TaxTMI 
TaxTMI 
2015 (11) TMI 1674
X X X X Extracts X X X X
X X X X Extracts X X X X
....t company, Infineon Technologies Asia Pacific Pte, Singapore, filed its return of income for Assessment Year 2009-10 on 30.9.2009 declaring total income of Rs. 7,14,36,670. The case was taken up for scrutiny. In the period under consideration, the assessee had reported the following international transactions :- Sl. No. Type of Transactions Paid (Rs.) Received (Rs.) 1. Purchase of Fixed Assets-Testing Equipment. 16957440 2. Software R&D and IT 1478729220 3. Marketing support services. 23211099 4. Reimbursement of Expenses. 123402721 Total 140360161 1501970319 Total International transactions Rs. 1,64,23,30,480 2.2 In view of the above international transactions entered into by the assessee, the Assessing Officer ('A.O') made a reference under Section 92CA of the Act to the Transfer Pricing Officer ('TPO') for determining the Arm's Length Price ('ALP') of these international transactions after obtaining the necessary approval from the CIT -I, Bangalore. The TPO vide order under Section 92CA of the Act dt.29.1.2013 prop....
X X X X Extracts X X X X
X X X X Extracts X X X X
....terprises (AEs) was at 6.56% which was within the margin of + / - 5%, the assessee concluded that the price of its international transactions are at Arm's Length. 3.4 While accepting TNMM as the MAM, the TPO rejected the assessee's T.P. Study for various reasons set out in the show cause notice issued and embarked on a fresh search using the data bases 'Prowess' and 'Capitaline'. After considering the objections of the assessee, the TPO selected the final set of 11 comparables which are as under :- Sl. No. Name of the Comparable Sales (Rs.) Cost (Rs.) Margin 1. Kals Information Systems Ltd. 2,14,04,686 1,87,93,813 13.89% 2. Akshay Software Technologies Ltd. 12,23,21,483 11,31,49,350 8.11% 3. Bodhtree Consulting Ltd. 16,05,75,212 9,89,56,821 62.27% 4. R S Software (India) Ltd. 1,49,57,12,634 1,36,01,02,589 9.97% 5. Tata Elxsi Ltd. (Seg.) 3,78,43,03,000 3,14,63,15,000 20.28% 6. Sasken Communication Technologies Ltd. (Seg.) 4,05,31,20,000 3,18,69,97,000 27.91% 7. Persistent Systems Ltd. 5,19,69,10,000 3,67,52,70,000 41.40% 8. Zylog Systems Ltd. 7,34,9....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ysis based on application of additional filters in determining the arm's length price. b. the learned AO/ learned TPO erred in including companies in the comparability analysis which do not satisfy the test of comparability. The following comparable companies selected by the learned TPO ought to be rejected as they are not comparable to the Appellant. Sl. No Name of Companies Rejection Reason 1 Bodhtree Limited - Engaged in development of proprietary software which is not similar to the Appellant - Abnormally fluctuating margins for the period from financial year (FY) 2004-05 to FY 2010-11. 2 Infosys Limited - Has high sales turnover as compared to the Appellant - Revenue is driven by brand value as against that of the Appellant 3 Larsen and Toubro Infotech Limited - Engaged in product development, infrastructure management services along with software development services and hence no segmental information is available. - Has high sales turnover as compared to the Appellant 4 Mindtree Limited - Has high sales turnover as compared to the Appellant 5 Persistent Systems Limited - Engaged in product development and has pro....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... TPO in the list of comparable companies to the assessee. The learned Authorised Representative also submitted that he would put forth submissions only on the comparability of the individual companies selected by the TPO in the final set of comparables and also on the inclusion of two of the companies selected by the TPO. 5.2 In this context, it was submitted that only the following grounds of appeal in respect of TP Issues are being pressed and would require consideration and adjudication by the Bench :- i) Grounds at S.No.5 pertaining to the grant of risk adjustment. ii) Grounds No. 2(b) related to the exclusion of individual companies selected by the TPO. iii) Ground No.6 : Addl. Ground raised in respect of exclusion of Kals Information Systems Ltd. iv) Ground No.7 : Addl. Ground for grant of depreciation adjustment. 5.3 Consequently, since all the other grounds, at S.Nos.1, 2, 2(a), (c), 3 and 4 relating to T.P. Issues are not being pressed, the same are rendered infructuous and accordingly dismissed. 5.4 In the course of proceedings before us, the learned Authorised Representative submitted that the facts of the case on hand are similar, inter alia, to the....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 7. KALS Information Systems Ltd. (KALS) 7.1 This company was selected by the TPO as a comparable to the assessee, in spite of the assessee objecting to its inclusion of this company, on the ground that this company, being in product development, is not functionally comparable to a software development services provider like the assessee. It is submitted by the learned Authorised Representative that 'KALS' is a product development company with significant inventory and many products as per details in its website and therefore being functionally dis-similar from the assessee in the case on hand, it ought to be excluded from the list of comparables to the assessee. In support of this proposition, the learned Authorised Representative for the assessee placed reliance on the decision of the co-ordinate bench of this Tribunal in the co-ordinate bench of this Tribunal in the case of Airbus India Operations Pvt. Ltd. in IT(TP)A No.35/Bang/2014 dt.10.10.2014. 