9911796707
TMI Blog2014 (2) TMI 229X X X X Extracts X X X X X X X X Extracts X X X X ..... submissions thereon into consideration before deciding to include this company in its final list of comparables - Non-furnishing the information obtained under section 133(6) of the Act to the assessee has vitiated the selection of this company as a comparable – the matter remitted back to the AO for fresh adjudication - The TPO is directed to make available to the assessee information obtained under section 133(6) of the Act. The TPO in his order has not given any reasoning for treating foreign exchange gain / loss as a non-operating item of income / expense - In the remand report submitted to the DRP, the TPO has merely stated that the exchange loss / gain could be on account of hedging / speculative activity owing to which it has been treated as non-operating in nature - In a rejoinder to the remand report, the assessee had submitted that the assessee receives remuneration from its AEs for rendering of services in foreign currency - The foreign exchange gain / loss relates entirely to the rendering of services and there is no speculative hedging activity. The foreign exchange gain should be considered as an operating income while computing the operating margins of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act which was offset by the available tax credit. In the period under consideration, since the assessee entered into two international transactions, the Assessing Officer made a reference under section 92CA of the Act to the Transfer Pricing Officer ('TPO') for determining the Arms' Length Price ('ALP') of these international transactions after obtaining necessary approval from the CIT, Bangalore-III. The TPO vide order under section 92CA of the Act dt.31.10.2011, proposed a T.P. adjustment of Rs. 2,45,79,840 to the ALP of international transactions. The Assessing Officer then issued a draft assessment order under section 143(3) r.w.s. 144C of the Act on 15.12.2011 - (i) proposing an addition on account of T.P. Adjustment to the ALP of Rs. 2,45,79,840 and (ii) Recomputation of the eligible deduction under section 10A of the Act by reducing communication charges of Rs. 10,57,458 and Foreign travel expenses of Rs. 1,43,12,209 incurred in foreign currency from export turnover without simultaneously reducing the same from total turnover. 2.2 Aggrieved by the draft assessment order for Assessment Year 2008-09 dt.15.12.2011, the assessee filed its objection thereto before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g a fresh economic analysis for the determination of the ALP in connection with the impugned international transaction and holding that the appellant's international transaction is not at arm's length. 7. The learned TPO and the learned Assessing Officer have erred, in law and in facts, by determining the arm's length margin / price using only FY 2007-08 data which was not entirely available to the appellant at the time of complying with the transfer pricing documentation requirements. 8. The learned TPO and the learned Assessing Officer have erred, in law and in facts, by rejecting certain comparable companies identified by the appellant in the comparability analysis by applying different quantitative and qualitative filters as stated below : (a) the learned AO/TPO erred in rejecting certain comparable companies identified by the appellant where consolidated results had been used for analysis. (b) the learned AO/TPO erred in rejecting certain comparable companies identified by the appellant using turnover Rs.1 Crore as a comparability criterion. (c) the learned AO/TPO erred in rejecting certain comparable companies identified by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, called for thereon. 5. CORPORATE TAX GROUNDS (Ground Nos.3 4) 5.1 In the grounds raised at S. No. 3 is the issue of reducing communication expenses and foreign travel expenses incurred in foreign currency from export turnover while computing the eligible deduction under section 10A of the Act. In the ground at S. No. 4, the assessee contends that if these expenses are to be excluded from the export turnover, then they should be excluded from the total turnover also. 5.2 We have heard both sides and carefully perused and considered the material on record. on this very issue, the Hon'ble Karnataka High Court in the case of CIT v. Tata Elxsi Ltd., has held that while computing the deduction under section 10A, if the export turnover in the numerator is to be arrived at after excluding certain expenses, then the same should also be excluded from the total turnover in the denominator. The relevant operative portion of the finding of the Hon'ble jurisdictional High Court is extracted and reproduced as under : "if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 10A of the Act. TRANSFER PRICING (GROUNDS 5 TO 16) 6.1 In the course of proceedings before us, the learned Authorised Representative submitted that the assessee would not urge or press the general grounds and would like to make submissions only on the comparability of the individual companies chosen by the TPO and those companies chosen by the assessee which were rejected by the TPO as comparables. 