TaxTMI 
TaxTMI 
TaxTMI 
2017 (1) TMI 1734
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.... CIT(A) erred in holding that profit on cost of more than 50% of the comparable company(ies) is abnormal without giving reasons how functions discharged, assets deployed and risks assumed of such companies were different from the appellant company. 4. In the facts and circumstances of the case, the learned CIT(A) erred in holding that the TPO erred in not excluding comparables having any related party transactions, even if the related party transactions are less than 25% of the revenues. 5. The learned CIT(A) erred in holding that the assessee is eligible for a standard deduction of 5% from the Arm's Length Price (ALP) under the proviso to Section 92C(2) of the Income Tax Act. 6. The learned CIT(A) erred in holding that the size, turnover and brand of the company are deciding factors for treating a company as a comparable, and accordingly erred in excluding M/s Infosys Technologies Ltd. as a comparable. 7. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT(A) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored. 8. The appellant craves leave to add, alte....
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....year (i.e. companies having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months) should not be rejected. 4. The learned CIT(A) has erred in law by upholding the TPO's approach of exercising his powers under section 133(6) of the Act to obtain information which was not available in public domain and relying on the same for comparability purposes. 5. The learned CIT(A) has erred, in law and in facts, by accepting certain comparable companies using unreasonable comparability criteria. 6. The learned CIT(A) has erred, in law and facts, by not making suitable adjustments to account for differences in the risk profile of the Respondent vis-a-vis the comparables. 7. The learned CIT(A) has erred, in law and in facts, by ignoring the fact that since the Respondent is availing tax holiday U/S 10A of the Act, there is no motive or reason to shift profits out of India, curbing which is the basic intention of introducing the transfer pricing provisions. 8. The learned CIT(A) erred in confirming the imposition of interest under section 234B and 234C of the Act; The Respondent submits that each of the above grounds is ....
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....tion of the arm's length price (ALP) of the international transactions of the assessee company. For the purpose of establishing the ALP of its international transactions with its AEs, the assessee had undertaken TP study, carried out by an independent external consultant in accordance with the provisions of the Act read with Income-tax Rules. The detailed analysis was undertaken to determine the functions performed, risks assumed and assets utilized by the assessee company and its AEs in respect of the international transactions between them. The assessee has adopted Transaction Net Margin Method (TNMM) as the most appropriate method to determine the ALP and a search was conducted on Prowess database and Capitaline database updated till 05.08.2005 and 12.08.2005 respectively to select the comparable companies. The searches on the databases yielded a set of 45 comparables for software development services with weighted average operating profit/operating profit cost of 9.97%. As the operating margin of the company of 5.15% was within the +/- 5% range of the arm's length margin, the price charged by the company to its AEs in respect of the said international transactions was found to ....
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....ve are legal issues and arise out of the order of the lower authorities. Reliance is based on the decisions of the Hon'ble Supreme Court in the case of Jute Corporation of India vs. C.I.T. (187 ITR 688) and National Thermal Power Corporation vs. C.I.T. (229 ITR 383) as well as the full Bench of the Bombay High Court in the case of Ahmadabad Electricity Co. Ltd. (199 ITR 351) and the decision of Chandigarh Special Bench in the case of DCIT vs. Quark Systems (P.) Ltd. (IT Appeal No.100(CHD.) of 2009). In the above circumstances the Petitioner prays that this Hon'ble Tribunal be pleased to; (i) admit and adjudicate the above additional ground, (ii) pass any other order that may be required in the circumstances of the case and render justice." 12. We have heard the arguments advanced by the ld. counsel for the assessee as well as the Addl. CIT(DR). During the course of hearing, the ld. counsel for the assessee has invited our attention to the fact that out of 17 comparables taken by the TPO, the CIT(Appeals) has excluded 13 comparables and has finally taken only 4 comparables for determination of ALP of the international transactions. Out of the finally set of comparable....
