9911796707
TMI Blog2014 (7) TMI 181X X X X Extracts X X X X X X X X Extracts X X X X ..... tion u/s 10A of the Act. During the scrutiny assessment proceeding, AO noticing that assessee has entered into international transaction with its AE made a reference to the Transfer Pricing Officer (TPO) for determining Arm's Length Price (ALP) as per section 92CA of the Act. In course of the proceeding before him, the TPO on examining the TP study undertaken by the assessee through an external consultant as well as other documents submitted in course of proceeding noted that the assessee had received an amount of Rs. 18,25,29,242/- from provision of software development services to its AE. Assessee has adopted transaction net margin method (TNMM) as the most appropriate method and has selected 36 companies as comparables for bench marking its price charged for the international transaction. Since the average profit margin on cost of the 36 comparable companies is 12.06% as against assessee's margin of 9.67%, the price charged for international transaction was found to be within ALP. The TPO though agreed with the assessee so far as adoption of TNMM is most appropriate method, but, he nevertheless rejected the TP study of the assessee by pointing out various defects and deficiencie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operations. It was submitted that the performance of the software segments clearly indicate that the company has income from sale of products. The learned AR further submitted that the company has a negative operating margin of 18.73% for FY 2004-05. Further, the learned AR submitted that as per the annual report submitted by the company in response to 133(6) related party transaction (RPT) also fails threshold limit applied by the TPO himself. In this regard, the learned AR submitted the following computation: Particulars AE Rendering of services 56,274,970 Receiving of services 10,011,622 Interest paid 1,513,025 Lease payments 1,830,084 Total RPT 69,629,701 RPT/Sales 60.60% ii. It was therefore submitted that this company under no circumstances can be considered as a comparable to the assessee, which is a purely software development service provider. The learned AR submitted that ITAT, Bangalore Bench in case of Huawei Technologies India Pvt. Ltd. Vs. ITO (ITA No. 1338/Bang/2010 dated 30/04/2013 has held the aforesaid company not to be a comparable in respect of a purely software development service provider. For the same reason Ld. AR sought exclusion of K ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat this company fails the RPT filter of more than 25% applied by the TPO himself. In case of Huawei Technologies India Pvt. Ltd. Vs. ITO (supra), the ITAT Bangalore Bench while examining the issue of comparability of the aforesaid company to a purely software development service provider has held as under: "In so far Kals Info Systems Ltd., and Accel Transmatics Ltd., chosen by the TPO as comparables, this Tribunal in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) has taken a view that these companies are not comparable to the software service provider companies as they are functionally different. The following are the relevant observations of the Tribunal in this regard:- 46. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual report, the salary cost debited under the software development expenditure was Rs. 45, 93,351. The same was less than 25% of the software services revenue and therefore the salary cost filt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d v Ad. c/T 12 Taxman.com 51, the DRP accepted the contention of the assessee that Accel Transmatic should be rejected as comparable. The relevant observations of DRP as extracted by the ITAT in its order are as follows: "In regard to Accel Transmatics Ltd. the assessee submitted the company profile and its annual report for financial year 2005-06 from which the DRP noted that the business activities of the company were as under. (i) Transmatic system - design, development and manufacture of multi function kiosks Queue management system, ticket vending system (ii) Ushus Technologies - offshore development centre for embedded software, net work system, imaging technologies, outsourced product development (iii) Accel lT Academy (the net stop for engineers)- training services in hardware and networking, enterprise system management, embedded system, VLSI designs, CAD/CAM/8PO (iv) Accel Animation Studies software services for 2D/3D animation, special effect, erection, game asset development 4.3 On careful perusal of the business activities of Acce/Transmatic Ltd. DRP agreed with the assessee that the company was functionally different from the assessee company as It was engaged i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inancial results in respect of product and services are available in respect of this company, if at all this company is to be treated as comparable, the TPO may be directed to consider the profit margin of software development services segment alone which is 16.97%, In respect of such contention, the learned AR relied upon the following decisions: 1. Trilogy E Business Software India Pvt. Ltd. (ITA No. 1054/Bang/2011) 2. LG Soft India P. Ltd. (TS-64-ITAT-2013(Bang.