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2014 (10) TMI 354 - AT - Income TaxArm s Length Price adjustment on international transaction selection of comparable - Held that - The assessee is engaged in the export of network security and administrative software solutions which are developed exclusively for the parent company BDC - for the purpose of determining the Arm s Length Price the assessee benchmarked 11 comparables and determined the Average Arithmetic Mean at 10.30% - Since the mean operating profit/Total cost of comparable companies was less than the OP/TC of 12.90% of the assessee it was contended that its international transaction relating to software development services is at Arm s Length Price - the TPO did not accept the comparables given by the assessee and made further search to find more comparables to broad base the data and arrive at proper benchmarking of the international transactions - the Tribunal in assessee s own case for AY 2006-07 has rejected the same as a comparable because of crossing the R&D/sales threshold of 3%. During A.Y. 2005-06 such ratio come to 7% - if Cressanda Solutions Ltd. is excluded as a comparable then VMF Soft Tech Ltd. which shows the profit margin of 35.70% also should be excluded from the list of comparables - R&D/sales threshold comes to 7% - in the subsequent year ICSA(India) Ltd it cannot be considered as a comparable - We accordingly hold that this cannot be considered as a comparable for determining the Arm s Length Price. Inclusion of SIP Technologies Ltd. Held that - No relevant data for AY 2004-05 is available since the company had closed its books of accounts for the year ending 30-09-2004 and subsequently closed its books of accounts only for the year ending 31-03-2006 which is for a period of 18 months - SIP Technologies and Exports Ltd. should not be considered as a comparable and has to be rejected although the same was considered by the assessee itself while preparing the T.P. report - When the TPO rejected certain companies as not comparable, there was no reason why SIP Technologies Ltd. should not be excluded from the list of comparables when the results of the entire year is not available there is no reason as to why the super profit making company VMF Soft Tech Ltd. should not be excluded from the list of comparables - both these companies were taken by the assessee as comparables, similar view should be taken for both the comparables - relying upon Assistant Commissioner of Income-tax Versus Frost & Sullivan (I) (P.) Ltd. 2012 (4) TMI 120 - ITAT MUMBAI - if abnormal loss making companies are excluded abnormal profit making companies are also to be excluded - if Cressanda Solutions Ltd. is excluded as a comparable then VMF Soft Tech Ltd. which shows the profit margin of 35.70% also should be excluded from the list of comparables. Exclusion of ABM Knowledgeware Ltd. Held that - The company holds intellectual property rights for several products and solutions and therefore the functions of ABM Knoweldgeware Ltd. are not comparable with that of BIPL - From the various details furnished by the assessee we find the assessee had very clearly brought out that the company is in software services - the company has discontinued its sale of IT products Division which clearly demonstrates that the company is into IT services and not sale of IT products. In the AY 2006-07 the Tribunal in assessee s own case has considered /-5% safe harbour provided u/s 92C(2) - the Arithmetic Mean of the assessee shown at 12.40% is near to the Arithmetic Mean determined at 14.69% - no adjustment is required to the international transaction of the assessee as the assessee would be at arm s length from the Indian Transfer Pricing perspective Decided against assessee. Excess deduction u/s 10B Reduction of IAC/telecommunication charges from the export turnover - Held that - Following the decision in CIT Vs. Gem Plus Jewellery India Ltd. 2010 (6) TMI 65 - BOMBAY HIGH COURT - if the telecommunication charges are reduced from the export turnover, the same should also be reduced from the total turnover - the submission of the Revenue would lead to a situation where freight and insurance, though it has been specifically excluded from export turnover for the purposes of the numerator would be brought in as part of the export turnover when it forms an element of the total turnover as a denominator in the formula. A construction of a statutory provision which would lead to an absurdity must be avoided - the two items, namely, Telecommunication charges and Expenses incurred in Foreign currency are liable to be excluded from the figure of Total turnover also for the purposes of computing deduction u/s 10A of the Act Decided in favour of assessee.
Issues Involved:
1. Transfer Pricing Adjustment 2. Exclusion of Telecommunication Charges for Deduction u/s.10B 3. Charging of Interest u/s.234B Issue-wise Detailed Analysis: 1. Transfer Pricing Adjustment: The assessee, engaged in the export of network security and administration software solutions, filed its return of income declaring a total income of Rs. 14,06,984/-. The AO completed the assessment determining the total income at Rs. 24,29,550/- by making three additions. The Ld. CIT assumed jurisdiction u/s.263 and set aside the AO's order, directing a denovo assessment. The assessee filed a report u/s.92E for international transactions with related parties, and a reference was made to the TPO u/s.92CA(1). The TPO observed discrepancies in the comparables used by the assessee and made adjustments, resulting in an addition of Rs. 2,73,94,482/- to the total income. The DRP directed the exclusion of certain comparables and computed the Arm's Length Price (ALP) with an Arithmetic Mean of 22.86%. The AO made an adjustment of Rs. 2,09,68,688/- to the total income. The assessee contested the selection of comparables, arguing that the TPO cherry-picked high-profit companies and failed to consider functional and risk differences. The Tribunal examined the comparables and excluded ICSA (India) Ltd. and SIP Technologies Ltd. due to non-availability of relevant data and functional dissimilarities. The Tribunal also excluded VMF Soft Tech Ltd. due to its super profit margins, aligning with the exclusion of loss-making companies like Cressanda Solutions Ltd. The Tribunal included ABM Knowledgeware Ltd. and Ontrack Systems Ltd. as comparables, resulting in a revised Arithmetic Mean of 14.69%, close to the assessee's margin of 12.40%. Consequently, no adjustment was required to the international transaction. 2. Exclusion of Telecommunication Charges for Deduction u/s.10B: The AO reduced the IAC/telecommunication charges from the export turnover for computing the deduction u/s.10B, resulting in a disallowance of Rs. 6,50,037/-. The assessee argued that if telecommunication charges are excluded from export turnover, they should also be excluded from total turnover, citing the decision of the Hon'ble Bombay High Court in CIT Vs. Gem Plus Jewellery India Ltd. The Tribunal upheld this argument, directing the AO to exclude telecommunication charges from the total turnover for computing the deduction u/s.10B. 3. Charging of Interest u/s.234B: The Tribunal found that charging of interest u/s.234B is mandatory and consequential in nature, dismissing the assessee's ground on this issue. Conclusion: The Tribunal allowed the appeal partly, providing relief on the transfer pricing adjustment by revising the comparables and directing the exclusion of telecommunication charges from the total turnover for computing the deduction u/s.10B. The ground related to charging of interest u/s.234B was dismissed.
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