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TMI Blog2015 (3) TMI 1024X X X X Extracts X X X X X X X X Extracts X X X X ..... tech Software Ltd. and Geometric Software Ltd. from the comparables. See Agile Software Enterprise Private Limited, C/o. Oracle India Private Ltd. Versus The Income Tax Officer [2015 (1) TMI 600 - ITAT BANGALORE] Inclusion of the reimbursement of expenses by the AE to the Assessee as part of the operating cost while working the adjustment on account of ALP - Held that:- It is clear from the decision rendered by the co-ordinate bench in the case of L.G.Soft India Pvt.Ltd. (2013 (9) TMI 191 - ITAT BANGALORE) that reimbursement of expenses cannot be considered as receipts for rendering services and should not be added back to the cost base for the purpose of mark up. Following the said decision, we hold that reimbursement of expenses cannot be considered as receipts for rendering services and should not be added back to the cost base for the purpose of mark up. As submitted by the learned DR neither the TPO not the DRP have gone into the question as to whether the receipt in question is reimbursement. We therefore remand the issue to the limited extent of verification regarding the nature of the receipt only and hold that if the receipts are purely reimbursement of expenses they sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ftware development Services - ₹ 7,51,78,503/- Reimbursement of expenses received - ₹ 27,02,741/- Reimbursement of expenses paid - ₹ 14,23,145/- TP ADJUSTMENT RELATING TO IT SERVICES (Software Development Services 4. Comparable ultimately selected by TPO and their arithmetic mean : Sl.No Name of company OP / TC (FY 2006-07) Sales (Rs.Cr.) 1 Aztec Software Limited 18.09 128.61 2 Geometric Software Limited (Seg.) 6.70 98.59 3 Infosys Ltd 40.38 9028.00 4 KALS Info Systems Limited 39.75 1.97 5 Mindtree Consulting Ltd 14.67 448.79 6 Persistent Systems Ltd. 24.67 209.18 7 R.Systems International Ltd. (Seg.) 22.20 79 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Adj.Arithmetic mean PLI 25.43% Arm s Length Price: Operating Cost 6,75,15,662+ ₹ 27,02,741* Rs.7,02,18,403 Arms Length Margin 25.43% of the operating cost Arms Length Price (ALP) At 118.44% of operating cost Rs.8,80,74,993/- 18.7. Price received vis- -vis the Arms Length Price: The price charged by the tax payer to its Associated Enterprises is compared to the Arms Length Price as under: Arms Length Price (ALP) At 125.43% of operating cost Rs.8,80,74,993 Price charged in the international transactions Rs.7,78,81,244 Shortfall being adjustment u/s.92CA Rs.1,01,93,749/- *Reimbursement of expense received The above shortfall of ₹ 1,01,93,749/- is treated as transfer pricing adjustment u/s 92CA. 6. Against the said adjustment proposed by the TPO which was incorporated in the draft assessment order by the AO, the assessee filed objections befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are more than ₹ 200 crores and cannot be compared with the Assessee whose turnover is less than ₹ 100 crores: (1) Flextronics Software Systems Ltd. 595.12 crores (2) Infosys Technologies Ltd. 9028.00 crores. Our attention was drawn to the observations of the Tribunal in the case of Triology E-Business Software India Pvt.Ltd. (supra) (ITA No.1338/Bang/2010) for assessment year (07-08) on the application of turnover filter and it was submitted that the aforesaid comparable companies have to be excluded from the final list of comparable selected by the TPO. 9. We have considered the submission of the learned counsel for the Assessee and the learned DR. In the case of Triology E-Business Software India (P) Ltd. (supra), this Tribunal on application of the turnover filter while selecting comparable companies for comparability analysis held as follows: (1) Turnover Filter 11. The ld. counsel for the assessee submitted that the TPO has applied a lower turnover filter of Q 1 crore, but has not chosen to apply any upper turnover limit. In this regard, it was submitted by him that under rule 10B(3) to the Income-tax Rules, it was necessary for comparing an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 13.It was further submitted that the TPO s range (Rs. 1 crore to infinity) has resulted in selection of companies like Infosys which is 277 times bigger than the Assessee (turnover of ₹ 13,149 crores as compared to ₹ 47.47 crores of Assessee). It was submitted that an appropriate turnover range should be applied in selecting comparable uncontrolled companies. 