TaxTMI 
TaxTMI 
2021 (2) TMI 671
X X X X Extracts X X X X
X X X X Extracts X X X X
....termining arm's length price without demonstrating as to why it was necessary and expedient to do so; b.Not appreciating that there is no amendment to the definition of "income" and the charging or computation provision relating to income under the head "Profits & Gains of Business or Profession" do not refer to or include the amounts computed under Chapter X and therefore addition made under Chapter X is bad in law and c.Passing the order without demonstrating that the Appellant had any motive of tax evasion. GROUNDS RELATING TO TP ADJUSTMENT 3. The learned CIT(A) has erred in confirming the action of the TPO in: a. computing the arm's length price based on the data for the Financial Year 2008-09 of the comparables, which was not available when the Appellant undertook transfer pricing documentation and reporting obligations; b.Rejecting following comparables selected by the Appellant on unjustifiable grounds; i. CG-VAK Software & Exports Ltd; ii. Lanco Global Systems Ltd; and iii. Quintegra Solutions Ltd. c. Ignoring the following additional comparables proposed by the Appellant witho....
X X X X Extracts X X X X
X X X X Extracts X X X X
....4D. On the facts and in the circumstances of the case, interest under Sections 234B, 234C and 234D is not leviable. The Appellant denies its liability to pay interest. Even otherwise the interest charged in excessive. The Appellant submits that each of the above grounds/sub-grounds are independent and without prejudice to one another. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal, so as to enable the Income-tax Appellate Tribunal to decide the appeal according to law. The Appellant prays accordingly. Brief Facts of the case are as under: 2. The assessee is a company. It was incorporated in June, 2000. M/s. Versata International Inc., USA holds the entire share capital of the assessee, except two shares. The assessee provides software research & development services for Versata International Inc. on a contract basis and as requested by Versata International Inc. For year under consideration, assessee provided software research and development services and call centre services to Versata International and is compensated on cost plus ba....
X X X X Extracts X X X X
X X X X Extracts X X X X
.....81% 9 Mindtree Ltd (seg) 5.52% 10 Larsen and Toubro infotech 24.72% 11 Infosys Ltd 45.61% Average mean 2 4.32% 5. The Ld.TPO finally passed an order u/s. 92CA of the Act and on the basis of the 11 comparables, having arithmetic mean of 24.32%. After factoring the working capital Ld.TPO determined proposed adjustment at Rs. 4,28,92,939/- being shortfall. Against the said adjustment proposed by the Ld.TPO which was incorporated in the draft assessment order by the AO, the assessee filed objections before the DRP. 6. The DRP rejected objections and confirmed the transfer pricing adjustment suggested by the Ld.TPO. The adjustment confirmed by the DRP was added to the total income of the assessee by the Ld.AO in the final order of assessment. Against the said order of the Ld.AO, the assessee has preferred the present appeal before the Tribunal. 7. At the outset, Ld.AR submitted that, on turnover filter, assessee wishes to argue only Ground no.4(c ). 8. The Ld.AR seeks exclusion of following comparables on turnover filter: Tata Elxsi Sasken Communication Mindtree Ltd Larson&Tubro Infotech Infosys Technologies Lt....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ent in monetary terms to eliminate the effect of such differences. It was his submission that size was an important facet of the comparability exercise. It was submitted that significant differences in size of the companies would impact comparability. In this regard our attention was drawn to the decision of the Special Bench of the ITAT Chandigarh Bench in the case of Dy. CIT v. Quark Systems (P.) Ltd. [2010] 38 SOT 207, wherein the Special Bench had laid down that it is improper to proceed on the basis of lower limit of 1 crore turnover with no higher limit on turnover, as the same was not reasonable classification. Several other decisions were referred to in this regard laying down identical proposition. We are not referring to those decisions as the decision of the Special Bench on this aspect would hold the field. Reference was also made to the OECD TP Guidelines, 2010 wherein it has been observed 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 compar....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ice and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which arc 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 & 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. 1.00 crore to 200 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 200.00 crores only should be taken into consideration for the purpose of making TP study." 15. It was brought to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....priate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely :- (a) comparable uncontrolled price method; (b) resale price method; (c ) cost plus method; (d) profit split method; (e ) transactional net margin method; (f) such other method as may be prescribed by the Board. (2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed: 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: Provided further that if the variation between the arm's length price so determined and price at which the international transaction has actually been undertaken does not exceed five per cent of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm's length price. (3) Wh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction. (2) For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the trans....
X X X X Extracts X X X X
X X X X Extracts X X X X
....inated from the list of comparables as laid down in several decisions referred to by the ld. counsel for the assessee. Applying those tests, the following companies will have to be excluded from the list of 26 comparables drawn by the TPO viz., Turnover Rs. (1) Flextronics Software Systems Ltd. 848.66 crores (2) iGate Global Solutions Ltd. 747.27 crores (3) Mindtree Ltd. 590.39 crores (4) Persistent Systems Ltd. 293.74 crores (5) Sasken Communication Technologies Ltd. 343.57 crores (6) Tata Elxsi Ltd. 262.58 crores (7) Wipro Ltd. 961.09 crores. (8) Infosys Technologies Ltd. 13149 crores. In present facts, assessee contests following comparables for exclusion by using turnover filter; Tata Elxsi 378.43 crores Sasken Communication 405.30crores Mindtree Ltd 793.22crores Larson&Tubro Infotech 1950.83crores Infosys Technologies Ltd 20264crores Zylog Systems Ltd. 734.94crores Respectfully following the view taken by this Tribunal in assessee's own case for assessment year 2007-08, and decisions relired by the Ld.AR herein above, we direct exclusio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....her investigation to ascertained the reasons for usually high profit and in order to establish whether the entities with such high profits can be taken as comparable or not. In the light of the aforesaid decision of the special bench and in view of the admitted position that the assessee follows fixed-price project model where revenues from software development is recognised based on software developed and built to clients, there is a possibility of expenditure in relation to revenue building boom in the earlier year. The results of both tree from financial year 2003 to 2008 excluding financial year 2007 as given by Ld. counsel for the assessee were also perused. Perusal of same shows that there has been a consistent change in the operating margins. The chart give filed by assessee in this regard is given as Annexure to this order. It appears to us that the revenue recognition method followed by the assessee is the reason for the drastic variation in profit margin of this company. In the given circumstances, we are of the view that it would be safe to exclude both tree consulting from final list of comparables chosen by assessee. We hold and direct accordingly." 16. We ....