9911796707
TMI Blog2015 (6) TMI 321X X X X Extracts X X X X X X X X Extracts X X X X ..... of the company, with respect to the segment information it is stated that the company is primarily engaged in software development and I.T enabled services which is considered the only reportable business segment as per Accounting Standard AS-17 “segment reporting” prescribed in Companies (Accounting Standard) Rules, 2006. We thus find that no segmental information is available, thus to be excluded from the list of comparable. Thus restore the issue back to the file of A.O/TPO, who after excluding the aforesaid 2 companies rework the addition - Decided in favour of assessee for statistical purposes. - I.T. A. No.771/AHD/2014 - - - Dated:- 5-6-2015 - SHRI ANIL CHATURVEDI SHRI KUL BHARAT, JJ. For the Appellant : Shri Dhanesh Bafna, A.R. For the Respondent : Shri Vimalendu Verma, CIT/DR ORDER PER SHRI ANIL CHATURVEDI,A.M. 1. This appeal filed by the Assessee is against the order dated 13.02.2014 of DCIT passed u/s. 143(3) r.w.s. 144C of the Act for A.Y. 2009-10. 2. The relevant facts as culled out from the material on record are as under. 3. Assessee is a company stated to be engaged in providing captive software development services to its As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.On the facts and in the circumstances of the case, the Ld. AO/DRP erred in modifying the set of comparable companies identified by the appellant in its Transfer Pricing Study Report for provision of software development services. In doing so, the Ld AO/DRP specifically erred in: 2.1 conducting a fresh search for comparables (by applying certain additional quantitative/qualitative filters for identifying comparables) and gathering data not available in the public domain by initiating the proceedings under section 133(6) of the Act. 2.2 introducing additional companies (by conducting a fresh search) which are functionally non-comparable to the appellant's business operations and having abnormal profit margins, thereby resulting in incorrect selection of comparables. 2.3 rejecting companies functionally similar to that of the appellant's business operations and considered comparable companies by the appellant. 3. The Ld. DRP/AO erred in considering the single year data for the comparables i.e. data for FY 2008-09 only and disregarding multiple year data which was considered by the appellant in accordance with the provisions of Rule 106(4) of the Income-tax Rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treated as at arms length by the Assessee. TPO though agreed that TNMM method was the most appropriate method but did not agree to arms length nature of the international transactions related to provision of software services as demonstrated by the Assessee in its TP study report. It was noticed by TPO that the PLI of the comparables was arrived by the Assessee by considering weighted average margin of 3 years data for F.Y. 06-07, 07-08 08-09 and it was seen that in none of the cases, the data for F.Y. 08-09 was used. It was also noticed that Assessee had selected 14 companies as comparables on the basis of search conducted in public data base. The filters/search applied by the Assessee were rejected by TPO and thereafter TPO disregarded the use of multiple year data for testing the markup for services rendered by Assessee, rejected certain quantitative filters applied by the Assessee and introduced certain new quantitative filter, included certain additional comparables which were not considered by the Assessee. Based on the aforesaid approach, revised set off comparables was considered by TPO and the addition on account of international transactions was made. 6. Before us, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the Assessee . The ld. D.R. on the other hand supported the order of A.O and ld. CIT(A). 7. We have heard the rival submissions and perused the material on record. The issue in the present case with respect to determination of ALP in the case of international transaction entered into by the Assessee. It is an undisputed fact that for determining arms length nature of international transaction Assessee had selected TNMM method as the most appropriate method which has also been accepted by the TPO as the most appropriate method. In the T.P. study carried out by TPO, fresh criteria were applied by TPO and the 2 companies, which were not considered as comparable by Assessee, were selected by TPO and their margins were applied to determine the ALP of the transaction. The 2 companies selected by TPO are Bodhtree Consulting Ltd and E-Infochip Bangalore Ltd . From the results of Bodhtree Consulting Ltd. which is placed at page 124 of the paper book it is seen that there is drastic fluctuation in the operating margins with a high of 80.15% in F.Y. 06-07 and low of -4.46% in F.Y. 10-11. We find that Special Bench of Tribunal in the case of Maersk Global Centres India Pvt. Ltd. in IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T in the case of Maersk Global Centres had an occasion to deal with the question as to whether high profit margin making companies should be excluded as a comparable. The Special Bench after considering several aspects held in para 88 of its order that the potential comparable companies cannot be excluded merely on the ground that their profit is abnormally high. The Special bench held that in such cases it would require further investigation to ascertain the reasons for unusually high profit and in order to establish whether the entities with such high profits can be taken as comparable or not. In the light of the aforesaid decision