6.2 In the light of the above, we now briefly examine the grounds of appeal at S. Nos. 5 to 16. Ground No. 5 This ground being general in nature, no adjudication is called for thereon. Ground No. 6 This ground is raised in respect of the TPO rejecting the assessee T.P. Study and conducting a fresh search for deciding the comparable companies. As the learned Authorised Representative had submitted the assessee would not press the general grounds, no separate adjudication is called for thereon. We will, however, later in this order, be dealing with the assessee's submissions / contentions raised in respect of individual comparables chosen by the TPO and in respect of companies chosen by the assessee in its T.P. Study but rejected by the TPO while finalizing the list ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ability of companies. As the learned Authorised Representative has submitted that the assessee is not pressing the general grounds, this ground requires no specific adjudication as this issue would be considered if necessary, in the course of examination of individual comparables raised by the assessee in this appeal. Ground No. 12 Since this ground is general in nature, no adjudication is required thereon. Ground No. 13 This ground is raised in respect of the grant of suitable adjustments towards differences in the risk profile between the assessee and the comparable companies. This ground was argued before us by the learned Authorised Representative and this issue is separately discussed in the later part of this order. Ground No. 14 This ground is raised in respect of non-consideration of foreign exchange loss / gain as part of operating loss / gain. This ground was argued before us by the learned Authorised Representative and is considered separately in the later part of this order. Ground No. 15 This ground is raised regarding mistakes in computing the operating margin of some comparable companies. This ground was argued before us by the learned Authori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Lower Ranhe (-)5% 9.10 Upper Range (+) 5% 20.58 7.2 The TPO observed that the assessee has characterized itself as a provider of software development services to its Associated Enterprises (AE) and that the assessee used TNMM as the MAM. While accepting the TNMM as the MAM, the TPO rejected the assessee's TP Study for various reasons set out in the show cause notice issued and embarked on a fresh search using the data bases 'Prowess' and 'Capital'. After considering the objections of the assessee, the TPO selected a final set of 20 comparables which are as under : Sl.No. Name of the company OP/TC % 1 Avani Cincom Technologies 25.62 2 Bodhtree Consulting Ltd 18.72 3 Celestial Biolabs 87.94 4 e-zest Solutions Ltd. 29.81 5 Flextronics (Aricent) 7.86 6 iGate Global Solution Ltd. 13.99 7 Infosys 40.37 8 Kals Information Systems Ltd (Seg) 41.94 9 LGS Global Ltd. 27.52 10 Mindtree Ltd (seg) 16.41 11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ground that this comparable company has categorized itself as a pure software developer, just like the assessee, and hence selected this company as a comparable. For this purpose, the TPO had relied on information submitted by this company in response to enquiries carried out under section 133(6) of the Act for collecting information about the company directly. 9.2 Before us, the learned Authorised Representative reiterated the assessee's objections for the inclusion of this company from the list of comparable companies on the ground that this company is not functionally comparable to the assessee as it is into software products. It is also submitted that the segmental details of this company are not available and the Annual Report available in the public domain is not complete. It was further contended that the information obtained by the TPO under section 133(6) of the Act, on the basis of which the TPO included this company in the final list of comparable companies, has not been shared with the assessee. In support of this contention, the learned Authorised Representative placed reliance on the following judicial decisions : (i) Trilogy E-Business Software India (P. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y because it has been deleted from the set of comparables in the case of Triology E-Business Software India (P.) Ltd. (supra). No doubt this company has been deleted as a comparable in the case of Triology E-Business Software India (P.) Ltd. (supra) and this can be a good guidance to decide on the comparability in the case on hand also. This alone, however, will not suffice for the following reasons :- (i) The assessee needs to demonstrate that the FAR analysis and other relevant facts of the Triology case are equally applicable to the facts of the assessee's case also. Unless the facts and the FAR analysis of Triology case is comparable to that of the assessee in the case on hand, comparison between the two is not tenable. (ii) After demonstrating the similarity and the comparability between the assessee and the Triology case, the assessee also needs to demonstrate that the facts applicable to the Assessment Year 2007-08, the year for which the decision in case of Triology E-Business Software India (P.) Ltd. (supra) was rendered are also applicable to the year under consideration i.e. Assessment Year 2008-09. 