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TMI Blog2015 (6) TMI 321X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment proceedings on perusing Form No. 3CEB that was filed by Assessee, A.O noticed that Assessee had entered into international transactions whose value exceeded Rs. 15 crore and therefore reference u/s. 92CA(1) of the Act was made to Addl. CIT (TPO) for determination of Arms Length Price (ALP). Accordingly order u/s. 92CA(3) dated 18.01.2013 was made by TPO by making an upward adjustment in Arms Length Price (ALP) and by virtue of which an amount of Rs. 11,09,37,862/- was added to the total income of the Assessee. Thereafter a draft order was passed u/s. 143(3) r.w.s. 144C(1) r.w.s. 92CA(3) on 15.03.2013 by making transfer pricing adjustment of Rs. 11,09,37,862/- against which Assessee preferred the reference before Dispute Resolution Panel (DRP). Hon'ble DRP passed order u/s. 144C(5) r.w.s. 144C(8) on 26.12.2013 wherein the TPO was directed to verify the facts and also include some companies as comparables. Pursuant to the directions of DRP, A.O on 05.02.2014 after giving effect to DRP's direction revised the adjustment at Rs. 4,12,15,474/- and accordingly vide order dated 13.02.2014 that was passed u/s. 143(3) r.w.s. 144C(5) r.w.s. 144C(8) r.w.s. 144C(13) r.w.s. 92CA(3) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst the comparable companies selected by the Ld TPO which include entrepreneurial companies and hence an adjustment is necessary; 4.2 disregarding the provisions of Rules 10B(2) and 10B(3) read with Rule 10C of the Rules. 5. On the facts and circumstances of the case and in law, the Ld. AO ought to have considered the fact that the appellant provided all the information requested during the assessment proceedings and has neither concealed any income nor furnished any inaccurate particulars of its income. Therefore, the Ld. AO has erred in initiating the penalty proceedings under Section 271 (i)(c) of the Act. 6. The Ld. TPO/AO has erred in not disposing off the rectification application filed by the appellant for rectifying certain mistakes made by the Ld. TPO/AO in computing the revised TP adjustment workings as per the Directions passed by the Ld DRP. 4. Before us, at the outset ld. A.R. submitted that though various grounds have been raised but the only issue is with respect to transfer pricing adjustment. 5. Before us, ld. A.R. reiterated the submissions made before TPO, DRP and further submitted that during the year under review, Assessee had rendered software servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had included 2 companies as comparables namely Bodhtree Consulting Ltd. (margin of 54.39%) and EInfochip Bangalore Ltd. (94.43%). He submitted that the aforesaid two companies which have been included by TPO needs to be excluded as they cannot be considered as comparable companies in the T.P. study. With respect to exclusion of E-Infochip Bangalore Ltd. as comparable, ld. A.R. submitted that it is a company whose activities cannot be compared with that of Assessee as E-Infochip Bangalore Ltd. was primarily engaged in software development and I.T enabled services. He pointed to the information of its activities as given in the audited Balance Sheet of the company, the copy of which was placed at page 388 of the paper book. With respect to exclusion of Bodhtree Consulting Ltd as comparable he submitted that the results of Bodhtree Consulting Ltd. cannot be considered to be as comparable because there was drastic fluctuation in the operating margin with a high of 80.15% and low of -4.46% in a period of 6 years which indicates that there could be certain extraordinary fluctuation in operating margins. He pointed to page 124 of the paper book which had the tabulated results of the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asons for unusually high profits and in order to establish whether the entities with such high profits can be taken as comparable or not. The relevant observation of the Bench is as under:- "In generality, we are of the view that the answer to this question will depend on the facts and circumstances of each case inasmuch as potential comparable earning abnormally high profit margin should trigger further investigation in order to establish whether it can be taken as comparable or not. Such investigation should be to ascertain as to whether earning of high profit reflects a normal business condition or whether it is the result of some abnormal conditions prevailing in the relevant year. The profit margin earned by such entity in the immediately preceding year/s may also be taken into consideration to find out whether the high profit margin represents the normal business trend. The FAR analysis in such case may be reviewed to ensure that the potential comparable earning high profit satisfies the comparability conditions. If it is found on such investigation that the high margin profit making company does not satisfy the comparability analysis and or the high profit margin earned