TaxTMI 
TaxTMI 
2016 (5) TMI 1377
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....ive at the export turnover only as per the definitions given in Sec.10A of the I.T. Act, 1961 and total turnover has not been defined in the section. 3. In the facts and circumstances of the case, the learned CIT (A) erred in holding that the TPO erred in not excluding comparables having any related party transactions, even if the related party transactions are less than 25% of the revenues. 4. The learned CIT(A) erred in holding that profit on cost of more than 50% of the comparable company(ies) is abnormal without giving reasons how functions discharged, assets deployed and risks assumed of such companies were different from the appellant company . 5. The learned CIT(A) erred in holding that the assessee is eligible for a standard deduction of 5% from the Arm's Length Price (ALP) under the proviso to Section 92C(2) of the Income Tax Act. 6. The learned CIT(A) erred in holding that the size, turnover and brand of the company are deciding factors for treating a company as a comparable, and accordingly erred in excluding M/s Infosys Technologies Ltd. as a comparable. 7. For these and other grounds that may be urged at the time of hear....
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....e it would produce anomalies or absurd results. Section 10A is a beneficial section which intends to provide incentives to promote exports. In the case of combined business of an assessee, having export business and domestic business, the legislature intended to have a formula to ascertain the profits from export business by apportioning the total profits of the business on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. In the case of section 80HHC, the export profit is to be derived from the total business income of the assxcessee, whereas in section 10-A, the export profit is to be derived from the total business of the undertaking. Even in the case of business of an undertaking, it may include export business and domestic business, in other words, export turnover and domestic turnover. To the extent of export turnover, there would be a commonality between the numerator and the denominator of the formula. 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 ....
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....eration in respect of export by the undertaking of articles, things or computer software received in or brought into India by the assessee in convertible foreign exchange but so as not to include inter alia freight, telecommunication charges or insurance attributable to the delivery of the articles, things or software outside India. Therefore in computing the export turnover the legislature has made a specific exclusion of freight and insurance charges. The submission which has been urged on behalf of the revenue is that while freight and insurance charges are liable to be excluded in computing export turnover, a similar exclusion has not been provided in regard to total turnover. The submission of the revenue, however, misses the point that the expression "total turnover" has not been defined at all by Parliament for the purposes of s.10A. However, the expression "export turnover" has been defined. The definition of "export turnover" excludes freight and insurance. Since export turnover has been defined by Parliament and there is a specific exclusion of freight and insurance, the expression "export turnover" cannot have a different meaning when it forms a constituent part of the t....
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....ssee has been categorized as a software design and development service provider for its parent company. The financial results of the assessee for the year under consideration are reported as under : "2.3 Financial Results of NDPL, F.Y. 2004-05 Operating Revenue Rs. 10,55,11,862. Operating Expenses Rs. 9,59,12,822 * PBIT Rs. 95,99,040. PBIT on cost 10% * Excluding foreign exchange loss of Rs. 7,053." The assessee entered into international transactions with its Associated Enterprises ('AEs') viz. Net Devices Inc., USA which are reported as per 3CEB Report and as per Section 92CA of the Act as under : Rendering of software development services : Rs. 10,55,11,862. Purchase of Lab Equipments : Rs. 34,35,078. The assessee selected 7 comparable companies and computed Arithmetic Mean ('AM') at 9.70% by adopting Transactional Net Margin Method ('TNMM') as Most Appropriate Method ('MAM') and OP/TC as Profit Level Indicator ('PLI'). The Transfer Pricing Officer ('TPO') rejected the comparables selected by the assessee are as under : Sl.No. Name of the Company Op. margin as taken by the tax payer. 1. Birlasoft Limited 13.....