9.5.3 It is a well settled principle that the assessee i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able to the assessee as it is into bio-informatics, software product / services and the segmental break up is not provided. The assessee has extensively quoted from various parts of the Annual Report of the company, which states as under : '(i) "Mission Statement" on page 2 of the Annual Report states that the company is also into bio-informatics products, ITES, Etc., "Celestial is committed to be a technology company respected globally for its software development, products, services in the area of Bio-informatics, Enterprise Resources Planning, Information Technology and Information Technology Enables Services" (emphasis supplied). (ii) The "Future Outlook" in the Directors Report of the Annual Report indicates that the company is into large scale development of bio tech products. " . Your company is setting up a manufacturing facility to manufacture Industrial Enzymes, Active Pharmaceuticals Ingredients and Herbal Pharmaceuticals. ." (iii) "Public Issue" in the Directors Report on page 13 of the Annual Report states :- " The company has raised Rs. 30 Crores for production of Enzymes, Bio Tech Products and Drug Molecule De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t it would continue to be applicable to F.Y. 2007-08 as well. 10.4 To this, the learned Authorised Representative countered that the functional profile of this company continues to remain the same for F.Y. 2007-08 as it was in F.Y. 2006-07 and the same is evident from the Annual Report quoted extensively above at para 10.2.1 (supra). 10.5.1 We have heard both parties and carefully perused and considered the material on record including the judicial decisions cited. As discussed earlier, there is merit in the contention of the learned Departmental Representative that the ruling of the co-ordinate bench of this Tribunal in the case of Triology E-Business Software India (P.) Ltd. (supra), was with respect to the facts relevant to an earlier financial year and there cannot be an assumption that it would continue to be applicable to all other assessee's for this year as well. At the same time, we find that the TPO also seems to have selected this company as a comparable, based on the reasoning given in the TPO's order for the earlier year i.e. F.Y. 2006-07. Evidently, in this view of the matter, the TPO has not conducted any independent FAR analysis for this company for the year und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the company is into provision of software development services as well as sale of software products. "Inventories" under schedule to the financial statements on page 16 of the Annual Report discloses "Software Development" as inventory and work-in-progress. It is to be noted that a pure software development service provider would not be able to disclose such details as it does not carry any such inventory or work-in-progress. "Background" under the Schedules to the financial statements on page 18 of the Annual Report states :- "The company is engaged in development of software and software products since its inception. This company consisting of STPI unit engaged in Development of Software and Software Products and a Training Centre engaged in training of software professionals on online projects" (emphasis provided) "Revenue Recognition" under Notes to the financial statements on page 18 of the Annual Report states :- "The company derives its revenues primarily from software services and software products." (iii) As per the Website of KALS, the company has developed two products, namely; 'Virtual Insure' and 'La-Vision' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, apart from relying on the decision of Trilogy E-Business Software India (P.) Ltd. (supra), the assessee has brought on record substantial evidence quoting from various portions of the Annual Report of that this company is functionally dis-similar and different from the assessee and hence is not comparable and therefore the finding rendered in respect of this company in the case of Trilogy E-Business Software India (P.) Ltd. (supra) for Assessment Year 2007-08 is applicable for this year i.e. Assessment Year 2008-09 also. In view of the facts and circumstances of the case as discussed above, we hold that this company i.e. KALS Information Systems Ltd., is to be omitted from the set of comparable companies. 12. (4) Infosys Technologies Ltd. 12.1 This was a comparable selected by the TPO. Before the TPO, the assessee objected to the inclusion of the company in the set of comparables, on the grounds of turnover and brand attributable profit margin. The TPO, however, rejected these objections raised by the assessee on the grounds that turnover and brand aspects were not materially relevant in the software development segment. 12.2 Before us, the assessee contended that this com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k up of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. It is ordered accordingly. 13. (5) Wipro Limited 13.1 This company was selected as a comparable by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the list of comparables or several grounds like functional dis-similarity, brand value, size, etc. The TPO, however, brushed aside the objections of the assessee and included this company in the set of comparables. 