TaxTMI 
TaxTMI 
2022 (3) TMI 1495
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.... software development service and Information Technology enabled Services (ITeS) to its Associate Enterprise (AE). 3. A search and seizure operation under section 132 of the Act was carried out in the business premises of the assessee on 18.12.2006. Pursuant to the search, notice under section 153A of the Act was issued for 6 Assessment Years 2002-03 to 2007-08 as required under section 153A of the Act. As far as Assessment Year 2002-03 to 2005-06 are concerned, the assessee has challenged the additions made to the total income of the assessee in the Order of Assessment passed under section 153A of the Act determining the Arm's Length Price (ALP) of the international transaction of rendering software development services and ITeS by the assessee to its Associated Enterprises (AE). There are certain common legal issues that are raised by the assesseee in all these four appeals. These appeals were heard together and we deem it convenient to pass a common order. 4. IT(TP)A No.1305/Bang/2010 for Assessment Year 2002-03 As far as the appeal of the assessee for Assessment Year 2002-03 is concerned, the assessee has raised the following grounds of appeal: 1. The order of....
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....s.10 crores under the facts and circumstances of the case. 5.6 The authorities below are not justified in rejecting an higher employee cost filter (40% rather than 25% of the Turnover) adopted by the appellant under the facts and circumstances of the case. The authorities below are not justified in law in not normalizing the operating profit by not considering for ESOP (Employee Stock Options) costs based upon fair market value which is the realistic approach to arrive at the true "employee" cost under the facts and circumstances of the case. 5.7 The authorities below further not justified in combining all the purchases, sales and other transactions and comparing them only with turnover (and not against the sum of turnover and purchases) while applying Related Party Transactions filter under the facts and circumstances of the case. 5.8 The authorities below are not justified in law in summarily rejected all the Companies which made losses for last 3 years without ascertaining any facts. On the other hand the authorities below have included all companies with abnormal profit margins. 5.9 The authorities below are not justified in law in rejecting ....
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....he case. 9. The authorities below are not justified in levying interest under Sec 234(A), (B), (C) on the facts and circumstances of the case. The levy is further bad in law as the computation of the interest and the amount, period and interest rate calculations are not explained. 5. Vide applications dated 23.11.2010, 07.02.2020 and 14.12.2021, the assessee has sought to raise the following additional grounds: 10. The entire assessment based upon the search proceedings which itself is bad in law as the mandatory conditions for being a valid search did not exist nor are they discernable from the facts. The conditions prescribed under Sec 132(1)(A),(B),(C) are not satisfied and consequently the issue of notice under Sec 153(A) is to be set aside. 11. The proceedings on the grounds of transfer pricing is bad in law as there was no attempt by appellant company to shift profits outside of India. The basic intention behind introducing the transfer pricing provisions in the Act is to prevent shifting of profits outside India. 12. The appellant craves leave to add, alter, delete or substitute any of the grounds urged above. 13. In view of th....
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....eference to Transfer Pricing Officer (TPO) under section 92CA of the Act, has not complied with the mandatory conditions laid down in the said section and has not afforded opportunity of being heard to the assessee before making a reference to the TPO. Though the learned Counsel for the assessee did not spell out as to what are the mandatory conditions that have not being satisfied or complied with by the AO while making a reference to the TPO, a plain reading of section 92CA of the Act shows that once an assessee enters into an international transaction, the AO has to make a reference to the TPO and the fact that he made a reference in the present case can only go to show that the AO is satisfied that it was necessary or expedient to make a reference to the TPO for determination of ALP of international transaction entered into by an assessee. The order passed in section 92CA of the Act clearly spells out that prior approval of the CIT, Karnataka Central Bengaluru, dated 10.09.2008 has been obtained by the AO before making a reference under section 92CA of the Act to the TPO. In these circumstances, we are of the view that there is no merit in ground No.3.1 raised by the assessee. ....
