AI Drafter - (New and Powerful) 
Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter. 
TaxTMI 
TaxTMI 
2024 (2) TMI 523
X X X X Extracts X X X X
X X X X Extracts X X X X
....es selected by the TPO which actually have performed similar business in the period similar to assessee's business period 3) The appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of appeal." 3. The brief facts qua the issue of transfer pricing adjustment of Rs. 4,45,29,090/- is that, assessee is engaged in the business of providing range of back office support services. It is a captive service provider for its group entities. During the year, assessee had entered following international transactions with its AEs. Sr. No. Nature of transactions Value of transaction (Rs.) 1 Provision of back office support services (ITES) 30,29,93,009 2 Provision of software development services (IT) 7,39,80,534 4. In the TP study report assessee has benchmarked the above transaction for ITES and IT services by adopting TNMM as Most Appropriate Method. The PLI was net cost plus and computed the operating margin under the BPO/ITES segment at 11.78% and Software/IT segment at 14.87%. The assessee in so far as ITes is concerned has chosen 10 comparables with arit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n 25.30 6. Further, the five comparables accepted by the ld. TPO out of assessee's comparables and introducing his own 15 additional comparables were as under:- Sr. No Name of the Company Operating Margin (%) 1 Bodhtree Consulting Ltd. 24.85 2 Akshay Software Technologie Ltd 07.72 3 Lanco Global Systems Ltd 13.78 4 Exensys Software Solutions Ltd 70.68 5 Sankhya Infotech Ltd 27.35 6 Sasken Network Systems Ltd 16.64 7 Gebbs Infotech Ltd 16.52 8 VJIL Consulting Ltd 06.68 9 Four Soft Ltd 24.70 10 Thirdware Solution Limited 66.11 11 Tata Elxsi Limited (Segmental) 24.35 12 Flextronics (Segmental) 32.19 13 L & T Infotech Ltd. 11.72 14 Infosys Ltd 43.49 15 Compulink Systems Ltd 43.62 16 Geometric Software Solutions Co. Ltd. 20.34 17 Visual Soft Technologies Ltd (Segmental) 23.52 18 Sasken Communication Technologies Ltd. (Segmental) 14.42 19 Satyam Computer Systems Ltd. 30.31 20 Zensar Technologies Ltd. 08.76 Arithmetic Mean 27.11 7. Before the ld. CIT (A) assessee had pointed out....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... & loss Account and Foreign Exchange Earnings of the company as Annexure Since, the company, does not have any export income under ITES, this company should be rejected. (C) Salary 1.15% of turnover The TPO has rejected Orient Information Technology Ltd with meager salary expenditure at 1.15% of sales, under IT segment as mentioned on page number 6 of the TP order. In this context, we want to place on record the inconsistent stand adopted by the TPO in selecting his own comparable. Vishal Information Technologies Ltd. The TPO has selected the company on page number 4 of the TP order and has prvided the reasons for selection of the comparable as "Engaged in information technology enabled services" In this connection, we wish to submit that employee cost as a percentage of sales is only 0.95% (Which is less than 1.15% of sales). We have attached herewith the working along with the profit and loss account as Annexure 4. S the salary expenses is less than 1.15%, this company should be rejected. (D) Lack of Segmental Data Mphasis BFL Ltd. The TPO on page number 2 of the TP order has provided the re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ghest standards and due to its ability it could wrest major contracts from large IT ВРО companies." On the same page no. 13, as per Para C, the Industry analysis in MDA report describes about the current trends in IT BPO service industry. This is a clear indicator that the company operates in IT BPO service industry." We have attached herewith the above pages as Annexure 6. Since, the company is only into providing BPO services, this company should be accepted as comparable. CMC Ltd. The TPO on page number 2 of the TP order has provided the reasons for rejection of the comparable as "engaged in trading in computer peripherals, system integration services. Page no. 67 of the annual account of the company, clearly indicates IT and BPO as two segments of the company. The data of each of the segments are available as per attached Annexure 7. The BPO segment profitability (NCP) of the company works out to 1.46%. Since, the profitability based on the segmental data is available, this company should be accepted as comparable. (E) Consistent/ chronically loss making Online Media Solutions Ltd The TPO on page n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rty Transactions > 25% Blue Star Infotech Ltd. The TPO has rejected this company on page number 5 of the TP order and has provided the reasons for rejection of the comparable as "Related party transaction more than 25%. In this connection, we submit as under: The related party transaction is only 3.44% which is less than the 25% criterion adopted by the TPO. We have attached herewith the working of RPT, profit & loss account along with related party disclosure schedule and working as Annexure 11. Since, RPT of the