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2015 (5) TMI 365 - AT - Income TaxTransfer pricing adjustment - determination of Arm s Length Price (ALP) in respect of international transaction entered into by the Assessee with it s Associated Enterprises (AE) - improper application of the Related Party Transaction (RPT) filter by the CIT(A) as submitted by AO - Held that - In the cases of 24/7 Customer Pvt. Ltd. (2013 (1) TMI 45 - ITAT BANGALORE ) and Sony India Private Ltd. (2008 (9) TMI 420 - ITAT DELHI-H) and various other cases has taken a view that comparables having RPT of upto 15% of total revenues can be considered. In view thereof the Revenue s grievance on this issue as projected in the relevant ground has to be allowed. It is held that the CIT(A) ought to have adopted a threshold limit of 15% of the total revenue attributable to related party transaction as ground for rejecting comparable companies. Consequently it is held that comparable companies having RPT upto 15% of the total revenues alone can be included. Excluding companies with abnormal profits - Held that - CIT(A) rejected some of the comparable companies chosen by the TPO by applying related party transaction filter. The filter of companies dealing in software products and abnormal profits owing to amalgamation of the companies during the relevant period thereby showing abnormal profits was applied to exclude Exensys Software solutions Ltd. was excluded for reasons of high turnover and high risk profile. Satyam Computer Services Ltd. has to be excluded from the comparable companies for non-reliability of financial data as it was involved in financial scam. - Decided against revenue. Exclusion of comparable companies with RPT of less than zero percent is not valid and that companies where RPT is less than 15% alone can be considered then the comparable rejected by the CIT(A) on the basis of the said filter will have to be included along with the four comparable retained by the CIT(A). Although 12 comparable which were rejected on the basis of RPT being more than zero percent one comparable viz. Four Soft Ltd. will have to be excluded since the RPT is at 19.89% and thus in excess of 15%. Sathyam Computers Ltd. will get excluded for the reason that the financial results are not reliable. The remaining 10 comparable companies which were excluded by the CIT(A) by applying the Related Party Transaction filter of 0% related party transaction will now have to be included. Foursoft Ltd. and Thirdware Solutions Ltd. should be excluded from the list of comparable companies as there is no sale of software products during the year by these companies. TATA Elxsi Ltd.should be excluded from the list of comparable companies as it is functionally different and has incomparable size to that of the assessee. Bodhtree Consulting Ltd. related party transaction as a percentage to the total revenue is 34% which is more than the accept/reject matrix of more than 25% fixed by the TPO. and Infosys Technologies Ltd. being a big company in all respects including the range of turnover be excluded from the list of comparable companies for the purpose of determining the ALP. Geometric Software Solutions Ltd. - remand the question of excluding this company as a comparable to the TPO. If the RPT is more than 15% of the total revenues than this company should be excluded from the list of comparable companies. Working capital adjustment - Held that - no basis for the TPO to come to a conclusion that advances received from AE as having been utilized for purchase of fixed assets and therefore they need to be ignored while computing working capital adjustment to the profit margin of the Assessee. Having come to this wrong conclusion without any basis the TPO has proceeded to ignore the advances received from AE while computing working capital adjustment. In our view such an approach cannot be sustained. Besides the above the DRP has ignored the submissions made by the Assessee regarding non utilization of the advances received for acquiring fixed capital. n our view the submissions made by the Assessee that the advance received from the AE should be considered while working out the working capital adjustment deserves to be accepted if the Assessee demonstrates that such advances were not utilized for acquisition of fixed assets. If it is so demonstrated these advances need to be included for working out the working capital of the Assessee while computing adjustment towards working capital. The issue is accordingly remanded to the AO/TPO and the Assessee is directed to file the necessary details to demonstrate its case regarding advances not having been utilized for acquiring fixed assets - Decided in favour of assessee for statistical purposes. Exclusion of telecommunication expenses and travel expenses both from total turnover as well as export turnover while computing deduction u/s.10A - Held that - As in Tata Elxsi Ltd. (2011 (8) TMI 782 - KARNATAKA HIGH COURT) held that while computing the deduction under section 10A of the Act if the export turnover in the numerator is to be arrived at after excluding certain expenditure then the same expenditure should also be excluded from the total turnover also. Respectfully following the same we dismiss this ground of revenue and of the view that the CIT(A) has rightly directed the AO to exclude telecommunication charges and travel expenses incurred be excluded both from export turnover and total turnover - Decided against revenue.