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....er pricing analysis alongwith the returns filed under section 139(1) of the Act and therefore the AO was well within his powers to examine the issue without regard to ALP in the proceedings under section 153A of the Act. These grounds are accordingly dismissed. 11. We shall now take up for consideration the main ground of appeal which is with regard to the determination of ALP in respect of the international transaction of rendering software development services by the assessee to its AE. As we have already seen the assessee has rendered software development services to its AE. To substantiate the price it received from the AE for the services so rendered as at arm's length, the assessee filed transfer pricing study in which it adopted Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) for determining the ALP. The operating revenue of the assessee was Rs.3,27,91,449/- and the operating expense was Rs.2,85,13,962/-. The operating profit was Rs.42,77,487/- giving a profit margin of 15%. The assessee chose OP/OC as the profit level indicator for comparing its margin with the comparable companies. The TPO rejected the TP analysis of the assessee whereby the as....
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....; : 29.30% Arm's Length Price Operating Cost Rs.3,06,46,199/- Arm's Length Margin 29.30% of the Operating Cost Arm's Length Price @ 129.30% of operating cost Rs.3,96,25,535/- 14.7. Price Received vis-à-vis the Arms Length Price : The price charged by the taxpayer to its Associated Enterprises is compared to the Arms Length price as under: Arms Length Price @,129.30% of operating cost Rs. 3,96,25,335/- Price received Rs. 3,52,43,127/- Shortfall being adjustment u/s 92CA Rs. 43,82,208/- 13. The adjustment suggested by the TPO was incorporated by the AO in the draft Order of Assessment against which the assessee filed objections before the Dispute Resolution Panel (DRP). The DRP confirmed the action of the TPO. The AO incorporated the additions suggested by the TPO in the final Order of assessment against which the assessee has filed the present appeal before the Tribunal. 14. As far as determination of ALP is concerned, the grounds that were pressed for....
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....Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010, relying on Dun and Bradstreet's analysis, held grouping of companies having turnover of Rs. 1 crore to Rs.200 crores as comparable with each other was held to be proper. The following relevant observations were brought to our notice:- "9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which .ire (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price 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 o....
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....e Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt.Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the....
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....ys Integrating (supra)." 18. Following the aforesaid decisions, we hold that the 4 comparable companies whose turnover is above Rs.100 crores should be excluded from the list of comparable companies. 19. As far as the remaining 6 companies are concerned, the assessee seeks exclusion of these companies on the ground that these companies are not functionally comparable. The 6 companies seeks to exclude on the basis of functional comparability are as follows: (i) Infotech Enterprises : As far as this company is concerned, this Tribunal in the case SAP Labs India Ltd., Vs. ACIT (2011) 44 SOT 156 (Bengaluru) a case in which the Assessee was a software development company such as the assessee in this appeal. The said decision was rendered for Assessment Year 2003-04. The tribunal took the view that the functions of Infotech Enterprises are different and that the said company operated in several segments, GIS Services, Engineering Services and Software Development Services. The Tribunal also found that the turnover of the said company from SWD services was less than 50 Crores and therefore the Tribunal directed exclusion of this company. The observations of the Tribunal are....
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....ght of the aforesaid factors that were pointed out by the assessee before the Tribunal. We are of the view that it would be appropriate to set aside the question of comparability of this company for a fresh consideration by the TPO/AO on the lines indicated in the decision referred to above. (vi) Visual Softechnologies Ltd., : As far as this company is concerned, this Tribunal in the case SAP Lab India Pvt. Ltd., (supra) rendered for the Assessment Year 2003-04 in paragraphs 7 to 8 took the view that this company was engaged in ITeS and cannot be compared with a software development service provider such as the assessee. Since the aforesaid case relates to Assessment Year 2003-04, we deem it fit to remand the question of comparability of this company to the TPO/AO for consideration afresh in the light of the observations referred to above for AY 2002-03. 20. No other issues were pressed for adjudication with regard to determination of ALP. The AO is directed to compute the ALP in accordance with the directions contained in this order, after affording opportunity of being heard to the assessee. 21. The Other ground that remains for consideration in this appeal is grou....
