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2014 (10) TMI 465 - AT - Income TaxComputation of ALP Transfer pricing adjustment Turnover Filter - Held that - Following the decision in Trilogy E-Business Software India (P.) Ltd. Versus Deputy Commissioner of Income-tax. Circle 12(4). Bangalore 2013 (1) TMI 672 - ITAT BANGALORE - The provisions of the Act and the Rules that are relevant for deciding the issue have to be first seen - Sec.92. of the Act provides that any income arising from an international transaction shall be computed having regard to the arm's length price - the provisions of law pointed out by the ld. counsel for the assessee as well as the decisions referred to by the assessee clearly lay down the principle that the turnover filter is an important criteria in choosing the comparables - The assessee's turnover is ₹ 47,46,66,638 - companies having turnover of more than 200 crores have to be eliminated from the list of comparables as laid down in several decisions referred to by the ld. counsel for the assessee - the AO is directed to compute the Arithmetic mean by excluding the aforesaid companies from the list of comparable. Selection of comparables Avani Cimcon Technologies Ltd. Functionally different unit - Held that - Following the decision in Telcordia Technologies Pvt. Ltd. v. ACIT 2012 (6) TMI 388 - ITAT MUMBAI - the Tribunal accepted the assessee's contention that this company has revenue from software product and observed that in the absence of segmental details, Avani Cincom cannot be considered as comparable to the assessee who was rendering software development services only - the margin of this company at 52.59% which represents abnormal circumstances and profits - The reasons given by the Assessee for excluding this company as comparable are found to be acceptable. KALS Information Systems Ltd. - Functionally different from software companies Held that - Following the decision in Bindview India Private Limited v. DCIT 2013 (6) TMI 113 - ITAT PUNE the company is engaged in development of software products and services and is not comparable to software development services provided by the assessee - the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act - This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO - this company was developing software products and not purely or mainly software development service provider the company cannot be treated as comparable. Celestial Labs Ltd. - Research & development company Held that - The TPO has accepted that up to AY 06-07 this company was classified as a Research and Development company. According to the TPO in AY 07-08 this company has been classified as software development service provider in the Capitaline/Prowess database as well as in the annual report of this company - it is in the business of providing software development services the company provides software products/services as well as bioinformatics services and that the segmental data for each activity is not available and therefore this company should not be treated as comparable - the Assessee has point out to several references highlighting the fact that this company was develops biotechnology products and provides related software development services - The TPO without any basis has however concluded that the business mentioned in the DRHP are the services or businesses that would be started by utilizing the funds garnered though the Initial Public Offer (IPO) and thus in no way connected with business operations of the company during FY 06-07 the company was basically/admittedly in clinical research and manufacture of bio products and other products, there is no clear basis on which the TPO concluded that this company was mainly in the business of providing software development services thus, this company cannot be treated as comparable. Accel Transmatic Ltd. Held that - The company was functionally different from the assessee company as it was engaged in the services in the form of ACCEL IT and ACCEL animation services for 2D and 3D animation and therefore assessee's claim that this company was functionally different was accepted the company has related party transactions which is more than the permitted level and therefore should not be taken for comparability purposes this company should not be treated as comparables. Exclusion of amount incurred on telecommunication charges and foreign currency from export turnover u/s 10A Held that - Following the decision in CIT v. Tata Elxsi Ltd 2011 (8) TMI 782 - KARNATAKA HIGH COURT - it would be just and appropriate to direct the AO to exclude the sum incurred on telecommunication charges and another sum incurred in foreign currency both from export turnover and total turnover Decided in favour of assessee.
Issues Involved:
1. Adjustment to the Arm's Length Price (ALP) in an international transaction. 2. Exclusion of certain companies from the list of comparables. 3. Computation of deduction under section 10A of the Income Tax Act. Detailed Analysis: 1. Adjustment to the Arm's Length Price (ALP) in an International Transaction: The primary issue was the addition to the total income by way of adjustment to the ALP of an international transaction carried out by the assessee under section 92CA of the Act. The assessee, a wholly-owned subsidiary of M/s. July Systems Inc., U.S.A., provided software research and development support services to its holding company and was remunerated on a cost-plus 15% markup basis. The total value of the international transaction was Rs. 18,61,98,727. The assessee initially adopted the Cost Plus Method in its Transfer Pricing Study (TP Study) to justify the price received as being at Arm's Length. However, the Transfer Pricing Officer (TPO) rejected this method and adopted the Transactional Net Margin Method (TNMM) as the most appropriate method. The TPO arrived at a final set of 26 comparables and determined an adjusted arithmetic mean of 23.36%, leading to a transfer pricing adjustment of Rs. 99,17,111. 2. Exclusion of Certain Companies from the List of Comparables: The assessee contested the inclusion of certain companies as comparables, arguing that their turnover was significantly higher than that of the assessee, making them incomparable. The Tribunal referenced its decision in the case of Trilogy E-Business Software India Pvt. Ltd. and agreed that companies with turnovers exceeding Rs. 200 crores should be excluded. Consequently, the following companies were excluded: - Flextronics Software Systems Ltd. - iGate Global Solutions Ltd. - Mindtree Ltd. - Persistent Systems Ltd. - Sasken Communication Technologies Ltd. - Tata Elxsi Ltd. - Wipro Ltd. - Infosys Technologies Ltd. Additionally, the Tribunal found that certain companies were not functionally comparable with the assessee, including: - Avani Cincom Technologies Ltd. - KALS Information Systems Limited - Celestial Labs Limited - Accel Transmission Limited The Tribunal directed the TPO to recompute the ALP after excluding these companies and considering only the software development segment margin of M/s. Megasoft Ltd. 3. Computation of Deduction Under Section 10A: The assessee also challenged the exclusion of Rs. 32,29,985 incurred on telecommunication charges and Rs. 71,35,610 incurred in foreign currency from the export turnover while computing the deduction under section 10A. The Tribunal, referencing the decision of the Karnataka High Court in the case of CIT v. Tata Elxsi Ltd., directed the Assessing Officer to exclude these amounts from both the export turnover and the total turnover. Conclusion: The appeal by the assessee was partly allowed. The Tribunal directed the TPO to recompute the ALP by excluding the specified companies and to consider only the software development segment margin of M/s. Megasoft Ltd. Additionally, the Assessing Officer was instructed to exclude the telecommunication charges and foreign currency expenses from both the export turnover and total turnover while computing the deduction under section 10A.
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