7.2.1 We have heard the rival contentions of both parties and perused and carefully considered the material on record; including the judicial pronouncement relied on by the assessee. We find that the issue of comparability of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds." Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. 47. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....., for Assessment Year 2009-10 in IT(TP)A No.35/Bang/2014 dt.10.10.2014. 8.2.1 We have heard the rival contentions of both parties in respect of this comparable company; M/s. Bodhtree Consulting Company, and perused and carefully considered the material on record; including the judicial pronouncement cited by the assessee in this regard. We find that the issue of comparability of this company i.e. 'Bodhtree' has been considered and decided by the co-ordinate bench of this Tribunal in the case of Airbus India Operations Pvt. Ltd. for Assessment Year 2009-10 (supra); wherein it has been held that this company being a software product company cannot be considered as comparable to a assessee that is a software development service provider and has held as under at paras 15 & 16 thereof :- " 15. BODHTREE CONSULTING LTD.: This company is listed at Sl.No.3 in the final list of comparables chosen by the TPO which is set out in para-4 of this order. The comparability of this company with a software development services company such as the Assessee for AY 09-10 was considered by this Tribunal in the case of M/s. Cisco Systems (India) Pvt.Ltd., IT (TP)A No.271/Bang/2014 for AY 09-10 orde....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion of ALP." 8.2.2 Following the above cited decision of the co-ordinate bench of this Tribunal in the case of Airbus India Operations Pvt. Ltd. for Assessment Year 2009-10 (supra) and taking into the facts and circumstances under which this company was considered and later excluded from the list of comparables, for identical reasons, we hold and direct the TPO to exclude this company, 'Bodhtree', from the list of comparable companies to the assessee in the case on hand. 9. Exclusion of companies based on Turnover Filter. 9.1 The learned Authorised Representative for the assessee brought to the notice of the bench that the following 7 companies ought to be excluded from the list of comparables as their turnovers are in excess of the upper turnover filter of Rs. 200 Crores and therefore cannot be comparable to the assessee whose turnover is approx. Rs. 150 Crores :- 1) Tata Elxsi Ltd. 2) Sasken Communication Technologies Ltd. 3) Persistent Systems Ltd. 4) Zylog Systems Ltd. 5) Larsen & Toubro Infotech Ltd. 6) Infosys Technologies Ltd. 7) Mindtree Ltd. In support of its contention, the assessee placed reliance on the decision of the co-ordinate bench ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....saction 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 Pvt. Ltd. 38 SOT 207, wherein the Special Bench had laid down that it is improper to proceed on the basis of lower limit of 1 crore turnover with no higher limit on turnover, as the same was not reasonable classification. Several other decisions were referred to in this regard laying down identical proposition. We are not referring to those decisions as the decision of the Special Bench on this a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tifying 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 classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet & Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 referred to in sub-section (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed: Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices: Provided further that if the variation between the arm's length price so determined and price a....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (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 sub-clause (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 international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d 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 Ltd. 343.57 crores (6) Tata Elxsi Ltd. 262.58 crores (7) Wipro Ltd. 961.09 crores (8) Infosys Technologies Ltd. 13149 crores" 18. Respectfully following the aforesaid decision of the Tribunal in the case of Trilogy EBusiness Software India Pvt.Ltd. (supra) and Assessee's case for AY 06-07, we hold that the aforesaid companies (listed at S.No.5 to 11 of the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ntial brand value, owns intellectual property rights and is a market leader in software development activities, whereas the assessee is merely a software service provider operating its business in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that :- (i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any intangible and hence does not have an additional advantage in the market. It is submitted that this decision is applicable to the assessee's case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee ; (ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856 (Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lowing the decision of the Tribunal referred to above, we hold that Infosys Ltd. be excluded from the list of comparable companies." 