AI Drafter 
TaxTMI 
TaxTMI 
2017 (1) TMI 1734
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....has not been defined in the section. 3. The learned 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 tha....
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....venues. d. The learned CIT(A) has erred in law and facts, by not accepting the Respondent's plea that companies having different accounting 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 p....
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....,52,862 us. 10A of the Act. During the course of assessment proceedings, having noted the international transactions undertaken by the assessee, the AO made a reference u/s. 92CA of the Act to the TPO for determination 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....
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....the Appellant by reason of the above additional grounds being admitted and adjudicated and accordingly the balance of convenience is in favour of such an order being passed by this Hon'ble Tribunal. The Petitioner states and submits that the issues raised in the additional ground above 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 t....
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....y the CIT(Appeals). 17. Having carefully examined the orders of lower authorities in the light of the order of the Tribunal and the chart filed before us, we find that the TPO has taken the following 17 comparables:- 1. Bodhtree Consulting Ltd. 2. Sankhya Infotech Ltd. 3. Visual Soft Technologies Limited (Seg) 4. LGS Global 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 t....
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....fee Software (India) Pvt. Ltd. (supra). Copy of the order of the Tribunal is available at pages 566 to 586 of the compilation. 22. From a perusal of the Tribunal orders, we find that the TPO has taken similar 17 comparables and had discussed all these comparables which were sought to be excluded by the assessee. The assessee also claims inclusion of LGS Global Ltd. (Lanco Global Solutions Ltd.), R S Software (India ) Ltd., Sasken Communication Technologies 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 (%) ....
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.... of functionality. However, as seen from the orders of Co-ordinate Benches in the case of ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra) as well as DCIT Vs. Toshiba embedded Software (I) Pvt. Ltd., in IT(TP)A No. 1/Bang/2012 dt. 1005-2013, Bodhtree Consulting Ltd., was accepted as a comparable. However, in the case of Cordys Software India P. Ltd., in ITA No. 1451/Hyd/2010 dt. 13-06-2014 (Where one of us, AM is the author) has considered in detail and excluded the same for the following reasons: "1. Bodhtree Consulting Ltd. The learned counsel submitted that this company 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 c....
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....LICONTM QT (Online Assessment System) - SILICONTM LCMS (Learning Content Management System) - IRMAQTM : This is an integrated resource planning, management tracking system exclusively developed for Airline operations. It is an end-to-end solution for all Flight Operations. - Sakai CLE : This is a widely used and popular open source LMS used in many leading educational institutions and corporate. The relevant extract from the Annual report substantiating that the company also engages in different activities is reproduced below: "2. Activities The company as engaged in the business of development of Software Products & Services and training. The production of software is not capable of being expressed in any generic unit and hence 11 is riot 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 th....
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....ies are also into product development but has selected these companies as comparables by applying the filter of more than 70% of its revenue being from software development services. The learned Counsel submitted that the functions of these companies are different from the Assessee who was into sole activity of software development for its associated enterprise. He submitted that the TPO has allocated the expenditure in the proportion of the revenue of these companies from software services and software products and has adopted the figure as segmental margin of the company and has taken these companies as comparables. He submitted that by taking the proportionate expenditure, the correct financial results would not emerge. He submitted that nothing prevented the Assessing Officer/TPO from obtaining the segmental details from the respective comparable 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 Trib....
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....ed that the said company has incurred expenditure for selling of products and has incurred R & D expenditure for development of the products. The above facts clearly demonstrate that there is functional dissimilarity between the Assessee and these companies and without making adjustment for the dissimilarities brought out by the TPO himself, these companies cannot be taken as comparable companies. The method adopted by the TPO to allocate expenditure proportionately to the software development services and software product activity cannot be said to be correct and reasonable. Wherever, the Assessing Officer/TPO cannot make suitable adjustment to the financial results of the comparable companies with the Assessee company to bring them on par with the Assessee, these companies are to be excluded from the list of comparables. Therefore, we direct the Assessing Officer/TPO to 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 adopt....
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....th any other company. The communication dated 25th August, 2009 to the TPO is placed before us. As this communication was not before the TPO at the time of transfer pricing adjustment we deem it fit and proper to remand this issue also to the file of the TPO to reconsider adopting this company as the comparable in the light of observations of this company to the TPO in the case of another Assessee. In the result, the Assessing Officer/TPO is directed to reconsider the issue in accordance with law, after affording a reasonable opportunity of being heard to the Assessee." Keeping the Assessee's objections and the decisions of the Coordinate Bench, prima facie, we are of the view that TATA Elxsi Limited is functionally different and has incomparable size to that of the Assessee. Further, we are unable to verify whether the segmental profits adopted by the TPO pertain to entire software development services 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 f....
