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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 ..... pment services. Therefore, the said transaction was referred to the Transfer Pricing Officer (TPO) u/s 92CA of the Act for determination of the arms' length price (ALP) of the international transaction. Consequently, the TPO, examined the financial results of the assessee and after determining the most appropriate method and after taking into consideration various margins of the various comparable companies, has arrived at the transfer pricing adjustment of Rs. 5,32,53,612/- vide order dated 16/02/2013. Based on the adjustment proposed by the TPO, the AO passed the draft assessment order against which the assessee preferred objections before the Disputes Resolution Panel (DRP). The DRP confirmed the adjustment proposed by the TPO as incorporated by the AO in the draft assessment order. Consequent thereto, the AO passed the final assessment order against which the assessee is in appeal before us. 3. The learned counsel for the assessee, at the time of hearing, submitted that though the assessee has raised as many as 7 grounds of appeal, the assessee does not wish to press grounds No.1 to 3, 4.1 to 4.4, 4.11 and 5 to 7. These grounds are accordingly rejected as not pressed. In addit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from challenging the same before us without cogent and reasonable cause. Therefore, we refuse to interfere with the orders of the authorities below on the comparability of KALS Information Systems Ltd. The other comparable companies which are being challenged by the assessee 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. Amongst these companies, the assessee is seeking exclusion of Tata Elxsi Ltd., Sasken Communication Technologies Ltd., Persistent Systems Ltd., Zylog System Ltd. Mindtree Ltd., Larsen & Turbo Infotech, Infosys Technologies Ltd., on the ground that the turnover of these companies is more than Rs. 200 crores. He submitted that the turnover of the international transaction of the assessee is only Rs. 68,00,66,852/- whereas the turnover of all the above companies was more than Rs. 200 crores. Therefore, as held by the Hon'ble ITAT in the case of Airbus India Operations Pvt. Ltd., in IT(TP)A No.35/Bang/2014, he prayed that these companies be excluded from the list of comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 483 cost 113149350 op profit 91,72,133 op/cost% 8.11% 2 Bodhtree Consulting Ltd. sales 160575212 cost 102646525 less forex loss 3689704 cost 98956821 op profit 61618391 op/oc 62.27% 3 Infosys Ltd. sales 202640000000 total cost 1450 cr 11145+933+1280+694=14052 cr Less provisions 114 cr donations 21 cr cost 139170000000 op profit 63470000000 op/oc 45.61% 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent result 3476378000 segment cost 307925000 unallocated cost 67065000 total cost 3146315000 op cost 3146315000 op profit 637988000 op/oc 20.28% 11 Zylog Systems Ltd. sales 7349351475 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 fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y with 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 wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rores and cannot be compared with the Assessee whose turnover is less than Rs. 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 Rs. 200 Crores cannot be compared with companies whose turnover is less than Rs. 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 comparability analysis held as follows:- "(1) Turnover Filter The ld. counsel for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own 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 Rs. 1,000 crore company cannot be compared with the transaction entered into by a Rs. 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 Rs. 13,149 crores as compared to Rs. 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 Rs. 1 crore to Rs. 200 crores was held to be proper. The following relevant observations were brought to our notice:- "9. Having heard b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken companies having turnover of more than Rs. 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 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. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ish 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 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 tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 Rs. 47,46,66,638. It would therefore fall within the catego ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 as this company is concerned, it is not in dispute before us that this company has been considered to be functionally different from a company providing simple software development services, as this company owns significant intangibles and has huge revenues from software products. In this regard, we find that the Bangalore Bench of the Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. v. DCIT, ITA No.1303/Bang/2012, by order dated 28.11.2013 with regard to this comparable has held as follows:- "11.0 Infosys Technologies Ltd. 11.1 This was a comparable selected by the TPO. Before the TPO, the assessee objected to the inclusion of the company in the set of comparables, on the grounds of turnover and br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nies. 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. 11.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee has brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) for Assessment Year 2007-08 is applicable to this year also. We are inclined to concur with the argument put forth by the assessee that Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the break-up of revenue from software services and software products is not available ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue 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 from software/product development services depends on the success of the products sold by its clients in the marketplace. Hence, it would be inappropriate to compare the business operations of the assessee with that of a company following hybrid business model comprising of royalty income as well as regular software services income, for which revenue break-up is not available. He finally submitted that this was a good reason to exclude this company also from the list of comparables. 20. On the other hand, the learned DR supported the order of the lower authorities regarding the inclusion of Tata Elxsi and Flextronics Software Systems Ltd., in the list of comparables. He reiterated the contents of para 14.2.25 of the TPO's order. He also read out the following portion from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able 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 the list of comparables. It is submitted by the learned counsel for the assessee that if all the above companies are excluded from the list of comparables, then the operating margin of the assessee would fall within the + or -5% of the operating margin of the comparable companies. AO is therefore directed to verify the said contention and compute the ALP accordingly. Further, as the ALP needs no further adjustment as a result of exclusion of all the above companies, we are not inclined to admit the additional ground of appeal seeking inclusion of the companies raised in the additional ground of appeal as comparable companies for the 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. 9. In the ..... 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