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2015 (11) TMI 66 - AT - Income TaxTransfer pricing adjustment - selection of comprabales - Xcel Vision Technologies - Held that - The learned CIT (Appeals) once he has applied certain filters like salary cost filter of 25%, RPT filter in excess of 0 %, turnover filter, etc., the filters should be consistently applied. Modifying them, as has been done by the learned CIT (Appeals) in the impugned order with respect to the salary cost filter of 25% of revenues, is arbitrary especially when the salary cost to this company is 24.70% of revenues, which is below the filter of 25% applied by the learned CIT (Appeals) himself. In this factual matrix, the salary cost of this company being 24.70% of revenues which is below the filter of 25% applied by the learned CIT (Appeals), we hold and direct that the company, i.e. Xcel Vision be excluded from the list of comparables to the assessee. Cherry Soft Technologies Ltd - CIT (Appeals) applied the on-site revenue filter of 75%. According to the assessee, the company is export oriented and has export turnover in excess of 75% of sales, its foreign currency expenses are less than 50% of sales and therefore the conclusion of the learned CIT (Appeals) to exclude this company by applying the on-site was incorrect. From the record it appears that these submissions/arguments put forth by the assessee have not been examined by the learned CIT (Appeals) and therefore, in the interest of justice and equity, we deem it fit to restore the matter to the file of the learned CIT (Appeals) for examination afresh in the light of the submissions put forth by the assessee and to adjudicate thereon on the comparability of Cherry Soft Technologies Ltd. after affording adequate opportunity to the assessee of being heard and to submit details/submissions in this regard. Working Capital and Risk Adjustment - Held that - . Keeping in mind the order of the co-ordinate bench of this Tribunal granting the assessee an adhoc 2% adjustment towards working capital and risk differentials, in its order in the assessee s own case for Assessment Year 2003-04, we restore this matter to the file of the Assessing Officer / TPO and direct them to examine and de novo adjudicate on the assessee s claim for grant of working capital and risk adjustment, taking into account the facts of the case for the year under consideration in the light of the Tribunal s order for Assessment Year 2003-04 M/s. Flextronics Software Systems Ltd.,Infosys Technologies Ltd., L&T Infotech Ltd., Satyam Computer Services Ltd. and iFlex Solutions Ltd. companies having turnover of more than ₹ 200 Crores, should be excluded from the list of comparable companies Geometric Software Solutions Ltd. - his company, having RPT of 16.25% fails the RPT filter of 15% applied and followed by other co-ordinate benches of this Tribunal, is to be excluded from the list of comparables. Even otherwise from the observations of the learned CIT (Appeals) from the Annual Report of this company as laid out in para 16.2 of this order, it is evident from its diversified activities that this company is functionally different and dis-similar from the assessee in the case on hand, who is a mere provider of software development services. Visualsoft Technologies Ltd. - CIT (Appeals), in our view from the facts recorded in the impugned order, has not factually brought out or established that the on-site revenue of this company was in excess of 75% of its revenues. In these circumstances, it cannot be said that the assessee has failed the on-site filter of more than 75% of its on-site revenues being from exports and therefore in our view, in the factual matrix of the case the learned CIT (Appeals) has erroneously excluded this company from the list of comparables when it has passed the on-site filter applied as has been contended by Revenue. We, therefore, restore this company i.e. Visual Soft Technologies Ltd. to the final set of comparable companies to the assessee for computing the ALP of its international transactions.
Issues Involved:
1. Selection of Most Appropriate Method (MAM) for Transfer Pricing. 2. Application of filters for comparables, including Related Party Transactions (RPT) and Turnover. 3. Inclusion and exclusion of specific comparable companies. 4. Working capital and risk adjustment. 5. Application of +/- 5% range as per proviso to Section 92C(2). 6. Levy of interest under Sections 234B and 234D. Detailed Analysis: 1. Selection of Most Appropriate Method (MAM) for Transfer Pricing: - The assessee initially adopted the Cost Plus Method (CPM) to justify the price charged to its Associated Enterprise (AE). The Transfer Pricing Officer (TPO) rejected CPM and adopted the Comparable Uncontrolled Price (CUP) Method. The CIT (Appeals) rejected both CPM and CUP, adopting the Transactional Net Margin Method (TNMM) as the MAM. The Tribunal noted that the assessee did not dispute the selection of TNMM as the MAM before it. 2. Application of Filters for Comparables: - Related Party Transactions (RPT): The CIT (Appeals) applied an RPT filter of more than 0%, excluding companies with any RPT. The Tribunal, following the decision in 24/7 Customer.Com Pvt. Ltd., held that companies with RPT in excess of 15% should be excluded. Consequently, companies such as Mphasis BFL Ltd., Kshema Technologies Ltd., and Orient Information Technologies Ltd. were included as they had RPTs below 15%. - Turnover Filter: The CIT (Appeals) applied a turnover filter of Rs. 200 Crores, excluding companies like Infosys Technologies Ltd. and Satyam Computer Services Ltd. The Tribunal upheld this filter, following the decision in Genesys Integrating Systems (India) Pvt. Ltd. 3. Inclusion and Exclusion of Specific Comparable Companies: - Xcel Vision Technologies: The Tribunal excluded this company as it failed the employee cost filter of 25% applied by the CIT (Appeals). - Cherry Soft Technologies Ltd.: The Tribunal remanded the matter to the CIT (Appeals) for re-examination regarding the on-site revenue filter. - Geometric Software Solutions Ltd.: The Tribunal upheld the exclusion of this company due to its diversified activities and RPT exceeding 15%. - Visualsoft Technologies Ltd.: The Tribunal reinstated this company as a comparable, noting that the CIT (Appeals) did not factually establish that its on-site revenue exceeded 75%. 4. Working Capital and Risk Adjustment: - The Tribunal directed the Assessing Officer (AO)/TPO to re-examine the assessee's claim for working capital and risk adjustment, following the precedent set in the assessee's own case for Assessment Year 2003-04, where an ad-hoc adjustment of 2% was allowed. 5. Application of +/- 5% Range as per Proviso to Section 92C(2): - The Tribunal dismissed this ground, noting that post the clarificatory amendment by Finance Act, 2012, the assessee is not entitled to the benefit of +/- 5%. 6. Levy of Interest under Sections 234B and 234D: - The Tribunal did not specifically address this issue in the detailed analysis provided. Conclusion: - Both the assessee's and Revenue's appeals were partly allowed. The Tribunal provided specific directions for re-examination and adjustments, ensuring adherence to legal precedents and proper application of filters for comparables.
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