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2020 (8) TMI 923
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....w and void ab-initio. 2. The reference made by the [earned AO suffers from jurisdictional error as the Ld. AO has not recorded any reasons in the draft assessment order based on which he reached the conclusion that it was 'necessary or expedient' to refer the matter to the Ld. Transfer Pricing officer ("TPO"/ "Ld. TPO") for computation of the arm's length price("ALP") as is Required under section 92CA(1 )of the Act. 3. The Ld. AO/ Ld. TPO has erred on facts and in law in enhancing the income of the eligible Assessee by Rs 9,42,35,339/- by holding that the international transactions do not satisfy the arm's length principle envisaged under the Act and in doing so have grossly erred in not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the present case; 4. The order of the Learned AO/TPO is violative of the principles of natural justice and void ab-initio and needs to be cancelled in as much as the eligible assessee as not provided with the mandator, Show cause Notice or an opportunity of being heard as required under the provisions of Section 92C(3) of the Act; 5. The Ld AO/Ld. TPO ha....
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....retaining certain companies in the final comparable set which were functionally/ qualitatively dissimilar to the Assessee; 11.1 Introducing Genesys International Corp. Ltd., in the final comparable set which comparable is functionally/qualitatively dissimilar to the appellant. 11.2 Introducing Infosys Ltd., in the final comparable set which comparable is functionally/qualitatively dissimilar to the appellant. 11.3 Introducing Larsen Et Toubro Infotech Ltd., in the final comparable set which comparable is functionally/qualitatively dissimilar to the appellant. 11.4 Introducing Spry Resources India Pvt. Ltd., in the final comparable set which comparable is functionally/qualitatively dissimilar to the appellant. 12. Without prejudice to the above, the learned TPO has erred on facts and in law by rejecting certain companies in the final comparable set which were functionally/ qualitatively similar to the Assessee and hence ought to have been included in the final list of comparables; 12.1 Excluding Akshay Software Technologies Ltd., from the final comparable set which comparable is functionally/qualitatively comparable to the Appell....
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....e economic details of international transaction entered into by assessee in Form 3CEB. Ld.TPO observed that, assessee entered into following international transactions: 4. Assessee computed its margin under software R&D segment to be 9.73%. Ld.TPO noted that, assessee in TP documentation considered 25 comparables with average margin of 12.79%. Assessee used TNMM as most appropriate method and OP/TC as PLI and arrived at the weighted average margin of 3 years data. Ld.TPO noted that assessee used earlier year data pertaining to FY 2009-10, 2010-11 besides the year ending on 2012 wherever available. 5. Ld.TPO objected use of multiple year data. Ld.TPO selected new set of 10 comparables which assessee objected on filters. Ld.TPO however finalised a set of comparables having average margin of 22.63%. Ld.TPO also used current year data for computing arm's length price of the transaction. SI. No. Name of the taxpayer OP/OC 1. Datamatics Global Services Ltd. 14.57% 2. Genesys International Corpn. Ltd. 30.09% 3. I C R A Techno Analytics Ltd. 17.24% 4. Infosys Ltd. 43.10% 5. Larsen & Toubro Infotech Ltd. 25.47% 6. Mindtree Lt....
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....ence made by the [earned AO suffers from jurisdictional error as the Ld. AO has not recorded any reasons in the draft assessment order based on which he reached the conclusion that it was 'necessary or expedient' to refer the matter to the Ld. Transfer Pricing officer ("TPO"/ "Ld. TPO") for computation of the arm's length price("ALP") as is Required under section 92CA(1 )of the Act." 13.1 He placed reliance upon decision of Hon'ble Supreme Court in case of NTPC Ltd vs CIT reported in 229 ITR 383 and Jute Corporation of India vs CIT reported in 53 taxman 85, submitted that comparables specified in additional grounds may be admitted. 13.2 Ld.CIT DR, opposed admission of additional ground. It was submitted that turnover filter was not alleged by assessee before DRP. 14. We have perused details relied upon by both sides 14.1 We have perused the directions of DRP in respect of these comparables and we note that argument advanced by assessee on turnover filter has been incorporated therein. Therefore we reject the argument of revenue that this issue was not raised before DRP. 14.2 Considering inadvertent mistake on behalf of assessee in raising these grounds be....
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....grams and other materials to be delivered to AE shall be owned by AE. 16.7 It has been submitted that assessee owns tangible assets like computer equipment, office lab equipment vehicles etc. Assessee also possesses trained and organised workforce which it uses for providing software R&D services to its AE. Risks: 16.8. It has been submitted that assessee undertakes Ltd market risk and foreign exchange risk. Apart from that service liability risk, product risk and R&D risks are owned by the AE. 17. Based on the above we shall analyse the comparables alleged by assessee for exclusion as well as inclusion. (Ld.AR restricted his arguments to Ground 11 Additional Ground and Ground 12.4. We are therefore considering comparables alleged in these grounds. However, assessee is at liberty of raising other issues in appropriate years.) Ground No.11 and Additional Ground 18. These grounds are raised by assessee, challenging, inclusion of following comparables for functional/qualitative dissimilarities and excessive turnover. Infosys Ltd Larsen and Toubro Infotech Ltd Mindtree Ltd Persistent Systems Ltd RS Software India Ltd 18.1 At the outset Ld.AR submitte....
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....y. 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 comparability." 12. The ICAI TP Guidelines note on this aspect lay down in para 15.4 that a transaction entered into by a Rs. 1,000 crore company cannot be compared with the transaction entered into by a Rs. 10 crore company. The two most obvious reasons ....
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...., 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 our notice that the above proposition has also been followed by the Honourable Bangalore ITAT in the following cases: 1. M/s Kodiak Networks (India) Private Limited v. ACIT (ITA No.1413/Bang/2010) 2. M/s Genesis Microchip (I) Private Limited v. DCIT (ITA No.1254/Bang/20l0). ....
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....it 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) Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that- (a) the price charged or paid in an international transaction has not been determined in accordance with sub-sections (1) and (2); or (b) any informat....
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....blished 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 transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or r....
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.... 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.' 13-14. The aforesaid decision clearly sets out the reason with reference to Rule 10B(2) of the Rules which provides that uncontrolled transaction has to be compared with international transaction having regard to the factors set out therein. Respectfully following the aforesaid decision of the Tribunal in the case of Trilogy E-Business Software India (P.) Ltd. (supra), we uphold decision of the CIT(A), to exclude the aforesaid companies from the list of comparable companies on the basis of turnover and size. The AO is directed to compute the Arithmetic mean by excluding the aforesaid companies from the list of comparable. Besides the above, the B....
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....is company is into software development service. The only line of business that this company carries on is rendering GIS based services and this is clear from the annual report which specifies that since the company carries on only one line of business viz., GIS based services there is no need to give any segmental results. In the circumstances, we are of the view that there is no basis for the TPO to conclude that this company is predominantly into software-development services. The presence of intangible assets is indicative of the fact that this company is not in software development services business. The TPO has overlooked this aspect and proceeded on the basis that the presence of intangible assets would not be significant. Rule 1013(2) of the Income Tax Rules, 1962 (Rules) specifically provides that for the purposes of sub-rule (1) of Rule lOB, 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 b....