TaxTMI 
TaxTMI 
2019 (11) TMI 1183
X X X X Extracts X X X X
X X X X Extracts X X X X
....provided by the assessee are broadly categorized in two segments i.e. : i. Software Development; and ii. Application Lifestyle Management (ALM) Services. 2.1 The assessment year 2005-06 is the first year of operation of assessee company. During the period relevant to assessment year 2005-06 the assessee entered into following international transactions with its group companies : Nature of the transactions Amount (Rs.) Provision of software development services to T-systems Group entities 3,22,82,358 Provision of application lifecycle management services to T-systems International 2,56,84,165 Provision of consultancy services by T-systems International on behalf of T-systems India 19,58,465 Procurement of IBM laptops from T-systems Singapore 17,20,795 Reimbursement of expenses and set up costs for the EPCOS project to T-systems Singapore 40,94,404 Payment of apartment rental fees to T-Systems International 1,35,075 Payment of guarantee fees to T-systems International 10,000 Procurement of licenses for software from T-systems International 4,41,352 Knowledge transfer from T-systems International 35,98,331 Provision of services by T-systems Internati....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is against the provisions of the Act. The ld. AR further submitted that the services rendered by the assessee to its group companies cannot be compared with Syntel India as the level of operation of both the companies is at variance. The ld. AR vehemently reiterated the contentions raised in paras 3.1 to 3.10 of the appeal against rejection of CUP as the most appropriate method. For the sake of ready reference we are reproducing the same : "3.1 Ignoring the fact that differences in volume of fixed assets and turnover between the Appellant and Syntel India did not materially affect its prices in the market and therefore use of CUP was appropriate; 3.2 Ignoring the significance of the average software industry billing rates published by software industry bodies and the comparability of such billing rates with the billing rates of the Appellant; 3.3 Concluding that the billing rates in the master service agreement between the Appellant and T- Systems Enterprise Services Gmbh ('T - Systems Germany') should have been determined by factoring first year incremental operating costs of the Appellant and thereby completely ignoring the fact that the Appellant is not a completel....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... and 3.10 Not considering the certificate provided by T-Systems Germany certifying that the software development services provided by the Appellant and Syntel India to T-Systems Germany are similar in nature." 5. In respect of ALM Services, the ld. AR submitted that the assessee had selected 19 companies as comparables in the TP study having average arithmetic mean of 6.08%. The TPO in transfer pricing proceedings accepted only two companies from the list of 19 companies selected by the assessee i.e. Sasken Network Systems Limited and VMF Softech Limited. The TPO selected two more companies i.e. Asian CERC Information Technology Limited and Bodhtree Consulting Ltd. The final set of comparables as per TPO are as under : Sr. No. Name of the company PBIT/Operating Cost 1 Asian CERC Information Technology Limited 30.39% 2 Bodhtree Consulting Ltd. 24.01% 3 Sasken Network Systems Limited 16.19% 4 VMF Soft Tech Limited 35.70% ARITHMATIC MEAN 26.57% 5.1 In First Appellate proceedings the CIT(A) enlarged the list of comparables and included Gebbs Infotech Limited and Lanco Global Systems Limited taking the tally of comparables to six for determining t....
X X X X Extracts X X X X
X X X X Extracts X X X X
..../2010 for assessment year 2006-07 decided on 25- 06-2013; iii. Ventura (India) Pvt. Ltd. Vs. Asst. Commissioner of Income Tax in ITA No. 1788/PUN/2014 for assessment year 2009-10 decided on 09-03- 2018; iv. M/s. Saggezza India P Ltd. Vs. DCIT in ITA No. 3323/Mds/2016 for assessment year 2012-13 decided on 22-03-2017. 5.4 The ld. AR further submitted that the CIT(A) in Appellate proceedings has rejected assessee's claim of adjustment on the ground that if at all adjustment is to be made, it should be made to the comparables and not the tested party. The ld. AR submitted that even if adjustment is applied to the comparables, the assessee would be within the tolerance limits. The ld. AR contended that in so far as quantum of travel cost and salary expenditure is concerned they have not been disputed by the Department. It is only the allowability of adjustment while calculating operating cost is the point of contention. 6. On the other hand Shri S.B. Prasad representing the Department vehemently defended the impugned order. The ld. AR submitted that the assessee has merely reiterated the contentions raised before the CIT(A). The CIT(A) has considered all the submissions of assess....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ar under appeal is the first year of operation. The assessee has incurred substantial expenditure on training and travel of employees. The expenditure on training and travel has not been disputed by the Department. It is allowability of adjustment that has been denied to the assessee by the authorities below. 11. The Co-ordinate Bench of Tribunal in the case of Ariston Thermo India Limited Vs. Dy. Commissioner of Income Tax (supra) has allowed adjustment in the operating margin of assessee for low capacity utilization and high fixed operation cost in the initial year of operation. Similarly, in the case of Ventura (India) Pvt. Ltd. Vs. Asst. Commissioner of Income Tax (supra), the Co-ordinate Bench has granted capacity utilization adjustment in the initial year of operation. Similar view has been taken in the cases of Skoda Auto India (P) Ltd. Vs. Assistant Commissioner of Income Tax (supra) and M/s. Saggezza India P Ltd. Vs. DCIT (supra). Taking into consideration entirety of facts and the decisions mentioned above, we are of considered view that the assessee deserves the benefit of adjustment in operating margins on account of substantial salary and travel cost in initial year o....