14.Reference was made to the decision of the ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010, wherein relying on Dun and Bradstreet s analysis, the turnover of Q 1 crore to Q 200 crores was held to be proper. The following relevant observations were brought to our notice:- 9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which .ire (sic) making losses as comparables. This shows that there is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issions. The provisions of the Act and the Rules that are relevant for deciding the issue have to be first seen. Sec.92. of the Act provides that any income arising from an international transaction shall be computed having regard to the arm s length price. Sec.92-B provides that international transaction means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. Sec.92-A defines what is an Associated Enterprise. In the present case there is no dispute that the transaction between the Assessee and its AE was an international transaction attracting the provisions of Sec.92 of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and (2), on the basis of such material or information or document available with him: Rule 10B of the IT Rules, 1962 prescribes rules for Determination of arm s length price under section 92C:- 10B. (1) For the purposes of sub-section (2) of section 92C, the arm s length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (a) . to (d) .. ( e)transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (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, betwe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared. A reading of the provisions of Rule 10B(2) of the Rules shows that uncontrolled transaction has to be compared with international transaction having regard to the factors set out therein. Before us there is no dispute that the TNMM is the most appropriate method for determining the ALP of the international transaction. The disputes are with regard to the comparability of the comparable relied upon by the TPO. In this regard we find that the provisions of law pointed out by the ld. counsel for the assessee as well as the decisions referred to by the ld. counsel for the assessee clearly lay down the principle that the turnover filter is an important criteria in choosing the comparables. The assessee s turnover is Q 47,46,66,638. It would therefore fall within the category of companies in the range of turnover between 1 crore and 200 crores (as laid down in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010) . Thus, companies having turnover of more th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the following four companies be excluded from the list of comparables selected by the TPO as they are functionally different and not comparable to the assessee. i) KALS Information Systems Ltd. ii) Tata Elxsi Ltd. (Seg). iii) Accel Transmatics Ltd. (Seg.) and iv) R Systems International Ltd. (Seg.) In this connection, the learned Authorised Representative drew the attention of the bench to the decision of the co-ordinate bench of this Tribunal in the case of Agile Software Enterprises Pvt. Ltd. (Supra) for Assessment Year 2006-07, wherein the companies listed at S.Nos.(i), (ii) and (iii) supra were held to be not functionally comparable with that of a pure software developer like the assessee. 8.2.1 We have heard the rival contentions of both the learned Authorised Representative and the learned Departmental Representative, perused and carefully considered the material on record; including the judicial decision cited and placed reliance upon by the assessee. On a perusal of the decision of the co-ordinate bench of the Tribunal in the case of Agile Software Enterprises Pvt. Ltd. (supra) for Assessment Year 2006-07, relied upon by the assessee, we find that the fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant extract are as follows: 16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds. Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn concl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of determining TNMM margin. Besides the above, it was pointed out that this company has related party transactions which is more than the permitted level and therefore should not be taken for comparability purposes. The submission of the ld. counsel for the assessee was that if the above company should not be considered as comparable. The ld. DR, on the other hand, relied on the order of the TPO. 50. We have considered the submissions and are of the view that the plea of the assessee that the aforesaid company should not be treated as comparables was considered by the Tribunal in Capgemini India Ltd (supra) where the assessee was software developer. The Tribunal, in the said decision referred to by the ld. counsel for the assessee, has accepted that this company was not comparable in the case of the assessees engaged in software development services business. Accepting the argument of the ld. counsel for the assessee, we hold that the aforesaid company should be excluded as comparables. 