Issues Involved:
1. Addition to total income due to determination of Arm's Length Price (ALP) for international transactions. 2. Exclusion of telecommunication and travel expenses from total turnover and export turnover for deduction u/s.10A. 3. Application of filters in selecting comparable companies for transfer pricing. 4. Eligibility for a standard deduction of 5% from the arm's length price. Detailed Analysis: 1. Addition to Total Income Due to Determination of ALP: The primary issue in both appeals concerns the addition to the total income due to the determination of ALP for international transactions between the Assessee and its Associated Enterprises (AE). The Transfer Pricing Officer (TPO) made an addition of Rs. 2,43,93,255 based on the ALP determination. The Assessee used the Transaction Net Margin Method (TNMM) with an operating profit margin of 10.93%. The TPO, however, identified 17 comparable companies and computed an arithmetic mean PLI of 23.45% after adjustments. The CIT(A) excluded 12 companies from the TPO's list due to related party transactions, supernormal profits, and non-reliability of financial data. The Tribunal upheld the exclusion of certain companies like Exensys Software Solutions Ltd. and Satyam Computer Services Ltd. for these reasons. The Tribunal also directed the inclusion of companies with RPT up to 15% of total revenues, aligning with established precedents. 2. Exclusion of Telecommunication and Travel Expenses: The AO excluded telecommunication and travel expenses from the export turnover without excluding the same from the total turnover while computing the deduction u/s.10A. The CIT(A) directed the AO to exclude these expenses from both total turnover and export turnover, following the decision of the Karnataka High Court in Tata Elxsi 349 ITR 98 (Karn). The Tribunal upheld this direction, ensuring consistency with the High Court's ruling. 3. Application of Filters in Selecting Comparable Companies: The Assessee contested the TPO's rejection of certain filters while selecting comparable companies. The Tribunal discussed the inclusion and exclusion of various companies based on functional dissimilarities, related party transactions, and other criteria. For instance, Sankhya Infotech Limited was excluded due to its involvement in product development and lack of segmental information. Similarly, Four Soft Ltd. and Thirdware Solutions Ltd. were excluded based on functional dissimilarities, as established in previous ITAT rulings. The Tribunal also excluded TATA Elxsi Ltd. for its functional differences and incomparable size. Additionally, the Tribunal remanded the issue of excluding Geometric Software Solutions Ltd. to the TPO for verification of its RPT percentage. 4. Eligibility for a Standard Deduction of 5% from the Arm's Length Price: The CIT(A) allowed a standard deduction of 5% from the arm's length price under the proviso to Section 92C(2). However, the Tribunal noted that if the difference between the arithmetic mean of the profit margins of comparable companies and the Assessee's profit margin exceeds 5%, no deduction should be allowed. The Tribunal directed the AO/TPO to recompute the profit margins and working capital adjustments based on the revised list of comparable companies and the inclusion of advances received from AE in the working capital computation, provided these advances were not used for acquiring fixed assets. Separate Judgments: The judgment does not mention separate judgments delivered by different judges; hence, it is treated as a single comprehensive judgment. Conclusion: The Tribunal's decision resulted in partial relief for both the Assessee and the Revenue. The Tribunal directed the AO/TPO to recompute the ALP adjustments and working capital adjustments based on the revised list of comparable companies and upheld the CIT(A)'s direction regarding the exclusion of telecommunication and travel expenses from both total turnover and export turnover. The Tribunal's decision aligns with established legal precedents and ensures a fair and consistent application of transfer pricing regulations.
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