TaxTMI 
TaxTMI 
2016 (6) TMI 1322
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....eal relating to transfer pricing matters On the facts and in the circumstances of the case and in law: 2. The learned AO/Transfer Pricing Officer ('TPO')erred in making an addition of Rs. 87,551,355 to the total income of the Appellant on account of adjustment in the arm's length price of the software research and development services transaction entered by the Appellant with its associated enterprise; Grounds of objections relating to Cost Plus Method ("CPM")/Comparable Uncontrolled Price ("CUP"): 3. The learned AO/TPO erred in rejecting the CPM/ CUP method adopted by the Appellant and using Transactional Net Margin Method ("TNMM") as the most appropriate method for determining arm's length price; Grounds of objections relating to TNMM: 4. The learned AO/TPOerred, in law and in facts, by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Rules, and conducting a fresh economic analysis for the determination of the ALP in connection with the impugned international transaction and holding that the Appellant's international transaction is not at arm's length; 5. The learned AO/ TPOerred, in la....
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....icense costs as operating in nature while computing the operating margin of the Appellant; 11. The learned AO/TPO erred, in law and in facts, by computing the arm's length price without giving benefit of +/- 5 percent under the proviso to section 92C of the Act; Grounds of appeal relating to general matters 12. The learned AO erred, in law and in facts, by levying interest of Rs. 16,422,055,Rs. 560,081and Rs. 425,858 under section 234B, 234C and 234Dof the Income Tax Act, 1961, respectively. 13. The learned AO erred, in law and in facts, in initiating penalty proceedings u/s 271(1)(c) of the Act. The Appellant submits that each of the above grounds is independent and without prejudice to one another. The Appellant craves leave to add, alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon'ble Tribunal to decide on the appeal in accordance with the law." 3. Ground Nos.1 & 2 are general in nature and does not require any specific adjudication. 4. Ground No.3 is regarding rejection of Most Appropriate Method ('MAM') adopted by the assessee as CPM/CUP by th....
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....7.05 11 Sasken Technologies 17.36 12 Mindtree Ltd. (Seg.) 14.83 13 L&T Infotech Ltd. 19.33 Average PLI 21.62% After allowing working capital adjustment of 1.29%, the adjusted mean margin was arrived at 23.33%. Accordingly, the TPO proposed an adjustment of Rs. 9,88,09,023 under Section 92CA of the Act. Aggrieved by the order of the TPO as well as A.O, the assessee filed objections before the DRP regarding the rejection of the MAM adopted by the assessee and using TNMM as MAM by the TPO for determining the ALP. The DRP did not accept the objections of the assessee on this issue while passing the impugned directions. 6. We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. At the outset we note that an identical issue has come up before this Tribunal for the Assessment Year 2008-09 and vide order dt.16.3.2016 in IT(TP)A No.1336/Bang/2012 the Tribunal has held in paras 5.5 to 5.8 as under : " 5.5 Against the Cost Plus Method, the assessee states that OECD guidelines called for adoption of this method in cases where semi-finished goods are sol....
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....t foreign exchange gain itself is less than 5%. Therefore, in the absence of correct cost structure and billing procedure, it is very difficult to accept the Cost Plus Method and analyse the issue. 5.7 The next contention of the assessee is with reference to CUP method. The assessee states in the Annexure III to 3CEB report that 'there are no internal comparables within the group as entire services of assessee are bought back by AE. Offshore software development work by other companies may represent external comparables. However, data in respect of the same which is available in terms of Euros per hour is not comparable without making suitable adjustments to the differences in the nature and terms of contract/transactions'. As necessary information required for these adjustments is not readily available in the public domain, assessee submits that this cannot be done. Thereafter, assessee proceeded to analyse and submit that on a rough and ready basis, this analysis was done with reference to rates charges by major Indian companies although the functions performed or risk assumed by them are significantly higher, as this will provide the connection of upper price charge at which ....
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....M and TNMM. In the absence of reliable data to undertake the exercise under the traditional methods, the only option is go for the transactional profit methods, when standard methods are not reasonably applied. In view of absence of reliable data either to adopt Cost Plus Method or to analyse the data on the basis of CUP method, either internal CUP or external CUP, we are of the opinion that under given facts and circumstances of the case, TNMM is the only option available to the TPO to analyse the assessee's transactions in order to arrive at the ALP. Therefore, we reject the assessee's contentions on CUP/CPM as most appropriate method and approve the approach taken by the TPO for analyzing transactions under TNMM." The assessee has not disputed that the facts and circumstances for the year under consideration are identical as for the Assessment Year 2008-09. Accordingly, following the earlier order of this Tribunal in assessee's own case this issue is decided against the assessee and confirmed the order of the TPO in adopting TNMM as MAM. 7. Ground No.4 is general in nature and does not require any specific adjudication. 8. Ground No.5 is regarding rejecting the mult....
