AI Drafter 
TaxTMI 
TaxTMI 
2017 (1) TMI 1571
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....). Intoto LLC, USA holds 99.82% of shares in M/s. Intoto Software India Pvt. Ltd. This unit is also registered with the Software Technology Parks of India. During the year, it has received operating receipts to the extent of Rs. 29.13 Crores and returned income of Rs. 67,34,480/- after claiming deduction u/s. 10A amounting to Rs. 3,92,54,019/-. As assessee's transactions are with its AE alone, the Transfer Pricing Officer [TPO] referred the case u/s. 92CA(1) of the Act for determination of Arm's Length Price [ALP] for the year. The TPO after considering assessee's TP study rejected the same stating that assessee has used inappropriate filters and also multiple year data and undertook the exercise afresh. TPO has selected 18 companies as comparable companies having an adjusted margin of 23.30% after providing negative working capital adjustment. Based on the above on an operating cost of Rs. 25,83,03,352/-, the ALP was arrived at Rs. 31,84,88,033/-. As the price received was less than that, TPO proposed an adjustment u/s. 92CA at Rs. 2,71,82,139/-. Consequent to the above order dt. 24-09-2013, the AO issued draft assessment order on 30-12-2013. Assessee preferred objections before t....
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....nies which finally selected by the AO/TPO as comparable companies, three companies i.e., Sr. No. 9. Mindtree Ltd (Seg); Sr. No. 11. R S Software (India) Ltd; Sr. No. 14 Thinksoft Global Services Ltd., are assessee's own selections in its TP study and accordingly has no objection for inclusion of the above companies. In addition, assessee is also not objecting to companies listed at : 1. Avani Cimcon Technologies Ltd., 2. CAT Technologies Ltd., 5. Evok Tech 6. E-Zest Solutions Ltd., 7. Kuliza Tech 10.Persistent Systems & Solutions Ltd., 13.Tata Elxsi Ltd (Seg) 15.Zylog Systems Ltd., 7. Assessee has objected to the following comparables in Ground No. 5: i. Sr.No. 3. Comp-U-Learn Tech India Ltd., ii. Sr.No. 4. E-Infochips Bangalore Ltd., iii. Sr.No. 12. Sasken Communication Technologies Ltd., iv. Sr.No. 16. Persistent Systems Ltd., 7.1. During the course of arguments even though assessee has objected to Mindtree Ltd (Seg), L&T Infotech Ltd. in the ground, Assessee's Counsel has not pressed these companies, accordingly, the ground raised to that extent objecting to the above two companies are considered as withdrawn. Assessee is mainly objectin....
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....at profitability varies from year to year and in this year, there was arbnormally very high margin, the reasons of which could not be analysed in the absence of annual report. It was further contended that segmental information was not available. On the argument that the said company is providing both software development and IT enabled services Ld. Counsel placed the disclosures in annual report of FY. 2008-09 and annual report of FY. 2009-10 to submit that the company is primarily engaged in software development and IT enabled services and has reported both of them as one segment. Therefore, company is not comparable with Assessees on functional analysis. It was further submitted that company has merged in 2012 with another company and it will be difficult to obtain further information/segmental information about the company now. In view of its fluctuating profits over the years, this company was not selected as a comparable earlier or in later years by Revenue. Since the disclosure in annual report is common, Assessee relied on the decision of Ahmadabad Bench of ITAT in the case of All Scrips (India) Private Ltd., in ITA No. 771/AHD/2014 for AY. 2009-10, wherein this comparable ....
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....activities and in the absence of segmental information, we direct AO/TPO to exclude the above while working out the comparability analysis. We uphold the plea of Assessee in this regard". 8.1.3. Respectfully following the same, AO/TPO is directed to exclude the said company from the list of comparables as it was not functionally similar. 8.2.1. Sasken Communication Technologies Ltd: The objection of assessee is that it is functionally different and it outsources its business and there is presence of intangible assets also, moreover, the said company also has very high turnover, one compared to assessee's turnover. It was submitted that this company was excluded by the Co-ordinate Benches in the following cases: a) D.E. India Software Pvt. Ltd., (AY.2010-11) in ITA No. 304/Hyd/2015; b) Trident Microsystems India Private Limited (AY.2010-11) in ITA No. 192/Bang/2015; 8.2.2. The Co-ordinate Bench in the case of D.E. India Software Pvt. Ltd., (AY.2010-11) in ITA No. 304/Hyd/2015 (supra) has excluded the said company by stating as under: "Sasken Communication Technologies Ltd: 13. This comparable was not objected to either before TPO or before DRP. Objections wer....
