TaxTMI 
TaxTMI 
2016 (5) TMI 1498
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....opment service provider. Assessee was a wholly owned subsidiary of one M/s. Sunquest, US, and was primarily developing software and providing support to its principal. Sunquest, US, was providing solutions in healthcare services which helped physicians, hospitals and medical practitioners to effectively manage the complexities in healthcare services. For the support services rendered by the assessee, Sunquest, US, was remunerating on cost plus basis. Assessee's financial results for relevant previous year read as under : Operating Revenues* 19,88,17,946 Forex gain ** 2,83,48,688 Total operating revenues 22,71,66,634 Operating Expenses *** 20,34,92,094 Operating (Profit)/Loss 2,36,74,540 Op Profit on cost % 11.63% 03. Whole of the revenue of the assessee came from the software development services rendered to its principal. Though it had also received certain cost reimbursements and expenses from the principal, such reimbursements were considered by the TPO to be at arms length and the adjustments made by him were confined to the software development services. 04. In order to justify its profit on cost of 11.63% assessee had selected 21 comp....
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....d by the TPO for the comparative study read as under : SI No. Name of the Comparable Sales (in Rs.) Cost InRs.) Margin 1 Kals Information 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 (segmental) 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 Limited 7,34,93,51,475 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% 06. Thereafter the AO made a work out of the working capital adjustment as per the formula prescribed in OECD guidelines, 2009. Average working capital adjustment worked out ....
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....g), Persistent Systems Ltd, Zylog Systems Ltd, Mindtree Ltd (seg), L & T Infotech and Infosys Technologies Ltd, had turnover well in excess of Rs. 200 crores. Relying on a decision of coordinate bench in the case of Lam Research (India) P. Ltd, v. DCIT [ITA Nos.1437 & 1385/Bang/2014, dt.30.04.2015], Ld. AR submitted that the comparability of these companies had come up before the coordinate bench in this case where the assessee concerned was into software development segment. As per the Ld. AR, of M/s. Lam Research (India) P. Ltd, (supra) had two segments, namely, software development segment and ITES segment. With regard to the software development segment, this Tribunal had held that the above mentioned companies were to be excluded. 10. Continuing his arguments, Ld. AR submitted that M/s. Bodhtree Consulting Ltd, was also one among the comparables which were disputed in the case of Lam Research India (P) Ltd (supra). According to him, at para 10 of the said order, it was held by this Tribunal that Bodhtree Consulting Ltd, was not a proper comparable in the software development services segment. 11. Vis-a-vis, Tata Elxsi Ltd, Sasken Communication Technologies Ltd, Persisten....
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.... for application of turnover filter as applied by this Tribunal in the case of M/s Genisys Pvt Ltd Vs DCIT(2011)64 DTR 225. Reliance has also been placed on the case of Yodlee Infotech Pvt. Ltd., vs. ITO (IT(TP)A.108/Bang/2014, dt.12.12.2014). No doubt before the CIT (A) though assessee had raised a ground for applying the turnover filter, it was not pressed. Nevertheless, assessee has raised an additional ground before us for application of turnover filter of Rs. 200 crores. By virtue of the Special Bench decision in the case of Quark Systems P. Ltd, (supra), an assessee cannot be deprived of the right to raise such a pleading as additional ground, since the Transfer Pricing is an evolving area. As per the Ld. DR if the turnover filter is to be applied, matter has to be sent to the CIT (A) for consideration since he had not adjudicated the issue. Assessee is seeking application of turnover filter in the case of Tata Elxsi Ltd, Sasken Communication Technologies Ltd, Persistent Systems Ltd, Zylog Systems Ltd, Mindtree Consulting Ltd (seg), L & T Infotech Ltd, and Infosys Ltd. Reliance has been placed by the assessee on the decision of coordinate bench in the case of Lam Research (In....
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.... 1,39,17,00,00,000 45.61% Average 24.32%" 17. It is clear from the above, that turnover of Tata Elxsi Ltd was Rs. 378.43 crores, that of Sasken Communication Technologies Ltd, came to Rs. 405.31 crores, that of Persistent Systems Ltd, was Rs. 519.69 crores, that of Zylog Systems Ltd was Rs. 734.9 crores, that of Mindtree Ltd (seg) was Rs. 793.22 crores, that of L & T Infotech Ltd, was Rs. 1,950.83 crores and that of Infosys Ltd, was Rs. 20,264 crores. Turnover of the assessee was only Rs. 22.72 crores. Obviously the volume of activity of the above mentioned companies were much higher to that of the assessee. It was more than ten times that of the assessee. In the case of Lam Research (India) P. Ltd, (supra) with regard to application of turnover filter, it was held as under at para 13 of the order dt.30.04.2015 : 13. We have heard the rival contentions and perused the material on record. In the case of Yodlee Infotech Pvt. Ltd., (supra), it was held as under : "20. We have to hold that assesseee can seek exclusion of comparables which were a part of its own list, at a later stage, and therefore, we are constrained to reject the line....