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....obal Ltd. (Lanco Global Solutions Ltd.) 5. R S Software (India) Ltd. 6. Sasken Communication Technologies Ltd. 7. Sasken Network Systems Ltd. 8. Geometric Software Solutions Co. Ltd. 9. Four Soft Limited 10. Tata Elxsi Ltd. (Seg.) 11. Infosys Technologies Ltd. 12. Flextronics Software Systems Ltd. (Seg.) 13. Satyam Computer Services 14. L & T Infotech Ltd. 15. iGate Global Solutions Ltd. 16. Thirdware Solutions Ltd. 17. Exensys Software Solutions Ltd. 18. Out of 17 comparables, the CIT(Appeals) had excluded 6 comparables i.e., R.S. Software (India) Ltd., Sasken Communication Technologies Ltd., Sasken Network Systems Ltd., Geometric Software Solutions Co. Ltd., Four Soft Limited and Tata Elxsi Ltd. (Seg.) on the ground that they have Related Party Transactions. 19. The CIT(Appeals) had also excluded 5 comparables i.e., Infosys Technologies Ltd., Satyam Computer Services and Flextronics Software Systems Ltd. (Seg.) on the ground of having Related Party Transactions and L & T Infotech Ltd. and iGate Global Solutions Ltd. having applied the turnover filter. He also excluded two comparables i.e., Thirdware Solutions Ltd. and Exensys Software Solutions Ltd. on....
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....echnologies Ltd., Sasken Network Systems Ltd., L&T Infotech Ltd. iGate Global Solutions Ltd. which were excluded by the CIT(Appeals). The CIT(A) has excluded the same by applying the RPT filter at 0%, whereas the Tribunal has repeatedly held that RPT filter has to be applied between the range of 15% to 25%. The inclusion/exclusion of these comparables were examined by the Tribunal in the case of ACIT v. McAfee Software (India) Pvt. Ltd. (supra) for the same assessment year, i.e., AY 2005-06. For the sake of reference, we extract the relevant portion of the order of the Tribunal as under:- "10. The final list of 17 companies selected by TPO are as under: Sl No. Comparables selected by TPO NCP Margins as per TPO Order (%) (WC-Unadj) NCP Margins as per TPO Order (%) (WC - Adj) 1. Bodhtree Consulting Ltd., 24.85 22.35 2. Lanco Global Systems Ltd., 13.65 9.51 3. Exensys Software Solutions Ltd., 70.68 62.85 4. Sankhya Infotech Ltd., 27.39 21.14 5. Sasken Network Systems Ltd., 16.64 14.02 6. Four Soft Ltd., 22.98 21.35 7. Thirdware Solution Ltd., 66.09 63.97 8. R S Software (India) Ltd., 8.07 6.79 9. Geometric Software Solutions Company Ltd., 20.34....
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.... should be rejected under the following TPO's filters: * Related party transactions filter: As per schedule 4 of the balance sheet, the company has investments in Perigon, LIC, USA and as per the response u/s 133(6); the company has export sales to Perigon LIC, USA of Rs. 133.90 lakhs, being 34.68% of the total turnover. * Functionally different filter: The company in its response to notice u/s 133(6) has stated that it provides e-paper solutions, data cleansing software, website development and other customized software and also state that the e-paper solutions and data cleansing services would come under the category of IT enabled services". Considering the above, we direct that the above company has to be excluded on the reason of RPT of more than 25% and functionality. Lanco Global Systems Ltd., : 10.4. This company even though included by TPO and has not been objected to by Assessee, was rejected by the CIT(A) on the reason of low profit margin. This is not a valid ground. Only continuous loss making companies are being excluded from the comparability. If this argument was accepted, the high profit making companies are also to be excluded. This is not the purpose for....