company is below 25%, this company should be accepted as comparable. (D) Lack of Segmental Data Thirdware Solutions Limited (IT) The TPO on page number 9 of the TP order has provided the reasons for acceptance of the comparable as "engaged in software development" In this connection, we wish to submit that Schedule 12 of the annual report of the company indicates that the company is engaged in the business of software services, software products, exports and revenue from subscription. The data pertaining to revenue as per Schedule 12 is tabulated below for your reference. Particulars Amount (In ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tware should be considered while benchmarking IT transaction. The data of each of the segments are available as per attached Annexure 15. The software division (IT) profitability (NCP) of the company works out to 8.98%. Since, the profitability of IT segment is available, this company should be accepted as comparable. । (E) Consistent/ chronically loss making ASM Technologies Ltd. The TPO on page number 7 of the TP order has provided the reasons for rejection of the comparable as "consistently loss making". On review of the annual report of the company it is seen that the company has positive net cost plus mark up of 9.27%. The copy of the relevant pages of annual report is attached herewith as Annexure 16 It is thus evident that ASM Technologies Ltd. is not a consistently loss making company and TPO's ground of rejection is erroneous. Since, the company is not consistent loss making, the company should be accepted as comparable. Astro Bio Systems Ltd. The TPO on page number 7 of the TP order has provided the reasons for rejection of the comparable as "consistently loss making". On review of the annua....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the company should be accepted as comparable. (F) Exceptional/Extra-ordinary event The TPO has rejected Melstar Information Technologies Ltd. having Exceptional/ Extra-ordinary event, as mentioned on page number 6 of the TP order. In this context, we want to place on record the inconsistent stand adopted by the TPO in selecting own comparable. Satyam Computer Ltd. The TPO on page number 9 of the TP order has provided the reasons for acceptance of the comparable as "The company recognizes its income from software services only" In this connection, we wish to submit that the annual accounts of the company are not reliable due to the financial fraud scam which has been discovered in the case of this company. In fact, all the financial statements are being under reconstruction. Further, the auditors of Satyam Computers have withdrawn their audit report pursuant to the confessions to the financial fraud made by the chairman of the company. The supporting to above is attached as Annexure 20. Since, the data of the company is influenced by exceptional/ extraordinary event, this company should be rejected as comparable. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....xceptional/ extraordinary event, this company should be rejected as comparable. 8. The ld. CIT(A) after perusing the reasoning given by the ld. TPO and the submissions made by the assessee and material placed on record has deleted the adjustment after observing and holding as under:- 5.9. I have perused the Assessment order, the TPO's order and verified the documents filed along with the submissions. 5.10. At the outset it needs to be mentioned that once, the TPO has adopted certain criteria/yardsticks for accepting/rejecting a company, he is bound to uniformly apply the same criteria while selecting his own set of source of financial information from the database. He should have referred comparables. The fundamental weakness of the TPO's order has been in adopting an inconsistent approach while applying the accept/reject filters of the comparables. It appears that the TPO has confined itself to the primary to the secondary source of information also like annual accounts/Directors report/website the company etc. to ensure that filters /criteria it had adopted applies equally to the comparables selected by it. As is evident from the detailed examination ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ch Ltd 13.18 6 Mphasis BFL 18.33 7 CMC Ltd 10.10 8 Computech International Ltd 8.98 9 ASM Technologies Ltd 12.68 10 Astro Bio Systems Ltd -2.66 11 Megasoft Ltd -5.23 12 R S Software Ltd 7.61 13 Goldstone Technologies Ltd 3.76 14 Cepha Imaging Pvt Ltd 48.35 15 Ace Software Exports Ltd 14.55 16 Akshay Software Technologies Ltd 7.72 17 Bodhtree Consulting Ltd 24.85 18 Compulink Systems Ltd 43.62 19 Flextronics Ltd 32.19 20 Four Soft Ltd. 24.70 21 Gebbs Infotech Ltd 16.52 22 Infosys Ltd 43.49 23 L & T Infotech Ltd 11.72 24 Lanco Global Systems Ltd. 13.78 25 Sankya Infotech Ltd 27.35 26 Sasken Network Systems Ltd. 16.64 27 Tata Elxi Ltd. 24.35 28 VJIL Consulting Ltd. 6.68 Arithmetic Mean 17.51 5.13 Based on my detailed discussion on selection of comparable companies, the arm's length operating margin to be taken in respect of the software services and IT enabled services are as under: Particulars Operating Margin IT Enabled services 13.73% ....