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....) Ltd. vs. Dy. CIT (2008) 118 TTJ (Del) 865 : (2008) 14 DTR (Del)(Trib) 228 : (2008) 114 ITD 448 (Del); 4. Dy. CIT vs. Indo American Jewellery Ltd., ITA No. 6194/Mum/2008 [reported at (2010) 131 TTJ (Mumbai) 163 : (2010) 40 DTR (Mumbai)(Trib) 386-Ed.]; 5. Philips Software Centre (P) Ltd. vs. Asstt. CIT (2008) 119 TTJ (Bang) 721 : (2008) 15 DTR (Bang)(Trib) 505 : (2008) 26 SOT 226 (Bang); 6. Asstt. CIT vs. NIT (2011) 57 DTR (Del)(Trib) 334 8.1 He further submitted that size as a criteria for selection of comparables is also recommended by OCED in its TP guidelines. The observation of OCED in para 3.43 of the chapter on guidelines reads as follows : "Size criteria in terms of sales, assets or number of employees : The size of the transaction in absolute value or in proportion to the activities of the parties might affect the relative competitive positions of the buyer and seller and therefore comparability." 8.2 The learned counsel for the assessee submitted that similar observations were also made by ICAI in para 15.4 of TP guidance note. He submitted that TPO's range of Rs. 1 crore to infinity has resulted in selection ....
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.... loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs. 1 crore to Rs. 200 crores have to be taken as a particular range and the assessee being in that range having turnover of Rs. 8.15 crores, the companies which also have turnover of Rs. 1 to Rs. 200 crores only should be taken into consideration for the purpose of making TP study. The above view was followed by the Co-ordinate Bench of this Tribunal in the case of M/s Bearing Point Business Consulting Pvt. Ltd.,(supra) At paras-5.1 of its order dated 21-12-2012 it was held as under; "5.1 We have heard the rival submissions and perused the materials on record. The TPO had, while selecting the above 26 comparables, applied a l....
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....urpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun and Bradstreet is more suitable ad reasonable. In view of the same we hold that the turnover filter is very important and the companies having a turnover of Rs. 1 Crore to200 Crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 Crores, the companies which also have turnover of 1.00 to 200 Crores only should be taken into consideration for the purpose of making TP study". 5.12 The above view has been followed in the recent order of the Tribunal n the case of Trilogy E - Business(supra). The relevant findings of the Tribunal are extracted as under; "20. In this regard we find that the provisions of law pointed out by the learned counsel for the assessee as well as the directions referred to by the learned 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 Cr....
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....ogies Ltd (seg), Persistent Systems Ltd, Zylog Systems Ltd, Mindtree Ltd (seg), L & T Infotech Ltd, and Infosys Ltd, from the list of comparables. 19. No doubt we are alive to the fact that Sasken Communication Technologies Ltd, Persistent Systems Ltd, Zylog Systems Ltd, Mindtree Ltd (seg), L & T Infotech Ltd, Infosys Ltd, were a part of assessee's own comparables. However as mentioned by us, assessee had taken a ground before the CIT (A) seeking exclusion based on turnover, though it has not pressed it. At least in the case of Persistent Systems Ltd, CIT (A) specifically mentioned this plea of the assessee though he had not directed its exclusion, for a reason that assessee was not pressing application of turnover filter. In such circumstances, we are of the opinion that assessee can very well plead for exclusion of these companies from the list of comparables. 20. Coming to Bodhtree Consulting Ltd, argument of the assessee is that it is functionally dissimilar. In the case of Lam Research India P. Ltd, (supra), comparability of Bodhtree Consulting Ltd, was an issue. In the software development services segment, it was held as under by this Tribunal at para 18 of its order :....
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....far as this company is concerned, the TPO rejected the same by applying the 25% employee cost filter. According to the TPO, usually software development services are high-end services performed by skilled and professional employees and hence the cost of rendering such high-end services is also high as they comprise of high salaries and better welfare facilities, compared to low-end services. Therefore, the filter of employee cost of more than 25% of turnover was considered by the TPO while choosing the comparable. (ii) The submission of the ld. counsel for the assessee was that in the case of assessee, this test is satisfied. In this regard, our attention was drawn to page 818 to 824 of the assessee's paperbook wherein annual report of this company has been provided. Attention was drawn to the fact that in the profit & loss account of the audited accounts, the cost of services has been shown as an expenditure and in Schedule 15 to the Notes to Accounts, it has been elaborated as follows:- Cost of services: Cost of services: Cost of Services - Overseas 2,77,32,337 Cost of Services - Domestic 2,58,40,435 Transcription charges &n....
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....han the grounds relating to application of turnover filter in grounds 5, 6 and 9, other grounds are not considered for adjudication by us. 25. In the result, appeal of the assessee is partly allowed for statistical purpose. 26. Now we take up appeal of the Revenue. Revenue has altogether taken nine grounds of which grounds 1, 8 and 9 are general in nature needing no adjudication. Vide its grounds 2 and 3, grievance raised by Revenue is that CIT (A) directed the AO to exclude from total turnover items which were excluded from export turnover also while working out the deduction available to the assessee u/s.10A of the Act. What we find is that the CIT (A) had followed the judgment of Hon'ble jurisdictional High Court in CIT v. Tata Elxsi Ltd, [349 ITR 98]. Just because of a reason that the Revenue has moved an appeal before the Hon'ble Apex Court against the judgment of Hon'ble jurisdictional High Court, we cannot say that Hon'ble jurisdictional High Court judgment should not be followed. We are of the opinion that CIT (A) was justified in giving directions which were in accordance with the law laid down by the Hon'ble jurisdictional High Court in Tata Elxsi Ltd (supra). Groun....