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....t possible to give the information as required by certain clauses of paragraphs 3.4C and 4 D of Part II of Schedule VI of the Companies Act, 1956." The Delhi Tribunal in ITO v. Colt Technology Services India Pvt. Ltd. (judgment dated 23.10.2012 in ITA No. 609I/Del/2011 for the assessment year 2005-06) has held that the said company is not a comparable to the Assessee therein which was also in the business of software development. 20. The submissions made by the learned counsel for the Assessee are considered. The activities set out above and the decision of the Delhi ITAT rendered in the context of a software development company such as the Assessee makes it amply clear that this company Sankhya cannot be regarded as a comparable. The same is directed to be excluded from the list of comparable companies. 22. We have considered his submission and find that the ITAT Hyderabad Bench on identical facts, held that the aforesaid two companies viz., Four Soft Ltd., and Thirdware Solutions Ltd., are not comparable companies in Software Development Services companies. The following were the relevant observations:- "15.4. FOURSOFT LIMITED : This comparable is objected on the same r....
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....arable companies before adopting them as comparable companies and before taking the operating margin for arriving at the arms length price. He submitted that wherever the segmental details are not available, then the said companies should not be taken as comparables. For this purpose, he placed reliance upon the decision of the Bangalore Tribunal in the case of First Advantage Offshore Services Pvt. Ltd. vs. The DCIT in ITA.No.1252/Bang/2010 wherein these companies were directed to be excluded from the list of comparables. 23. The learned D.R. however, supported the Orders of the authorities below. 24. Having heard both the parties and having gone through the material on record, we find that the TPO at page 37of his order has brought out the differences between a product company and a software development services provider. Thus, it is clear that he is aware of the functional dissimilarity between a product company and a software development service provider. Having taken note of the difference between the two functions, the Assessing Officer ought not to have taken the companies which are into both the product development as well as software development service provider as com....
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.... exclude these three companies from the list of comparables. 27. The learned counsel for the Assessee submitted before us that TATA Elxsi Ltd., a comparable company out of the 10 excluded by the CIT(A) by applying RPT filter and which gets included in the comparable companies because of 15% RPT being adopted as threshold limit for excluding companies for the purpose of comparability. It was his submission that this company will however, have to be excluded as this company was held to be not comparable with an Assessee such as the Assessee in the present case providing software development services by the ITAT Hyderabad Bench in the case of CNO IT Services (India) Pvt. Ltd. (Formerly known as Conseco Data Services (India) Pvt. Ltd.) Hyderabad vs. DCIT, Circle 1(2) Hyderabad, in ITA.No.1280/Hyd/2010 Assessment Year 2005-2006 order dated 12.2.2014. 28. We have considered his submission and find that the ITAT Hyderabad Bench on identical facts, held on comparability of TATA Elxsi Ltd. as follows: "15.7. TATA ELXSI LIMITED : The objection of the Assessee is that TATA Elxsi operating two segments - system communication services and software development services. The TPO accep....
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....rvices or pertain to limited service akin to Assessee services. Since, these aspects are not clear from the data furnished before us, we direct the TPO to examine and in case, the segmental profits of a particular service is not available, then, to exclude the TATA Elxsi Limited from the list of comparables. Accordingly, this issue is restored to the file of TPO for examination and to decide in accordance with law and facts, after affording reasonable opportunity of being heard to Assessee." 29. Though the issue has been set aside to the AO in the aforesaid decision, the ITAT Hyderabad in the case of NTT Data India Enterprise Application Services Pvt.Ltd., ITA No.1612/Hyd/2010 order dated 23.10.2013 and in a subsequent ruling in the case of Invensys Development Centre (India) Pvt.Ltd., ITA No.1256/Hyd/2010 order dated 28.2.2014, held that TATA Elxsi is not functionally comparable with that of a software development service provider such as the Assessee. 30. In view of the aforesaid decision rendered on identical facts and circumstances, we are of the view that TATA Elxsi Ltd., should be excluded from the list of comparable companies. "13. Similarly, the other cases, Bodhtree ....
