TaxTMI 
TaxTMI 
2016 (1) TMI 1359
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....ut 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: Sl. No Name of company OP / TC (FY 2006-7) Sales (Rs.Cr.) 1 Aztec Software ....
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....bove 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 international transactions. The tax payer received an amount of Rs. 80,593,261/- in the form of reimbursement. In the 3CEB Report it was stated that 'with respect to reimbursements received, the assessee has certified that the actual costs incurred on behalf of the AE are recharged to the AE and are supported by relevant third party invoices. Consequentl....
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....ctions 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 comparable companies during the previous year was beyond 15% of its revenue and hence ought not to be included as a comparable. The Chart also gives the cases decided by various Benches of the ITAT where the comparable companies have been held to be not comparable with that of an Assessee providing IT Software development Services. We will proceed to consider the comparability of companies chosen by the TPO and listed in pa....
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....dmission 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 can be no valid objection to deciding the question of applying the aforesaid filter, if otherwise it is found to be a valid filter. We are of the view that the decision of the special Bench, chandigarh in the case of Quark Systems (supra) clearly supports the plea of the Assessee. The Special Bench in the aforesaid decision in the case of Quark Systems (supra) has after considering the OECD Commentaries observed as follows: "35. In para 4.16 of latest report, the OECD pr....
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....sonable 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 accordance with law. In the light of the aforesaid judicial pronouncement, we are of the view that the additional ground of appeal deserves to be admitted for adjudication. Accordingly, the additional ground is admitted for adjudication. 15. We have considered the submission of the learned counsel for the Assessee. In the case of Triology E-Business Software India (P) Ltd. (supra), this Tribunal on application of the turnover filter while selecting comparable companies for comparability analysis held ....
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....ant 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 Infosys which is 277 times bigger than the Assessee (turnover of Rs. 13,149 crores as compared to Rs. 47.47 crores of Assessee). It was submitted that an appropriate turnover range should be applied in selecting comparable uncontrolled companies. 14.Reference was made to the decision of the ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010, wherein relying on Dun and Bradstreet's analysis, the turnover of Q 1 crore to Q 200 crores was held to be proper. The following relevant obse....
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....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 transaction" means a transaction between two or more associated enterprises, either or both of whom are nonresidents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or ....
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....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:- "10B. (1) For the purposes of sub-section (2) of section 92C, 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, in the following manner, namely :- (a)....... to (d)........ (e)transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise 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 comparab....
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....arability 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 facts which could have an influence on the determination of transfer prices in relation to the transactions being compared." A reading of the provisions of Rule 10B(2) of the Rules shows that uncontrolled transaction has to be compared with international transaction having regard to the factors set out therein. Before us there is no dispute that the TNMM is the most appropriate method for determining the ALP of the international transaction. The disputes are with regard to the comparability of the comparable relied upon by the TPO. 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 Q 47,46,66,638. It....
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....rs (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 learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'__________ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt.Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criteria for choosing companies as comparable companies in determination of ALP in transfer pricing cases. In doing so the Hon'ble Bombay High Court has followed the decision of the Hon'ble Delhi High Court in the case of Agnity India Technologies Pvt.Ltd. (Supra). There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two vie....
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.... 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 Kals Information System Ltd. The assessee 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. We have given a careful consideration to the submission made o....
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....CCEL Transmatic Ltd. from the final list of comparables for the purpose of determining TNMM margin." Besides the above, it was pointed out that this company has related party transactions which is more than the permitted level and therefore should not be taken for comparability purposes. The submission of the ld. counsel for the assessee was that if the above company should not be considered as comparable. The ld. DR, on the other hand, relied on the order of the TPO. 50. We have considered the submissions and are of the view that the plea of the assessee that the aforesaid company should not be treated as comparables was considered by the Tribunal in Capgemini India Ltd (supra) where the assessee was software developer. The Tribunal, in the said decision referred to by the ld. counsel for the assessee, has accepted that this company was not comparable in the case of the assessees engaged in software development services business. Accepting the argument of the ld. counsel for the assessee, we hold that the aforesaid company should be excluded as comparables." 20. The facts and circumstances under which the aforesaid companies were considered as comparable is identical in the c....
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....aring 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. counsel for the assessee fairly admitted that comparable company at Sl.No.6 viz., Flextronics Software Systems Pvt. Ltd. should be taken as a comparable, while comparable at Sl.No.24 viz., Tata Elxsi Ltd. should be rejected as a comparable." 23. In view of the aforesaid decision, we hold that Tata Elxsi has to be excluded from the list of comparable chosen by the TPO. 24. The next submission of the learned counsel for the Assessee is on ground No.4.6 of the grounds of appeal before the Tribunal which reads thus: "4.6 That the learned TPO erred in considering cost to cost receipt of reimbursement of expenses as part of the operating income and operating expenses for the purposes of determining the arm's length price." 25. The DRP in its order in para 4 to 4.2 has expressed the view that the same is part of the operating revenue in the software development service segment of the Assessee. ....
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....essee has given detailed submissions in this regard in Ground No.12 raised before the DRP. The DRP has not given any findings in this regard. We are of the view that in the present case, the question of risk adjustment may not be required to be gone into in view of the fact that many of the comparable companies chosen by the TPO have been deleted from the list of comparable companies for determination of arithmetic mean of profit margin of comparable companies to determine ALP. We therefore deem it fit and proper to leave this issue open for the present, with liberty to the Assessee to raise this issue, if circumstances warrant in some other AY. No other submissions were made on other grounds of appeal raised before us with regard to determination of ALP, except with regard to comparability analysis, reimbursement of expenses being treated as part of operating expenses and risk adjustment. 29. It was submitted by the learned counsel for the Assessee that after excluding the aforesaid comparable companies from the list of comparable chosen by the TPO and after considering the reimbursements received by the Assessee from its AE as not part of the operating revenue, the difference be....