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....dinate Benches also, the same was to be excluded. i. Intoto Software India Pvt. Ltd., ITA No. 1196/Hyd/2010; ii. Cordys Software India P. Ltd., ITA No. 1451/Hyd/2010 Geometric Software Solutions Company Ltd.,: 10.8. Even though this company was accepted as comparable in ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra) and Cordys Software India P. Ltd., in ITA No. 1451/Hyd/2010 dt. 13-06-2014 (supra) and was not objected to, we find that the Co-ordinate Bench at Banalore in the case of DCIT Vs. Toshiba embedded Software (I) Pvt. Ltd., in IT(TP)A No. 1/Bang/2012 dt. 10-05-2013 has considered that this is in product development. We have perused the TPO's order. In page 85 and 86 of the order, this comparable was analysed. TPO records that there are product sales to the extent of 18%. Segmental profits are not available. On assumptions, this company was retained. We are of the opinion that being a product based 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. Followin....
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....n. Consequent to the amendment brought out to the proviso to Section 92C(2), the Revenue contends that the deduction is not permissible. It relies on Co-ordinate Bench decision in ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra) (at para 16)]. Learned Counsel contends that the standard deduction was granted correctly as the amendments will apply to the cases pending as on 01-04-2009 and this order was passed by AO on 28-11-2008. Even the explanation brought in later also does not apply to the case. He relied on the principles laid down in SAP Labs India Pvt. Ltd., Vs. ACIT [6 ITR (Trib) 81 (ITAT), (Bang)] and DCIT Vs. Synopsis India P. Ltd., in IT(TP)A No. 1107 & 1093/Bang/2011 dt. 08-10-2015 in support. 11.1. We have considered the rival contentions. The order of Ld.CIT(A) is in accordance with the provisons. The issue was analysed by the Co-ordinate Bench in the case of SAP Labs India Pvt. Ltd., Vs. ACIT [6 ITR (Trib) 81 (ITAT), (Bang)] (supra) at paras 61, 62, 63 & 64 as under: "61. The Central Board of Direct Taxes in its Circular No. 5 of 2010 dated June 3, 2010 [(2010) 324 ITR (St.)....
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.... cent and that of the Assessee is 10 per cent., then the difference of 10 per cent is more than 5 per cent and therefore, the Assessee will not get the marginal relief and the entire difference of 10 per cent will be added as the arm's length price adjustment. If the arm's length price determined by the Transfer Pricing Officer/Assessing Officer is 15 per cent and that of the Assessee is 11 per cent., the difference of 4 per cent is less than 5 per cent and in that case, the rate disclosed by the Assessee at 11 per cent shall be taken as the arm's length price. This is the position after the amendment. 64. In view of the above discussion, we find that the second limb of the proviso to section 92C(2) given an option to the Assessee to claim a marginal variance of 5 per cent as standard deduction. This ground of the Assessee is accepted and we hold that this benefit of deduction of 5 per cent has to be given to the Assessee, if the circumstances, so warrant". 11.2. Not only that, the explanation brought in by Finance Act, 2014 w.e.f. 01-04-2015 also specifies that the provisions of second proviso shall also be applicable to all assessments or reassessments proceedin....
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....tted that the said company has a diversified functional professional profile and is also engaged in sale of software licenses. They invest in R&D and also provides / sells software licenses and there are no segmental results available in its audited financials to segregate profitability from provision of software development services and from sale of software licences. These informations were supported by the annual report for Financial year 2004-05 of the said company. In its annual report a generic disclosure was made that the company is involved in trading of software and provision of IT services. Schedule 14 of the Financial statement of the said company provide information on details of purchases as per which the total purchase cost incurred by the company was about Rs. 56871743/- as against the total cost of Rs. 175527264/- which is about 32% of the total cost. Besides the said company earned abnormally high OP / TC margin of 66.11% during Financial Year 2004-05 indicating risk dissimilarity vis a vis the assessee which claimed to be a cost plus low risk captive which cannot be expected to earn such high profitability. Regarding Visual Soft TechLtd. (seg) it was submitted tha....
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.... earned from international transaction and comparison of the same with the uncontrolled transactions. The Tribunal held that if net revenue of the AE is negative then the assessee would get no remuneration, which is however irrelevant for the purpose of ALP determination. Actually this decision of Mumbai Bench relied upon by the Ld. DR is helpful to oppose the contention of the Ld. AR that the loans are normally part of business and the loss making companies should have also been considered as comparables by the TPO. 17. We thus in absence of a successful rebuttal by the department that aforesaid four comparables searched by the TPO were not comparable with the assessee, are not inclined to interfere with the above finding of the Ld. CIT(A) on the issue. The same is upheld. The ground is thus rejected." 24. Having carefully examined the aforesaid orders of the Tribunal in the light of assessee's contentions, we find that exclusion of Geometric Software Solutions Co. Ltd., Four Soft Limited, Tata Elxsi Ltd. (Seg.), Infosys Technologies Ltd., Flextronics Software Systems Ltd., Satyam Computer Services, Thirdware Solutions Ltd., and Exensys Software Solutions Ltd. made by ....