13. The facts and circumstances under which the aforesaid companies were considered as comparable is identical in the case of the Assessee as well as in the case of Triology E-Bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparable chosen by the TPO listed in the chart given at para-4 of this order viz., Tata Elxsi Ltd., is concerned, the comparability of the aforesaid two companies with that of the software service provider was considered by the Mumbai Bench of this Tribunal in the case of Logica Pvt.Ltd. IT (TP) 1129/Bang/2011 AY 07-08) wherein on the aforesaid company, the Tribunal held as follows:- 14. As far as comparable at Sl.No.6 24 are concerned, the comparability of the aforesaid two companies with that of the software service provider was considered by the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India Private Ltd. (supra) wherein on the aforesaid two companies, the Tribunal held as follows:- 7.7. Tata Elxsi Limited.: From the facts and material on record and submissions made by the learned AR, it is seen that the 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 AR 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 segme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egasoft Ltd., has related parties transaction exceeding 15% and therefore should not be regarded as comparable and in this regard drew our attention to the following observations of the ITAT Bangalore Bench in the case of Tektronix Engineering Devt. (supra): 7. Related Party Transactions exceeding 15%. 7.1 In respect of the following 3 comparable companies selected by the TPO, the learned Authorised Representative of the assessee has objected to their inclusion in the list of comparables on the grounds of that their RPT is in excess of 15%. The three comparables are - S.No. Name of company RPT % (i) Aztec Software Ltd. 17.78 (ii) Geometric Software Ltd. (Seg) 19.34 (iii) Megasoft Ltd. 17.08 In support of their exclusion, the learned Authorised Representative has placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of Agile Software Enterprises Pvt. Ltd. in IT(TP)A No.1172/Bang/2010 dt.26.9.2014; which is also for Assessment Year 2006- 07; the period under consideration. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nies while working out the ALP. There is no dispute that RPT filter in the case of Megasoft Ltd. was 17.08%, that of Aztech Software Ltd. was 17.78% and that of Geometric Software Ltd. was 19.34%. Coordinate Benches of the Tribunal are consistently following 15% as cut off mark for applying the RPT filter. Accordingly, we direct exclusion of Megasoft Ltd., Aztech Software Ltd. and Geometric Software Ltd. from the comparables. 7.3 Following the aforesaid decision of the co-ordinate bench of this Tribunal in the case of Agile Software Enterprises Pvt. Ltd. (supra), we hold that the aforesaid three companies listed at para 7.1 of this order be excluded from the list of comparables. 15. Following the aforesaid decision of the Tribunal, we hold that Megasoft Ltd., be excluded from the final list of 20 comparable companies chosen by the TPO. 16. The learned counsel for the Assessee addressed argument on the next issue in the appeal, viz., the action of the TPO in including the reimbursement of expenses of ₹ 27,02,741/- by the AE to the Assessee as part of the operating cost while working the adjustment on account of ALP. The learned counsel for the Assessee pointed o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessee that the sum in question is purely reimbursement of expenses. 19. We have considered the rival submissions. It is clear from the decision rendered by the co-ordinate bench in the case of L.G.Soft India Pvt.Ltd. (supra) that reimbursement of expenses cannot be considered as receipts for rendering services and should not be added back to the cost base for the purpose of mark up. Following the said decision, we hold that reimbursement of expenses cannot be considered as receipts for rendering services and should not be added back to the cost base for the purpose of mark up. As submitted by the learned DR neither the TPO not the DRP have gone into the question as to whether the receipt in question is reimbursement. We therefore remand the issue to the limited extent of verification regarding the nature of the receipt only and hold that if the receipts are purely reimbursement of expenses they should neither be considered as operating income nor operating expenses for the purpose of calculating margins of the Assessee. We hold and direct accordingly. 20. In the result the appeal by the Assessee is partly allowed. Pronounced in the open court on this 20th day of Mar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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