TaxTMI 
TaxTMI 
2015 (8) TMI 1448
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....A reference under Section 92CA of the Act was made by the Assessing Officer to the Transfer Pricing Officer ('TPO') in respect of the international transactions reportedly entered into by the assessee in the year under consideration for determining their Arm's Length Price ('ALP'). The TPO passed an order under Section 92CA of the Act dt.29.1.2013 proposing a T.P. Adjustment of Rs. 5,09,95,875 to the ALP of the international transactions of the software development segment of the assessee. 2.2 After receipt of the TPO's order under Section 92CA of the Act, the Assessing Officer passed the draft order of assessment for Assessment Year 2009-10 under Section 143(3) rws 144C of the Act vide order dt.25.2.2013 wherein the income of the assessee was determined at Rs. 8,72,84,476. The Assessing Officer subsequently passed the order of assessment for Assessment Year 2009-10 vide order dt.26.4.2013 determining the assessee's income at Rs. 8,72,84,476 I view of the following additions/disallowances :- (i) Disallowance u/R 14A rw Rule 8D : Rs. 4,163. (ii) T.P. Adjustment: Rs. 5,09,95,875. 2.3 Aggrieved by the order of assessment for Asse....
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....at rejecting companies using export sales less than 75% of the operating revenues as a comparability criterion in respect of the software development services transaction, is not appropriate. (d) The learned CIT (Appeals) has erred, in law and in facts, by upholding the action of A.O./TPO in accepting/rejecting certaincomparable companies based on unreasonable comparability criteria. (e) The learned CIT (Appeals) has erred, in law and in facts, by considering incorrect receivables and payables in computing the working capital adjustment and further erred, by restricting the benefit on account of working capital adjustment to 1.71 percent. (f) The learned CIT (Appeals) has erred, in law and in facts, by not considering foreign exchange gain/loss as operating in nature while computing the operating margin of the appellant and comparable companies. (g) The learned CIT (Appeals) has erred, in law and in facts, by not making suitable adjustments to account for differences in the risk profile of the appellant vis-à-vis the comparables and conducting that once the working capital adjustment is granted, there is no necessity of providing any further adjustments. 2. Th....
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....ation 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. 7,34,93,51,475 7,81,69,98,160 7.81 9. Mindtree Ltd. (Seg) 7,93,22,79,326 5,74,06,73,058 5.52 10. Larsen and Toubro Infotech 19,50,83,81,374 15,64,12,76,626 24.72 11. Infosys Ltd. 2,02,64,00,00,000 1,39,17,00,00,000 45.61 Average Mean 24.32 4.6 The TPO computed the ALP of the software development services of the assessee as under:- Arm's length mean margin on cost 24.32% Less : Working Capital Adjustment (Annex.C) 1.40% Adjusted Margin 22.92% Operating Cost 411,532,645 Arm's Length Price 122.92% of operating cos....
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....he assessee submitted that he is not pressing grounds at S.No.1(a) to (c) and would make submissions only on the grounds related to exclusion and inclusion of comparable companies and the adjustments to be granted. Consequently, the grounds at S. Nos. 1(a) to (c) being not pressed by the assessee, are rendered infructuous and are accordingly dismissed. 5.3 Before us, the learned Authorised Representative for the assessee put forth submissions for the exclusion of various comparable companies from the list of final comparables chosen by the TPO. The learned Authorised Representative submitted that the co-ordinate benches of this Tribunal in the case of Mindteck (India) Ltd. [IT Appeal No. 70 (Bang.) of 2014, dated 21-8-2014] for Assessment Year 2009-10 and in the case of Cisco Systems (India) (P.) Ltd. v. Dy. CIT [S.P. No.130/Bang/2014 AND IT(TP)A No.271/Bang/2014, date :14-08-2014] have discussed and decided on the issue in question and therefore places reliance on the decision in the above mentioned cases. We shall now deals with the comparables which the assessee seeks exclusion/inclusion of. 6. Bodhtree Consulting Ltd. 6.1 This company was selected as ....