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....dology without assigning any cogent reasons under the facts and circumstances of the case. 5.2 Without prejudice, the authorities below were not justified in law in rejecting the revised Transfer Pricing Study submitted by the appellant company under TNMM methodology is not in accordance with law under the facts and circumstances of the case. 5.3 The authorities below ought not to have used a separate database (PROWESS) for conducting the TNMM study and further the authorities below failed to consider the details and database considered by the appellant under the facts and circumstances of the case. 5.4 The authorities below have deviated from functional analysis, OECD guidelines and other conditions which are necessary for selecting comparables under the facts and circumstances of the case. 5.5 The authorities below are not justified in law in not limiting the turnover to Rs.50 crores for the purpose of arriving at comparables since the turnover of the appellant company had not crossed more than Rs.10 crores under the facts and circumstances of the case. 5.6 The authorities below are not justified in rejecting an higher employee cost fi....
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....ns raised by the appellant regarding the companies selected by the TPO and the justification provided for the companies selected by the appellant The authorities below ought to have at least taken the average of companies which the appellant and the TPO did not dispute. 7. Without prejudice the authorities should have adopted the income by taking into account the average of the comparables which have been accepted by both the appellants and the revenue and ignored all other comparables on the facts and circumstances of the case. 8. Disallowance under Section 10A 8.1 The authorities below are not justified in reducing the delivery charges from the export turnover and thereby restricting the claim of the appellant under section 10A of the Income-tax Act, 1961 under the facts and circumstances of the case. 8.2 Without prejudice the authorities below are not justified in law in disallowing the claim of exemption under section 10A of the Act for the additions made by the TPO under the facts and circumstances of the case. 9. The authorities below are not justified in levying interest under Sec 234(A), (B), (C) on the facts and circumstances of....
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....reasons stated while deciding identical grounds in the appeal for AY 2002-03, these grounds are dismissed. 26. The other grounds that remains for adjudication in this Assessment Year is the determination of ALP with regard to SWD services and ITeS services rendered by the assessee to its AE. 27. SWD Segment : The profit margin of the assessee in the SWD segment was 15.36% and the turnover of the assessee was 4.91 Crore. Both the assessee and the AO chose TNMM as the MAM for determining ALP of the international transaction. The TPO, after rejecting the TP study of the assessee, claiming that the price received in the international transaction is at arm's length, selected 6 comparable companies which are as follows: Sl. No. Company Name Operating Income Expenses PBDIT Depreciation PBIT % to cost 1 Geometric Software Solutions Co. Ltd 59.07 43.6 15.47 4.52 10.95 22.75 2 Kshema Technologies 1.td 56.37 46.66 9.71 2.94 6.77 13.64 3 Zylog Systems Ltd., 64.62 46. I3 16.25 3.25 15.24 30.86 4 Infoteeh Enterprises Ltd 120.89 76.6 44.29 15.1.3 29.16 31.78 5 Sasken....
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....d the fact that this company was rejected as not comparable with a software development services company such as the assessee. Following the same, we direct exclusion of this company from the list of comparable companies. The next company which assessee seeks exclusion is Visualsoft Technologies Ltd. The comparability of this company for Assessment Year 2003-04 was already discussed while deciding the appeal of the assessee for Assessment Year 2002-03 and this company was rejected as being in ITeS services in the aforesaid decision. Following the same, we direct exclusion of this company also in the list of comparable companies. 30. ITeS Segment : As far as ITeS segment is concerned, the turnover of the assessee in the ITeS segment was a sum of Rs.1,20,83,092/- with a margin of 15.33%. Both the assessee and the TPO chose TNMM as the MAM for determining ALP and the PLI chosen for the comparison of the assesseee's margin with that of the comparable companies was OP/OC. The assesseee's OP/OC in the ITeS segment was 15.31%. The TPO, after rejecting the TP study of the assesseee, chose 4 comparable companies which were as follows: Sl. No Company Name Sales (Rs.cr.) OP ....
