TaxTMI 
TaxTMI 
2022 (4) TMI 1688
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....d contract are operating in nature without appreciating the fact that same are part of financing / treasury function and are not operating in nature. 3. The LAO, based on the directions of Hon'ble DRP, erred in confirming the order off the Learned TPO who had incorrectly rejected the transfer pricing documentation maintained by the Appellant on the basis that: a. The Appellant has used prior year data pertaining to the FY 2010-11 and FY 2011-12. b. In computing the operating profit margin ('OPM') of the comparable companies chosen by Appellant, it has computed the same by adopting a 3-year average of the OPM of the respective comparable company. c. The Appellant, in its search process, has not applied the filter of excluding companies that have employee cost at less than 25% of their sales. d. The Appellant, in its search process, has not applied the filter of excluding companies that do not have any export revenue to sales. e. The Appellant has selected the comparable companies which have a financial different from that of the Appellant. 4. The Hon'ble DRP and the LAO erred in confirming the order of th....
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....able companies c. Disclosures in the annual report of the comparable companies does not contain a break up of trade debtors and creditors d. Cost of capital is different for different companies 9. Without prejudice to the above, the Hon. DRP erred in not providing the benefit of the working capital adjustment which has been allowed by both the TPO and the Hon. DRP consistently in earlier years without there being any changes in facts of the current years vis-a-vis previous years. 10. Without prejudice to the above, the Ld. TPO erred in considering incorrect receivable and payable of the Appellant for the computation of the working capital adjustment. 11. The Hon'ble DRP and the LAO erred in confirming the order of the Learned TPO which had failed to provide adequate adjustment towards differences in risk as claimed by the Appellant to improve degree of comparability. On the above and such other grounds as may be urged at the time of hearing your appellant prays your Honour to consider the facts and circumstances of the case and render justice." 2. Brief facts of the case are as under: The assessee is into the business ....
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....re - software development services. Marlabs India has an offshore development centre in Bengaluru and Mysore in India form where it undertakes the software development activity for its associated enterprise Marlabs Inc.. The various functions performed by Marlabs India and Marlabs Inc. in the development projects are as illustrated below: 1. Requirement Analysis 2. High Level Design 3. Low Level Design 4. Coding 5. Testing 6. Implementation Support" 4. The Ld.TPO observed that assessee had following international transactions with its associated enterprise: Segment ALP determined under section 92CA(3) Price received Adjustment under section 92CA SWD 55,50,37,250 50,77,91,697 4,72,45,553 ITES 13,73,15,547 12,58,59,210 1,14,56,337 Total 5,87,01,890 5. From the TP documentation the Ld. TPO observed that assessee computed its margin by using OP/OC at 8.96% by using TNMM as most appropriate method for software development service segment and ITES segment. It was observed that assessee used 26 comparables for software development service segment having aver....
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....Tribunal. 9. At the outset, the Ld.AR submitted that assessee do not wish to press Ground Nos. 1, 3, comparables sought for exclusion in 4 (i)-(iii), (v), (vii)-(ix), (xi)-(xiv) under software development service segment and in comparable sort for exclusion in (ii) for IT enabled service segment. Ground No. 5, 6 (b) (i), Ground No. 8, 10, 11. Accordingly these grounds are dismissed as not pressed. 10. Before we undertake the comparability analysis it is an acorn on to understand functions performed, assets owned and risk assumed by assessee under software development service segment and ITeS service segment. Apart from the functions noted by the Ld.TPO reproduced herein above, the assessee performed following functions under the IT and ITeS segment. As per TP documentation the assessee is engaged in the business of providing IT and ITES services to Marlabs US. It has been recorded that the assessee at the request of Marlabs US in accordance with performance standards and rules as specified by Marlabs US provides services to Marlabs US. Ld.TPO has analysed functions performed by is assessee under both segments as under: "As per the Service Agre....
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....change loss as operating in nature. 11.1 The Ld.AR submitted that assessee bears foreign exchange risk on account of the transactions with the AE and therefore assessee enters into forward contracts to hedge foreign exchange losses. The assessee enters into one-year forward exchange contracts with its bank. It is submitted that assessee, for receivables in the FY 2012-13 enters into contracts in FY 2011- 12. A summary of the date of entry into the forward contract and the date of settlement is enclosed in Annexure 1 to the synopsis filed before us. This was also furnished to the DRP. He submitted that it is this change that resulted in the abnormal loss of approx. Rs. 4.67 crores out of Rs. 4.79 crore foreign exchange loss incurred the Company. He also submitted that similar abnormal loss was derived in FY 2008-09; in the assessment proceedings for this period, the foreign exchange loss was considered as non-operating. 11.2 The Ld.AR submitted that assessee consistently has considered foreign exchange gain and loss as non-operating in nature as part of its inter-company agreement. He referred to pages 352-361 of the paper book for the inter-company agreement a....