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....e, however, submits before us that later on it came to the assessee's notice that this company is not being considered as a comparable company in the case of companies rendering software development services. In this regard, the ld. counsel for the assessee has brought to our notice the decision of the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. v. ITO, ITA No.7633/Mum/2012, order dated 6.11.2013. In this case, the Tribunal followed the decision rendered by the Mumbai Bench of the Tribunal in the case of Wills Processing Services (I) P. Ltd., ITA No.4547/Mum/2012. In the aforesaid decisions, the Tribunal has taken the view that Bodhtree Consulting Ltd. is in the business of software products and was engaged in providing open & end to end web solutions software consultancy and design & development of software using latest technology. The decision rendered by the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. (supra) is in relation to A.Y. 2008-09. It was affirmed by the learned counsel for the Assessee that the facts and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY....
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....ntative supported the orders of the authorities below. 7.3.1 We have heard both parties and perused and carefully considered the material on record. We find that a co-ordinate bench of this Tribunal in the case of Mindtech (India) Ltd. (supra) for Assessment Year 2009-10 has excluded these six companies at S.Nos.5 to 11 of the TPO's list (supra) from the set of comparables on the ground of having turnover in excess of Rs. 200 Crores in the year under consideration i.e. period relevant to Assessment Year 2009-10. The relevant portion of the order of the co-ordinate bench at paras 17 & 18 thereof is extracted hereunder:- '17. The next aspect which was highlighted by the learned counsel for the assessee is the application of turnover filter. The assessee's turnover is admittedly less than Rs. 50 crores. The companies listed at sl.nos.5 to 11 of the final list of comparables chosen by the TPO have turnover above Rs. 200 crores. This Tribunal in ITA No.1054/Bang/2011 for AY 07-08 in M/S.Triology E-Business Software India Pvt. Ltd. v. DCIT, Circle 12(4), Bangalore had held on the application of the turnover filter as follows: "(1) Turnover Filter ....
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....xtract 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 Rs. 1 crore to Rs. 200 crores was held to be prope....
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.... not comparable with the Assessee. 16. 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 Rs. 200 crores as comparables. In these circumstances, it was submitted by him that the assessee cannot have any grievance in this regard. 17. 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 non-residents, 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 expen....
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....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: 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 ....
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....ed, 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 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 th....
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....93 9. Mindtree Ltd. (Seg) 793.22 10. L&T Infotech Ltd. 1950.83 11. Infosys Technologies Ltd. 20,264 Inclusion of companies sought for by the assessee. 8. SIP Technologies & exports Ltd. 8.1 In the proceedings before us, the learned Authorised Representative of the assessee submitted that the TPO has wrongly excluded SIP Technologies & Exports Ltd., a comparable chosen by the assessee, on the grounds that the RPT in this case is more than 25% and also for the reason that this company is having diminishing revenues. It is the contention of the assessee that the Annual Report of the company for the year under consideration has not reported any RPT in the current year. 8.2 We have heard both the parties and perused the material before us. We are of the view that it is not clear to us as to how and from what information the TPO drew the conclusion that this company had RPT in excess of 25% during this year. However, from the record before us, it appears that the assessee's contrary claim to the effect that this company i.e. SIP Technologies & Exports Ltd. has reported NIL RPT during this year, has not been examined by the authorities ....
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.... order, the co-ordinate bench of the Tribunal has held that foreign exchange gain on realization of consideration for rendering software development services should be regarded as part of the operating revenue. Following the order of the co-ordinate bench in the case of Mindteck (India) Ltd. (supra), we also hold that foreign exchange gain on realization of consideration for rendering software development services is to be regarded as part of operating revenues. The Assessing Officer/TPO are directed to verify this aspect as to whether the foreign exchange gain is on account of realisation of consideration and if that is so, to then consider the same as operating in nature. 10. Working Capital Adjustment. 10.1 In Ground No.1(e), the assessee had raised the issue of incorrect computation of working capital adjustment. It was submitted that the amount of receivables and payables have been taken incorrectly in the computation of working capital adjustment. 10.2 We have heard both parties in the matter. In the light of the averments of the assessee, we deem it fit to remand the matter back to the file of the TPO to examine and verify the assessee's claim that the amount of....