13.2 Before us, the assessee contended that this company is functionally not comparable to the assessee for several reasons, which are as under : (i) This company owns significant intangibles in the nature of customer related intangibles and technology related intangibles and quoted extracts from the Annual Report of this company in the submissions made. (ii) The TPO had adopted the consolidated financial statements for comparability purposes and for computing the margins, which contradicts the TPO's own filter of rejecting companies with consolidated financial statements. 13.3 P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t performs a variety of functions under the software development and services segment namely: (a) Product design services (b) Innovation design engineering and (c) visual computing labs. In the submissions made the assessee had quoted relevant portions from the Annual Report of the company to this effect. In view of this, the learned Authorised Representative pleaded that this company be excluded from the list of comparables. 14.3 Per contra, the learned Departmental Representative supported the stand o the TPO in including this company in the list of comparables. 14.4.1 We have heard both parties and carefully perused and considered the material on record. From the details on record, we find that this company is predominantly engaged in product designing services and not purely software development services. The details in the Annual Report show that the segment "software development services" relates to design services and are not similar to software development services performed by the assessee. 14.4.2 The Hon'ble Mumbai Tribunal in the case of Telcordia Technologies India (P.) Ltd. (supra) has held that Tata Elxsi Ltd. is not a software developmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and to make its submissions in the matter which maybe duly considered before a decision is taken thereon. 16. (8) VMF Softech Limited 16.1 This company was selected as a comparable by the assessee but was rejected by the TPO on the ground that it fails the export revenue filter adopted by the TPO. 16.2 Before us, the assessee contends that the TPO erred in computing the export revenues filter. As per the assessee, it does not fail the export revenue filter as the actual quantum of its export revenue is 94.36%. 16.3 We have heard both parties and carefully considered the material on record. we find from the record that the TPO has not explained in his order as to how this company has failed the export revenue filter applied by him. In this view of the matter, in the interest of justice and equity, we deem it fit to remand the issue of the comparability of this company to the file of the TPO so that he may examine the computation given by the assessee and decide the issue afresh. The TPO is directed to afford the assessee adequate opportunity of being heard and make submissions in the matter, which maybe duly considered before a decision is rendered. It is ordered accordingl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utation given by the assessee and decide the issue afresh after affording the assessee adequate opportunity of being heard and to make submissions in the matter which may be duly considered before a decision is taken. 19. (11) Larsen Toubro Infotech Ltd. 19.1 This company was selected as a comparable by the assessee but was rejected by the TPO on the ground that it fails the 25% RPT filter. 19.2 Before us, the assessee contended that this company does not fail the RPT filter. It was submitted that the computation done by the TPO was erroneous and the actual computation of RPT is 19.7% for this company. 19.3.1 We have heard both parties and carefully considered the material on record. There are a number of decisions of the co-ordinate benches of this Tribunal wherein the threshold limit for the RPT filter has been taken variously between 25% and 15%. However, in the latest case on the subject, the threshold limit has been taken at 25%. We, therefore, respectfully following the decision of the co-ordinate bench of this Tribunal in the case of Support Soft India P. Ltd. (ITA No.1372/Bang/2011 dt.28.3.2013) hold that the threshold limit for RPT filter should be taken as 25%. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computing the margins, has treated foreign exchange gain/ loss arising out of the normal course of business as a non-operating item of income / expense respectively and excluded the same for computing the margins. The assessee contends that the foreign exchange gain / loss arising in the normal course of business should be considered for computing the operating margins of the assessee and of the comparables. The assessee has placed reliance on the following judicial decisions :- (i) Sap Labs India (P.) Ltd. v. Asstt. CIT [2011] 44 SOT 156 (ii) Four Soft Ltd. v. Dy. CIT [IT Appeal No. 1495 (Hyd.) of 2010, dated 9-9-2011] 21.2.1 We have heard both parties and given careful consideration to the material on record. We find that the TPO in his order has not given any reasoning for treating foreign exchange gain / loss as a non-operating item of income / expense. In the remand report submitted to the DRP, the TPO has merely stated that the exchange loss / gain could be on account of hedging / speculative activity owing to which it has been treated as non-operating in nature. In a rejoinder to the remand report, the assessee had submitted that the assessee receives remuner ..... X X X X Extracts X X X X X X X X Extracts X X X X
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