TaxTMI 
TaxTMI 
2022 (3) TMI 1495
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.... 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 the authorities below in so far as it is against the app....
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....gher 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 the companies having minor variations during the end of the financial year under the facts and circumstances of the case. 5.10 The authorities be....
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.... 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 the above and other grounds that may be urged at the time of the hearing of the appeal, the appellant prays that the appeal may be allowed in the interest of justice and equity. 14. a) The authorities below ought to have restricted t....
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....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. Consequently, grounds 3.1 is held to be without any merit and is dismissed. As far as Grd.No.3.2 is concerned, Section 92CA(1) requires an Assessing officer to refer an International Transaction for determination to the TPO if he considers it "necessary or expedient" to refer the mater to the TPO. The ex....
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....nd 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 assessee compared its profit margin with its comparable companies and claimed that the margin it earned in the international transaction was comparable with the profit margins of the comparable companies. The TPO to whom the reference was made by the AO under section 92CA of the Act, rejected the TP analysis and chose 17 ....
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....o 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 adjudication were grounds 5.4, 5.4 and 14 and 15. In these grounds, the assessee essentially has prayed for exclusion of 10 companies. 15. We have heard the rival submissions and the plea of the assessee for exclusion of 10 comparable companies out of 17 comparable companies chosen by the TPO. The assessee seeks exclusion of 4 comparable companies on the basis that the turnover of the 4 comparable companies was more than 100 crores and therefore it should not be compared with the assessee whose turnover was only Rs.3,27,91....
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....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 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 f....
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....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 5 companies turnover was much higher compared to that the Assessee. 17.8. In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating (supra), we proceed to examine the said issue also. On this issue, the first aspec....
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....ia 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 in paragraph 77 of the aforesaid order. The Delhi Tribunal in the case of the Motorolla Services Pvt. Ltd., 97 taxmann.com 487 (Delhi Tribunal) for Assessment Year 2002-03 however remanded the question of comparability of company for fresh consideration to consider the segmental margin of this company. We are of the view that since the decision of the Tribunal for Assessment Year 2002-03 is directly applicable to the present appeal which is in relation to Assessment Year 2002-03. It would be appropriate to remand the issue to the TPO/AO for fresh consideration to conside....
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....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 ground No.8 raised by the assessee which is with regard to the computation of deduction under section 10A of the Act whereby the AO reduced delivery charges from the export turnover without excluding the same from the total turnover. This issue is no longer res integra and has been settled by the Hon'ble Karnataka High Court in the case of Tata Elxsi 349 ITR 98 (Karnataka) wherein it was held that whatever is excluded from the Export turnover should also be excluded from the total turnover. Moreover, the order of the Hon'ble Karnataka High Court has been upheld by the Hon'ble Supreme Court in the cas....
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....nctional 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 and purchases) while applying Related Party Transactions filter under the facts and circumstances ....
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....A 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. 24. Additional Grounds raised by the assessee 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 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 provisio....
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.... 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 Communication Technologies [Ad 113.59 86.04 27.55 25.21 2.34 7.1 6 Visualsoft Technologies Ltd., 122.04 82.37 39.67 10.29 29.38 31.7 28. The TPO determined 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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....1%. 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 to Total Cost% RPT (Rs. Cr.) % of RPT over Sales Expor t (Rs. Cr.) % of exports over Sales Data base 1 Vishal information Technologies Ltd 13.72 19.83% NIL NIL 13.2 96% 'P 2 Wipro BPO Solutions Ltd 194.23 26.61% NIL NIL 194.05 99.91% P 3 Tricorn India Ltd (Se0 6.64 81.94% NIL NIL 5.46 97% P 4 Fortune Infotech Ltd 13.98 93.36% 0.21 1.50% 13.98 100.00 P Average 55.44% 31. The TPO determined the ALP of the international transaction 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 &nb....
