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TMI Blog2014 (12) TMI 804X X X X Extracts X X X X X X X X Extracts X X X X ..... e comparables - assessee’s turnover is ₹ 47,46,66,638. It would therefore fall within the category of companies in the range of turnover between 1 crore and 200 crores - thus, companies having turnover of more than 200 crores have to be eliminated from the list of comparables. Improper selection of comparables – KALS Information Systems Ltd. - Held that:- Following the decision in Trilogy E-Business Software India (P.) Ltd. Versus Deputy Commissioner of Income-tax. Circle 12(4). Bangalore [2013 (1) TMI 672 - ITAT BANGALORE] wherein it has been held that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act – The 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 - this company was developing software products and not purely or mainly software development service provider. Accel Transmatic Ltd. – Held that:- The company should not be treated as comparables was considered by the Tribunal in Capgemini India (P.) Ltd. Versus Additional Commissioner o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me-tax Act, 1961 [ the Act ] in relation to assessment year 2006-07. 2. Ground No.1 is general in nature, calling for no specific adjudication. 3. Grounds No.2 to 4 raised by the Assessee project the grievance of the Assessee regarding the action of the learned Assessing Officer and Hon ble Dispute Resolution Panel, excluding expenses incurred on travel expenses in foreign currency and expenses incurred towards telecommunication expenses from export turnover on the ground that these expenses are incurred in rendering technical services rendered to clients outside India, while computing deduction under section 10A. It is the plea of the Assessee that at all times, during the relevant previous year, it was engaged in development of computer software and not rendering any technical services. Without prejudice to its contention that the aforesaid sums should not be excluded from the export turnover while computing deduction u/s.10A of the Act, the Assessee has also made an alternate prayer that if the expenses are reduced from the export turnover, the same should also be reduced from the total turnover and in this regard, has placed reliance on the decision of the Hon ble Karnata ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se ( AE ) and therefore the price at which the assessee renders services to its AE has to pass the Arm s Length Price (ALP) test as laid down by section 92C of the Act. During the financial year 2005-06, the assessee provided software research development support services to its AE and was remunerated on a cost plus basis. The total value of international transaction with respect to the provision of software research development support services by the assessee to its AE was ₹ 9,84,50,937. 7. In support of the assessee s claim that the price charged by it for services rendered to its AE was at arms length, the assessee filed a report as required by the provisions of section 92E of the Act in Form 3EB together with detailed analysis. The assessee adopted Transaction Net Margin Method (TNMM) as the most appropriate method for determining the ALP. Operating profits to cost was adopted as the Profit Level Indicator ( PLI ). The PLI of the assessee was arrived at as follows:- Operating Revenue Rs.9,84,50,937 Operating Cost Rs.8,83,97,189 Operating Profit Rs.1,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Shortfall being adjustment u/s.92CA Rs.68,91,931 The above shortfall of ₹ 68,91,931/- is treated as transfer pricing adjustment u/s 92CA. 10. Against the said adjustment proposed by the TPO which was incorporated in the draft assessment order by the AO, the assessee filed objections before the DRP. The DRP rejected those objections and confirmed the transfer pricing adjustment suggested by the TPO. The adjustment confirmed by the DRP was added to the total income of the assessee by the AO in the fair order of assessment. Against the said order of the Assessing Officer, the assessee has preferred the present appeal before the Tribunal. 11. The ld. counsel for the assessee brought to our notice that out of the 20 comparable companies chosen by the TPO, the following companies will have to be excluded as the turnover of these companies are more than ₹ 200 crores and cannot be compared with the Assessee whose turnover is less than ₹ 20 crores: (1) Flextronics Software Systems Ltd. 595.12 crores (2) iGate Global Solutions Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not reasonable classification. Several other decisions were referred to in this regard laying down identical proposition. We are not referring to those decisions as the decision of the Special Bench on this aspect would hold the field. Reference was also made to the OECD TP Guidelines, 2010 wherein it has been observed as follows:- Size criteria in terms of Sales, Assets or Number of Employees: The size of the transaction in absolute value or in proportion to the activities of the parties might affect the relative competitive positions of the buyer and seller and therefore comparability. 12. The ICAI TP Guidelines note on this aspect lay down in para 15.4 that a transaction entered into by a ₹ 1,000 crore company cannot be compared with the transaction entered into by a ₹ 10 crore company. The two most obvious reasons are the size of the two companies and the relative economies of scale under which they operate. The fact that they operate in the same market may not make them comparable enterprises. The relevant extract is as follows [on Rule 10B(3)]: Clause (i) lays down that if the differences are not material, the transactions would be comparable. Thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the Indian scenario into consideration, we feel that the classification made by 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 ₹ 1.00 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 200.00 crores only should be taken into consideration for the purpose of making TP study. 