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....re Solutions Co. Ltd. 7. Tata Elxsi Ltd. (Seg.) 8. Sasken Communication Technologies Ltd. (Seg.) 9. Igate Solutions Ltd. (Seg.) 10. Flextronics Software Ltd. (Seg.) 11. L&T Infotech Ltd. 12. Satyam Computer Services Ltd. 13. Infosys Technologies Ltd. On exclusion of the above companies form the list of the comparables, the remaining 4 companies are having a turnover between Rs. 1 Crore to Rs. 200 Crores and after giving effect to the finding given above, the arithmetic mean of the margins of the remaining comparables works out as under : Sl.No. Name of the company OP/OV % OP/OC after working capital adjustment. 1 Bodhtree Consulting Ltd. 24.01 21.19 2 Lanco Global Systems Ltd. 13.22 8.57 3 Sankya Infotech Ltd. 26.63 20.05 4 Visual Soft Technologies Ltd. 23.52 19.75 MEAN (69.56/4) 17.39 Considering the above, the ALP of the international transactions works out as under : A. Operating Cost (including foreign exchange loss) Rs.9,59,12,822. B. ARMS LENGTH MARGIN 17.39% C. PRICE @ 117.39% Rs.11,25,92,061. D. ALP (95% of C)....
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....ified tolerance range in the Act or Rules under the Transfer Pricing provisions, however, in due course of discussion and adjudication of this issue in a series of decisions of this Tribunal, commonly accepted tolerance range of 5% to 25% of the total revenue from RPT has been considered as reasonable depending upon the facts and circumstances of each case. In the case on hand, the availability of the comparables is abundant in number as the TPO selected 17 comparables by applying the filter of 25% of revenue from related parties. Therefore, in this case, good number of comparables are available and there is no difficulty in searching the comparables. Accordingly, in order to determine the ALP by considering the comparable uncontrolled transactions, it should be kept in mind that the uncontrolled transactions should be least influenced by the RPT in the case of DCIT Vs. Textron Global Technology Centre Pvt. Ltd. in IT(TP)A No.29/Bang/2012 & C.O. No.40/Bang/2012 Dt.20.3.2015 for the Assessment Year 2005-06 the Tribunal has held in para 17 as under :- "17. In view of the conclusion above that exclusion of comparable companies with RPT of less than zero percent is not valid, ....
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.... having more than 15% of RPT are directed to be excluded. Sl. No. Comparable Company Name % of RPT Over sales 1. Aztec Software Limited 17.78 2. Geometric Software Limited 19.34 3. Megasoft Limited 17.08 The order of the CIT (Appeals) stands modified on this issue. 8.1 Ground No.4 is regarding exclusion of the companies having more than 50% of profit margin. The learned Departmental Representative has submitted that the CIT (Appeals) has excluded two companies viz. Accentia Software Solutions Ltd. and Thirdware Solutions Ltd. on the ground that these companies are having abnormal profits of more than 50%. Thus the learned Departmental Representative contended that high profits or high loss cannot be a reason for exclusion of a company in the list of comparables. He has relied upon the order of the TPO and submitted that the TPO found that these two companies are in the similar business and therefore functionally comparable with the assessee. 8.2 On the other hand, the learned Authorised Representative of the assessee has submitted that the CIT (Appeals) has excluded these two companies by considering various facts on functional comparabi....
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....of development of software products & services and training. The company focuses on the development of niche products for the transport and aviation industry. However, segmental information in relation to the above mentioned activities is not available in public domain. Therefore, as Sankhya engages itself in products and services as well as software training, it cannot be considered as a comparable of the Appellant. The products developed and owned by Sankhya are listed below: (1) SILICONTM Training Suite of Products: The products are a comprehensive enterprise wide training platform that covers the entire spectrum of training in a paperless environment. It comprises of four products:- - SILICONTM LMS (Training Management Information - SILICONTM QT (Online Assessment System) - SILICONTM LCMS (Learning Content Management System) - IRMAQTM : This is an integrated resource planning, management tracking system exclusively developed for Airline operations. It is an end-to- end solution for all Flight Operations. - Sakai CLE : This is a widely used and popular open source LMS used in many leading educational institutions and corporat....
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....g software product combined with implementation and customer services. In support of his contention, he has relied upon the following decisions : i) M/s. McAfee Software (India) Pvt. Ltd. in IT(TP)A Nos.4/Bang/2012 & 1388/Bang/2011. ii) M/s. Sunquest Information Systems (India) Pvt. Ltd. in IT(TP)A No.1302/Bang/2012. iii) M/s. Symbol Technologies India Pvt. Ltd. in IT(TP)A No.391/Bang/2012. iv) Textron Global Technology Centre Pvt. Ltd. in IT(TP)A No.29/Bang/2012. 9.2 The learned Departmental Representative has submitted that the TPO has analysed the functions of this company and it was found that this company is engaged in the similar activity of providing software development services. He has relied upon the orders of the authorities below. 9.3 We have heard the rival submissions as well as considered the relevant material on record. The learned Authorised Representative of the assessee has contended that this company is having diversified activities including software product as well as trunky project. We find that as per Schedules 12 as well as 14 of the balance sheet of this company, this company has sale of license, purchase of licens....
