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TMI Blog2015 (10) TMI 2242X X X X Extracts X X X X X X X X Extracts X X X X ..... er Section 10A of the Act, as has been prayed by the assessee in its alternate plea Interest under Section 234B is consequential and mandatory and the Assessing Officer has no discretion in the matter. - I.T.(T.P.) A. No. 1425/Bang/2010 - - - Dated:- 23-9-2015 - Smt. P. Madhavi Devi, Judicial Member And Shri Jason P. Boaz, Accountant Member For the Appellant : Shri T. Suryanarayana, Advocat For the Respondent : Shri Farhat Hussain Qureshi, CIT(D.R) ORDER Per Shri Jason P. Boaz, A.M. : This appeal by the assessee is directed against the order of assessment for Assessment Year 2006-07 dt.18.10.2010 passed under Section 143(3) rws 144C(13) of the Income Tax Act, 1961 (in short 'the Act') in pursuance of the directions of the Dispute Resolution Panel ( DRP ), Bangalore issued under Section 144C(5) rws 144C(8) dt.17.9.2010. 2. The facts of the case, briefly, are as under :- 2.1 The assessee-company is a wholly owned subsidiary of Misys International S.A., Luxembourg, which is part of Misys Group based in U S A. The assessee is engaged in the provision of software development and product support services to its group companies. For Assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. That the learned A.O./TPO and the learned Panel erred in ignoring the limited risk nature of the services provided by the appellant and in upholding the conclusion of the learned TPO that no adjustment on account of risk differential is required while determining the Arm s Length Price of the international transactions of the appellant. 3.1 That the learned TPO and the learned Panel erred in collecting selective information of the companies by exercising power granted to him under Section 133(6) of the Act that was not available to the appellant in the public domain and relying on the same for comparability purposes. 3.2 That the learned TPO erred in not applying multiple year/prior year data for comparable companies while determining ALP. 3.3 That the learned TPO erred in using data as at the time of assessment proceedings, instead of that available as on the date of preparing the TP documentation for comparable companies while determining the ALP. 3.4 That the learned TPO erred in including companies in the comparability analysis which are different from the appellant in functions, asset base and risk profile. 3.5 That the learned TPO erred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned A.O. and the learned Panel, erred in reducing an adhoc amount of expenditure incurred in foreign currency from the export turnover on the incorrect premise that the AR of the assessee has agreed to exclude the said foreign currency charges. 6.4 That the learned A.O. and the learned Panel, erred in not appreciating the fact that the expenses incurred in foreign currency are for the purpose of travel of employees for training and travel of management personnel and the same is not in any way attributable to rendering technical services outside India. 7. That the learned A.O. and the learned Panel, erred in not following the decisions of the jurisdictional ITAT in adjusting the communication charges and expenses incurred in foreign currency while computing the deduction under Section 10A of the Act. 8. Without prejudice to the above, the learned A.O. and the learned Panel, erred in not reducing the said communication expenses of INR 80,91,499 and expenses incurred in foreign currency of INR 1,22,50,000 pertaining to the 10A units from the total turnover and not following the rulings of the jurisdictional ITAT. 9. That the learned A.O. and the learned Panel, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... national transactions were at Arm s Length. 4.5 The TPO, however, on examination of the assessee's T.P. Study rejected it for the various reasons given in his order under Section 92CA of the Act. The TPO, thereafter, conducted his own search adopting various filters / criteria and finally selected the following twenty companies as the final set of comparable companies :- Sl. No. Company Name Sales OP to Total Cost % 1. Aztec Software Limited 128.61 18.09 2. Geometric Software Limited (Seg.) 98.59 6.70 3. Infosys Limited 9028.00 40.38 4. KALS Info Systems Ltd. 1.97 39.75 5. Mindtree Consulting Limited 448.79 14.67 6. Persistent Systems Limited 209.18 24.67 7. R Systems International Ltd. (Seg) 79.42 22.20 8. Sasken Communicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order of assessment. The objections filed by the assessee before the DRP regarding the comparability of the companies selected by the TPO were rejected and subsequent thereto the Assessing Officer passed the impugned assessment order. Aggrieved by the final order of assessment dt.18.10.2010 for Assessment Year 2006-07, the assessee is before the Tribunal in appeal. 