15. It was brought to our notice that the above proposition has also been followed by the Honourable Bangalore ITAT in the following cases: 1. M/s Kodiak Networks (India) Private Limited Vs. ACIT (ITA No.1413/Bang/2010) 2. M/s Genesis Microchip (I) Private Limited Vs. DCIT (ITA No.1254/Bang/20l0). 3. Electronic for Imaging India Private Limited (ITA No. 1171/Bang/2010). It was finally submitted that companies having turnover more than ₹ 200 crores ought to be rejected as not comparable with the Assessee. 16. The ld. DR, on the other hand pointed out that even the assessee in its own TP study has taken companies having turnover of more than & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etical mean of such prices: Provided further that if the variation between the arm s length price so determined and price at which the international transaction has actually been undertaken does not exceed five per cent of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm s length price. (3) Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that (a) the price charged or paid in an international transaction has not been determined in accordance with sub-sections (1) and (2); or (b) any information and document relating to an international transaction have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made in this behalf; or (c) the information or data used in computation of the arm s length price is not reliable or correct; or (d) the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction if (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. (4) The data to be used in analysing the comparability of an uncontrolled transaction with an international ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14. Respectfully following the aforesaid decision of the Tribunal in the case of Trilogy E-Business Software India Pvt. Ltd. (supra), we hold that the following companies should be excluded from the list of comparable companies. (1) Flextronics Software Systems Ltd. 595.12 crores (2) iGate Global Solutions Ltd. 527.91 crores (3) Mindtree Ltd. 448.79 crores (4) Persistent Systems Ltd. 209.18 crores (5) Sasken Communication Technologies Ltd. (Seg.) 240.03 crores (6) Infosys Technologies Ltd. 9028 crores 15. The AO is directed to compute the Arithmetic mean by excluding the aforesaid companies from the list of comparable. 16. Improper selection of comparables: It was submitted by the learned counsel for the Assessee that the following companies are not functionally comparable with that of the Assessee. a) KALS Information Systems Limited b) Accel Transmission Limited. 17. In this regard our attention was drawn to the decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information 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. (e) Accel Transmatic Ltd. 48. With regard to this company, the complaint of the assessee is that this company is not a pure software development service company. It is further submitted that in a Mumbai Tribunal Decision of Capgemini India (P) Ltd v Ad. CIT 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 Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntical in the case of the Assessee as well as in the case of Trilogy E-Business Software India Pvt. Ltd. (supra). Respectfully following the decision of the Tribunal referred to above, we direct that the following companies be excluded from the list of 26 comparable arrived at by the TPO:- a) KALS Information Systems Limited b) Accel Transmission Limited. 20. As far as the comparable chosen by the TPO viz., TATA Elxsi is concerned, this Tribunal in the case of Yodlee Infotech Pvt. Ltd. Vs. ITO in ITA No.1538/Bang/2012 by its order dated 30.8.2013 held that this company is not functionally comparable with a software development service provider. The following were the relevant observations of the Tribunal in this regard. 15. Tata Elxsi Limited. 15.1.1 This company was selected by the TPO for inclusion in the set of comparables. Before the TPO, the assessee had objected to the inclusion of this company in the set of comparables for various reasons such as functional dissimilarity significant R D activity, brand value, size, etc. The TPO, however, rejected the assessee's objections and included the company in the set of comparables. Before us, in this appeal the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee in the case on hand. Further, the Mumbai ITAT in the case of Telecordia Technologies India Pvt . Ltd. (ITA No.7821/Mum/2011) has held, that this company, M/s. Tata Elxsi Ltd. is not a software development service provider, at para 7.7 on page 21 of its order which is extracted hereunder : 7.7 . Tata Elxsi is engaged in development of niche product and development services, which is entirely different from the assessee company. We agree with the contention of the learned Authorised Representative that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company fit for comparability analysis for determining the arms length price for the assessee, hence, should be excluded from the list of comparable parties. As can be seen from the extracts of the Annual Report of this company, placed before us, this factual position pertaining to Tata Elxsi Ltd., has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bilities 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 (which was akin to software development) internally and that the portion of the revenue from development of software sold and used for customization was less than 25% of the overall revenues. The TPO therefore held that less than 25% of the revenues of the comparable are from software products and therefore the comparable satisfied TPO s filter of more than 75% of revenues from software development services. Having drawn the above conclusion, the TPO did not bother to quantify the revenues which can be attributed to software product development and software development service but adopted the margin of this company at the entity level. In terms of Rule 10B(3)(b) of the Rules, an uncontrolled transaction shall be comparable to an international transaction if (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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