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TMI Blog2014 (12) TMI 386X X X X Extracts X X X X X X X X Extracts X X X X ..... rongly claiming and raising the invoices on 31.03.2005 - even if they had raised the invoices in the next financial year, benefit of Section 10A would have been available on the invoice amount - It is accepted that benefit of Section 10A was granted in the AO in the next assessment year decided in favour of assessee. Transfer pricing adjustment Determination of ALP Application of upper filter - Held that:- Assessee rightly contended that with regard to the application of upper filter up to ₹ 200 crores as the assessee was a midsized company having a turnover of ₹ 23 crores only - The comparison of a small assessee with giant sized companies having huge turnover will definitely not serve the purpose of selecting appropriate comparables relying upon CIT Versus Agnity India Technologies Pvt. Ltd. [2013 (7) TMI 696 - DELHI HIGH COURT] thus, the AO is directed to re-adjudicate the issue of arms length pricing and determine the same by excluding the comparables having turnover of more than ₹ 200 crores - The AO will also take into account the bank and finance charges as part of operating expenses of comparables for arriving at the margin AO will only ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted that in rest of the grounds the grievance of the assessee is on four counts the first of which is the turnover filter. It was submitted that TPO has chosen to take lower filter with respect to turnover and did not include companies having turnover of less than ₹ 1 crore whereas on the other hand, he has not capped upper filter. Ld. A.R. submitted that the appellant had operating revenue of only ₹ 23.46 crores against operating expenses of ₹ 21.13 crores and thereby providing the profitability of ₹ 11.05 % of operating expenses whereas the turnover of comparables was up to ₹ 15000 crores and in this respect our attention was invited to page 5 of the synopsis to highlight the turnover of comparables. The Ld. A.R. submitted that TPO had applied lower filter of ₹ 1 crores but failed to apply upper filter of 200 crores which was not justified as in a series of judicial orders, it has been held that upper filter turnover filter up to ₹ 200 crores should be applied to select the comparables and in this respect our attention was invited to a decision of Hon'ble Delhi High Court in the case of CIT Vs Agnity India Technologies Pvt. Ltd. in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filter for the purpose of benchmarking the international transactions. 4. The 3rd argument taken by the Ld. A.R. is with respect to inclusion of 4 comparables namely M/s. Avani Sincom Technologies, Kals Information System, Bodhtree Consulting Ltd. and LGS Global Ltd. Ld. A.R. submitted that M/s. Avani Cincom Technologies and Kals Information System are also engaged in the development and sale of products and therefore, was not comparable with the assessee as assessee was not into development and sale of products but was only a consulting service provider. Ld. A.R. relied upon a number of case laws wherein the above said companies were found to be functionally different in view of their involvement of Product development and their sale. Our specific attention was invited to page 6 7 of synopsis where the following case laws were mentioned. i) Cincon Systems India Pvt. Ltd. Vs ACIT, ii) Witness Systems Software India(P) Ltd. Vs DCIT 34 Taxman.com 183. iii) L G soft India Pvt. Ltd. Vs DCIT IT(TP)A No.1121.Bang/11 iv) Bearing Point Business Consulting P. Ltd. Vs DCIT I.T.A.No. 1124/Bang/11 dt. 21.12.2012. v) Trilogy E Business System India Vs. DCIT in I.T.A.No. 105 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een excluded from the list of operating expenses even though interest and foreign exchange gain / loss has specifically been excluded from the list of operating expenses. 6. Ld. D.R. in respect of deduction u/s 10A has relied upon the orders of authorities below. Arguing upon the transfer pricing issue, Ld. D.R. submitted that considering objections of the assessee, DRP had already directed the exclusion of one comparable. As regards the argument of the Ld. A.R. regarding application of lower filter of ₹ 1 crore, Ld. D.R. submitted that lower turnover filter is applied in view of the fact that financial results of the assessees having turnover of less than ₹ 1 crores are volatile and are not reliable. The plea of the Ld. A.R. regarding upper cap is totally misconceived. It was submitted that in many cases TPOs have repeatedly demonstrated that the turnover and profitability have no correlation of statistical significance. Regarding reliance to the case law of Cincom Systems in I.T.A.No. 761/D/2012, the Ld. D.R. submitted that the findings of the Tribunal were not based on this aspect and only remote reference to turnover was made. Referring to the judgement of Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia P. Ltd. I.T.A.No. 1781/Hyd/2011 viii) Market Tools Research Pvt. Ltd., I.T.A.No. 2066/Hyd/2011 8. Replying to the argument of Ld. A.R. regarding exclusion of 4 comparables, namely M/s. Avani Sincon Technologies, Kals Information System, Bothtree Consulting Ltd. and LGS Global Ltd. Ld. D.R. submitted that in respect of Avani Sincon Technologies, the TPO has used segmental data and had obtained information u/s 133(6) to find out comparability. Moreover, it was submitted that Avani Sincon Technologies has termed itself is purely software developer. As regards Kals Information System, Ld. D.R. submitted that the assessee itself had accepted Kals Information Systems Ltd. as comparable and in this respect our attention was invited to page 48 of TPO s order. As regards LGS Global Ltd., and ARMAN Software the Ld. D.R. submitted that TPO at page 66-75 has clearly dealt with these comparables. In view of the above arguments, it was submitted that no cherry picking was done by TPO and rather he has gone by the information available as per annual report. As regards reliance placed by Ld. A.R. on Safe Harbour Rule, Ld. D.R. submitted that shelter can only be taken on fulfillment of cer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ars. Thereafter, the legal formality was completed when agreement dated 31.03.2005 was executed between STPI and the assessee. The assessee could not place on record the copy of the letter written by them, informing STPI about commencement of production, but, there was evidence in the form of reports for the months of January, February