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.... as learned Departmental Representative and considered the relevant material on record on the admission of the additional ground raised by the assessee. The assessee is seeking exclusion of 3 companies from the set of comparables which are part of the TP analysis study. The learned Authorised Representative of the assessee has submitted that these companies were selected by the assessee in the TP analysis however, the assessee raised the objection before the DRP regarding the functional dissimilarity as well as extra-ordinary events during the year which has not been considered by the DRP and excluded these companies on the ground of turnover filter. The learned Authorised Representative has submitted that from the record it is apparent that these companies are functionally not comparable with the assessee and further there are precedence wherein the Tribunal has held that these companies cannot be considered as good comparables. He has relied upon the decision of the Special Bench of the Tribunal in the case of CIT Vs M/s Quark Systems Pvt.Ltd.,(2010) 38 SOT 0307. 10.2 On the other hand, the learned Departmental Representative has objected to the admission of the additional gro....
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.... if the taxpayer or its counsel had taken Datamatics as comparable in its T.P. audit, the taxpayer is entitled to point out to the Tribunal that above enterprise has wrongly been taken as comparable. In fact there are vast differences between tested party and the Datamatics. The case of Datamatics is like that of "Imercius Technologies" representing extreme positions. If Imercius Technologies has suffered heavy losses and, therefore, it is not treated as comparable by the tax authorities, they also have to consider that the Datamatics has earned extraordinary profit and has a huge turnover, besides differences in assets and other characteristics referred to by Shri Aggarwal. The Tribunal is a fact-finding body and, therefore, has to take into account all the relevant material and determine the question as per the statutory regulations." "38. Accordingly, on facts and circumstances of the case, we hold that taxpayer is not estopped from pointing out that Datamatics has wrongly been taken as comparable. While admitting additional ground of appeal raised by the assessee to require us to consider whether or not Datamatics should be included in the comparable, we make no comments on ....
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....2015 (hyd) has taken the following view on adopting this company as a comparable company in software development segment: "Kals Information Systems Ltd : 10. Assessee objected to the above company before TPO stating that the above said company is functionally different as it is engaged in the development of software and software products. It has inventories equivalent to 27% of the revenue. TPO however rejected Assessee's contentions stating that company classified itself as pure software development service provider. Further, extracting page No. 22 of the annual report of the company, TPO opined that the segmental information indicates that revenue is shown to have been earned from application software and training. Accordingly, he rejected Assessee's objections and included as the comparable company. DRP confirmed the same. 10.1. Assessee's main objection before us is on functionality of the comparable company. As seen from the annual report of 2008-09 and 2009-10 and comparative statement placed by Assessee, the company classified itself as 'the company engaged in development of software and software products since its inception'. The company consisting of STPI unit engage....
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....d the export turnover filter of 75% of the total turnover. He has further contended that there is nothing on record to show that the export turnover during the year was less than the filter applied by the TPO in the case of the assessee. 14.3 Having considered the rival submissions as well as the relevant material on record, we note that the Delhi Bench of the Tribunal in the case of Ion Trading India Pvt. Ltd. (supra) has considered this issue in paras 52 & 53 as under : " 52. We have considered the submission and perused the material placed on record. A Coordinate Bench of Tribunal in the case of Tibco Software (India) (P) Ltd. vs. DCIT ITA No. 94/PN?2014 dated 10.4.2015, it was held as under: "32. By way of Ground of Appeal No.4.5, the appellant has assailed the action of the TPO in excluding Sasken Communications Technologies Ltd. from the final set of comparables. As per the discussion in para 11(viii) of the order of the TPO, it is noticed that the said concern has been excluded on the ground that during the year under consideration it has undertaken business restructuring. The Ld. Representative also pointed out that in the show-cause notice dated 31.10.2012 issued ....
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....elds, it cannot be treated as a functionally different company when the prominent activity is only software development services. 15.4 We have considered the rival submissions as well as the relevant material on record. At the outset we note that the co-ordinate bench of this Tribunal in the case of Ion Trading India Pvt Ltd (supra) has considered the comparability of this company in para 11 as under : " 11. Observations of the Co-ordinate Bench with regard to M/s Tata Elxsi Ltd. as it appears at para-26.4 of the very same order is re-produced hereunder; "26.4 Tata Elxsi Ltd.:- As far as this company is concerned, it is not in dispute before us that in assessee's own case for the A.Y. 2007-08, this company was not regarded as a comparable in its software development services segment in ITA No.1076/Bang/2011, order dated 29.3.2013. Following were the relevant observations of the Tribunal:- II. UNREASONABLE COMPARABILITY CRITERIA : 19. The learned Chartered Accountant pleaded that out of the six comparables shortlisted above as comparables based on the turnover filter, the following two companies, namely (i) Tata Elxsi Ltd; and (ii) M/s. Flextronics S....
