TaxTMI 
TaxTMI 
2016 (6) TMI 249
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....reciating that out of the set of 42 comparables identified by the assessee, only those comparables are to be rejected by applying criteria whose turnover was less than Rs. 1 Cr." 4. Facts of the case, in brief, are that the assessee company is a subsidiary of Starent Networks Corporation (SNC), USA and exports software services to its holding company Starent Networks Corporation, USA. It owns 2 separate undertakings engaged into software development and export activity. Both the units are established as 100% EOU. The assessee filed its return of income on 31-10-2006 showing total income of Rs. 18,42,018/-. 5. The AO made a reference to the TPO u/s.92CA(1) of the I.T. Act for determining the ALP with reference to the international transactions reported in Form 3CEB. The TPO noted that the assessee, during the impugned assessment year, has entered into with its AE the following international transactions : Associated enterprise International transaction Amount (in rupees) Starent Networks Corporation, USA Software Development Services 7,70,17,274/- Starent Networks Corporation, USA Import of equipments 7,20,918/- 6. From the various detai....
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....as compared with your company 5. Companies that had substantial (excess of 25 per cent) transactions with related parties 6. Companies for which financial data for F.Y.2004-05 is not available 10. The TPO rejected 4 out of the 7 companies above and held that the following 3 companies are comparable : Sr.No. Name of the company PBIT/Operating Cost 1 Kedia Infotech Ltd., 22.54% 2 E Star Infotech Ltd. 22.87% 3 Sterling International Enterprises Ltd. 33.84% 11. After considering the various objections by the assessee the TPO incorporated certain new comparables suggested by the assessee and took the final set of comparables as under : Sr. No. Name of the company PBIT/Operating Cost 1 Chakkilam Infotech Ltd. 12.69% 2 E Star Infotech Limited 22.87% 3 Exensys Software Solutions Ltd. 32.25% 4 Kedia Infotech Ltd. 22.54% 5 Lanco Global Systems Limited 10.69% 6 Network Programs (India) Ltd. 12.91% 7 Space Computer & Systems Ltd. 44.58% 8 Sterling International Enterprises Ltd. 33.84% 9 TVS Infotech Ltd. 13.31% ARITHMETI....
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....erage of arithmetical mean of the comparable companies would fall within the safe harbour limit of +/-5%. 2.2.5 As this Ground is decided in favour of the Appellant giving findings on Ground 2 and 3 would be academic, hence, I do not consider it necessary to give my findings on Ground 2 and 3 raised by the Appellant." 15. Aggrieved with such order of the CIT(A) the Revenue is in appeal before us. 16. The Ld. Departmental Representative heavily relied on the order of the TPO and the grounds raised by the Revenue. 17. The Ld. Counsel for the assessee on the other hand submitted that the assessee in its TP study report has earlier applied the turnover filter of Rs. 10 lakhs to Rs. 10 crores. However, during the assessment proceedings before the TPO the same was modified to Rs. 1 crore to Rs. 100 crores on the ground that there was a mistake. The TPO instead of accepting the same applied the turnover filter of Rs. 1 crore to Rs. 20 crores. He submitted that in subsequent years the TPO and DRP have accepted the turnover filter of Rs. 1 crore to Rs. 100 crores. Further, the Ld.CIT(A) following the decision of M/s. Genesys Integrating Systems India Pvt. Ltd. (Supra) has ....
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....r has observed as under : "9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which are making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which are loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonabl....
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....him that the TPO should have given working capital adjustment for the difference in levels of accounts receivable and accounts payable in the books of the tested party, vis-a-vis the comparable companies. It was argued that a company would be willing to accept a slightly lower price for its services if it were to provide the services on cash basis, than a company, which allows a customer to pay at a later date. Conversely in case of companies receiving credit, in form of accounts payable, their cost of sales reflects not only the purchase price of goods but also time value for the credit allowed by the suppliers. Relying on various decisions it was argued that to bring all the companies to an equal footing, an adjustment is required to be made to account for the underlying cost component in the sales price or cost of sales. 24. Based on the arguments advanced by the assessee the Ld.CIT(A) allowed the claim of the assessee regarding working capital adjustment by observing as under : "2.3.5 I have considered the submission of the Appellant and the data available on record. Delhi bench of ITAT in the case of Vedaris Technologies Pvt. Ltd. Vs. ACIT (2010) 41 DTR 73 (Del) an....
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.... on the following decisions: i. Demag Cranes & Components (India) Pvt. Ltd. Vs. DCIT (ITA No. 1683/PN/2011) (A.Y. 2007-08) decided on 31-12-2012. ii. Ariston Thermo India Limited Vs. DCIT (ITA No. 1455/PN/2010) (A.Y. 2006-07) decided on 25-06-2013. and in support of risk adjustment the ld. AR placed reliance on following case laws: i. Intellinet Technologies India Pvt. Ltd. (ITA No. 1237/Bang/2010)(A.Y. 2006-07) decided on 30-03-2012. ii. Curam Software International Pvt. Ltd. Vs. ITO (ITA No. 1280/Bang/2012)(A.Y. 2008-09) decided on 31-07-2013. The ld. DR submitted that the DRP has admitted that working capital adjustment cannot be denied. However, the assessee did not furnish the necessary documents in support of its submissions. Similarly, for risk adjustment the assessee failed to provide necessary information. A perusal of directions of DRP shows that the issue of working capital adjustment and risk management has been summarily rejected by the DRP. The ld. AR pointed that working capital adjustment has been allowed in the subsequent assessment years i.e. assessment years 2009-10 and 2010-11. The ld. AR referred to the orde....