TaxTMI 
TaxTMI 
2016 (1) TMI 1277
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....3. The assessee has adopted TNMM in respect of international transactions with its Associated Enterprises (AE). The assessee had selected 23 comparables out of which 7 comparables were found to be suitable for comparison and the final set of comparables considered by the TPO were 20 in number. For the assessment year 2008-09, operating mark up on cost of the assessee works out to 15.71% and the Arithmetical Mean operating mark up on cost of comparable companies works out to 14.84% in the case of the assessee and 23.65% in the case of the comparable companies as per the TPO. The assessee's total income was determined at Rs. 1,82,29,221/- and tax payable thereon was at Rs. 61,96,112/-. 4. Aggrieved by the assessment, the assessee preferred an appeal before the CIT(A)-IV, Bangalore. With respect to the ground raised before the CIT(A) that the AO had erred in concluding that communication expenses (internet charges) of Rs. 21,16,982 were attributable to delivery of computer software outside India and that travelling expenses of Rs. 16,38,726 incurred in foreign currency were towards technical services rendered outside India and in reducing these expenses from the assessee's export t....
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....been held as under:- "(1) Turnover Filter 11. The ld. counsel for the assessee submitted that the TPO has applied a lower turnover filter of Rs. 1 crore, but has not chosen to apply any upper turnover limit. In this regard, it was submitted by him that under rule 10B(3) to the Income-tax Rules, it was necessary for comparing an uncontrolled transaction with an international transaction that there should not be any difference between the transactions compared or the enterprises entering into such transaction, which are likely to materially affect the price or cost charged or paid or profit arising from such transaction in the open market. Further it is also necessary to see that wherever there are some differences such differences should be capable of reasonable accurate adjustment in monetary terms to eliminate the effect of such differences. It was his submission that size was an important facet of the comparability exercise. It was submitted that significant differences in size of the companies would impact comparability. In this regard our attention was drawn to the decision of the Special Bench of the ITAT Chandigarh Bench in the case of DCIT v. Quark Systems ....
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....Rs. 200 crores was held to be proper. The following relevant observations were brought to our notice:- "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 .ire (sic) 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 arc loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classif....
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....tribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. Sec.92-A defines what is an Associated Enterprise. In the present case there is no dispute that the transaction between the Assessee and its AE was an international transaction attracting the provisions of Sec.92 of the Act. Sec.92C provides the manner of computation of Arm's length price in an international transaction and it provides:- (1) that the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely :- (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board. (2) The most appropriate method ....
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....nterprise 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 subclause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction. (2) For the purposes of sub-rule (1), the comparability of an in....
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....parability of the comparable relied upon by the TPO. 20. In this regard we find that the provisions of law pointed out by the ld. counsel for the assessee as well as the decisions referred to by the ld. counsel for the assessee clearly lay down the principle that the turnover filter is an important criteria in choosing the comparables. The assessee's turnover is Rs. 47,46,66,638. It would therefore fall within the category of companies in the range of turnover between 1 crore and 200 crores (as laid down in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010) . Thus, companies having turnover of more than 200 crores have to be eliminated from the list of comparables as laid down in several decisions referred to by the ld. counsel for the assessee. Applying those tests, the following companies will have to be excluded from the list of 26 comparables drawn by the TPO viz., Turnover Rs. (1) Flextronics Software Systems Ltd. 848.66 crores (2) iGate Global Solutions Ltd. 747.27 crores (3) Mindtree Ltd. 590.39 crores (4) Persistent Systems Ltd. 293.74 crores (5) Sasken Communication Technologies Lt....