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.... Bengaluru Bench, this Tribunal in paras 15.33 held that this company has a unique software developed and renders specialized services in its area of specialization and has a competitive edge and advantage, therefore not comparable with the service provider such as the assessee. The profile of the company being identical in Assessment Year 2002-03 as stated before us, this company is directed to be excluded from the list of comparable companies. As far as Wipro Business Solution is concerned, in the case of HSBC Electronic Data Processing India Pvt. Ltd., Vs. ACIT 166 CTJ 790 (Hyd. Trib.) rendered for Assessment Year 2003-04, the comparability of this company was remanded to the AO/TPO. Vide 14 of the aforesaid order. We are of the view that the facts and circumstances being identical, the issue with regard to comparability of this company is remanded to TPO/AO for consideration as directed by the Tribunal in the case of HSBC Electronic Data Processing India Pvt. Ltd., (supra). We hold and direct accordingly. 33. The TPO is directed to compute the ALP in the ITeS segment in accordance with the directions contained in this order, after affording the assessee opportunity of being he....
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.... 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 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 pr....
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....id 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 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. 37. Additional Grounds raised are as follows: 10. The entire assessment based upon the search proceedings which itself is bad in la....
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....ices rendered by the assessee to its AE. 40. SWD Segment : As far as software development segment is concerned, the operating revenue of the assessee was 4.69 Crores and the OP/OC was 16.98%. The TPO chose 13 comparable companies as follows: Sl. No. Company Name Sales (Rs.cr.) Operating Profit (Rs. Cr) OP to Total Cost% 1 VMF Technologies Ltd 2.00 0.08 4.37% 2 Lanco.Global Systems ltd 2.88 0.28 10.70% 3 Exensys Software Solutions ltd. 3.02 1.13 60.09% 4 I3odhtrec consultim2, ltd- 4.26 0.57 15.29% 5 Sankhya lnfotech ltd 12.41 3.21 34.96% 6 Thirdware Solution limited 23.88 9.17 62.28% 7 Geometric Software Solutions Co.ltd 63.67 8.99 16.44% 8 Tata Elxsi Limited (seg) 94.1 I 16.20 20.80% 9 Sasken Communication Technologies ltd (seg) 123.78 14.36 13.13% 10 Visual soft Technologies ltd 153.86 37.66 32.41% 11 L&T Infotech 364.60 .36.77 11.22% 12 Satyam Compute'r Services Ltd 2541.54 582.18 29.71% 13 Infosys technologies Ltd 4760.89 1352.75 39.69% avg. 27.01% . 41. The TPO computed the ALP on international transaction which resulted in an addition of Rs.40,93,660 which was confirmed by the DRP. 42. In t....
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.... should be excluded from the list of comparable companies. (iv) Thirdware Solutions Ltd., : In the case of Dell International Services Pvt. Ltd., 83 taxmann.80 (Bang. Trib.) rendered for Assessment Year 200405, this company was regarded as not comparable with a software services company vide para 14.3 of this order for the reason that this company was in the software design and consultancy and also there was no segmental information available. Following the said decision, we direct exclusion of this company. (v) Visual soft Technologies Ltd., : As far as this company is concerned in the case of SAP Lab India Pvt. Ltd., (supra), this company was directed to be excluded for Assessment Year 2003-04 on the ground that this was purely an ITeS company. Though this decision relates to Assessment Year 200304, the parties agreed that the profile of the company remains same in AY 2004-05. Hence, we direct exclusion of this company. TPO is directed to compute the ALP in accordance with the directions contained in this order in the SWD service segment, after affording the assessee opportunity of being heard. 44. ITeS Segment : As far as the ITeS segment is concerned, the revenue earned by t....
