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TMI Blog2014 (4) TMI 930X X X X Extracts X X X X X X X X Extracts X X X X ..... e communication expenses from the total turnover also and workout the deduction accordingly – Decided in favour of Assessee. Determination of ALP u/s 92C of the Act - Transfer pricing adjustment – Income from software segment, ITES segment and capital advances to AE – Held that:- As already decided that these companies are not to be selected on various reasons, the objections of Assessee s upheld and the TPO/AO is directed to work out the arithmetic mean of PLI on the balance of companies – Decided in favour of Assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... Datamatics Financial Services Ltd. 4. Transworks Information Services Ltd. 5. Cosmic Global Ltd. 6. Vishal Information Technologies Ltd. 7. Asit C Mehta Financial Services Ltd. 8. Goldstone Infratech Ltd. 9. Spanco Ltd. 10. Ace Software Exports Ltd. 11. Apex Knowledge Solutions P. Ltd. 12. R Systems International Ltd. 13. Flextronics Software Systems Ltd. Arithmetic mean of the above companies was arrived at 24% (OP/OC) and as operating revenue declared by Assessee is at 9.58%. The TPO recommended the addition of Rs. 27,32,841/- being shortfall u/s 92C of the Act. 5.3 With reference to the software development services in the software development segment, the TPO selected 20 comparables, which are as under: 1. Aztec Software Ltd. 2. Geometric Software Ltd. 3. Infosys Ltd. 4. KALS Info Systems Ltd. 5. Mindtree Consulting Ltd. 6. Persistent Systems Ltd. 7. R Systems International Ltd. 8. Sasken Communications Ltd. 9. Tata Elxsi Ltd. 10. Lucid Software Ltd. 11. Media Soft Solutions Ltd. 12. RS Software India Ltd. 13. SIP Technologies & Exports Ltd. 14. Bodh Tree Consulting Ltd. 15. Accel Transmatics Ltd. 16. Synsoys Business Solu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order of the TPO and found severe material deficiencies and inconsistencies in the sand taken by the TPO. Accordingly, we did not accept the decision of the TPO and held that the ALP on interest should be in the range of Libor + certain basis points, depending on some internal CUP available in the tax payer's cases or the external CUP adopted from other cases. 3. Sri F.M. Mohanty, one of the members of the DRP, Hyderabad, had expressed his disagreement with the decision taken. He is of the opinion that it is in appropriate to issue any directions on this matter regarding determination of ALP on loan transactions. 4. Section 144C(5) of IT Act read with sub-section [8] does not mandate the DRP to have any discretion not to issue directions on any particular issue referred to it meaning thereby that any issue referred to it meaning thereby that any issue referred to the DRP has to be disposed off as per the provisions contained in section 144C of the IT Act. While giving his dissent note, Sri F.M. Mohanty ha raised certain issues which need to be clarified for the purpose of record. The same are as under: (i) It is mentioned that DRP, Bangalore, has approved the interest ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es prevailing in India during the relevant time were of the order of 10 to 14% per annum. In the second case, considering that there is no significant difference between the rate of interest paid by the tax payer and the comparables, no adjustment was proposed. In both the above instances the TPO has rightly recognized the principle involved i.e. rate of interest in international transactions is benchmarked against Libor + certain basis points (i.e. interest rates prevailing in international money markets) and not against interest rates prevailing in India. Another most question is whether the TPO would have allowed interest @ 14% p.a. in case it was claimed by the tax payers in the above cases, having held ALP of interest on loan at such rate. Definitely not. In the above cases he accepted 'Libor + certain basis points', whereas for payments he did not accept. This kind of one sided action defies equity and logic. There is no mechanism created by the CBDT to communicate the decisions of all the benches of the DRP among all the DRPs across the country. In the absence of such an organized mechanism, guidelines to follow the same, it cannot be expected to follow the decision gi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uidelines issued by the CBDT for the functioning of the DRPs. In any case, if what is suggested by Sri F.M. Mohanty is to be followed, the whole functioning of the DRP would be paralyzed and unworkable and the institution itself becomes redundant. (iv) There is no appeal by the Department against the orders of the DRP. It is a conscious decision taken by the Government of India not to appeal the decisions taken by a panel consisting of 3 senior commissioners. They are expected to decide the issues judiciously and objectively to the best of their knowledge and ability. Whether there is an appeal against such orders or not is only a consequence and a consequence should not be at the back of the mind while deciding the issues, otherwise the decision itself will be biased. (v) In almost all the cases where the TPO determined ALP of interest at 14%, the Indian entity is the parent and they have extended loans to their AEs located outside the country for the purpose of expanding their business and/or for meeting working capital requirements etc. There is no question of shifting of profit out of the country and on the contrary once the AEs establish themselves in those countries it wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .3.2006 is 4.42% and the assessee has charged interest at 6% which is higher than the LIBOR rate, we are of the view that no addition on this count is liable to be made in the hands of the assessee. In the circumstances, the addition as made by the Assessing Officer on this count is deleted." 