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.... DRP confirmed the order of the AO. In this appeal, the assessee seeks exclusion of 3 comparable companies out of the 4 chosen by the TPO. The assessee seeks exclusion of Fortune Infotech Ltd., and Tricom India Ltd., by placing reliance on the decision of the ITAT, Bengaluru Bench, in the case of 24/7 Customer.com Ltd., Vs. DCIT [2012] 28 taxmann.com 258 (Bengaluru). The aforesaid decision which was in relation to a company providing ITeS for Assessment Year 2004-05 held that Fortune Infotech Ltd., was engaged in performing specialized services in medical transcription, patient record management and after finding that this company has developed unique software from which it would derive substantial benefits advantage, it was held that this company cannot be compared with a pure ITeS service provider such as the assessee. Following the aforesaid decision and accepting the submission of the Counsel for the assessee with the profile Fortune Infotech Ltd., in Assessment Year 2003-04 is also similar, We exclude Fortune Infotech Ltd., from the list of comparable companies. As far as Tricom India Ltd., is concerned which the assessee seeks exclusion, in the very same decision of the ITAT,....
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.... income of Rs. 83,16,488/- as against the returned income of Rs. 93,292/- under the facts and circumstances of the case. 3. Legal Grounds: 3.1 The reference to TPO is bad in law as the mandatory conditions have not been satisfied or complied with as the reasons have not been recorded before the matter was referred to the TPO. 3.2 The order is further bad in law as the appellant was denied of opportunity of being heard before reference to the TPO which is against the principles of natural justice. 4. The authorities below are not justified in holding that the amendment to proviso to section 92C(2) of the Act is effective from 1-10-2009 was clarificatory and denied the 5% rebate which ought to have been given as per the existing proviso for the respective years. 5. Appropriate Transfer Pricing Methodology: 5.1 The authorities below failed to appreciate that CPM is the appropriate methodology for determining the transfer pricing for IT and ITES services. The authorities below are not justified in rejecting the Cost plus Methodology without assigning any cogent reasons under the facts and circumstances of the case. 5.2 With....
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....iate that the appellant company had zero onsite revenue. Without prejudice, the authorities below ought to have considered companies with at most 5-10% onsite revenues under the facts and circumstances of the case. 5.11 The learned authorities below failed to understand the risk-insulated environment in which the appellant operated and the nature of services provided by it to the AE while determining the ALP. Further the authorities failed to consider the lower risk companies receive lower returns while computing the mark-up under the facts and circumstances of the case. 5.12 The authorities below are further not justified in law in holding that the appellant company has not provided the computation before seeking for working capital adjustment. 5.13 The order of the authorities below has various factual errors and further the authorities below have not followed a consistent Policy in adopting the filters under the facts and circumstances of the case. 6. Without prejudice the authorities below ought to have considered the objections raised by the appellant regarding the companies selected by the TPO and the justification provided for the companie....
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..... b) Without prejudice, the authorities below ought to have applied the turnover filter of Rs.1 crore to Rs.200 crores for selection of comparables under the facts and circumstances of the case. 15. The authorities below erred in selecting the following functionally dissimilar companies as comparable for Software Development Services segment under the facts and circumstances of the case: a) Exensys Software Solutions b) Bodhtree Consulting c) Sankhya Infotech d) Thirdware Solutions e) Visual Soft Technologies 16. The authorities below erred in selecting the following functionally dissimilar companies as comparable for Information Technology Enabled Services segment under the facts and circumstances of the case: a) Fortune Infotech Limited b) Spanco Telesystems and Solutions Limited c) Ultramarine Pigments Limited d) Vishal Information Technologies Limited 38. We have already decided the ground Nos.3, 17, 18 as well as ground Nos.10 to 13 while deciding the appeal for Assessment Year 2002-03. The grounds raised in AY 2004-05 are identical and arise under same facts and circ....
