TaxTMI 
TaxTMI 
2018 (8) TMI 201
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..... Persistent System Ltd. , M/s. Sasken Communication Technologies Ltd. , M/s Tata Elxsi Ltd. , M/s Persistent Systems Ltd. , M/s. Sasken Communication Technologies Ltd. , M/s Tata Elxsi Ltd. , M/s. Wipro Ltd. , and M/s. Infosys Ltd. , as comparables for determining ALP in the case of the assessee? (2) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in super imposing the decision of other benches of the Tribunal in the case of the assessee to reject the six cases of comparables namely M/s. Megasoft Ltd. , M/s. Avani Cimcon technology Ltd. , M/s Kals Information Systems Ltd. , M/s. Accel Transmatics Ltd. ,M/s. Celestial Labs Ltd and M/s Lucid Software Ltd. when selection of comparables in a case for determining ALP depends on assessee specific FAR analysis? (3) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in relying on the decision of other benches of the Tribunal to reject the six cases of comparables namely, M/s. Megasoft Ltd. , M/s. Avani Cimcon Technology Ltd. , M/s. Kals Information Systems Ltd. , M/s. Accel Transmatics Ltd. , M/s Celestial Labs Ltd and M/s. Lucid Software Ltd. without consi....
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.... that while computing relief under Section 10A of the IT Act, the amount of communication expenses should be excluded from the total turnover if the same are reduced from the export turnover? While giving the answer to the issue, the High Court, inter-alia, held that when a particular word is not defined by the legislature and an ordinary meaning is to be attributed to it, the said ordinary meaning is to be in conformity with the context in which it is used. Hence, what is excluded from 'export turnover' must also be excluded from 'total turnover', since one of the components of 'total turnover' is export turnover. Any other interpretation would run counter to the legislative intent and would be impermissible. 18. XXXXXX 19. In the instant case, if the deductions on freight, telecommunication and insurance attributable to the delivery of computer software under Section 10A of the IT Act are allowed only in Export Turnover but not from the Total Turnover then, it would give rise to inadvertent, unlawful, meaningless and illogical result which would cause grave injustice to the Respondent which could have never been the intention of the legislature. 20. Even in common parlanc....
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.... 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)]: xxxx xxxx xxxx 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 proper. The following relevant observations were brought to our notice:- xxxx xxxx xxxx 15. It was brought to our notice that the above proposition has als....
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....y such persons or such other relevant factors as the Board may prescribe, namely :-- (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board. (2) The most appropriate method referred to in sub- section (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed: Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices: Provided further that if the variation between the arm's length price so determined and price at which the international transaction has actually been undertaken does not exceed five per cent of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm's length price. (3) Where during the course of any proceeding for the assessment 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 ....
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....net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction. (2) For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:-- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets 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....
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.... 848. 66 crores (2) iGate Global Solutions Ltd. 747. 27 crores (3) Mindtree Ltd. 590. 39 crores (4) Persistent Systems Ltd. 293. 74 crores (5) Sasken Communication Technologies Ltd. 343. 57 crores (6) Tata Elxsi Ltd. 262. 58 crores (7) Wipro Ltd. 961. 09 crores. (8) Infosys Technologies Ltd. 13149 crores. " 12. Respectfully following the decision of the Tribunal referred to above, we hold that the comparables chosen by the TPO at Sl. Nos. 6,9,10,17,18, 22, 24 & 26 have to be excluded as comparables for the purpose of determining the ALP of the impugned transaction in this appeal. " Regarding Substantial Question No. 2: "(b) Avani Cimcon Technologies Ltd. As far as this company is concerned, the plea of the Assessee has been that this company is functionally different from the assessee. Based on the information available in the company's website, which reveals that this company has developed a software product by name "DXchange", it was submitted that this company would have revenue from software product sales apart from rendering of software services and therefore is functionally different from the assessee. It was further submitted that ....
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....and of the assessee is that it is absolutely a research & development company. In this regard, the following submissions were made:- * In the Director's Report (page 20 of PB-Il), it is stated that "the company has applied for Income Tax concession for in-house R&D centre expenditure at Hyderabad under section 35(2AB) of the Income Tax Act. " * As per the Notes to Accounts - Schedule 15, under "Deferred Revenue Expenditure" (page 31 of PB-II), it is mentioned that, "Expenditure incurred on research and development of new products has been treated as deferred revenue expenditure and the same has been written off in 10 years equally yearly installments from the year in which it is incurred. " * An amount of Rs. 11,692,020/- has been debited to the Profit and Loss Account as "Deferred Revenue Expenditure" (page 30 of PB-II). This amounts to nearly 8. 28 percent of the sales of this company. It was therefore submitted that the acceptance of this company as a comparable for the reason that it is into pure software development activities and is not engaged in R&D activities is bad in law. 43. Further reference was also made to the decision of the Mumbai Bench of the Tribu....
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....e is no other detail in the TPO's order as to the nature of software development services performed by the Assessee. Celestial labs had come out with a IT(TP)A No. 1366/Bang/2011 public issue of shares and in that connection issued Draft Red Herring Prospectus (DRHP) in which the business of this company was explained as to clinical research. The TPO wanted to know as to whether the primary business of this company is software development services as indicated in the annual report for FY 06-07 or clinical research and manufacture of bio products and other products as stated in the DRHP. There is no reference to any reply by Celestial labs to the above clarification of the TPO. The TPO without any basis has however concluded that the business mentioned in the DRHP are the services or businesses that would be started by utilizing the funds garnered though the Initial Public Offer (IPO) and thus in no way connected with business operations of the company during FY 06-07. We are of the view that in the light of the submissions made by the Assessee and the fact that this company was basically/admittedly in clinical research and manufacture of bio products and other products, there i....
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....atic should be rejected as comparable. The relevant observations of DRP as extracted by the ITAT in its order are as follows: xxxxxxxxxx 49. 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. " Regarding Substantial Question No. 3: "19. As far as Sl. No. 16 viz. , Me....