-TP) 3. Bearing Point Business Consulting Pvt. Ltd. (ITA No. 1124/Bang/2011) 4. Intoto Software India Pvt. Ltd. (ITA No. 1196/Hyd/2010) 5. Transwhich India Pvt. Ltd. VS. DCIT (ITA No. 948/Bang/2011) 6. Mercedez Benz research & development India Pvt. Ltd., (ITA No. 1222/Bang/2011). 7. Huawei Technologies India Pvt. Ltd. Vs. ITO (ITA No. 1338/Bang/2010) ii. The learned DR, on the other hand, submitted that the TPO having correctly considered the profit margin of the company by examining the annual report there is no need to modify the order of the TPO in this regard. iii. We have heard the parties and perused the materials on record. On a consideration of the contentions raised by the assessee vis-àvis mate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and also engaged in development of products consultancy and solution. That apart, the size, reputation and brand value of Infosys, in no way makes it comparable to a small captive service provider like assessee. Therefore, following consistent view of different benches of Tribunal, we exclude this company from the list of comparables. IV. Tata Elxsi Ltd. (Seg.) i. Objecting to the aforesaid company being treated as comparable, the learned AR submitted that the said company shall be rejected as comparable since it is a specialized embedded software development company. Further, he submitted that as per the information obtained from the said company u/s 133(6) of the Act, it was stated that due to the complex segments in which they are operating, it is not comparable to any other software services company. The AR relied on the following precedents in support of his submissions: 1. Conexant Systems India Pt. Ltd., (ITA No. 1429/Hyd/2010 and 1978/Hyd/2011) 2. Telcordia Technologies India P. Ld., (ITA No. 7821/Mum/2011) 3. Logica Pvt. Ltd. (IT(TP)A No. 1129/Bang/2011) 4. Huawei Technologies India Pvt. Ltd. Vs. IT) (ITA No. 1338/Bang/2010) AY 2006-07 ii. The learned DR, on the oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as turnover of Rs. 53 crores whereas the TPO has not brought any evidence to prove that this company has its own product. The fact that the company has no R&D expenditure, as can be seen from the annual report, is suggestive of the fact that it is not involved in the product development. It was submitted that since the company has operating profit from software services segment for the FY 2005-06, it is to be considered as a comparable. 6.3 In respect of L&T Infotech Ltd., it is submitted that the company is not involved in product development, hence, the conclusion drawn by the TPO while excluding this company is improper. 6.4 In so far as Birla Technology Ltd., is concerned, it is the contention of the learned AR that TPO has wrongly rejected by this company applying RPT filter, It is submitted that the RPT of this company is only 3.07% of the total revenue. It is submitted that TPO by including reimbursement transactions has calculated RPT. 6.5 In respect of Golden Stock Technology Ltd., it is submitted that TPO has rejected this company as BPO service provider. The learned AR submitted that the statement relied upon by the TPO in response to the notice issued u/s 133(6) is c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g/including the comparables as per our directions, hereinabove, the assessee's margin is found to be within Arm's length, then, issue of risk adjustment may not arise. This ground of the assessee is considered to be allowed for statistical purposes. 10. In Ground No. 13, the assessee has challenged the action of the AO in excluding communication expenses from the export turnover while computing deduction u/s 10A of the Act. This issue is squarely covered by the decision of the Hon'ble Bombay High Court in case of CIT Vs. Gemplus Jewellery, 330 ITR 175 and ITO Vs Saksoft Ltd (313 ITR AT 353 (Chennai) SB). Following the ratio laid down in the aforesaid judgments, we direct the AO to exclude the communication expenses from export turnover as well as total turnover while computing deduction u/s 10A of the Act. 11. Ground No. 14 is in respect of levy of interest u/s 234B of the Act. Levy of interest u/s 234B of the Act being consequential in nature is not required to be considered at this stage. Hence, this ground is dismissed as infructuous. 12. Ground No. 15 is in respect of initiation of proceeding u/s 271(1)(c) of the Act. In our view at this stage it is premature to consider thi ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
