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TMI Blog2015 (8) TMI 712X X X X Extracts X X X X X X X X Extracts X X X X ..... td. [2013 (1) TMI 45 - ITAT BANGALORE] wherein held companies with RPT in excess of 15% of total revenues are to be excluded from the set of comparable, we hold that the learned CIT (Appeals) was not correct in holding that companies with any RPT have to be excluded from the set of comparable companies, and direct the TPO / A.O. to apply the RPT filter at 15% of total revenues for including / excluding the comparable companies, excluded by the learned CIT (Appeals), in the final set of comparables. - Decided partly in favour of revenue. Turnover Filter of 200 Crores - Held that:- This Tribunal in the case of Genisys Integrating Systems (India) Pvt. Ltd. (2011 (8) TMI 952 - ITAT BANGALORE) has held that turnover is an important filter of comparability which has to be adopted for determination of ALP and has determined the upper limit of the turnover filter to be applied at 200 Crores in cases where the turnover of the assessee is less than 200 Crores. In the case on hand, the turnover of the assessee being approx. 7.97 Crores only, falls within the range of 1 Crore to 200 Crores. Therefore, following the decision of the co-ordinate bench of this Tribunal in the case of Genisys Integ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i C.H. Sundar Rao, CIT-I (D.R) ORDER Per Shri Jason P. Boaz, A.M. : These are cross appeals, one by the assessee and one by Revenue, directed against the order of the Commissioner of Income Tax (Appeals)-IV, Bangalore dt.30.11.2011 for Assessment Year 2005-06. The assessee has also filed cross objections in the matter. 2. The facts of the case, briefly, are as under :- 2.1 The assessee company, in the business of providing software development services, filed its return of income for Assessment Year 2005-06 on 29.10.2005 declaring total income of ₹ 24,93,540 after claiming deduction of ₹ 1,50,41,210 under Section 10A of the Income Tax Act, 1961 (in short 'the Act'). The return was processed under Section 143(1) of the Act and the case was subsequently taken up for scrutiny. The Assessing Officer observed from the Form No.3CEB that the assessee had reportedly entered into international transactions with its Associated Enterprises ('AEs') in the year under consideration and made a reference to the Transfer Pricing Officer ( 'TPO') under Section 92CA of the Act for determination of the Arm's Length Price ('ALP') thereof, the details of which are as under :- ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT (Appeals) erred in holding that profit on cost of more than 50% of the comparable company(ies) is abnormal without giving reasons how functions discharged, assets deployed and risks assumed of such companies were different from that of the appellant company. 6. The learned CIT (Appeals) erred in holding that the assessee is eligible for a standard deduction of 5% from the ALP under the proviso to Section 92C(2) of the IT Act, 1961. 7. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT (Appeals) in so far as it relates to the above grounds may be revered and that of the Assessing Officer may be restored. 8. The appellant craves leave to add, alter, amend and / or delete any of the grounds mentioned above." IT(T.P)A No.73/Bang/2012 - Assessee's appeal for A.Y. 2005-06. 5. In the assessee's appeal in respect of the order of the CIT (Appeals) - IV, Bangalore dt.30.11.2011 for Assessment Year 2005-06, the following grounds have been raised :- " 1. The order of the CIT (Appeals) IV, Bangalore-560 001 dt.30.11.2011 in ITA No.04/Range-12/10-11, for the above mentioned assessment year is contrary to law, facts, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order passed in violation of the principles of natural justice is nullity in law. 11. The appellant craves leave to file additional grounds / arguments at the time of hearing." Transfer Pricing Issues. 6.0 Before proceeding to deal with the above grounds of appeal on T.P. issues, the approach of the TPO vis-a-vis that of the assessee in its T.P.Study submitted before the TPO is briefly summarised as under. 7.0 The assessee is engaged in the provisions of software development services. For the year under consideration, the assessee has reported the following international transactions in its 3CEB report :- (i) Software Development Services : Rs.4,99,98,250. (ii) Reimbursement of expenses : Rs.1,59,320. The assessee in its T.P. Study has adopted CUP Method as the Most Appropriate Method (MAM) and compared the price charged by it to its AEs with the price charged by it to third parties to justify the ALP of its international transactions. As the assessee had selected CUP Method by considering the price charged by it to its AEs vis-à-vis the price charged to unrelated parties, there was no search process involved. 8. The TPO's Approach. 