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TMI Blog2014 (4) TMI 997X X X X Extracts X X X X X X X X Extracts X X X X ..... more than 200 crores have to be eliminated from the list of comparables – thus, those companies have to be eliminated from the list of comparables – Decided in favour of Assessee. Functionally different Companies – Held that:- The decision in Trilogy E-Business Software India Private Limited v. DCIT [2013 (1) TMI 672 - ITAT BANGALORE] followed - The company was not comparable in the case of the assessees engaged in software development services business - Neither the TPO nor the DRP have noticed that there is bound to be a difference between the Assessee and Megasoft and the profit arising to the Megasoft as a result of the existence of the software product segment and no finding has been given that reasonably accurate adjustments can be made to eliminate the material effects of such differences - the TPO was justified in selecting M/s. Megasoft Ltd as comparable - the AO/TPO is directed to take segmental margins of 23.11% for comparability - Decided in favour of Assessee. Forex gain/loss impact – Held that:- The decision in Trilogy E-Business Software India Private Limited v. DCIT [2013 (1) TMI 672 - ITAT BANGALORE] followed - foreign exchange gain/loss being considered as n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt year - the expenses pertaining to assessment year 2006-07 cannot be claimed as deduction in the present assessment year – Decided in favour of Assessee. - ITA No. 1124/Bang/2011 - - - Dated:- 21-12-2012 - Shri N. Barathvaja Sankar And Shri George George K, J.M,JJ. For the Petitioner : Shri Padam Chand Khincha, C.A. For the Respondent : Shri Farhad Hussain Qureshi, CIT (DR-II), ITAT ORDER Per George George K :- 1. This appeal filed by the assessee-company is directed against the order of the assessing officer dated 30.9.2011 u/s 143(3) r.w.s. 144C of the Act. The relevant assessment year is 2007-08. 2. The assessee company has, in its grounds of appeal, raised 22 grounds. It had raised legal issue vide ground Nos. 1 to 7 under the caption A - relating to Transfer pricing - Legal issues. However, during the course of hearing, neither any submission nor arguments were made by the learned AR with regard to these grounds. Accordingly, these grounds have not been taken up for adjudication. Ground No.19 relates to the disallowance of Rs.9,94,202/- representing assets costing less than US $ 1000 written off and claimed as revenue expenditure. However, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. When the assessing officer referred the case to the TPO to determine the arm s length price [ALP], the TPO, after examining the details furnished by the assessee, had passed an order u/s 92CA of the Act dated 29.10.2010 whereby made an adjustment of Rs.4,94,71,132/- in respect of software development services. With regard to reimbursement of expenses, the Assessing Officer accepted ALP of assessee and no adjustment was made. While concluding the assessment, the AO had, following the provisions of s. 92CA of the Act, added the transfer pricing adjustment of Rs.4.94 crores to the assessee s total income. As regards the claim of deduction u/s 10A of Rs.6.48 crores, the AO recomputed the deduction by reducing from the export turnover a sum of Rs.69.45 lakhs being telecommunication, insurance and travelling expenses without corresponding deduction from the total turnover. As a result of recompuation of deduction under section 10A of the Act, the claim was reduced to Rs.6,37,73,510/- as against Rs.6,48,95,788. In respect of the assessee s claim for deduction of Rs.77.12 lakhs being the prior period expenses, the AO had, after considering the assessee s contentions, rejected the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction is comparable, the enterprise level differences will have to be reckoned; and that in choosing the most appropriate method, rule 10C(2)(e) factors the ability of making reliable and accurate adjustment to account for the differences in the enterprises levels; - that size is an important facet of an enterprise level difference. Size of an enterprise is thus to be examined for comparability purposes and that significant differences in size of companies would impact comparability; - that size as one of the selection criteria has been approved by various Benches of the Tribunal including the Chandigarh Special Bench in the case of DCIT v. Quark Systems Pvt. Ltd [38 SOT 207], the Bangalore Bench in Philips Software Centre Private Limited 26 SOT 226 (Bang) etc., - that the size as a criteria for selection of comparables is also recommended by OECD in its TP Guidelines, 2010; and that the ICAI TP guidance notice has observed that a transaction entered into by a Rs.1000 crore company cannot be compared with the transaction entered into by a Rs.10 crore company; and that the two most obvious reasons are the size of the two companies and the relative economies of scale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /2010; (iv) Electronic for Imaging India Pvt. Ltd - ITA NO.1171/Bang/2010. - that the information obtained by process of issuing notice u/s 133(6) was not available in public domain or at the time of study by the assessee; that the data available subsequently or obtained through notice u/s 133(6) - which data was