TaxTMI 
TaxTMI 
2016 (1) TMI 1359
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....h international transactions were carried out by the Assessee with its AE in respect of Software development Services. 3. Financial Results of the Assessee for the F Y 2005-06 Description Amount Operating Revenue Rs.52,03,85,342 Operating Cost . . . . Rs.45,11,93,191 Operating Profit (PBIT) Rs. 6,91,92,151 Operating Profit to Cost Rati 15.33% International Transactions (as mentioned in the 92 CE report) : Software development Services - Rs. 52,02,48,242/- Reimbursement received - Rs. 8,05,93,261/- TP ADJUSTMENT RELATING TO IT SERVICES (Software Development Services 4. The Assessee filed a Transfer Pricing Study in which he chose 44 companies as comparable companies whose arithmetic mean of profit margins operating profit to operating cost was 11% and claimed that its operating profit margin of 15.33% was within the (+) (-) 5% profit margin of comparable companies and therefore the price charged in the international transaction was at Arm's length. The TPO rejected the claim of the Assessee and he chose 20 comparable companies. The Comparable ultimately selected by TPO and their arithmetic mean was as follows:....
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....d by the tax payer to its Associated Enterprises is compared to the Arms Length Price as under: Arms Length Price (ALP) at 120.44% of operating cost Rs.64,04,83,603 Price charged in the international transactions Rs.60,09,78,603 Shortfall being adjustment u/s.92CA Rs.3,95,05,000/- The above shortfall of Rs. 3,95,05,000/- is treated as transfer pricing adjustment u/s 92CA." 6. It can seen from the aforesaid calculation given by the TPO that the operating cost has been increased by Rs. 8,05,93,261 which was reimbursement of expenses received by the Assessee from it's AE. According to the Assessee this sum ought not to have been added to the operating cost as it was reimbursement of expenses at actual costs incurred by the Assessee on behalf of AE which was reimbursed by the AE. The TPO has given the following reasons for not accepting the claim of the Assessee in this regard: "2.5 International Transactions (as mentioned in the 92 CE report) • Provision of software services Rs. 520,248,242/- • Reimbursement Received Rs. 80,593,261/- The arm's length price has to be determined with reference to the above int....
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....ctions pertaining to the software development services segment are analysed as under. As the method followed by the TPO and the taxpayer is TNMM(as discussed below), these transactions are aggregated for the transfer pricing study." 7. Against the said adjustment proposed by the TPO which was incorporated in the draft assessment order by the AO, the assessee filed objections before the DRP. The DRP rejected those objections and confirmed the transfer pricing adjustment suggested by the TPO. The adjustment confirmed by the DRP was added to the total income of the assessee by the AO in the fair order of assessment. Against the said order of the Assessing Officer, the assessee has preferred the present appeal before the Tribunal. 8. The assessee filed a chart before us showing as to how some of the comparable companies chosen by the TPO are not comparable (a) for the reason that the turnover of those companies were beyond Rs. 200 crores and therefore cannot be compared with the Assessee whose turnover is only Rs. 12.99 Crores, (b) for the reason that these companies were not functionally comparable; (c) for the reason that the related party transaction (RPT) carried out by the c....
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....eiterating the stand taken as above in the application for admission of additional ground, further placed reliance on the decision of the Hon'ble Special Bench in the case of the ITAT Chandigarh Bench in the case of DCIT v. Quark Systems Pvt. Ltd. 38 SOT 207 wherein it was held that a taxpayer is not estopped from pointing out a mistake in the assessment though such mistake is the result of evidence adduced by the taxpayer. 12. The learned DR opposed the prayer for admission of additional ground. According to him the Assessee is taking a totally new plea for the first time before Tribunal by way of additional ground and the same should not be permitted. 13. We have given a very careful consideration to the rival submissions. We are of the view that the question as to whether the aforesaid two companies are comparable or not with the Assessee company in terms of FAR analysis, has to be decided on the basis of data which is available in the public domain i. e., published annual report of these two companies. Therefore facts necessary to apply the filter sought to be relied upon by the Assessee in the additional ground of appeal are already available on record. Therefore there c....
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.... make no comments on merit except observing that assessee from record has shown its prima facie case. Further claim may be examined by the Assessing Officer. This course we adopt as objection to the inclusion of Datamatics as comparable has been raised now and not before revenue authorities. Therefore, we deem it fit and proper to remit the matter to the file of the Assessing Officer for consideration of claim of the taxpayer and make a de novo adjudication of the arm's length price after providing reasonable opportunity of being heard to the assessee. We order accordingly." 14. The question as to whether the turnover filter was a filter applied in determining ALP in Software Development Services, is a matter of judicial decisions rendered in several decisions of the Tribunal and Hon'ble High Courts. In the light of the later judicial pronouncement, the Assessee is entitled to rely on the same and claim that the said filter should be applied to exclude a company chosen as a comparable company by the TPO. As held by the Special Bench in the case of Quark Systems(supra), there cannot be any tax liability on the basis of admission and the determination of tax liability has to be in....
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....affect the relative competitive positions of the buyer and seller and therefore comparability." 12. The ICAI TP Guidelines note on this aspect lay down in para 15.4 that a transaction entered into by a Rs. 1,000 crore company cannot be compared with the transaction entered into by a Rs. 10 crore company. The two most obvious reasons are the size of the two companies and the relative economies of scale under which they operate. The fact that they operate in the same market may not make them comparable enterprises. The relevant extract is as follows [on Rule 10B(3)]: "Clause (i) lays down that if the differences are not material, the transactions would be comparable. These differences could either be with reference to the transaction or with reference to the enterprise. For instance, a transaction entered into by a Rs. 1,000 crore company cannot be compared with the transaction entered into by a Rs. 10 crore company. The two most obvious reasons are the size of the two companies and the relative economies of scale under which they operate." 13.It was further submitted that the TPO's range (Rs. 1 crore to infinity) has resulted in selection of companies like....
