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TMI Blog2014 (11) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... e list of comparables if in the initial Transfer Pricing Study undertaken by it, such a concern has been adopted as a comparable - the profit margins of the concern are fluctuating widely and are abnormally high for the period under consideration - assessee has justifiably demonstrated that the concern M/s. Bodhtree Consulting Ltd. is liable to be excluded from the final set of comparables, even though the said concern was considered as a comparable initially in its Transfer Pricing Study - the concern, M/s. Bodhtree Consulting Ltd. be excluded from the final list of comparables for carrying out the comparability analysis – thus, the AO is directed to re-work the arm’s length price of international transactions of software services rendered by the assessee to its Associate Enterprise – Decided in favour of assessee. - ITA No. 227/PN/2014 - - - Dated:- 21-10-2014 - Shri G. S. Pannu And Shri R. S. Padvekar,JJ. For the Petitioner : Shri Dhanesh Bafna and Roshan Lu navat For the Respondent : Smt. M.S. Verma, CIT ORDER Per G. S. Pannu, AM The captioned appeal of the assessee for assessment year 2009-10 is directed against an order of the Deputy Commissione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. The Ld. DRP / AO erred in not allowing an adjustment for the difference between the level of risk borne/assets employed by the comparables and the appellant as provided by the appellant, without providing any cogent reasons, and disregarding the provisions of Rules 10B(2) and (3) read with Rule 10C of the Rules. In doing so, the Ld DRP/AO erred by: (i) failing to capture that the appellant is a routine captive service provider as against the comparable companies selected by the Ld TPO which include entrepreneurial companies and hence an adjustment is necessary; (ii) disregarding the provisions of Rules 10B(2) and 10B(3) read with Rule 10C of the Rules. 3. In this appeal, although the assessee has raised multiple Grounds of Appeal but the substantive dispute is with regard to an addition of ₹ 1,96,89,494/- made by the Assessing Officer to the stated value of the international transactions of software services (IT services) rendered by the assessee towards Associate Enterprises in order to determine their arm s length price. 4. The appellant before us is a company incorporated under the provisions of the Companies Act, 1956 in November, 2007 as a wholly owned sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the Assessing Officer has passed an assessment order u/s 143(3) r.w.s. 144C(13) of the Act on 26.12.2013 whereby, in terms of section 92CA(4) of the Act total income of the assessee has been computed in conformity with the arm s length price of the international transactions of software services determined by the TPO at ₹ 1,96,89,494/-. This addition is the subject matter of the proceedings before us. 7. In the Memo of Appeal, assessee has raised multiple Grounds of Appeal assailing the aforesaid addition but in the course of hearing before us, the learned Representative for the assessee has argued on (i) exclusion of Bodhtree Consulting Limited from the list of final comparables; (ii) inclusion of Akshay Software Technologies Limited in the final list of comparables; and, (iii) correcting the margin of Mindtree Limited a comparable adopted by the TPO in the final set of comparables. 8. Before we proceed to adjudicate the specific grievance of the assessee in the above background, the following facts are relevant. The international transactions which are subject matter of consideration before us relates to the services comprising of software development, test and qual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to the stated value of the international transactions so as to bring it at the level of arm s length price. 10. At the time of hearing, one of the aspects raised by the assessee is the exclusion of Bodhtree Consulting Ltd. from the final set of comparables. According to learned Representative for the assessee, the said concern is liable to be excluded as it has abnormal trends in its profitability. As per the appellant, the said concern is a abnormally high profit making concern whereby, its margins for the year under consideration are 64.48%. In this context, it is submitted that abnormal profit-making concerns ought to be excluded from the final set of comparables as it would skew the results of the comparability analysis. It has also been asserted that the appellant is a captive service provider and has transacted only with its Associate Enterprise and is being compensated on cost plus agreed mark-up in respect of the software services. The assessee does not bear significant risks as compared to the comparables which are full risk bearing entities. Therefore, the concerns which have abnormally high profits or which witness wide fluctuations in their profits considered over ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investigation that the high margin profit making company does not satisfy the comparability analysis and or the high profit margin earned by it does not reflect the normal business condition, we are of the view that the high profit margin making entity should not be included in the list of comparable for the purpose of determining the arm's length price of an international transaction. Otherwise, the entity satisfying the comparability analysis with its high profit margin reflecting normal business condition should not be rejected solely on the basis of such abnormal high profit margin. 14. In terms of the aforesaid discussion in the order of the Special Bench, it is clear that concerns which earn abnormally high profit margins cannot be excluded straight away but it would require further investigations to ascertain the reasons for their high profits. It would be necessary to ascertain as to whether the high profit margins reflect a normal business phenomenon or whether it is a result of certain abnormal conditions prevailing in a particular year. In order to do so, the profit margins earned by such a concern in the proximate preceding and succeeding years would be required ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view that it would be safe to exclude Bodhtree Consulting from the final list of comparables chosen by the assessee. We hold and direct accordingly. 15. The aforesaid discussion of the Bangalore Bench of the Tribunal reflects that assessee is justified in asserting that the margins of 64.48% of the said concern considered for the year under consideration is not a normal business trend. Thus, in our considered opinion, the inclusion of the said concern in the final set of comparables would not lend credibility to the comparability analysis and therefore, the same deserves to be excluded. We hold so. 16. In so far as the plea raised by the learned CIT-DR to the effect that the said concern was initially included by the assessee in its Transfer Pricing Study as a comparable is concerned, the appellant s Representative pointed out that in the Transfer Pricing Study, assessee had carried out the comparability analysis by adopting multiple year s data of the comparables which had off-set the wide fluctuations. However, the TPO has dis-agreed with the assessee on the adoption of multiple year s financial data of the comparables and instead, he has carried out the comparability ana ..... X X X X Extracts X X X X X X X X Extracts X X X X
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