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....sed company, the same is not strictly comparable to a service company like Assessee. In the absence of segmental profit of service income, we have to exclude the same. Following the decision in the case of DCIT Vs. Toshiba embedded Software (I) Pvt. Ltd., in IT(TP)A No. 1/Bang/2012 dt. 10-05-2013 (supra), this company is accordingly excluded. Igate Global Solutions Ltd., & L&T Infotech: 10.9. These two companies are found comparable in many orders of the Co-ordinate Benches, but excluded on the basis of turnover filter of Rs. 200 Crores limit in ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra), we have considered the same. Assessee's turnover is about 63 Crores. The turnover of Igate Global Solutions Ltd., (Seg) is about 405 crores and L & T Infotech Ltd is of 562 Crores. This is with the range of ten times the upper limit. Moreover, Assessee Counsel has not pressed on turnover filter of Rs. 200 Crores. Therefore, these two are retained. Flextronics Software Systems Ltd.,: 10.10. This company was objected to on functional dissimilarity. This was considered in ITO Vs. M/s. Sunquest Information Systems (In....
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....bsp;"61. The Central Board of Direct Taxes in its Circular No. 5 of 2010 dated June 3, 2010 [(2010) 324 ITR (St.) 293] has clarified that these new provisos are effective from April 1, 2009 onwards. In fact these provisos have been brought into the Act by the Finance (No.2) Act, 2009. So, it will be applicable to the assessment year 2009-10 and onwards. 62. In the present case, the assessment year is 2003-04. Therefore, the amended proviso as explained above is not applicable to the present case in hand. The proviso applicable to the present case is the one which stood before the substitution brought in by the Finance (No.2) Act, 2009 with effect from October 1, 2009. The earlier proviso is extracted below: "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, or, at the option of the Assessee, a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean". 63. The first limb of the old proviso and the first limb of the present proviso is regarding arriving at the arithmetical mean which is the same. There ....
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.... shall also be applicable to all assessments or reassessments proceedings pending before the AO as on the first day of October, 2009. The present proceedings were concluded before that day. So, the second proviso to Section 92C(2) does not apply to the impugned order. The pre-amended proviso, as interpreted by various authorities does permit standard deduction of (+) or (-) 5% to Assessee. The order of Ld.CIT(A) is confirmed. The Revenue's ground is rejected accordingly." 23. Our attention was also invited to the order of the Tribunal in the case of ITO v. Colt Technology Services India Pvt. Ltd. in ITA No.609/Bang/2011 in which these comparables were also examined by the Tribunal and Visual Soft Technologies Ltd. was excluded from the list of comparables. The relevant portion of the Tribunal's order is extracted hereunder for the sake of reference:- "14. We find the submissions of the assessee differentiating its case with the claimed comparables (i) Exensys Software Solutions Ltd. 2) Sankhya Infotech Ltd. 3) Third Ware Solution Ltd. And 4) Visual Soft Technologies Ltd. (SEG) searched by TPO, which have been accepted by the Ld. CIT(A), have not been successfully rebutted by the....
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....ity. Regarding Visual Soft TechLtd. (seg) it was submitted that company is engaged in undertaking substantial R & D activities and hence should be excluded from the final set of comparables since its return includes a return on account of the R & D function. It was demonstrated by the fact that during Financial Year 2004-05, the said company was having a high R & D / sales spend of 4.5% (fails the R /& D filter of 3%as applied by the assessee). The Ld. CIT(A) on the basis of Indian TP regulations, OECD Guidelines and judicial decisions came to the conclusion that in much as these companies owning software products and undertaking R & D command a premium return compared to any routine contract software development service provider, they should not be taken as comparable for a contract software development service provider such as the assessee. After exclusion of the above companies from the comparables the Ld. CIT(A) has worked out the following result :- 15. In conclusion the Ld. CIT(A) in para 47 of the first appellate order has held that with the mean OP / TC margin of 14.04%, after availing the benefit of the (+/-) 5 percent range, the assessee's international transactions are....