by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arable was excluded by the Pune Tribunal in the case of PTC Software (India) Pvt. Ltd (in ITA No. 336/PN/2014 order dated 31.10.2014) by holding as under;- 29. The assessee further has assailed the inclusion of Bodhtree Consulting Ltd. appearing at item No.6 in the list of comparables selected by the TPO. The said company was selected as a comparable by the TPO because in assessment year 2008-09, Bodhtree Consulting Ltd. was selected by the assessee itself. On the other hand, the objection raised by the assessee was that the current year's profits of the said company were on higher side and the same thus, was not functionally comparable. The trend of OP / TC of Bodhtree Consulting Ltd. was as under: Particulars FY 05-06 FY 06-07 FY 07-08 FY 08-09 FY 09-10 FY 10-11 FY 11-12 FY 12-13 OP / TC 13.87% 80.15% 19.89% 62.27% 33.42% -4.46% 3.29% -11.53% 30. The plea of the assessee before us was that admittedly it had selected the said company in the preceding year as a comparable because it was functionally comparable in the said year. However, because of the fluctuating profits shown by the assessee which varied in the range of 80.15% to -4.46%, the said company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s (India) Private Ltd. vs. ACIT vide ITA No.7466/Mum/2012 dated 07.03.2014. The relevant observations of the Bench are as under :- "In generality, we are of the view that the answer to this question will depend on the facts and circumstances of each case inasmuch as potential comparable earning abnormally high profit margin should trigger further investigation in order to establish whether it can be taken as comparable or not. Such investigation should be to ascertain as to whether earning of high profit reflects a normal business condition or whether it is the result of some abnormal conditions prevailing in the relevant year. The profit margin earned by such entity in the immediately preceding year/s may also be taken into consideration to find out whether the high profit margin represents the normal business trend. The FAR analysis in such case may be reviewed to ensure that the potential comparable earning high profit satisfies the comparability conditions. If it is found on such investigation that the high margin profit making company does not satisfy the comparability analysis and or the high profit margin earned by it does not reflect the normal business condition, we are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidered opinion, there is no material to say that the high profit margin of 34.71 % declared by the said concern in the instant financial year is a normal business trend. Ostensibly, the financial results of either the three preceding financial years or of the succeeding financial year do not justify that the margin of 34.71% for the year under consideration is a normal business trend. Thus, in our considered opinion, the inclusion of the said concern in the final set of comparables would not lend credibility to the comparability analysis and therefore it deserves to be excluded. We hold so. 9.The plea setup by the CIT(A), and which has been reiterated before us is that the point setup by the assesses would involve consideration of multiple year data of the comparable whereas the transfer pricing analysis is required to be done based on the singular financial year data i.e. financial year data of the comparables relevant to the year in which the international transactions have been entered into. In our considered opinion, the aforesaid plea of the Revenue is untenable having regard to the issue in question. No doubt, sub-rule (4) of rule 10B of the Income Tax Rules, 1962 (in shor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of Bodhtree Consulting Ltd., the objection raised by the assessee was on two accounts that first it was engaged in the sale of software products and no segmental data was available. However, on the other hand, the said company was picked up by the assessee as a comparable in the financial year 2008-09. We find that the profits declared by the said concern ought to be considered while selecting the said comparables. The perusal of the results shown by the said company reflected high margins in certain years and very low in other years, which do not reflect normal business conditions. Consequently, the margins of the said companies cannot be applied as comparables while benchmarking international transactions of the assessee in IT segments. 35. The learned Authorized Representative for the assessee during the course of arguments had stated that if the assessee was to succeed on its plea of exclusion of KALS Information System Ltd. and Bodhtree Consulting Ltd. from the final set of comparable, then the stated variation between arm's length price worked out by the TPO / DRP and the value stated value of the income would fall within +/- 5% margin and therefore, in terms of sec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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