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....rms Length Price @ 136.49% of operating cost Rs.2,86,05,720/- Price received Rs.2,45,12,060/- Shortfall being adjustment under section 92CA Rs.40,93,660/- The difference of Rs. 40,93,660/- as determined above is the transfer pricing adjustment under section 92CA." 46. The DRP confirmed the order of the TPO. Before the Tribunal, the assessee seeks exclusion of one comparable company on the application of turnover filter of more than 100 Crores viz., Wipro BPO Ltd., whose turnover is more than 400 Crores. We have already held companies with huge turnover cannot be compared with a company having small turnover. Hence, Wipro BPO Ltd., is directed to be excluded from the list of comparable companies. 47. The assessee seeks exclusion of 5 comparable companies on the ground of functional comparability. We will deal with each of these companies: (i) Fortune Infotech Ltd., (ii) Tricom India Ltd., are sought to be excluded by the assessee on the basis of the decision of the ITAT rendered in the case of 24/7 Customer.com Pvt. Ltd., (supra). In the aforesaid decision, which was rendered in the context of Assessment Year 2004-05 in the case of an Assessee rendering ITeS. Vi....
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....ase. 2. The appellant denies itself liable to be assessed on a total income of Rs. 85,80,257/- as against the returned income of Rs. 96,450/- 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 circumsta....
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....lant 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 riskinsulated 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 companies selected by the appellant The authorities ....
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....200 crores for selection of comparables under the facts and circumstances of the case. 14. 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) Bodhtree Consulting b) Exensys Software Solutions c) Sankhya Infotech Limited d) Four Soft e) Tata Elxsi Limited (Seg) f) Thirdware Solutions 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. Vishal Information Technologies Limited b. Nucleus Netsoft & GIS Limited c. Maple E Solutions Limited 53. 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 2005-06 are identical and arise under same facts and circumstances. For the reasons stated while deciding identical grounds in the appeal for AY 2002-03, these grounds are dismissed. 54. The other grounds that remains for adjudication in this Assessment Year is....
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....125.95% of operating cost Rs.6,93,49,579/- Price received Rs. 6,36,43,445/- Shortfall being adjustment u/s 92CA Rs.57,06,134/- The difference of Rs.57,06,134/- as determined above is the transfer pricing adjustment under section 92CA. 57. The DRP confirmed the order of the Tribunal. Before the Tribunal, the assessee seeks exclusion of 11 out of the 17 comparables chosen by the TPO. On the application of turnover filter, the assessee seeks exclusion of iGate Technologies Ltd., Flextronics Ltd., L & T Infotech Ltd., Satyam Computer Services Ltd., and Infosys Ltd. The turnover of these companies was admittedly above 100 Crores and cannot be compared with the assessee. While deciding appeal for Assessment Year 2002-03, we have already held that turnover is a relevant criterion for choosing comparable companies and companies with high turnover cannot be compared with the companies with low turnover. Following this ratio, the aforesaid companies are directed to be excluded from the list of comparable companies. 58. The assessee seeks exclusion of following 6 companies on the ground of functional comparability. We will deal with these companies as follows: 1. Bodhtree Cons....
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....ting exp. (Cr.) 1. Allsec Technologies Ltd., 57.76 29.85 56.15 97.2% -- 7.60 2. Saffron Global Ltd., 27.78 24.88 27.78 100% -- 0.12 3. Vishal Information Tech. Ltd., 20.82 45.62 20.82 100% -- -- 4. Cosmic Global Ltd., (Tulsyan Tech. Ltd.,) 1.90 17.02 1.70 89.5% -- -- 5. Transworks Information Services Ltd., 108.23 2.81 107.78 99.6% 3.57 2.59 6. Wipro BPO Solutions Ltd., 617.71 18.59 617.71 100% 6.34 2.59 7. Ace Software Exports Ltd., 5.90 14.50 5.90 100% 0.3 0.02 8. Nucleus Netsoft & GIS Ltd., 2.79 40.06 1.24 44.4% -- -- 9. Maple E Solutions Ltd., 1.47 28.75 1.47 100% -- 0.20 10. Progeon 189.28 18.65 161.52 85% 4.8% 16.66 Average 24.07 62. TPO computed the ALP in the 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 adjustm....