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....rit in the objection of the ld. counsel for the assessee and hence we direct that Avani Cimcon Technologies Ltd. be excluded from the list of comparables selected by the TPO. 12. With regard to the other 8 comparables selected by the TPO, the ld. counsel for the assessee submitted that these companies were functionally different from the assessee for the following reasons:- 1 Celestial Biolabs Ltd. The company is into bio- informatics software product/services and in the development of products in the field of bio-technology and pharmaceuticals. 2 E-Zest Solutions Ltd. The company rendered product development services and high- end technical services which came under the category of KPO services. 3 Kals Info Systems Ltd. It is engaged in the development of software products and providing related services. As per the website of KALS, it is evident that the company is a full-fledged software product development company and also provides implementation and maintenance of software products. It also has a training centre engaged in training of software professionals for online projects. 4 Persistent Systems Ltd. It is a product company. Persi....
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....nologies Ltd. Full-fledged risk assuming entrepreneur It is a giant company in the area of software development and assumed all risks leading to higher profits and is therefore not comparable with to the assessee which is a captive unit of the parent company and assumes only limited risks. Holds technology and marketing intangible It is actively engaged in research & development activities and also owns intellectual property. It also partakes in activities and advertising for brand building. Infosys was ranked as the top IT services company in that year and therefore has significant brand value. Functionally different It provides end-to-end solutions encompassing technical consulting, design, development, re-engineering, maintenance, systems integration and implementation. 3. Wipro Ltd. (Seg) Functionally different It is a product development company. The annual report for FY 2007-08 shows that it has income from both sale of software products and software development services. Full-fledged risk assuming entrepreneur It is a giant company and assumed all risks leading to higher profits and is therefore not comparable to the assessee company which is a captive unit....
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....23, pages 22-23) iv. GXS India Technology Centre in IT(TP)A No.1444/Bang/2012 (para.17, pages 36-38) 11. We have heard both the parties. We are of the opinion that (i) Flextornics Software, (ii) iGate Global Solutions Ltd., (iii) Infosys Technologies Ltd., (iv) Persistent Systems Ltd., (v) Sasken Communications, where turnover is more than Rs. 200 crores is to be rejected as comparable to that of the assessee based on the decision of this Tribunal in the case of Triology EBusiness Software India Pvt. Ltd. (supra). We find that Tata Elxsi Ltd. and Wipro Ltd., are not only having a turnover of more than Rs. 200 crores but are also functionally different as pointed out by the learned counsel for the assessee and hence, cannot be taken as a comparable to that of the assessee. Hence, ground No.5 of the department is dismissed. 12. Ground No.6 by the department is that the CIT(A) erred in rejecting the diminishing revenue filter used by the TPO to exclude companies that do not reflect the normal industry trend. 13. The CIT(A) on this issue held as follows:- "129. I find merit in the appellant's contention that revenue is not a true indicator of a company's perform....
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....he learned counsel for the assessee argued that M/s.Maars Software International Ltd. is to be taken as a comparable since it is involved in software development activity which is same as that of the assessee. The CIT(Appeals) held as follows:- "146. Though employee cost forms a significant portion of the total costs of a software company, the problem lies in correctly gauging such costs. All companies do not follow a uniform policy in classifying such costs, but classify them variously as administrative, marketing, operating, or software development expenses and not necessarily as personnel expenses in the profit and loss account. Further, companies may outsource their services rather than employ their own personnel and outsourcing costs may be disclosed under various heads like legal and professional charges, contracts costs, etc. As there is no way of tracking or identifying employee costs, they may not be particularly amenable to be used as a filter in the selection or rejection of comparables. 147. I find merit in the appellant's contention that when TNMM is adopted as the most appropriate method for determination of ALP, only the net margin of the tested....