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....rlier FY 2005-06, there is no reason why the taxpayer is objecting to it. How the company is functionally similar in the earlier FY 2005-06 but the same is not functionally similar for the subsequent FY 2006-07 even when no facts have been changed from the preceding year. Thus the taxpayer is arguing against this comparable as the company was not considered as a comparable by the taxpayer for the present FY 2006-07." 21. We have heard the rival submissions and considered the facts and materials on record. After considering the submissions, we find that Tata Elxsi and Flextronics are functionally different from that of the assessee and hence they deserve to be deleted from the list of six comparables and hence there remains only four companies as comparables, as listed below:" 26.5. Following the aforesaid decision of the Tribunal, we hold that M/S.Tata Elxsi Ltd. should not be regarded as a comparable". The co-ordinate bench in the said case has followed the decision of the Tribunal of M/s. Cisco Systems Pvt. Ltd. dt.14.8.2014 in IT(TP)A No.271/Bang/2014 and directed the A.O/TPO to exclude this company form the list of comparables. We concur with the view of th....
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....in the sale of software service as well as its products and has operation in Wifi place and broadband connectivity. It is apparently an onsite service company. This is evident from the various comparables of only reports and related documents produced before us. Zylog System Ltd also undergone into the business of restructuring where it is clear Dugout fair flex matrix. Therefore, it is apparent that the company, which have undergone the business restructuring process during the year, cannot be held to be a comparable in view of the extraordinary circumstances. The company is also owning significant intangibles and carrying on research and development activities ownership significant intangibles cannot be held to be a comparable with the assessee and therefore on this ground too this comparable is ordered accordingly to be excluded." No contrary view has been brought before us therefore following the order of the Delhi Bench of the Tribunal (supra), we direct the A.O/TPO to exclude this company from the list of comparables. 17. Ground No.8 is regarding restricting the benefit of working capital adjustment. 17.1 The learned Authorised Representative of the assessee has subm....
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.... the appropriate actual working capital adjustment as per the working in case of each comparable. 18. Ground Nos.9 & 10 are regarding risk adjustment - No argument has been advanced by the learned Authorised Representative. We note that the DRP has directed the TPO to grant risk adjustment which has been challenged by the revenue. Accordingly this ground is dismissed. 19. Ground No.11 is regarding the benefit of proviso to Section 92C of the Act. 19.1 If the comparable price is within the range of + or - 5% of the assessee's price then the benefit of proviso to section 92C shall be granted to the assessee. Accordingly, we direct the A.O/TPO to consider the same at the time of passing the order to give effect this order of the Tribunal. 20. The revenue has raised the following grounds : "1. On the facts and in the circumstances of the case the Dispute Resolution Panel erred in holding that the size and turnover of the company are deciding factors for treating the company as a comparable and accordingly erred in excluding M/s. Tata Elxsi Ltd., Sasken Communication Technologies Ltd., Persistent Systems Ltd., Zylog Systems Ltd., Mind Tree Ltd., L&T Infotech and Infos....
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.... contended that the filter of revenue from RPT should be applied at 15% instead of 25% applied by the TPO. The learned Departmental Representative has submitted that there is no standard rule for applying the filter of 15% regarding the RPT. It is pertinent to note that the ALP as per the provisions of the TP has to be determined by considering uncontrolled comparable prices and therefore only unrelated prices have to be taken into account to bench marked international transactions. However, 0% RPT of the comparable price is an impossible situation and therefore a reasonable tolerance range from revenue from RPT can be considered for selecting uncontrolled comparables. There is no dispute that there cannot be a single criteria/parameter to be applied as a general rule in all the cases. The tolerance range varies from case to case and depending upon the availability of comparables for a particular case. Thus if the comparables of an international transactions are easily available in sufficient number then this tolerance range of RPT should be restricted to minimum. Though there is no specified range in the provisions of Act or Rules, however, in due course of discussion and adjudica....
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....ssue of examining the functional comparbility of this company does not arise in the appeal of the assessee. 23. Since we have excluded certain companies and also included one of the companies excluded by the DRP therefore the A.O/TPO is directed to recompute the ALP after giving effect to the order of this Tribunal. 24. The Ground No.4 is regarding direction of the DRP to grant risk adjustment. 24.1 We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. At the outset we note that the DRP has decided this issue by following various decisions of this Tribunal in para 14.5 and 14.6 as under :- " 14.5 The decision of the jurisdictional ITAT which is binding on the Panel was examined. It is seen that the Hon'ble Bangalore ITAT in case of Intellinet Technologies India Pvt. Ltd. Vs. ITO (ITA No.1237/Bang/200&) rejected the tax department's argument that a single customer risk borne by the tax payer in its status of a captive service provider was equivalent to the marketing and technical risk attached to the comparables. The Hon'ble ITAT held that the risk of having a single cust....