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TMI Blog2015 (7) TMI 566X X X X Extracts X X X X X X X X Extracts X X X X ..... he purpose of determination of the ALP of the international transaction, as it would only result in academic exercise. In view of the same, the additional grounds of appeal are not admitted. - Decided partly in favour of assessee. - Stay Petn.No.30/Bang/2014 (In IT(TP)A No.30/Bang/2014) - - - Dated:- 30-6-2015 - Smt. P. Madhavi Devi and Shri Jason P.boaz, JJ. For the Petitioner : Shri K.R.Vasudevan, Advocate. For the Respondent : Shri Farhat Hussain Qureshi, CIT(DR). ORDER Per Smt.P. MADHAVI DEVI, JM: This appeal by the assessee is against the assessment order dated 29/11/2013 passed u/s 143(3) r.w.s.144C(13) of the Income tax Act, 1961 [hereinafter referred to as 'the Act' for short] for the assessment year 2009-10. 2. Brief facts of the case are that the assessee is a company which is engaged in the business of software development and ITES services. It filed its return of income for the relevant assessment year declaring nil income after claiming deduction u/s 10A of the Act. During the assessment proceedings u/s 143(3) of the Act, the Assessing Officer (AO) observed that the assessee had entered into an international transaction with its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see had identified 17 companies as comparables to justify the international transaction with its AE to be at arm s length. The arithmetic mean of the said companies was shown at 13% and since the assessee had earned OP/TC of 13.86%, it claimed that it was in line with the average OP/TC earned by the comparable companies identified in the transfer pricing report and therefore submitted that no adjustment was called for. The TPO, however, rejected the comparable companies selected by the assessee and proposed 11 companies as comparable to the assessee. Based on the same, the TPO determined arm s length margin (after working capital adjustment) to be 22.78% and proposed the transfer pricing adjustment of ₹ 5,32,53,612/-. 5. Before us, the learned counsel for the assessee has filed a chart containing the details of all the 11 companies adopted by the TPO out of which two companies have been accepted by the assessee as comparable. The companies accepted by the assessee are Akshay Software Technologies Ltd., and R S Software India Ltd. As regards KALS Information Systems Ltd., is concerned, we find that the assessee had not challenged consideration of the said company before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order of the DRP to convince us that the order of the TPO needs to be upheld. 7. Having regard to the rival contentions and the material on record, we find that of the assessee is 100% capital service provider providing software development and testing services in pursuance of the service agreement with its parent company Sabre Inc . The assessee is rendering services on a total cost + mark up basis without regard to the success or failure of such activity. The financial results declared by the assessee for the FY 2008-09 are: Operating Revenues 68,00,66,852 Operating Expenses 59,72,63,776 Operating (Profits)/Loss 8,28,03,076 Op Profit on cost % 13.86% The international transactions (between the assessee and its AE) are: Sl. No. Type of transaction Amount (Rs.) 1 Software Development Services (Recd) 68,00,66,852 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 Kals Information Systems Ltd. sales 21404686 expenses 18793813 Total cost 19620476 Less forex loss 390795 Loss on sale of MF 423326 Interest 12542 cost 63469173337 op profit 2610873 op/oc 13.89% 5 Lar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... op profit 1521640000 op/oc 41.40% 8 R S Software (India) Ltd. Sales 1495712634 Total cost 1400395176 Less: interest 40160587 donations 132000 op cost 1360102589 op profit 135610045 op/oc 9.97% 9 Sasken Communication Te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost 6623293113 depreciation 193705047 total cost 6816998160 op cost 6816998160 op profit 532353215 op/oc 7.81 9. The companies which, according to the assessee, are to be excluded are as under: i) Bodhtree Consulting Ltd. ii) Tata Elxsi Ltd. iii) Sasken Communication Technologies Ltd., iv) Persistent Systems Ltd. v) Zylog System Ltd. vi) Mindtree Ltd. vii) Larsen and Turbo Infotech viii) Infosys Technologies Ltd. The assessee has relied upon the decision of the Tribunal in the case of Airbus India Operations Pvt. Ltd., (cited supra) in support of its contentions stated above. 10. Before applying the said decision to the facts of the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th a software development services company such as the Assessee for AY 09-10 was considered by this Tribunal in the case of M/s. Cisco Systems (India) Pvt.Ltd., IT (TP)A No.271/Bang/2014 for AY 09-10 order dated 14.8.2014. This Tribunal held as follows: 26.1 Bodhtree Consulting Ltd .:- As far as this company is concerned, it is not in dispute that in the list of comparables chosen by the assessee, this company was also included by the assessee. The assessee, however, submits before us that later on it came to the assessee s notice that this company is not being considered as a comparable company in the case of companies rendering software development services. In this regard, the ld. counsel for the assessee has brought to our notice the decision of the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. v. ITO, ITA No.7633/Mum/2012, order dated 6.11.2013. In this case, the Tribunal followed the decision rendered by the Mumbai Bench of the Tribunal in the case of Wills Processing Services (I) P. Ltd., ITA No.4547/Mum/2012. In the aforesaid decisions, the Tribunal has taken the view that Bodhtree Consulting Ltd. is in the business of software products and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies are more than ₹ 200 crores and cannot be compared with the Assessee whose turnover is less than ₹ 200 crores: (1) Mindtree Ltd. (2) Persistent Systems Ltd. (3) Sasken Communication Technologies Ltd. (4) Infosys Technologies Ltd. (5) Tata Elxsi Ltd. (6) Larsen Toubro Infotech (7) Zylog System Ltd. In this regard, our attention was drawn to the decision of the ITAT Bangalore Bench in the case