of the Special Bench and in view of the admitted position that the assessee follows Fixed Price Project model where revenues from software development is recognized based on software developed and billed to clients, there is a possibility of the expenditure in relation to the revenue being booked in the earlier year. The results of Bodhtree from F.Y. 2003 to 2008 excluding F.Y. 2007 as given by the learned counsel for the assessee were also perused. Perusal of the same shows, that there has been a consistent change in the operating margins. The chart f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n making companies should be excluded as a comparable. The Special Bench after considering several aspects held in para 88 of its order that the potential comparable companies cannot be excluded merely on the ground that their profit is abnormally high. The Special bench held that in such cases it would require further investigation to ascertain the reasons for unusually high profit and in order to establish whether the entities with such high profits can be taken as comparable or not. In the light of the aforesaid decision of the Special Bench and in view of the admitted position that the assessee follows Fixed Price Project model where revenues from software development is recognized based on software developed and billed to clients, there is a possibility of the expenditure in relation to the revenue being booked in the earlier year. The results of Bodhtree from FY 2003 to 2008 excluding FY 2007 as given by the learned counsel for the assessee were also perused. Perusal of the same shows, that there has been a consistent change in the operating margins. The chart filed by the assessee in this regard is given as an annexure to this order. It appears to us that the revenue recogni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ussion of the Special Bench, it is quite clear that the concerns earning abnormal high profit margins cannot be excluded from the list of comparables unless appropriate investigations are made. It would be necessary to ascertain as to whether the high profit margins reflect a normal business phenomena or whether it is the result of certain abnormal conditions prevailing in a particular year. In order to determine so, profit margins earned by such concern in the proximate preceding and succeeding years would be required to be considered in order to establish whether the high profit margins reflect a normal business trend or otherwise. In this background of the matter, the appellant has furnished before us the operating margin trends of the said concern over the five financial years i.e. for the three preceding years and one succeeding financial year. Notably, for the financial year under consideration, the margin of the said concern is 34.71 % whereas for the preceding three financial years of 2003-04, 2004-05 and 2005-06 it is -6.47%, -69.07% and -44.21% respectively and for the subsequent financial year of 2007-08, the margin is 3.67%. The aforesaid clearly suggests a wide fluctua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich could have an influence on the determination of transfer prices in relation to the tested transaction. We are only pointing out the aforesaid to say that the proposition being canvassed by the Revenue that data of the financial year in which the international transaction has been entered into, alone and alone, is to be used is not an absolute proposition. Needless to say, the objective of carrying out the comparability analysis is to determine the arm's length price of an international transaction by means of examining similarly placed uncontrolled transactions. Therefore, if on facts, it can be established that adoption of a certain comparable would lead to skewed results or that the financial data of a particular comparable is otherwise devoid of credibility, such comparables would deserve to be excluded from the list of comparables even if such an exercise involved examination of data of the comparables for more than one financial year. In the present case, as our discussion in the earlier paras reveal, the profit margin of 34.71% for the year under consideration is an abnormal business trend, and, accordingly the said concern is liable to be excluded. Therefore, we do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is-a-vis exclusion of KALS Information System Ltd. and Bodhtree Consulting Ltd. from the final set of comparables. We accordingly, direct the Assessing Officer to recompute the arm's length price of the transactions of assessee company with its AEs applying the average profit margin of remaining comparables and if the difference between the arm's price length so recomputed and the price actually charged is within the limit of +/- 5%, then no Transfer Pricing adjustment is to be made. The grounds of appeal raised by assessee are thus, allowed for statistical purposes. 10. Before us, Revenue has not brought any contrary binding decision in its support. With respect to E-Infochip Bangalore Ltd., we find that in the annual accounts of the company, with respect to the segment information it is stated that the company is primarily engaged in software development and I.T enabled services which is considered the only reportable business segment as per Accounting Standard AS-17 segment reporting prescribed in Companies (Accounting Standard) Rules, 2006. We thus find that no segmental information is available. With respect to E-infochip Ltd. Assessee had raided objection against ..... X X X X Extracts X X X X X X X X Extracts X X X X
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