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....open market. Rule 10B(2) of the Rules provides comparability of an international transaction with an uncontrolled transaction needs to be judged with reference to certain specified factors. Rule 10B(3) of the Rules provide that: "An uncontrolled transaction shall be comparable to an international transaction if - (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences." The OECD Guidelines on this aspect is as follows:- Para 1.35. Where there are differences between the situations being compared that could materially affect the comparison, comparability adjustments must be made, where possible, to improve the reliability of the comparison. Therefore, in no event can unadjusted industry average returns themselves establish arm's length conditions" Para 1.36 . ............ material differences between the compare....
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....3) of the Rules which clearly emphasizes the necessity and compulsion of undertaking adjustments. Hence in case appropriate adjustments cannot be made to the uncontrolled transaction, due to lack of data, then in order to read the provisions of transfer pricing regulations in harmony, the adjustments should be made on the tested party. The reliability and accuracy of adjustments would largely depend on availability of reliable and accurate data. For certain types of adjustments, relevant data for comparables may either not be available in public domain or may not be reliably determinable based on information available in public domain, whereas, it may be possible to make equally reliable and accurate adjustments on the tested party (whose data would generally be easily accessible). In such a scenario, one has to resort to the provisions of Rule 10B(3)(ii) which provides for making "reasonably accurate adjustments" for eliminating any material differences between the two transactions being compared. Therefore, keeping in mind the aforesaid objective, the net profit margin of the tested party drawn from its financial accounts can be suitably adjusted to facilitate its comparison w....
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....ordingly we remand these issues back to the Ld.AO, with the direction to consider the claim of assessee based on the above discussions in respect of the forex loss earned by assessee for year under consideration, as non-operative in the hands of assessee. Accordingly ground 2 stands allowed for statistical purposes. 12. Ground No. 4: The assessee is seeking inclusion of following comparables under the respective segments: Software development service segment: Evoke Technologies Pvt.Ltd. Helios & Matheson information technology Ltd R Systems International Ltd Zylog Systems Ltd IT enabled service segment Calibre Point business Solutions Ltd R Systems International Ltd MPS Ltd 13. The Ld.AR submitted that, Helios & Matheson information technology Ltd, R Systems International Ltd, Calibre Point business Solutions Ltd was rejected for use of different financial year. It is submitted that merely because these comparables have different financial year cannot lead to the conclusion that they are not comparable with that of assessee. The Ld. CIT.DR relied on orders passed by authorities below. We have perused submissions advanced for both sides....
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....fotech Ltd, Mindtree Ltd., Persistent Systems Ltd do not satisfy the turnover filter. He submitted that these comparable also had functionally not compatible as they are basically product companies and owns high IP which is not akin to the assessee under consideration. On the contrary the Ld.CIT.DR relied on orders passed by authorities below. 19. We have perused submissions advanced for both sides in light of records placed before us. Before us the Ld.AR placed reliance on the decision of coordinate bench of this Tribunal in case of Software paradigms Infotech Ltd vs. ACIT in IT(TP)A No. 2828/B/2017 for assessment A 2013-14 by order dated 27/12/2021, wherein the comparables alleged for exclusion by the assessee has been dealt with in identical circumstances in a captive service provider for failing in turnover filter. This Tribunal observed and held as under: "12. We have perused submissions advanced both sides in light of records placed before us. 13. One of the arguments by the assessee before the Ld. TPO as well as DRP was that these companies had turnover which was in excess of Rs. 200 crores and therefore these companies cannot be regarded as....
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....nt 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 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 is....
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....ices, Infosys BPO Ltd., Harton Communications Ltd., and Micro land Ltd. 21. The Ld.AR placed reliance on the decision of coordinate bench of this Tribunal in case of Software paradigms Infotech Ltd vs. ACIT in IT(TP)A No. 2828/B/2017 for assessment A 2013-14 by order dated 27/12/2021, wherein the comparables alleged for exclusion by the assessee has been dealt with in identical circumstances in a captive service provider like present assessee. On the contrary the Ld.CIT.DR relied on orders passed by authorities below. 22. This Tribunal observed and held as under: "12. We have perused submissions advanced both sides in light of records placed before us. 13. One of the arguments by the assessee before the Ld.TPO as well as DRP was that these companies had turnover which was in excess of Rs. 200 crores and therefore these companies cannot be regarded as a comparable in the case of the assessee whose turnover was only Rs. 64 crores. The Ld.TPO as well as DRP took the view that the functional comparability of the companies were alone to be seen and turnover was not an important criterion. In ground No. 5(iv), the assessee has challenged the or....
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....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 aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5-8-2011. The decisions re....