TaxTMI 
TaxTMI 
2017 (4) TMI 762
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....mpany also reported the following international transactions with its Associated Enterprises (AE): • Provision for Software development and related services - Rs. 12,74,70,626/- • Interest paid Rs. 1,42,784/- The assessee-company sought to justify the consideration received for international transactions with its AEs to be at arm's length price. The assessee-company also submitted transfer pricing study report adopting gross profit margin by cost as the profit level indicator for the transfer pricing (TP) study. The assessee-company applied CPM method i.e. cost plus method which was considered to be most appropriate method for the purpose of bench marking its international transactions. The assessee-company's profit margin was computed at 39.5% and the assessee-company claimed that he same was comparable with other companies rendering or engaged in similar business. For the purpose of transfer pricing (TP) study assessee-company had chosen 12 comparable entities and the arithmetical average of operating margin of said comparables was computed at 23.11%. According to the assessee-company, its PLI was much higher than the original arithmetical mean of the....
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.... 13.65% 10.49% 3 Exensys Software Solutions Ltd 70.68% 64.50% 4 Sankhya Infotech Ltd 27.39% 22.28% 5 Sasken Network Systems Ltd 16.64% 15.05% 6 Foursoft Ltd 22.98% 22.48% 7 Thirdware Solutions Ltd 66.09% 65.64% 8 R S Software (India) Ltd 8.07% 7.73% 9 Geometric Software Solutions Ltd 20.34% 18.82% 10 Tata Elxsi Ltd (seg) 24.35% 23.92% 11 Visualsoft Technologies Ltd (seg) 23.52% 21.21% 12 Sasken Communication Ltd (seg) 14.42% 14.27% 13 iGate Global Solutions Ltd (seg) 4.32% 2.77% 14 Flextronics Software Systems Ltd 32.19% 30.66% 15 L&T Infotech Ltd 10.33% 9.52% 16 Satyam Computer Services Ltd 29.44% 28.14% 17 Infosys Ltd 42.83% 42.34% Arithmetic Mean 26.59% 24.90% The TPO computed average profit margin of the comparable finally selected by him at 26.59%. After giving working capital adjustment of 1.69% adjusted arithmetical mean PLI was determined at 24.9%. On the above basis, the TPO computed TP adjustment as follows: Arms Length Price : Operating Cost Rs. 11,8....
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....olding that the size and turnover of the company are deciding factors for treating a company as a comparable and accordingly excludeing Exensys Software Solutions, iGate Global Solutions Ltd . L & T Infotech Ltd, Satyam Computers Ltd, Thirdware Solutions, M/s Infosys Technology Ltd, M/s Flextronics Software Systems Ltd, Tata Elxsi and Ltd., as comparables in the segement. 3. The learned C1T (A) in the facts and circumstances of the case erred in holding that M/s Tata Elxsi Ltd , cannot be taken as comparable, without appreciating the fact that the company qualifies all the qualitative and quantitative filters applied by the TPO in selection of this company as a comparable. 4. The learned CIT(A) in the facts and circumstances of the case erred in holding that M/s Bodhtree Consulting Ltd., cannot be taken as comparable, without appreciating the fact the company qualifies all the qualitative and quantitative filters applied by the TPO in selection of this company as a comparable. 5. The Ld. CIT(A) erred in rejecting the diminishing revenue filter used by the TPO to exclude companies that do not reflect the normal industry trend. 6. The C1T(A) erred in directing the AO to r....
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.... stated as under: Exensys Software Solutions is engaged in various activities including BPO and is basically a product based company. This company is to be rejected for the following reasons: * During the year under consideration, Holool India Limited was amalgamated with Exensys Software. This has resulted in jump in revenues and profits. This is amply clear, if one refers to page 16 and onwards of the Annual Report under the Director's Report. Considering this as an exceptional year of operation, this company is to be rejected as a comparable. * This company is engaged in the business of BPO services. This is clear from page 19 of the Annual Report under Management Discussion Analysis - Future Outlook. The Directors of the company observe as follows: "The company's outlook for the next year is to achieve a positive growth in the solutions segment of the business in line with the industry growth rates, to consolidate in the BPO segment, and to expand strategic relationship to achieve the desirable growth rates". From the above, it is clear that the company operates in atleast two business segments viz software services and BPO services. As per the dire....