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....study." 15.It was brought to our notice that the above proposition has also been followed by the Honourable Bangalore ITAT in the following cases: 1.M/s Kodiak Networks (India) Private Limited Vs. ACIT (ITA No.1413/Bang/2010) 2.M/s Genesis Microchip (I) Private Limited Vs. DCIT (ITA No.1254/Bang/20l0). 3.Electronic for Imaging India Private Limited (ITA No. 1171/Bang/2010). 16.It was finally submitted that companies having turnover more than Rs. 200 crores ought to be rejected as not comparable with the Assessee. 17. The ld. DR, on the other hand pointed out that even the assessee in its own TP study has taken companies having turnover of more than Q 200 crores as comparables. In these circumstances, it was submitted by him that the assessee cannot have any grievance in this regard. 18. We have considered the rival submissions. The provisions of the Act and the Rules that are relevant for deciding the issue have to be first seen. Sec.92. of the Act provides that any income arising from an international transaction shall be computed having regard to the arm's length price. Sec.92-B provides that "international transactio....
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....essment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that- (a)the price charged or paid in an international transaction has not been determined in accordance with sub-sections (1) and (2); or (b)any information and document relating to an international transaction have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made in this behalf; or (c)the information or data used in computation of the arm's length price is not reliable or correct; or (d)the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D, the Assessing Officer may proceed to determine the arm's length price in relation to the said international transaction in accordance with sub-sections (1) and (2), on the basis of such material or information or document available with him: Rule 10B of the IT Rules, 1962 prescribes rules for Determination of arm's length price under section 92C:- ....
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....s in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction if- (i)none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii)reasonably accurate adjustments can be made to eliminate the material effects of such differences. (4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into : Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals fa....
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....sfied that such differences do not "materially affect the price... or cost"; secondly, an attempt to make reasonable adjustment to eliminate the material effect of such differences has to be made. The learned counsel for the Assessee however submitted that the Hon'ble Court was only by way of an obiter dictum and the Hon'ble Court was concerned only with the issue of excluding high profit making or abnormally loss making companies from being regarded as comparable companies. He pointed out that in any event the earlier decision of the Hon'ble Delhi High Court in the case of Agnity India Technologies Pvt.Ltd. ITA No.1204/2011 dated 10.7.2013 had taken the view that turnover was a relevant criteria in choosing comparable companies. 17. We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt.Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the ....
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....of a pure software developer like the Assessee. 19. The following were the relevant observations of the Tribunal on the aforesaid comparable companies in the case of Triology E-Business Software India Pvt.Ltd.(supra): "(d) KALS Information Systems Ltd. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual repot, the salary cost debited under the software development expenditure was Q 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal's decision of the ITAT in the case of Bindview India Private Limited Vs. DCI, ITA No. ITA No 1386/PN/1O wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows: "16. Another issue relating to selection of comparables by the TPO is regarding inclusion of....
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....activities of the company were as under. (i) Transmatic system - design, development and manufacture of multi function kiosks Queue management system, ticket vending system (ii) Ushus Technologies - offshore development centre for embedded software, net work system, imaging technologies, outsourced product development (iii) Accel IT Academy (the net stop for engineers)- training services in hardware and networking, enterprise system management, embedded system, VLSI designs, CAD/CAM/BPO (iv) Accel Animation Studies software services for 2D/3D animation, special effect, erection, game asset development. 4.3 On careful perusal of the business activities of Accel Transmatic Ltd. DRP agreed with the assessee that the company was functionally different from the assessee company as it was engaged in the services in the form of ACCEL IT and ACCEL animation services for 2D and 3D animation and therefore assessee's claim that this company was functionally different was accepted. DRP therefore directed the Assessing Officer to exclude ACCEL Transmatic Ltd. from the final list of comparables for the purpose of determining TNMM margin." Bes....
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.... Mumbai Bench of this Tribunal in the case of Logica Pvt.Ltd. IT (TP) 1129/Bang/2011 AY 07-08) wherein on the comparability of the aforesaid company, the Tribunal held as follows:- "14. As far as comparable at Sl.No.6 & 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, ....
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....g the decision of the Bangalore ITAT in the case of LG Soft India (P) Ltd. Vs. DCIT in IT(TP) A.No.1121/Bang/2011 dated 22.3.2013, that if the receipts are mere recovery of expenses without any service than the same should not be added back to the cost base for the purpose of mark up. Following the said decision the ITAT remanded to the TPO/AO to examine the facts with regard to reimbursement. 27. We are of the view that in the light of the aforesaid decision in Assessee's own case, that the issue needs re-examination by the TPO/AO in the light of the material now placed by the Assessee before the Tribunal. The TPO/AO shall consider the claim of the Assessee in this regard. The Assessee will provide the necessary supporting evidence to substantiate its claim. The TPO/AO will examine the claim of the Assessee after affording opportunity of being heard and in the light of the ruling of the ITAT in the case of LG Soft India (P) Ltd.(supra). We hold and direct accordingly. 28. The learned counsel for the Assessee has submitted before us that the TPO and the DRP have rejected the claim of the Assessee regarding risk adjustment. The Assessee has given detailed submissions in this r....