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....nch of this Tribunal in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856/Del/2010 which has been upheld by the Hon'ble Delhi High Court reported in 219 Taxman 26 in paras 5 to 8 which are as under : "5. The tribunal has observed that the assessee was not comparable with Infosys Technologies Ltd., as Infosys Technologies Ltd. was a large and bigger company in the area of development of software and, therefore, the profits earned cannot be a bench marked or equated with the respondent, to determine the results declared by the respondent- assessee. In paragraph 3.3 the tribunal has referred to the difference between the respondent-assessee and Infosys Technologies Ltd. For the sake of convenience, we are reproducing the same:- Basic Particular Infosys Technologies Ltd. Agnity India Risk Profile Operate as full-fledged risk taking entrepreneurs Operate at minimal risks as the 100 percent services are provided to AEs Nature of Services Diversified-consulting, application design, development, re-engineering and maintenance system integration, package evaluation and implementation and business process management, etc. (refer page 117 of t....
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....assed by the TPO. TPO, as noted above, however had taken three companies, namely, Satyam Computer Service Ltd., L&T Infotech Ltd. and Infosys Technologies as comparable to work out the mean. 8. It is a common case that Satyam Computer Services Ltd. should not be taken into consideration. The tribunal for valid and good reasons has pointed out that Infosys Technologies Ltd. cannot be taken as a comparable in the present case. This leaves L&T Infotech Ltd. which gives us the figure of 11.11 percent, which is less than the figure of 17 percent margin as declared by the respondent-assessee. This is the finding recorded by the tribunal. The tribunal in the impugned order has also observed that the assessee had furnished details of workables in respect of 23 companies and the mean of the comparables worked out to 10 percent, as against the margin of 17 percent shown by the assessee. Details of these companies are mentioned in para 5 of the impugned order." Following the decision of the Hon'ble Delhi High Court (supra), we do not find any reason to interfere with the impugned order of the CIT (Appeals) on this issue. C.O. No.19/Bang/2012 12. The assessee has raised t....
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....le that fail the test of comparability on application of related party transaction filter of 15% and thus not comparable to the Appellant in respect of its software development services. 2. 2. The ld. A.O/TPO erred in considering Flextronics Software Systems Ltd. (Seg.) that fails the test of comparability due to functional dissimilarity and thus not comparable to the Appellant in respect of its software development services. The appellant craves leave to add, alter, amend or withdraw all or any of the grounds of appeal and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing." 14. First we take up the additional grounds raised by the assessee in respect of the exclusion of Bodhtree Consultancy Ltd. & Flextronics Software Systems (Seg.). 15.1 The learned Authorised Representative of the assessee has submitted that though the assessee did not raise any objection before the authorities below in respect of the comparability of these two companies however in view of the various decisions of the Tribunal, these two companies are found to be not cocmparable with the software development services prov....
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....und to be comparable by the authorities below and even otherwise from the Annual Report of this company the RPT are less than 15% and therefore when the company itself has reported the RPT as less than 15% then the same cannot be excluded from the set of comparables merely on assumption of wrong facts. 16.3 We have heard the rival submissions as well as considered the relevant material on record. There is no dispute that as per the Annual Report of this company, the RPT has been reported only to the extent of Rs. 10,73,871 in the nature of manager remuneration to the Managing Director and therefore the said transaction is almost NIL and in any case is less than 15% of the total sales. The learned Authorised Representative of the assessee has placed reliance on the decision of the Hyderabad Bench of ITAT in the case of NTT Data India Enterprise Application Services Pvt. Ltd. (supra), we find that the Tribunal has recorded the submissions of the counsel of the assessee in para 7 as under : "7. Bodhtree Consulting Ltd. The learned counsel submitted that this company should be rejected under the following TPO's filters : - Related party transactions filter....