and April, 2006, which were examined and referred by the _ Tribunal. The date of commencement of production as recorded therein was 01.04.2004. Thus, confirming that the date of commencement of commercial production was before 31.03.2005. Subsequently, the assessee had also written letter dated 10.12.2007, intimating the date of commencement of production, which was accepted by the STPI. The Tribunal has rightly observed that intimation to STPI was a mere ministerial requirement and not a precondition for registration, which was granted earlier. No benefit or advantage was obtained by the assessee by wrongly claiming and raising the invoices on 31.03.2005. Even if they had raised the invoices in the next financial year, benefit of Section 10A would have been available on the invoice amount. It is accepted that benefit of Section 10A was granted in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he view taken by the Tribunal has been affirmed. This is in consonance with the view expressed by the Division Bench of this Court in M/s. Quantum Coders Ltd. (supra). On this aspect, therefore, the answer being clear and already adjudicated, no substantial question of law arises. The appeals are accordingly dismissed. 9.1 Therefore, following the above we also hold the issue in favour of the assessee and in view of this, grounds No.1, 2 2.15 are decided in favour of the assessee. 10. As regards the determination of arms length prices the first contention raised by the Ld. A.R. is regarding application of upper filter up to ₹ 200 crores as the assessee was a mid sized company having a turnover of ₹ 23 crores only. The Assessing Officer had selected comparable which had turnover ranging from ₹ 89 Crores to ₹ 15000 crores and comparables selected by TPO does not match with the assessee company as the turnover of comparable was ₹ 781 crores, 15648 crores, ₹ 572 crores, ₹ 409 crores etc. which is exorbitant when compared with the turnover of the assessee, which is mere ₹ 23 crores. The comparison of a small assessee with giant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Capitaline 2% Systernlogic Solutions Ltd. Capitaline 24% Powersoft Global Solutions Ltd. Capitaline 24% Advanced Micronic Devices Ltd.(Information Technology) Seg-P 7% Tata Infotech Ltd. Seg-p 10% 5.1 In the proceedings before the TPO, the number of comparable cases was reduced to 20. He included the case of Infosys Technologies Ltd. and excluded some case for the reasons mentioned earlier. No adjustment was made on account of working capital The mean was worked' at 27.08% against the margin of 17% declared by the assessee. 5.2 Various arguments, as stated earlier, were. taken before the DRP which inter-alia included rejection of comparable cases; application of arbitrary filter of wage to sales ratio; ignoring that the assessee is a limited risk company; inclusion of Infosys Technologies Ltd.; and inclusion of Sat yam Computers' Services Ltd. in. spite of the. fact that its data is not reliable as publicly known. On t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken as comparable companies and to consequently exclude Wipro BPO Ltd. which has a turnover of ₹ 322 crores in the relevant period. 12. Similarly, in the case of L G Soft India Pvt. Ltd. Vs DCIT in I.T.A.No. 1121/Bang/2011, the Tribunal has held as under: We have heard the rival submissions and perused the materials on record. Before we proceed to consider the issues, it is to be mentioned the line of business of the present case and that of Trilogy E-business Software India (P.) Ltd. (supra), Telecordia Technologies India (P.) Ltd. (Supra) and CSR India (P.) Ltd. (supra) are similar, namely, development of software and the size turnover range was also similar to that of the assessee's in the instant case. Further, the assessment year 2007-08 was subject matter of consideration in the case of Trilogy E-Business Software India (P.) Ltd. (supra),- Telecordia Technologies India (P.) Ltd. (supra) and CSR India (P.) Ltd. (supra) and the cornparables selected by the TPO in those cases are identical to that of the present case. Therefore, the finding recorded in the Case of Trilogy E-Business Software India (P.) Ltd. (Supra), Telecordia Technologies India (P.) Ltd. (Su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which are loss making companies should also be excluded. For the purpose or classification of companies on the basis of net sales or .turnover, we find that a reasonable classification has to be made. Dun Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of ₹ 1 crore to ₹ 200 crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores the companies which also have turnover of 1.00 to 200 crores only should be taken into consideration for the purpose of making TP study. 3.6.3 The above view has been followed in the case of Trilogy E Business Software India (P) Ltd. (supra) and the relevant portion of the finding is extracted as under: 20. In this regard, we find that the provisions of law pointed out by the learned counsel for the assessee as well as the decisions referred to by the Id. Counsel for the assessee clearly lay down the principle that the turnover filter is an important criteria in choosing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company. The argument of Ld. A.R. that a company might take employees on contract basis, do not hold any force as the argument is based only on assumptions. Therefore, we are not in agreement with the arguments of the Ld. A.R. 15. As regards the argument of Ld. A.R. regarding exclusion of LGS Global Ltd., Avani Cincon, Kals Information Systems and Bothtree Consultants, we are of the opinion that the company having similar functions can only be compared with the assessee and as per various decisions of the Tribunal as relied upon by the Ld. A.R., these companies were into development of the product also in addition to the business of providing services. 16. Ld. D.R. had argued that the TPO had taken segmental figures only to make the comparison. Therefore, we hold that this issue can be examined by the Assessing Officer afresh to ascertain as to whether segmental data relating to the provision of services were used or consolidated results were used for making comparison. 17. As regards the last argument of the Ld. A.R. regarding inclusion of finance and bank charges in operating expenses while computing the margin and comparables, we are in agreement with the argument of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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