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....TA No.192/Bang/2015 (supra), wherein it was held as under: "18. 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 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 subclause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, betw....
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....s 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." 19. 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. 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 havin....
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....mited (ITA No. 383/Hyd/2014). The decision of Kenexa Technologies Private Limited (supra) is for AY. 2009-10 which does not apply to the facts for this assessment year AY. 2009-10. Likewise, the other decision also. We have perused the annual reports placed in the Paper Book from Pg. Nos. 407 to 506. As seen from the annual report, the receipts are from software development services only and there are no sale of products. The extraordinary events referred to pertain to investment in other companies which has no bearing on the P&L A/c. Fluctuating revenues cannot be a reason to exclude companies unless business profile is entirely different. As we do not see any reason to exclude the same and as the Ld. Counsel fairly admitted that this company was not excluded/not objected in other similarly placed companies in decided cases for this assessment year, we agree with the decision of the TPO/DRP. The ground to that extent is rejected. 8.5. The ground No. 5 is considered partly allowed. 9. Ground No.6 is pertaining to treating provision for bad and doubtful debts as non-operating expenses for the purpose of margin computation of comparable companies as selected by the TPO. Even th....
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....O to examine the objections of assessee and re-compute the margins considering the provision for bad and doubtful debts as operating expenses. This ground is considered allowed. 10. Ground No. 7 pertains to rejection of certain comparable companies selected by assessee. a) Akshay Software Technologies Ltd., b) LGS Global Ltd., c) R Systems International Ltd., d) Quinegra Solutions Ltd., e) Allgo Embedded Systems Private Ltd., and f) Lucid Software Ltd., 10.1. Even though Ld. Counsel argued that these companies are to be included, it was fairly admitted that the above companies were rejected in various Co-ordinate Bench decisions for the same year and accordingly, he has not seriously contested the issue. Further, it was also pointed out that this ground becomes academic, if assessee's objections on the comparable companies in Ground No.5 are accepted. Considering the submissions on the above and also the fact that these companies are not selected in any of the other Co-ordinate Bench decisions, we reject this ground. 11. Ground No.8 pertaining to use of filters, Ground No.9 pertaining to multiple year data and Ground No.10 pertaining to the adjustment for....
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....as no working capital contingencies. * The company has never taken any loans till date from the date of incorporation nor has incurred any expense for meeting the working capital requirement." We have gone through the submissions and the order of the TPO. The assessee pleaded that the DRP has acceded such a plea in some other case. On examination, we find that the DRP, Hyderabad in the case of Cordys Software India P. ltd., for A.Y. 2008-09 in its directions dated 03.08.2012 has given a finding as under : "7.7. 4 Thus, working capital adjustment is made for the time value of money lost when credit time is provided to the customers. The applicant is not an entrepreneur but a captive service provider. Its entire funding needs are provided by the A.E. This being so, the applicant does not stand to lose anything as it is compensated on a total cost plus basis. The TPO probably was carried away by the large amount of receivables appearing in the books of the applicant. But the applicant is running its business without any working capital risk while comparable companies have such a risk for them. If at all any working capital adjustment is to be made to t his situation, only a p....
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....rovider cannot be compared to companies which hold significant brand value as such companies will be receiving a premium in the market because of the existence of the brand. Without prejudice the above argument that Infosys has to be rejected, the Assessee submitted that if the Learned TPO wishes to consider Infosys as a comparable, the brand related profits as disclosed in the annual report should be excluded in determining the profitability of the company for transfer pricing purposes. Please refer to Section 6 of Annexure A of the submission to the Learned TPO dated August 7, 2013. The Learned TPO in the Final Order has commented the following on selection of Infosys as a comparable: * The Learned TPO in the final order has accepted the fact that Infosys has brand but has argued that brand only improves the volume but does not materially impact the profitability. 34. We have gone through the submissions and the order of the AO. The grounds raised before us were the same grounds raised before the TPO. Respectfully following various decisions of the Hon'ble ITAT, this panel and earlier panel decided that Infosys Technologies Limited shall not be taken as compara....