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....these companies are more than Rs.100 Crores. 43. The assessee seeks to exclude certain companies on the ground that these companies are not functionally comparable with the assessee which is purely of software development. We will deal with each of these companies: (i) Exensys Software Solutions Ltd., : This Tribunal in the case of ITO Vs. M/s. Vendio Technologies (India) Pvt. Ltd., (2015) 62 taxmann.com 210 (Bang. Trib.) rendered for Assessment Year 2005-06 held that this company operates in 3 business segments i.e., provision SWD services, ITeS and software products and therefore not comparable with anx assessee providing software services. Though the decision relates to Assessment Year 2005-06, the profile of the company remains the same as submitted by the parties before us and therefore this company is directed to excluded from the list of comparable companies. (ii) Bodhtree Consulting Ltd., and (iii) Sankhya Infotech Ltd., : The Bengaluru Bench of the Tribunal in the case of Sysarris Software Pvt. Ltd., Vs. DCIT (2016) 67 taxmann.com 243 (Bang. Trib.) held that Bodhtree Consulting Ltd., cannot be regarded as a comparable vide para 16 of this Order and also held that ....
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....,00,000 33.51% Average Margin 36.51% Assessee's Margin 16.95% Assessee's Turnover 2,45,12,060 45. The TPO computed the ALP as follows : "17.6 Computation of Arms Length Price: The arithmetic mean of the Profit Level indicators is taken as the arms length margin (Please see Annexure-B for details of computation of PLI of the comparables). Based on this. the arms length price of the software services rendered by you is computed as under: Arithmetic mean PLI &....
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....d that this company outsources its work and therefore cannot be considered as a comparable company. Following the aforesaid decision, these 3 companies are directed to be excluded from the list of comparable companies. (iv) Spanco Telesystems and Solutions Ltd.,(Spanco) and (v) Ultramarine Pigments Ltd.,(ultramarine) : As far as these companies are concerned, the ITAT, Hyderabad Bench, in the case of Brigade Global Services Pvt. Ltd., Vs. ITO (2013) 33 taxmann.com 618 (Hyderabad) rendered for Assessment Year 2004-05 held that Spanco cannot be regarded as comparable for absence of segmental data for determining employee cost and applying the employee cost filter of more than 25% of the revenue and cannot be compared with the assessee. Ultramarine Pigments Ltd., was excluded in the aforesaid decision on the ground of abnormal profits due to abnormal circumstances. 48. The AO is directed to compute ALP in the ITeS segment as per the directions contained in this order, after affording assessee opportunity of being heard. 49. The other issue in this appeal is with regard to excluding delivery charges in the export turnover without excluding the same from the total turnover. Whi....
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....umstances of the case. 5.4 The authorities below have deviated from functional analysis, OECD guidelines and other conditions which are necessary for selecting comparables under the facts and circumstances of the case. 5.5 The authorities below are not justified in law in not limiting the turnover to Rs.50 crores for the purpose of arriving at comparables since the turnover of the appellant company had not crossed more than Rs.10 crores under the facts and circumstances of the case. 5.6 The authorities below are not justified in rejecting an higher employee cost filter (40% rather than 25% of the Turnover) adopted by the appellant under the facts and circumstances of the case. The authorities below are not justified in law in not normalizing the operating profit by not considering for ESOP (Employee Stock Options) costs based upon fair market value which is the realistic approach to arrive at the true "employee" cost under the facts and circumstances of the case. 5.7 The authorities below further not justified in combining all the purchases, sales and other transactions and comparing them only with turnover (and not against the sum of turnover an....