8.1 The TPO, rejected the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Tata Elxsi Ltd. 6. Sasken Communication Technology Ltd. As seen from the order of the learned CIT(A) in case of some of the comparable companies, the assessee had argued against their inclusion on grounds of there being functionally dis-similarity also. We find that the learned CIT(A) has not adjudicated on this aspect, as the companies had been excluded from the list of comparables on the ground of RPT. 9.3 Companies with abnormal profits Relying on the various decisions cited in the impugned order, the learned CIT(A) held that companies showing extra-ordinary profits have to be excluded from the list of comparables. Accordingly, the learned CIT (Appeals) excluded two companies, namely (i) Exensys Software Solutions Ltd. and (ii) Thirdware Solutions Ltd. showing profits of 70.68% and 66.09% from the set of comparable companies chosen by the TPO. 9.4 Companies with High Turnover. Relying on the decision of the co-ordinate bench of this Tribunal in the case of Genisys Integrating Systems (India) P. Ltd. V DCIT (2011) TaxCorp (TP) 3848, in which it was held that the turnover range of ₹ 1 Crore to ₹ 200 Crore was to be applied, the learned CIT (Appeals) held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -do- 8. Infosys Technologies Ltd. -do- 10.2 We have heard both parties, perused and carefully considered the order of the TPO under section 92CA of the Act, the order of assessment, the impugned order of the learned CIT(A), the submissions of both the learned Departmental Representative for revenue and the learned Authorised Representative of the assessee, including the judicial decisions cited and placed reliance upon. We now proceed to consider the various issues raised by Revenue and the assessee. Revenue's appeal in IT(TP)A No.175/Bang/2011 for A.Y. 2005-06. 11. The Grounds raised by Revenue at S.Nos.1, 7 & 8 are general in nature and no adjudication being called for thereon, are dismissed as infructuous. 12. Ground No.2 : Computation of Deduction u/s.10A of the Act. 12.1 Revenue challenges the order of the learned CIT(A) in directing the Assessing Officer to recompute the eligible deduction to the assessee u/s.10A of the Act by reducing the expenditure incurred in foreign currency towards communication expenses from both 'export turnover' as well as 'total turnover'. The learned Departmental Representative was heard in support of the ground raised. 12.2 Per contra, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted party transactions as proposed by the TPO, the learned counsel for the assessee argued that the transfer pricing regulations do not stipulate any minimum limit of related party transactions which form the threshold for exclusion as a comparable. In this regard, the learned counsel for the assessee objected to the TPO's setting a limit of 25% on related party transactions. He objected to the inclusion of comparables being related party transactions in excess of 15% of sales / revenue. In support of this proposition, the learned counsel for the assessee placed reliance on the decision of the Hon'ble Bench of the ITAT, Delhi in the case of Sony India (P) Ltd. reported in 2008-TIOL-439- ITAT-Delhi dt.23.12.2008. The learned counsel for the assessee drew our attention to para 115.3 of the order wherein the Tribunal has held that - " ………..We are further of the view that an entity can be taken as uncontrolled if its related party transactions do not exceed 10 to 15% of total revenue. Within the above limit, transactions cannot be held to be significant to influence the profitability of the comparables. For the purpose of comparison what is to be judged is the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appeals) in the impugned order, relying on the decision of the coordinate bench of this Tribunal in the case of Genisys Integrating Systems (India) Pvt. Ltd. V DCIT (2011) Tax Corp (T.P) 3848, in which it was held that the turnover range of ₹ 1 Crore to ₹ 200 Crore is to be applied, held that companies which were having turnover exceeding ₹ 200 Crores should be excluded from the set of comparables. In that view of the matter, the following companies were excluded from the TPO's list of comparables :- Sl.No. Name of the company Turnover in Crores (Rs.) 1. IGate Global Solutions Ltd. (Seg) 406.00 2. Flextronics Software Systems Ltd. 457.45 3. L&T Infotech Ltd. 562.45 4. Satyam Computer Services Ltd. 3,464.20 5. Infosys Technologies Ltd. 6,859.70 14.2 The learned Departmental Representative for Revenue has challenged the decision of the learned CIT (Appeals) in holding that size and turnover are deciding factors for treating a company as a comparable. 14.3 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial decisions cited and placed reliance upon. We find that a co-ordinate bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal, we find that the issue relating to exclusion of high profit margin entities from comparables has been decided in favour of the assessee in the cases cited by Shri Porus Kaka without taking into consideration some vital aspects including the relevant TP Regulations in India. It is observed that the decision initially taken in one case without much meaningful discussion has been invariably followed by the Tribunal in other cases decided thereafter. On the other hand, it is observed that the Tribunal, in some of the cases cited by Shri Ajeet Kumar Jain, the ld. CIT DR, has passed well discussed and well reasoned orders after taking into consideration not only the relevant TP regulations in India but even the relevant OECD guidelines. For instance, in the case of BP India Services Private Limited (supra), it was held by the Mumbai Bench that the very rationale of having average in case of more than one comparables is to iron out the effect of extreme cases and find the profit margin as a representative of the whole lot. It was also held by the Tribunal that the higher or lower profit rate has not been prescribed as the determinative factor in the relevant Rules i.e. Rule 10B(2) an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd on analyzing the decisions rendered by the Division benches of this Tribunal on this issue after taking into consideration inter alia the T.P. Regulations in India as discussed above, we are of the view that the potential comparables cannot be excluded merely on the ground that their profit is abnormally high. In our opinion, the matter in such case would require further investigation to ascertain the reasons for unusual high profit and in order to establish whether the entities