not available in the public domain - should be rejected. Thus, the approach adopted by the TPO was bad in law; 4.1 With regard to the margin or adopting of the companies as comparables as proposed by the TPO in the show-cause notice, it was contended by the assessee that - (i) Megasoft Ltd: This company has two segments, viz., soft ware service segment and software product segment. The margin of 60.23% being abnormal, this company is to be rejected as comparable; (ii) Avani Cimcon Technologies Ltd: The margin of this company was adopted at 52.59% in the final computation of the arm s length price. After analyzing the operating revenues, operating expenses, operating profit for the last 4 F.Ys, it has been evolved that this company has made an unusually high profit during the FY 2006-07. Thus, this company s growth rate was nearly double the industry averag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (7) Helios Matheson Information Technology Ltd (8) Ishir Infotech Ltd (9) KALS Information Systems Ltd. (Seg.) (10) LGS Global Ltd. (Lanco Global Solutions Ltd.) (11) Lucid Software Ltd (12) Mediasoft Solutions Pvt. Ltd (13) Megasoft Ltd (14) Quintegra Solutions Ltd (15) R.S. Software (India) Ltd (16) R Systems International Ltd (seg) (17) SIP Technologies Exports Ltd (18) Thirdware Solutions Ltd (Seg) (vii) that assuming without admitting that turnover filter should not be applied, the following companies deserve to be rejected on merits, namely: (a) Infosys Technologies Limited; (b) Wipro Limited; (c) Tata Elxsi Limited; (viii) Benefit of 5 per cent range: that the assessee should be given a standard deduction of 5% as provided under proviso to section 92C(2) before making adjustments for the transfer price; Relies on case laws: (a) M/s. SAP Labs India Private Ltd v. ACIT 2010-TII-44- ITAT-BANG-TP; (b) Philips Software Centre Pvt. Ltd - 26 SOT 226 (c) MSS India Pvt. Ltd 32 SOT 132 (d) Customer Services India (P) Ltd v. ACIT 30 SOT 486 4.2 It was asserted that ever after adopting the comparables as chosen by the TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned A R as well as the rival submission of the learned D R on various aspects of the adjustment made by the TPO. We have also duly perused the relevant case records and also the documentary evidences including the recent order of the Tribunal in the case of M/s. Trilogy E-Business Software India Private Limited (supra) produced by the learned AR during the course of hearing in the shape of voluminous paper books. We would like to reiterate that the Bangalore Tribunal had recently delivered a decision in the case of Trilogy E-Business Software India Private Limited v. DCIT (ITA No.1054/Bang/2011 dated 23.11.2012) herein referred to Trilogy E - Business. In the said case, the assessee was engaged in the business of rendering software development business, just like the assessee in the instant case. The comparables selected by the TPO in the case of Trilogy E- Business Software and the assessee of this case are identical. They are as follows: (1) Accel Transmatic Ltd (Seg.); (2) Avani Cimcon Technologies Ltd. (3) Celestial Labs Ltd. (4) Datamatics Ltd (5) E-Zest Solutions Ltd. (6) Flextronics Software Systems Ltd. (7) Geometric Ltd. (Seg.) (8) Helios ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .1254/Bang/2010; (iii) Electronic for Imaging India Pvt. Ltd - ITA NO.1171/Bang/2010; (iv) M/s.Trilogy E-Business Software India Private Ltd. v. DCIT - ITA No.1054/Bang/2011 dated 23.11.2012. 5.1.1 In the case of M/s.Genisys Integrating Systems (India) Pvt. Ltd. v. DCIT (supra) relying on Dun and Bradstreet has observed as under: 9. .we find that the TPO himself has rejected the companies which are making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which are loss making are exclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... echnologies Ltd. 13149 crores .. 5.1.3 In view of the above said reasoning and the orders of the Benches of Bangalore Tribunal cited supra, the following companies will have to be eliminated from the list of comparables selected by the TPO, namely: (i) Flextronics Software Systems Limited; (ii) iGate Global Solutions Limited; (iii) Mindtree Limited; (iv) Persistent Systems Limited; (v) Sasken Communication Technologies Limited; (vi) Tata Elxsi Limited; (vii) Wipro Limited; (viii) Infosys Technologies Limited. II. 5.2 We shall now deal with the improper selection of comparables by the TPO for the reasons that they were functionally different as observed by the earlier Bench in the case of Trilogy E-Business. A. Accel Transmatic Ltd. (Seg): The selection of this company as comparable by the TPO was duly considered by the Tribunal in the case of Trilogy E-Business and reason recorded in its finding is extracted as under: 50. We have considered the submissions and are of the view that the plea of the assessee that the aforesaid company should not be treated as comparables was considered by the Tribunal in Capgemi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formation 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. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable . 5.2.1 In conformity with the findings of the coordinate bench of the Tribunal in the case of Trilogy E-Business, we are of the considered view that (i) Accel Transmatic Ltd (Seg); (ii) Avani cimcon Technologies Ltd; (iii) Celestial Labs. Ltd., (iv) KALS Information Systems Ltd (seg) cannot qualify as comparables in the case of the assessee under consideration. It is ordered accordingly. 