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....business of BPO as a product development company. Now, the law is quite settled that product development company cannot be compared with that of software development company. Further it is also clear that there is amalgamation of Holool India Ltd., with the assessee-company as a result of which there were abnormal profits. The relevant part of the decision in the case of Intoto Software India Pvt. Ltd., (supra) is extracted below: "17. Having heard both parties and having considered the material available on record, we find that there is no dispute that the assessee has accepted the Exensys Software Solutions Limited as one of the comparable companies when proposed by the TPO. However, the fact that there is an amalgamation of two companies i.e., Exensys Software Limited and Holool India Limited, the results of which, has resulted in high operating margin cannot be lost sight for. It has been held in many cases by this Tribunal as well as the Higher Forums that to compare a company with another company, both the companies have to be brought on par with each other after making the necessary adjustments wherever necessary and possible. However, where there are extraordinary events....
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....deem it fit and proper to remand this issue to the file of the Assessing Officer/TPO for reconsideration. If it is found that there is an amalgamation of Exensys Software Limited and Holool India Limited and formed as one entity viz., Exensys Software Solutions Limited. during the relevant previous year and the financial result is the combined result of these two companies, then, we direct the Assessing Officer/TPO to exclude this company from the list of comparables." Respectfully following the ratio of the decision in the above case, we hold that Exensys Software Solutions Ltd., cannot be compared with that of the assessee-company on both grounds of functionality or even on amalgamation. Accordingly, we direct the AO/TPO to exclude this company from the list of comparables. 10.1 iGate Solutions and L&T Infotech were excluded by the CIT(A) on the ground that turnover is more than Rs. 200 crores. The learned AR of the assessee seeks to exclude this company from the list of comparables on the ground that turnover is more than 10 times the turnover of that of the assessee-company. Reliance in this regard is placed on the decision in the case of McAfee Software India P. Ltd. vs.....
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....ollowing this, we hold that this company should be excluded from the list of comparables on the ground of functionality. Accordingly, we direct the AO/TPO to exclude this company from the list of comparables. 10.6 Infosys Technologies was excluded from the list of comparables by the CIT(A) on the ground that its turnover exceeds Rs. 200 crores. However, it is contested by the learned authorised representative of the assessee that this company is functionally different from that of the assessee-company as it enjoys high brand value and has placed reliance on the decision of the co-ordinate bench in the case of McAfee Software India P. Ltd.(supra), Sunquest Information Systems (India) Pvt. Ltd.(supra), Agnity India technologies Pvt. Ltd.(ITA No.3856/Del/2010) and Intoto Software India Pvt. Ltd. (supra). 10.7 After hearing rival submissions and perusing material on record, we are of the considered opinion that Infosys Infosys cannot be considered as comparable with that of the assesseecompany as it has got high brand value. Now the law is quite settled that the companies with high brand value cannot be compared with that of software development company y and respectfully followi....
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....e was accepted as a comparable by the TPO also. Even before the DRP, the assessee did not challenge the inclusion of this company as a comparable. However, in the CO filed before the Tribunal, the assessee has sought to challenge the inclusion of this company as a comparable in ground No.5(d). The law by now is well settled that assessee is entitled to raise an objection regarding comparability at any stage of proceedings and even in a case where the assessee has not raised objection for including the same as a comparable before the lower authorities, or the assessee had chosen in its TP study a company which it seeks to exclude as a comparable. The Special Bench of Chandigarh Tribunal in DCIT v. Quark Systems P. Ltd. (2010) 38 SOT 307 has held that the Tribunal is a fact finding body and therefore has to take into account all the relevant material and determine the question as per the statutory regulations and that tax payer is not estopped from pointing out a mistake in the assessment, though such mistake is a result of evidence adduced by the tax payer. We therefore proceed to determine the comparability of Bodhtree Consulting Ltd. In this regard, we find that ITAT Hyderabad Ben....
