst. CIT [2012] 15 ITR (Trib) 610 (Bang) ; (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.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion has actually been undertaken does not exceed five per cent. of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm's length price. (3) Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that- (a) the price charged or paid in an international 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 relati....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions ; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (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 tran....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Investment Advisors (India) P. Ltd. v. Deputy CIT [2015] 376 ITR 183 (Delhi) ; [2015] 56 taxmann.com 417 (Delhi) wherein at paragraph 3 of the said judgment the hon'ble Delhi High Court held that the mere circumstance of a company otherwise conforming to the stipulations in rule 10B(2) of the Income-tax Rules, 1962 ("the Rules") in all details, presenting a peculiar feature, such as huge profit or a huge turnover, ipso facto does not leads to its exclusion. The Transfer Pricing Officer, first, has to be satisfied that such differences do not "materially affect the price . . . or cost"; secondly, an attempt to make reasonable adjustment to eliminate the material effect of such 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)....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ebts as non-operating in nature and fringe benefit tax as part of operating cost : As far as foreign exchange gain/loss being considered as not forming part of the operating cost, the reasoning of the Revenue is that such loss or gain cannot be said to be one realised from international transaction though they may form part of the gain/loss of the enterprise and, therefore, they should be excluded while determining operating cost. On the above issue, we find that the Bangalore Bench of the Income-tax Appellate Tribunal in the case of SAP Labs India Pvt. Ltd. v. Asst. CIT [2010] 6 ITR (Trib) 81 (Bang) ; [2011] 44 SOT 156 (Bang.) has taken the view that foreign exchange fluctuation gains 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 a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....olution Panel and this order. 23. In the result, the appeal by the Revenue is treated as partly allowed for statistical purposes. 24. We now take up the assessee's appeal for consideration. As far as the appeal of the assessee is concerned, the first grievance is regarding choosing ICRA Techno Analytics Ltd. and Kals Information Systems Ltd. as comparable companies. As far as ICRA Techno Analytics Ltd. is concerned, learned counsel for the assessee has pointed out before us that the related party transaction (RPT) of this company during the relevant period was in excess of 15 per cent. Our attention was drawn to the submissions made by the assessee before the Dispute Resolution Panel on this aspect at page 376 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 case....
X X X X Extracts X X X X
X X X X Extracts X X X X
....aged in training of software professionals on on-line projects. This indicates that company is engaged in development of software and products and its inventory also indicates that the assessee has been using its readymade libraries for sales. This company was rejected in earlier year on functional analysis by the Income-tax Appellate Tribunal in the case of Planet Online Pvt. Ltd. (I.T.A. No. 464/Hyd/2014) wherein it was held that company is engaged in development of software products. Since its annual report states the same facts in this assessment year also, we are of the opinion that the company cannot be selected as a comparable as it was engaged in development of software and software products. Accordingly, the assessee's objections 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-associate....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mental profit and loss for both the software and the mobile payment platform segment was given to the Transfer Pricing Officer. In the show-cause notice, no query was raised about the segmental profit and loss account. According to the assessee, this indicates that the Transfer Pricing Officer accepted the segmental results as per the transfer pricing study of the assessee. It is the stand of the assessee that in the order passed, the learned Transfer Pricing Officer has not considered the segmental profit and loss while determining the transfer pricing adjustment. Instead the learned Transfer Pricing Officer has unilaterally considered the cost and operating revenues of both the mobile payment platform service segment and the software development segment for computing the arm's length price. This has been 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 rel....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f other activities like marketing, sales, legal, customer support, client management, data centre, and IT support, project management, etc., are involved. The learned Transfer Pricing Officer has assumed that whole of non-associated enterprise expenses is research and development. However, this is not correct. It involves various activities/expenses like marketing, sales, legal, customer support, etc. The contention of the Transfer Pricing Officer is, therefore, without basis. 31. It was pointed out that even though the assessee is 100 per cent. subsidiary, it is separate legal entity. There is no bar on it to carry on business in India with third party clients. The Transfer Pricing Officer's assumption that the assessee cannot do any third party business because it is 100 per cent. subsidiary is bad in law. 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ved a part of revenue from the Nokia deal. The same has been reflected as income in the profit and loss account of the financial year 2010- 11. A copy of financial statement for the financial year 2010-11 was filed before the Dispute Resolution Panel. 35. The summary of the revenue earned from mobile payment platform segment in the financial year 2010-11 was as follows : Nature of income Amount (Rs.) Assignment of UBI contract 11,39,25,000 Assignment of other contracts 45,57,000 Transfer of employees 68,36,213 Managed services revenue 1,85,02,569 Professional services revenue 20,65,688 Total 14,58,86,470 36. Further, during the financial year 2011-12, the assessee received Rs. 8,71,561 as income from mobile payment services and Rs. 16,92,09,899 as managed service revenue and professional service revenue 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....