26.3 ........ "26.4 Tata Elxsi Ltd.:- As far as this company is concerned, it is not in dispute before us that in assessee's own case for the A.Y. 2007-08, this company was not regarded as a comparable in its software development services segment in ITA No.1076/Bang/2011, order dated 29.3.2013. Following were the relevant observations of the Tribunal:- II. UNREASONABLE COMPARABILITY CRITERIA : 19. The learned Chartered Accountant pleaded that out of the six comparables shortlisted above as comparables based on the turnover filter, the following two companies, namely (i) Tata Elxsi Ltd; and (ii) M/s. Flextronics Software Systems Ltd., deserve to be eliminated for the following reasons : (i) Tata Elxsi Ltd., : The company operates in the segments of software development services which comprises of embedded product design services, industrial design and engineering services and visual computing labs and system integration services segment. There is no sub-services break up/information provided in the annual report or the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lopment services. 3. The contribution of the embedded services segment is to the tune of Rs. 230 crores in the total segment revenue of Rs. 263 crores. Even if we consider the other two sub-segments pertain to IT enabled services, the 87.45% (›75%) of the segment's revenues is from software development services. 4. This segment qualifies all the filters applied by the TPO." Regarding Flextronics Software Systems, the following extract from page 143 of TPO's order was read out by him as his submissions : "It is very pertinent to mention here that the company was considered by the taxpayer as a comparable for the preceding assessment year i.e., AY 2006-07. When the same was accepted by the TPO as a comparable, the same was not objected to it by the taxpayer. As the facts mentioned by the taxpayer are the same and these were there in the earlier FY 2005-06, there is no reason why the taxpayer is objecting to it. How the company is functionally similar in the earlier FY 2005-06 but the same is not functionally similar for the subsequent FY 2006-07 even when no facts have been changed from the preceding year. Thus the taxpayer is arguing against....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in ITA No.1124/Bang/2011. 10.2 We find that the co-ordinate bench of this Tribunal in the case of Intellinet Technologies India Pvt. Ltd. (supra) and Bearing Point Business Consulting Pvt. Ltd. (supra) thereof have held that, in principle, risk adjustment must be granted, if warranted in the facts of the case, for bringing the comparables on par with the assessee company. Following the above decision and of the co-ordinate bench (supra), we also hold that in principle, the assessee must be granted risk adjustment, if so required in the peculiar facts of the case for bringing the comparable companies on par with the assessee. However, the quantum of risk adjustment to be granted, if any, is remanded back to the file of the TPO. The TPO is directed to examine the details of the quantitative computation of risk adjustment and attendant details submitted by the assessee justifying its claim for risk adjustment and to take into account the same along with all the relevant material and to decide the percentage of risk adjustment in accordance with law. It is ordered accordingly. Consequently, Ground No.5 is treated as allowed for statistical purposes. CORPORATE TAX 11. Charge o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t as a percentage of the gross block of the appellant during the financial year 2004 was 25% and the comparables reported an average depreciation cost as a percentage of the gross block of 10%. - The difference in the depreciation cost arises due to differences in the accounting treatment across the comparables and the appellant. - Considering the above fact, to achieve reliable comparability, the margins of the comparable companies post the adjustment of the depreciation should be considered." 19.2 ........... 19.3 ............ 19.4 We have heard both parties and considered the rival submissions. We find force in the submissions of the learned Departmental Representative. Whether an adjustment towards depreciation is warranted or not may be, issue of principle. But whether the principle needs to be applied to a particular case or not would depend on the peculiar facts of that case. It cannot be anybody's case that an adjustment has to be necessarily granted whenever and wherever there is difference in depreciation between the tested party and the comparables. An adjustment for difference in depreciation is a valid principle for comparability, but whether this case e....