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....te that the Indian software industry uses two different models for revenue recognition. The first is the Time and Material (T&M) Contracts model in which Customer are billed on the basis of hours worked by the employees of supplier software companies. Hourly rates are agreed on by both parties and are applied to the total hours worked to arrive at the revenue that is to be recognized. The second is the Fixed Price Project Model (FPP). Under the Fixed Price Project Model, the total contract price is agreed upon between the parties. Billing may be done either at the end of the contract or over the period of the contract on the basis of the agreed milestone for billing. In this respect, the basis of revenue recognition by this entity can be seen from the annual report as below: 3. Revenue Recognition : Revenue from software development is recognised based on software developed and billed to clients. From perusal of the above, it is seen that this entity is engaged in building revenues through Fixed Price Project model. As is a natural corollary in such type of revenue recognition, some part of the expenditure may be booked in one year, for which the revenue ....
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....nexure to this order. It appears to us that the revenue recognition method followed by the assessee is the reason for the drastic variation in the profit margins of this company. In the given circumstances, we are of the view that it would be safe to exclude Bodhtree Consulting from the final list IT(TP)A No.1302/Bang/2011 & CO No.92/Bang/2012 of comparables chosen by the assessee. We hold and direct accordingly." 33. The ld. counsel for the assessee filed before us a chart showing the fluctuation margins of Bodhtree Consulting Ltd., which are as follows:- 34. As can be seen from the above analysis, this company has erratic margins and growth over the years. The margins of Bodhtree are consistently changing. This reflects that the revenue recognition policy followed by Bodhtree is not proper and is resulting in consistent change in margins. Further, the growth rate over the years is also fluctuating to extremes. Further, growth in revenues is not supported by growth in expenses. In some cases, expense growth is higher than the revenue growth. Also salary cost ratio is widely fluctuating. These circumstances are peculiar in nature and require further analysis, with....
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....ver would be a component or part of a denominator, the other component being the domestic turnover. In other words, to the extent of export turnover, there would be a commonality between the numerator and the denominator of the formula. In view of the commonality, the understanding should also be the same. In other words if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover. The components of the export turnover in the numerator & the denominator cannot be different. Therefore, though there is no definition of the term 'term turnover' in Section 10-A, there is nothing in the said Section to mandate that, what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. Though when a particular word is not defined by the legislature and an ordinary meaning is to be attributed to the same the said ordinary meaning to be attributed to such word is to be in conformity with the context in which it is used. When the statute presc....
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....o. 3. The learned CIT (Appeals), has erred in confirming the action of the Assessing officer and Transfer Pricing Officer in: a. Passing the order without affording the Respondent an opportunity to substantiate its claim and rebut the method and basis finally adopted; b. Passing the order without demonstrating that the Respondent had evasion; c. Relying upon replies received under section 133(6) without giving an opportunity to the Respondent to cross examine the parties involved, despite a specific request so made; and d. Not appreciating that the charging or computation provision relating to income under the head "Profits & Gains of Business or Profession" do not refer to or include the amounts computed under Chapter X and therefore the addition made under Chapter X is bad in law. Grounds relating to Transfer Pricing 4. The learned CIT (Appeals) has erred in confirming the action of the Transfer Pricing Officer in: a. Rejecting the transfer pricing analysis undertaken by the Respondent on unjustifiable grounds and conducting a fresh transfer pricing analysis; b. Computing the Arm's Length Price based on the data for the financial year 2004- 2005 of ....