5.2.2 After excluding from the TPO list of comparables, the companies having turnover exceeding Rs.200 crores and four companies which are functional dissimilar to that of the assessee, the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % alone should be taken for comparability. The DRP has not given any specific finding on the above plea of the Assessee. Perusal of the order of the TPO shows that the TPO relied on information which was given by this company in which this company had explained that it has two divisions viz., BLUEALLY DIVISION and XIUS-BCGI DIVISION. Xius-BCGI Division does the business of product software (developing software). This company develops packaged products for the wireless and convergent telecom industry. These products are sold as packaged products to customers. While implementing these standardized products, customers may request the company to customize products or reconfigure products to fit into their business environment. Thereupon the company takes up the job of customizing the packaged software. The company also explained that 30 to 40% of the product software (software developed) would constitute packaged product and around 50% to 60% would constitute customized capabilities and expenses related to travelling, boarding and lodging expense. Based on the above reply, the TPO proceeded to hold that the comparable company was mainly into customization of software products developed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gain/loss being considered as not forming part of the operating cost, the reasoning of the revenue is that such loss or gain cannot be said to be one realized from international transaction though they may form part of the gain/loss of the enterprise and therefore they should be excluded while determining operating cost. On the above issue we find that the Bangalore Bench of ITAT in the case of Sap Labs India (P) Ltd. Vs. ACIT (2011) 44 SOT 156 (Bang.) has taken the view that Foreign Exchange Fluctuation gains are required to be added to operating revenue. Following the same, the AO is directed to accept the claim of the Assessee in this regard . 5.3.1 In conformity with the above finding, we direct the AO/TPO to consider the foreign exchange gain or loss as part of the operating cost or revenue as the case may be. Since the TPO had computed the margin without considering the foreign gain or loss, the assessee had tabulated revise margins of comparables after considering the foreign exchange gain or loss as operating in nature. The tabulated revised margin of comparable after considering the foreign exchange gain or loss is made as Annexure A to this order. The Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the risk of having a single customer, whereas the same cannot be said as regards the comparables. As pointed out by the learned counsel for the assessee, the comparables were dealing in open market and therefore, they were prone to the marketing and technical risks. They would have incurred certain expenditure on marketing services and also to safeguard the technical use by them. In such a case, the risk encountered by the assessee cannot be said to be the equivalent risks attached to the comparables. The risk attributed to the assessee by the TPO is an anticipated risk whereas the risk attributed by the assessee to the comparables is an existing risk. In such situation, the TPO ought to have given the risk adjustment to the net margin of the comparables for bringing them on par with the assessee company . 5.5.2 In conformity with the findings of the earlier Bench (supra), we direct the AO/TPO to work out suitable risk adjustment and compute the ALP accordingly. 5.5.3 It is to be noted that no submissions/arguments were raised in course of hearing with regard to the other issue of TP adjustment, apart from above discussed issue and hence, ground nos.8, 9, 16 and part o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould also be reduced from the total turnover in order to maintain parity between the numerator and the denominator. In the light of the above judgment, we direct the Assessing Officer to reduce a sum of Rs.69,45,076/- from the export turnover as well as from the total turnover while computing deduction under section 10A of the Act. It is ordered accordingly. Prior period expenses 7. The Assessing Officer disallowed a sum of Rs.77,12,144/- on the ground that it is prior period expenses. The relevant finding of the Assessing Officer reads as follows:- 6. Since the company follows mercantile system of accounting, under mercantile system of accounting the assessee-company is required to make provision for such contingencies in the relevant FY itself. Therefore, for having not made the provisions in that year, for such expenses, in the subsequent years the claim of expenses cannot be allowable. Further, as the expenditure debited are not related to relevant assessment year, the expenditure so debited amounting to Rs.77,12,144/- is disallowed and brought to tax . 7.1 In this context, the submission of the assessee is that this amount ..... X X X X Extracts X X X X X X X X Extracts X X X X
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