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TMI Blog2015 (3) TMI 448X X X X Extracts X X X X X X X X Extracts X X X X ..... t by the CIT(A), it is not in dispute before us that in view of the substitution of the Second proviso to Section 92C(2) of the Income-tax Act by the Finance (No.2) Act, 2009, the second ground of appeal filed by the Revenue may have to be allowed. Consequently it is held that if the difference between the arithmetic mean of the profit margins comparable companies ultimately retained and the profit margin of the Assessee is more than 5% than no deduction under the proviso to Sec.92C(2) of the Act could be allowed to an Assessee. In the light of the decision of Trilogy EBusiness Software India Pvt. Ltd. [2013 (1) TMI 672 - ITAT BANGALORE] we hold that igate Global solutions Ltd., Flextronics Software Systems Ltd. And L & T Infotech Ltd would have to be excluded as comparable companies as these companies have turnover above ₹ 200 Crores. So also Tata Elxsi Ltd., would have to be excluded as not comparable in the light of the decision in the case of Logica Pvt. Ltd. (2015 (3) TMI 401 - ITAT BANGALORE). Sankhya Infotech Limited (‘Sankhya’) cannot be regarded as a comparable Sankhya is engaged in the business of development of software products & services and training. The c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,845/- by the CIT(A) in the appeal filed by the assessee. 3. The assessee, Novell India, is a subsidiary of Novell, USA and is a captive service provider. It is engaged in the business of providing software development and support services to Novell, USA. During the financial year 2004-05 relevant to the assessment year 2005- 06, the only international transaction that took place between Novell India and Novell US was provision of software development and support services to Novell US at a price of ₹ 55,01,62,457/-. 4. 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.55,01,62,457 Operating Cost Rs 50,01,47,691 Operating Prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Software Solutions Ltd. and Thirdware Solutions Ltd. (which are Sl.No.3 7 of the final list of comparable companies chosen by the TPO given as annexure-I to this order) were rejected based on the ground that these companies had abnormal profits in AY 05-06 and hence should be excluded for the purpose of comparability. In coming to the above conclusion, the CIT(A) followed the decisions of this Hon ble Tribunal in the case of Mentor Graphics (Noida) (P.) Ltd. vs DCIT (2007] 109 lTD 101 (Del), E-gain Communications (P.) Ltd vs. ITO, Ward 1(4), Pune[2008]- (023)- SOT-0385-TPIIN] and SAP Labs India Pvt. Ltd vs ACIT [2010] ITA No. 398 418 (Bang)]. (ii) One company, Satyam Computer Services Ltd (which is Sl.No.16 of the final list of comparable companies chosen by the TPO given as annexure-I to this order)selected by the TPO, was rejected for non-reliability of financial data. In doing so, the CIT(A) followed the decision of this Hon ble Tribunal in AgnIty India Technologies v. ITO (ITA 3856/DeI/2010) and SAP India Pvt. Ltd v. ITO [ITA No. 398/8/2008]. (iii) One company, lnfosys Technologies selected by the TPO, (which is Sl.No.17 of the final list of comparable companies chose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... follows:- (1) Assessment and reference to Transfer Pricing Officer are bad in law. (2) Departure from earlier year s stand by the Transfer Pricing officer ( TPO ) The TPO having accepted the international transaction of the Appellant as being at arm s length in the assessment year 2004- 05, the CIT(A) erred in law in confirming the different view adopted by the TPO in the assessment year 2005-06. (3) The fresh comparable search undertaken by the TPO is bad in law. (4) Determination of arm s length price by the TPO. (5) Erroneous data used by the AO/TPO. (6) Non-allowance of appropriate adjustments to the comparable companies, by the TPO. (7) Confirmation of levy of interest under Section 234B and non-adjudication on the grounds raised as regards levy of penalty. 13. We have heard the rival submissions. As regards the improper application of the RPT filter by the CIT(A), it is not in dispute before us that this Tribunal, in the cases of 24/7 Customer Pvt. Ltd. (ITA No.227/Bang/2010), and Sony India Private Ltd. reported in (2009) 315 ITR (80) 150 (Del.) and various other cases has taken a view that comparables having RPT of upto 15% of total revenues can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that igate Global solutions Ltd., Flextronics Software Systems Ltd. And L T Infotech Ltd would have to be excluded as comparable companies as these companies have turnover above ₹ 200 Crores. So also Tata Elxsi Ltd., would have to be excluded as not comparable in the light of the decision in the case of Logica Pvt. Ltd. (supra). 17. The learned counsel for the Assessee also seeks exclusion of one comparable chosen by the TPO as a comparable viz., Sankhya lnfotech Limited. He also seeks inclusion of one of its comparables in the TP study viz. Melstar Information Technologies Limited which was excluded by the TPO. Besides the above, the learned counsel for the Assessee also submitted that an adjustment for depreciation ought to be allowed. The submissions on this aspect will be set out in the later paragraphs. Sankhya Infotech Limited ( Sankhya ) 18. It was submitted by the learned counsel for the Assessee that Sankhya is engaged in the business of development of software products services and training. The company focuses on the development of niche products for the transport and aviation industry. However, segmental information in relation to the above ment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e economic conditions during the FY 2004-05 and