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....es below are not justified in reducing the delivery charges from the export turnover and thereby restricting the claim of the appellant under section 10A of the Income-tax Act, 1961 under the facts and circumstances of the case. 8.2 Without prejudice the authorities below are not justified in law in disallowing the claim of exemption under section 10A of the Act for the additions made by the TPO under the facts and circumstances of the case. 9. The authorities below are not justified in levying interest under Sec 234(A), (B), (C) on the facts and circumstances of the case. The levy is further bad in law as the computation of the interest and the amount, period and interest rate calculations are not explained. 52. Additional Grounds raised are as follows: 10. The entire assessment based upon the search proceedings which itself is bad in law as the mandatory conditions for being a valid search did not exist nor are they discernable from the facts. The conditions prescribed under Sec 132(1)(A),(B),(C) are not satisfied and consequently the issue of notice under Sec 153(A) is to be set aside. 11. The proceedings on the grounds of transfer pricing ....
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.... MAM and the PLI chosen for the purpose of comparison was OP/OC. The TPO chose 17 comparables. SI No. Particulars Unadjusted Margin (%) Adjusted Margin (%) 1. Bodhtree Consulting Limited 24.85% 23.57% 2. iGate Global Solutions Limited 4.32% 2.65% 3. Infosys Technologies India Limited 42.83% 42.59% 4. Lanco Global Systems Limited 13.65% 10.44% 5. Larsen & Toubro Infotech Limited 10.33% 9.47% 6. R S Software (India) Limited 8.07% 7.66% 7. Sasken communications Technologies Limited 14.42% 14.26% 8. Sasken Network Systems Limited 16.64% 15.05% 9. Satyam Computers Services Limited 29.44% 28.26% 10. Visualsoft Technologies Limited 23.52% 21.26% 11. Exensys Software Solutions Limited 70.68% 64.95% 12. Sankhya Infotech Limited 27.39% 22.34% 13. Four Soft Limited 22.98% 22.55% ....
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....ion of following 6 companies on the ground of functional comparability. We will deal with these companies as follows: 1. Bodhtree Consulting Ltd., 2. Excensis Software Solutions Ltd., 3. Sankhya Infotech Ltd., 4. Foursoft Ltd., 5. Tata Elxsi Ltd., 6. Thirdware Solutions Ltd., 59. Exclusion of all the aforesaid 6 comparable companies was considered by this Tribunal in the case of Sysarris Software Pvt. Ltd., (supra) rendered in Assessment Year 2005-06. Bodhtree Consulting Ltd., was not regarded as a comparable company with a SWD service provider such as the assessee vide para 21 of this order, as this company had erratic margin, similarly Exensys Software Solutions Ltd., was excluded from the list of comparable companies vide para 10 of the order on the ground that it had income from SWD services and BPO services. Segmental results were not available for the purpose of comparison. Sankhya Infotech Ltd., was excluded vide paragraph 24 of the order on the ground that this company was a SWD service provider and product company with no segmental information available. As far as Foursoft Ltd., is concerned, vide para 31 of this ord....
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.... ITeS segment as follows: "17.6 Computation of Arms Length Price: The arithmetic mean of the Profit Level indicators is taken as the arms length margin (Please see Annexure-B for details of computation of PLI of the comparables). Based on this. the arms length price of the software services rendered by you is computed as under: Arithmetic mean PLI : 24.07% Less: Working capital adjustment (As per annexure C) (-) 0.24% Adjusted Arithmetic Mean PLI 24.31% Arm's Length Price Operating Cost Rs.2,90,43,666/- Arm's Length Margin 24.31% of the Operating Cost Arm's Length Price @ 124.31% of operating cost Rs.3,61,04,181/- 17.7.Price Received vis-à-vis the Arms Length Price The price charged by the taxpayer to its Associated Enterprises is compared to the Arms Length price as under: Arms Length Price @ 125.95% of operating cost Rs.3,61,04,181/- Price received Rs. 3,35,60,241/- Shortfall being adjustment u/s 92CA Rs.25,43,940/- The difference of Rs.25,43,940/- as determined above is the transfer pricing adjustment under section 92CA." 63. The DRP confirmed the order....