with such high profit can be taken as comparables or not. 99. The question No. 2 referred to this Special Bench is as to whether, in the facts and circumstances of the case, companies earning abnormally high profit margin should be included in the list of comparable cases for the purpose of determining arm's length price of an international transaction. As already observed, the issue involved in this question has become infructuous in so far as the case of the assessee before the Special Bench is concerned and the same therefore no more survives for consideration in the present case. In generality, we are of the view that the answer to this question will depend on the facts and circumstances of each cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of comparables merely because they have high profits, without examining whether these companies satisfy the comparability analysis. In this factual matrix, respectfully following the decision of the Special Bench of the ITAT, Mumbai in the case of Maersk Global Centres (India) Pvt. Ltd.(supra), we hold that the learned CIT (Appeals) was wrong in excluding the companies merely because of high profit margins, reverse his finding in the matter and restore the matter to the file of the TPO. The TPO is directed to re-examine and decide on the comparability of the companies excluded by the learned CIT (Appeals) on grounds of abnormal profit in the light of our observations in this order after affording the assessee adequate opportunity of being heard and filing details in the matter. Consequently, Ground No.5 of Revenue's appeal is allowed as indicated above. 16. Ground No.6 : Standard deduction 5%. 16.1 Ground No.6 of revenue's appeal contends that the impugned order of the learned CIT (Appeals) is erroneous in granting standard deduction of 5% in computing the ALP of the international transactions, by citing various judicial pronouncements. 16.2.1 We have heard the rival contenti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of any help to the assessee. In this view of the matter, we hold that the learned CIT (Appeals) erred in allowing the assessee the benefit of 5% standard deduction and accordingly reverse this order of this issue in view of the retrospective amendment w.e.f. 1.4.2002 brought about by the insertion of Section 92C(2A) of the Act by Finance Act, 2012. Consequently, we allow the ground raised by revenue at S.No.6. 17. In the result, revenue's appeal for Assessment Year 2005-06 is partly allowed. Assessee's appeal for A.Y. 2005-06 in IT(TP)A No.74/Bang/2012. 18. The Grounds raised at S.Nos.10 & 11 of the assessee's appeal are general in nature and not being urged before us in the course of appeal hearings, are dismissed as infructuous. 19. The Grounds raised at S.Nos.1 to 4 : In the course of appeal proceedings, the learned Authorised Representative of the assessee submitted that these grounds are not being pressed. In view of these grounds not being pressed, they are rendered infructuous and are accordingly dismissed. 20.1 Grounds No.5 & 6 are related to Miscellaneous Income. In Ground No.5, the assessee has assailed the decision of the authorities below in excluding mis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enue's appeal in the case on hand, earlier in this order, the learned CIT (Appeals) had adjudicated on the issues of RPT Filter, Turnover Filter and Abnormal Profit Margins and then deleted / excluded certain companies from the list of 17 comparables chosen by the TPO. It is however observed that the learned CIT (Appeals) has not adjudicated on other issues of non-comparability, such as some of the companies chosen by the TPO as comparables are claimed to be functionally not comparable to the assessee. 22.2 Before us, the assessee had submitted a chart explaining its stand on each of the companies which as per the assessee are required to be excluded from the set of 17 comparable companies adopted by the TPO. The learned Authorised Representative submitted that the assessee accepts 9 of the comparable companies adopted by the TPO at S.Nos.1, 2, 4, 5, 8, 9, 10, 11 and 12 of the TPO's list of 17 comparable companies. The assessee has filed a chart giving the reasons why the other 8 companies are required to be excluded and the judicial decisions of various Tribunals in support of its contentions. 23.0 Turnover Filter of ₹ 200 Crores. 23.1 The learned Authorised Representativ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation after affording the assessee adequate opportunity of being heard, and the same holds good in respect of the assessee's submissions. 26. Exclusion on grounds of being functionally different. 26.1 The assessee has sought the exclusion of M/s. Exensys Software Solutions Ltd. from the list of comparables, in respect of which submissions were put forth before us. It was submitted that this company is a product company and therefore it is not comparable to the assessee in the case on hand, who is providing software development services. It was also submitted that the TPO has himself excluded this company from the list of comparables in the next Assessment Year 2006-07 and therefore following this, M/s. Exensys Software Solutions Ltd. ought to be excluded from the list of comparables. 26.2 We have heard the rival contentions and perused and carefully considered the material on record. As contended by the assessee, we find that the TPO has excluded this company from the final set of comparables in Assessment Year 2006-07. We are, however, of the view that there is a requirement for examining whether the facts of the case on hand and that of the comparable company i.e. Exensys ..... X X X X Extracts X X X X X X X X Extracts X X X X
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