of Genisys Integrating Systems (India) Ltd., ITA No.1231/Bang/201,0 which was followed by the ITAT Bangalore Bench in the case of Trilogy E-Business Software India Pvt.Ltd. (supra) for assessment year (07-08) on the application of turnover filter and it was held that comparable companies having turnover of above ₹ 200 Crores cannot be compared with companies whose turnover is less than ₹ 200 Crores. The learned DR relied on the order of the TPO/DRP. 17. We have considered the submission of the learned counsel for the Assessee and the learned DR. In the case of Trilogy E-Business Software India (P) Ltd. (supra), this Tribunal on application of the turnover filter while selecting comparable companies for com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. These differences could either be with reference to the transaction or with reference to the enterprise. For instance, 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 200 crores as comparables. In these circumstances, it was submitted by him that the assessee cannot have any grievance in this regard. 17. We have considered the rival submissions. 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 nonresidents, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 under sub-section (3) of section 92D, the Assessing Officer may proceed to determine the arm s length price in relation to the said international transaction in accordance with sub-sections (1) and (2), on the basis of such material or information or document available with him: 18. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ially 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 transaction shall be the data relating to the financial year in which the international transaction has been entered into : Provided that data relating to a period not being more than two years prior 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. 19. 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. 20. In this regard we find th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rables on the ground of turnover filter of the Rs.200/- crores. 13. In addition to the above, the assessee is also seeking exclusion of Infosys Ltd., Tata Elxi from the list of comparables on the ground of functional dissimilarity and placed reliance upon the decision of this Tribunal in the case of Airbus India Operations Pvt. Ltd., (cited supra). We find that in Airbus India Operations Pvt. Ltd., (cited supra), this Tribunal has held as under: 19. The next submission of the learned Counsel for the Assessee was that though, Infosys Technologies Ltd., Tata Elxsi Ltd. (seg.) have to be excluded by applying the Turnover filter, they are also additionally functionally not comparable as held by this Tribunal in the case of Genisys Integrating Systems (India) Ltd. (supra) and Cisco Systems (India) (supra). We have considered his submission and we find that in the case of Cisco Systems (India) (supra), this tribunal has also held that the aforesaid two companies are also not functionally comparable to a company such as the Assessee rendering purely software development services. The following were the relevant observations of the Tribunal. 26.2 Infosys Ltd. :- As far ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits cannot be considered as comparable to captive service providers assuming limited risk ; (iii) the company has generated several inventions and filed for many patents in India and USA ; (iv) the company has substantial revenues from software products and the breakup of such revenues is not available ; (v) the company has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in AUTOLAY , a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded from the list of comparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annual report or the databases based on which the margin from software services activity only could be computed. The company has also in its response to the notice u/s.133(6) stated that it cannot be considered as comparable to any other software services company because of its complex nature. Hence, Tata Elxsi Ltd., is to be excluded from the list of comparables. (ii) Flextronics Software Systems Ltd. : The learned TPO has considered this company as a comparable based on 133(6) reply wherein this company reflected its software development services revenues to be more than 75% of the software products and services segment revenues. Flextronics has a hybrid revenue model and hence should be rejected as functionally different. Based on the information provided under Revenue recognition in its annual report, it can be inferred that the software services revenues are earned on a hybrid revenue model, and the same is not similar to the regular models adopted by other software service providers. The learned representative pleaded that a regular software services provider could not be compared to a company having such a unique revenue model, wherein the revenues of the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainst this comparable as the company was not considered as a comparable by the taxpayer for the present FY 2006-07. 21. We have heard the rival submissions and considered the facts and materials on record. After considering the submissions, we find that Tata Elxsi and Flextronics are functionally different from that of the assessee and hence they deserve to be deleted from the list of six comparables and hence there remains only four companies as comparables, as listed below: 26.5. Following the aforesaid decision of the Tribunal, we hold that M/S.Tata Elxsi Ltd. should not be regarded as a comparable. 20. Respectfully following the decision of the Tribunal referred to above and taking note of the fact that the facts and circumstances under which the aforesaid company was considered by the TPO as comparable with a software development service provider such as the Assessee for identical reasons, we direct the TPO to exclude the aforesaid two companies from the list of comparable companies for the purpose of computation of ALP. 8. Since the facts and circumstances in the case before us are similar, we direct the AO/TPO to exclude these companies also from t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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