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....the case of companies rendering software development services. In this regard, the ld. counsel for the assessee has brought to our notice the decision of the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. v. ITO, ITA No.7633/Mum/2012, order dated 6.11.2013. In this case, the Tribunal followed the decision rendered by the Mumbai Bench of the Tribunal in the case of Wills Processing Services (I) P. Ltd., ITA No.4547/Mum/2012. In the aforesaid decisions, the Tribunal has taken the view that Bodhtree Consulting Ltd. is in the business of software products and was engaged in providing open & end to end web solutions software consultancy and design & development of software using latest technology. The decision rendered by the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. (supra) is in relation to A.Y. 2008-09. It was affirmed by the learned counsel for the Assessee that the facts and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY 08-09 as far as this comparable company is concerned. Following the aforesaid decision of the Mumbai Bench of the Tribunal, we hold that Bodhtree Con....
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....e us, the learned Authorised Representative contended that this company is not functionally comparable, as the company is into bio-informatics software product / services and the segmental break up is not provided. It was submitted that :- (i) This company is engaged in the development of products in the field of bio-technology, pharmaceuticals, etc. and therefore is not functionally comparable to the assessee; (ii) This company has been held to be functionally incomparable to software service providers by the decision of the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra); (iii) The co-ordinate bench of this Tribunal in its order in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) at para 43 thereof had observed about this company that - " ..... As explained earlier, it is a diversified company and therefore cannot be considered as comparable functionally with the assessee. There has been no attempt to identify, eliminate and make adjustment of the profit margins so that the difference in functional comparability can be eliminated. By not resorting to such a process of making a....
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....sh that this company is functionally dis-similar and different from the assessee in the case on hand and is therefore not comparable and also that the findings rendered in the cited decisions for the earlier years i.e. Assessment Year 2007- 08 is applicable for this year also. We agree with the submissions of the assessee that this company is functionally different from the assessee. It has also been so held by co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) as well as in the case of Trilogy E-Business Software India Pvt. Ltd. (supra). In view of the fact that the functional profile of and other parameters of this company have not changed in this year under consideration, which fact has also been demonstrated by the assessee, following the decision of the co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 in ITA No.845/Bang/2011 and Trilogy E-Business Software India Pvt. Ltd. in ITA No.1054/Bang/2011, we hold that this company ought to be omitted form the list of comparables. The A.O./TPO are accordingly directed. 25. Following the decision of the coordinate Bench of this Tribunal....
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....083/Del/2010). (iv) The factual position and circumstances pertaining to this company has not changed from the earlier Assessment Year 2007-08 to the period under consideration i.e. Assessment Year 2008-09 and therefore on this basis, this company cannot be considered as a comparable in the case on hand. (v) The relevant portion of the Annual Report of this company evidences that it is in the business of product development. The learned Authorised Representative prays that in view of the factual position as laid out above and the decisions of the co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 and other cases cited above, it is clear that this company being into product development cannot be considered as a comparable to the assessee in the case on hand who is a software service provider and therefore this company i.e. Lucid Software Ltd., ought to be omitted from the list of comparables. 16.2 per contra, the learned Departmental Representative supported the action and finding of the TPO in including this company in the list of comparables. 16.3 We have heard the rival submissions and peruse....
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....t companies whose export sales were less than 25% of their total sales ought to be excluded, the appellant is aggrieved that the TPO had rejected M/s VMF Soft Tech Ltd. as a comparable stating that it did not have more than 25% export revenue. It was argued that export revenue of this company was 94.36% of its operating revenues, as evidenced by Schedule 9 of its profit and loss account, given on page 25 of the annual report and hence the company passed the export revenue filter adopted by the TPO. 183. I have, examined the profit and loss account of M/s VMF Soft Tech Ltd. and find that its total sales during the relevant FY was Rs. 1,61,45,213, out of which, export sales amounted to Rs. 1,57,16,663, or about 97% of total revenue. Thus, there was no reason to reject this company as a comparable on applying the export revenue filter. I therefore direct the AO to include this company in the final list of comparables. " 31. We are in conformity with the order of the CIT(Appeals) in directing the AO to include VMS Soft Tech Ltd. as a comparable. Ground No.12 raised by the Revenue is dismissed. 32. Ground Nos.13 & 14 are general in nature and are therefore not adjudicated....