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....ting to the said fact has been examined but the Tribunal has just reproduced the submissions of the assessee as pleaded in case of NTT Data India Enterprise Application Services Pvt. Ltd. (supra) and therefore it is a clear case of assumption of unexamined facts. Accordingly, we are of the view that when the relevant record showing the RPT at 34.68% as claimed by the learned Authorised Representative of the assessee is not available or produced either before the authorities below or before us, then this objection of the assessee cannot be accepted for want of the supporting evidence. However, in the interest of justice, we set aside this issue to the record of the A.O./TPO to verify the fact as alleged by the assessee and if need arises the information under Section 133(6) of the Act may also be called for and decide the RPT issue. 17. Flextronics Software India Pvt. Ltd. 17.1 The learned Authorised Representative of the assessee has submitted that this company is having hybrid model of supplying both products and services. It offers new product design and development to enhancing and testing their current products. These services are provided for fixed networks, mobile netwo....
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....the software development services and software product activity cannot be said to be correct and reasonable. Wherever, the Assessing Officer/TPO cannot make suitable adjustment to the financial results of the comparable companies with the assessee company to bring them on par with the assessee, these companies are to be excluded from the list of comparables. Therefore, we direct the Assessing Officer/TPO to exclude these three companies from the list of comparables.". Respectfully following, we exclude the same." In view of the facts as recorded and considered by the co-ordinate benches of this Tribunal that this company is in the activity of software development services as well as software products and further also incurred R&D expenditure. Therefore, the same was found to be dis-similar to this pure software development services provider in the capacity of captive service provider. By following the earlier order of the Tribunal, we direct the Assessing Officer/TPO to exclude this company from the list of comparables. 18. The assessee has raised objections against the inclusion of the following companies by the TPO : (i) Sankya Infotech Ltd. (ii) ....
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....form that covers the entire spectrum of training in a paperless environment. It comprises of four products:- - SILICONTM LMS (Training Management Information - SILICON TM QT (Online Assessment System) - SILICONTM LCMS (Learning Content Management System) - IRMAQTM : This is an integrated resource planning, management tracking system exclusively developed for Airline operations. It is an end-to end solution for all Flight Operations. - Sakai CLE : This is a widely used and popular open source LMS used in many leading educational institutions and corporate. The relevant extract from the Annual report substantiating that the company also engages in different activities is reproduced below: "2. Activities The company as engaged in the business of development of Software Products & Services and training. The production of software is not capable of being expressed in any generic unit and hence 11 is riot possible to give the information as required by certain clauses of paragraphs 3.4C and 4 D of Part II of Schedule VI of the Companies Act, 1956." The Delhi Tribunal in ITO v. Colt Technology Services India Pvt. Ltd. (judgmen....
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....s as well as the relevant material on record, We note that the assessee has submitted computation of RPT of this company at page No.561 of the paper book wherein the assessee has calculated this percentage by considering the various transactions with the Related Parties which consists of software development services charges and marketing expenses. Therefore, this issue requires a proper examination and verification of the fact as produced by the assessee. Accordingly, in the facts and circumstances of the case, we set aside this issue of comparability of this company to the record of the A.O./TPO for proper verification of the facts as contended and produced by the assessee before us and then decide the issue after giving an opportunity of hearing to the assessee. Tata Elxsi Ltd. (Seg.) 18.4.1 The learned Authorised Representative of the assessee has submitted that this company is functionally different from the assessee as this company is engaged in the diversified activity of software development segment as well as in product design, this company also incurred deferred and promotional expenses and engaged in the activity such as hardware design, industrial design and engin....
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.... & 24 are concerned, the comparability of the aforesaid two companies with that of the software service provider was considered by the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India Private Ltd. (supra) wherein on the aforesaid two companies, the Tribunal held as follows:- "7.7. Tata Elxsi Limited.: From the facts and material on record and submissions made by the learned AR, it is seen that the Tata Elxsi is engaged in development of niche product and development services, which is entirely different from the assessee company. We agree with the contention of the learned AR that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company fit for comparability analysis for determining the arms length price for the assessee, hence, should be excluded from the list of comparable parties." 15. In view of the above, the ld. coun....