its margins are adversely affected by its peculiar circumstances. The business profile of Melstar is not aligned with the normal trend of the software industry in India. The company therefore is not treated as a comparable. (page 82 of the TP order) 22. It is the submission of the learned counsel for the Assessee before us that that Melstar passes all filters applied by the TPO in his order and is functionally comparable. The filters applied by TPO and their satisfaction was tabulated as under: 23. It was further pointed out by him that the TPO has concluded that Melstar is not comparable on the ground that there was an extraordinary debit of ₹ 2.85 Cr and on the ground that the company s sales are diminishing. A perusal of the revenues of the previous financial years (page 81 of the TP order) demonstrates that the revenues are more or less consistent for the previous financial years and has only substantially decreased in the financial year 2004-05. The relevant extract of the Annual Report (Page 4) is reproduced below: C) Financial performance based on given indicators As per the audited financial results f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of a few comparables selected by CIT(A), as available in their annual reports, is as below:- Bodhtree Consulting Ltd. 3. Fixed Assets Fixed Assets are accounted at cost of acquisition inclusive of other related expenses on such acquisition. Depreciation on fixed assets is provided on a prorata basis using straightline method at rates as per Schedule XIV to the Cornpones Act, 1956. Lanco Global Systems Ltd. Fixed Assets: (i) Fixed assets are stated at cost less accumulated depreciation. Cost of acquisition of fixed assets is inclusive of freight, duties, taxes and incidental expenses thereto. Depreciation and Amortisation (i) Depreciation is provided on straight line method on prorata basis and at the rates and manner specified in the Schedule XIV of the Companies Act, 1956. (ii) Preliminary Expenses are amortised over the period of 5 years. (iii) Public Issue Expenses are amortised over the period of 5 years. Sankhya Infotech Ltd. 5. Fixed assets Fixed assets are stated at cost, less accumulated depreciation. Direct costs are capitalized until fixed assets are ready for use. Cost means cost of bringing the asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se (i). 29. Sub-clause (iii) of the said Rule specifies that before a comparison of the net margins realised under sub- clauses (i) and (ii) is done, the net margin realised under sub-clause (ii) must be adjusted to take into account the differences which could materially affect the net profit margin in the open market. Relevant extracts of Rule 10B(1)(e)(iii) are reproduced as under:- (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market, (emphasis supplied) 30. According to ld. counsel for the assessee, based on the above, there was a need for making an adjustment on account of difference between the net margin of the assessee and that of the comparable companies. It was further pointed out by him that Rule 10B(3) of the Rules provides that an uncontrolled transaction shall be considered as a comparable if: a) none of the differences ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, the margins of the comparable companies post the adjustment of the depreciation should be considered. The Tribunal held on the above issue as follows: 19.4 We have heard both parties and considered the rival submissions. We find force in the submissions of the learned Departmental Representative. Whether an adjustment towards depreciation is warranted or not may be, issue of principle. But whether the principle needs to be applied to a particular case or not would depend on the peculiar facts of that case. It cannot be anybody s case that an adjustment has to be necessarily granted whenever and wherever there is difference in depreciation between the tested party and the comparables. An adjustment for difference in depreciation is a valid principle for comparability, but whether this case entails such an adjustment has to be examined in the light of the particular facts of the case. Hence, the additional ground raised by the assessee is as much as issue of fact as it is of principle. 19.5 Before us, the assessee has not been able to adduce any reason as to why this issue was not raised before the authorities below. It gives credence to the view of the learned Departmenta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed only if there are operational differences that affect comparability. We remit the issue of depreciation as raised by the assessee in the additional grounds (supra) to the file of the Assessing Officer / TPO with direction to examine and consider the claim for adjustment towards depreciation in the light of our observations from paras 19.3 to 19.8 of this order and to dispose the matter expeditiously after affording adequate opportunity of being heard to the assessee. It is ordered accordingly. 34. The above observations were referred to by the Tribunal in the case of M/S. Honeywell Technology Solutions Lab P Ltd. (supra). We however do not find any quantification of adjustment to be allowed given by the Assessee. 35. We are of the view that it would be just and appropriate to remand the issue to the AO for fresh consideration in the light of the decisions referred to above. We are also of the view that the Assessee should be directed to give the quantification of adjustment to be allowed, if found eligible, applying the ratio laid down in the case of 24/7 customercare.com (supra). We hold and direct accordingly. 36. According to the learned counsel for the Assessee, if ..... X X X X Extracts X X X X X X X X Extracts X X X X
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