9. Further, in the case of Four Soft Ltd. v. Dy. CIT [2011] 142 TTJ 358, the coordinate bench held as follows: "19. We have considered the rival submissions and perused the materials available on record. We do not find any merit in the arguments of the learned departmental representative as we find that he ALP is to be determined for the international transaction, that is, on international loan and not for the domestic loan. Hence, the comparable, in respect of foreign currency loan in the international market, is to be LIBOR based which is internationally recognised and adopted. In our considered view, the DRP rightly directed the assessing officer to adopt the LIBOR plus for the purpose of TP adjustment. Our view is fortified by the decision of the Madras Bench in the case of Siva Industries (supra). We do not find any merit in the arguments of the learned counsel for the assessee that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 31-12-2007]. In fact, the AO did mention that the issue is pending by way of reference to Hon'ble High Court. Since the issue was decided in favour of Assessee by the Special Bench as well as coordinate benches, we direct the AO to exclude the said communication expenses from the total turnover also and workout the deduction accordingly. Accordingly, Ground Nos. 23 & 24 are allowed. 12. Ground Nos. 25 & 26 pertaining to levy of interest u/s 234B and initiation of penalty proceedings u/s 271(1)(c) of the Act, which do not require any adjudication. 13. Ground No. 22 is with reference to disallowance of unutilized balance of cenvat credit written off in the books of account and this issue was not argued at the time of hearing nor pressed, therefore, the same is treated as withdrawn. Software Segment and ITES: determination of ALP u/s 92C of the Act. 14. With reference to ITES, Assessee is objecting to comparables only before us. Even though, Assessee has raised many grounds on various objections taken before the DRP on various filters. Assessee's objections on ITES is with reference to following companies: 1. Maple eSolutions Ltd.: The contention is to exclude the said company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n completely different line of business and also having super normal profits. He relied on the following case law: 1. Bangalore ITAT order in the case of Google India(P.) Ltd. (supra) where this company is rejected as comparable to ITES. 2. Hyderabad ITAT order in the case of Capital IQ Information Systems (India) Ltd. (supra) vide Para 15. 3. Mumbai ITAT order in Teva India(P.) Ltd. (supra). 6. Allsec Technologies Ltd. The learned counsel for the assessee submission is to exclude the said company from the list of comparables on the ground that this company is having super normal profits. Further it has been experiencing extraordinary events. During the FY 2005-06, this company had gone for a IPO during the relevant previous year and also the company had entered into a share purchase agreement with shareholder of B2K Corporation Pvt. Ltd., which is engaged in the business of inbound and outbound voice, email chat services and information technology services. He relied on the following case law: 1. Bangalore ITAT order in the case of Google India (P.) Ltd. (supra) where this company is rejected as comparable to ITES. 2. Hyderabad ITAT order in the case of Capital IQ Info ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The learned counsel for the assessee submission is to exclude the said company from the list of comparables on the ground that this company is a giant company and is engaged in the development of niche products. He relied on the decision of Hyderabad ITAT in the case of Intoto Software Pvt. Ltd. in ITA No. 1196/Hyd/2010 (32 Taxmann.com 21). 2. Flextronics Software Systems Ltd. The learned counsel for the assessee submission is to exclude the said company from the list of comparables on the ground that in this company substantial acquisition of Flextroncis International took place on 05-05-2005 and hence cannot be taken as comparable. He relied on Hyderabad ITAT order in the case of Capital IQ Information Systems (India) Ltd. (supra). 3. Persistent Systems Ltd. The learned counsel for the assessee submission is to exclude the said company from the list of comparables on the ground that in this company substantial acquisition of Norwest Capital Partners took placed on 22-11-2005 and hence cannot be taken as comparable. He relied on Hyderabad ITAT order in the case of Capital IQ Information Systems (India) Ltd. (supra). 4. KALS Info Systems Ltd. The learned counsel for the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X
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