4.8 We have heard the rival contentions and perused and carefully considered the material on record including the impugned order of assessment for Assessment Year 2006-07, the directions of the DRP, the submissions put forth by both the learned Authorised Representative for the assessee and the learned Departmental Representative for Revenue and the judicial decisions cited and placed reliance upon. We now proceed to consider the comparability of individual companies objected to by the assessee. Companies whose exclusion from TPO s list of comparables is sought by the assessee. 5.0 Out of the 20 comparable companies finally selected by the TPO, the assessee seeks exclusion of the following companies :- i) Aztec Software Ltd. ii) Geometric Software Ltd. (Seg.) iii) Infosys Technologies Ltd. iv) KALS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by different co-ordinate benches of this Tribunal in various cases. In support of its contention, for exclusion of this company from the list of comparables, the learned Authorised Representative of the assessee placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of Huawei Technologies India Pvt. Ltd. for Assessment Year 2006-07 (supra). 6.4 Per contra, the learned Departmental Representative supported the order of the TPO including these three companies in the list of comparables to the assessee. 6.5.1 We have heard the rival contentions and have perused and carefully considered the material on record, including the judicial decision relied on by the assessee. We find that the co-ordinate bench of this Tribunal, in the case of Huawei Technologies India Pvt. Ltd. for Assessment Year 2006-07 (supra) has excluded the above three companies from the set of comparables on grounds of having RPT in excess of 15% and at paras 16 17 of its order has held as under :- 16. As far as Megasoft Ltd., Aztec Software Ltd., and Geometric Software Ltd., chosen by the TPO as comparables are concerned, it is not in dispute that the related party transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esaid decision of the co-ordinate bench of this Tribunal in the case of Huawei Technologies India Pvt. Ltd. for Assessment Year 2006-07 (supra), we hold that these three companies, namely Aztec Software Ltd., Geometric Software Ltd. and Megasoft Ltd. shall be excluded from the set of comparables for the software development services segment of the assessee. 7.1 (4) KALS Infosystems Ltd. This company was selected as a comparable by the TPO and was retained as a comparable even though the assessee objected to its inclusion before the DRP. It is the contention of the assessee that this company is into software products, and training apart from provision of software development services and therefore being functionally different, from the assessee who is purely into provision of software development services, ought to be excluded from the list of comparable companies. In support of this contention for exclusion of this company from the list of comparables, the learned Authorised Representative of the assessee placed reliance on the decision of the co-ordinate bench of the Tribunal in the case of Huawei Technologies India Pvt. Ltd. for Assessment Year 2006-07 (supra). 7.2 (5) A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they are functionally different. The following are the relevant observationsof the Tribunal in this regard :- (d) KALS Information Systems Ltd. 46. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual repot, the salary cost debited under the software development expenditure was ₹ 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal s decision of the ITAT in the case of Bindview India Private Limited Vs. DCI, ITA No. ITA No 1386/PN/1O wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows: 16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that function ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on kiosks Queue management system, ticket vending system (ii) Ushus Technologies - offshore development centre for embedded software, net work system, imaging technologies, outsourced product development (iii) Accel IT Academy (the net stop for engineers)- training services in hardware and networking, enterprise system management, embedded system, VLSI designs, CAD/CAM/BPO (iv) Accel Animation Studies software services for 2D/3D animation, special effect, erection, game asset development. 4.3 On careful perusal of the business activities of Accel Transmatic Ltd. DRP agreed with the assessee that the company was functionally different from the assessee company as it was engaged in the services in the form of ACCEL IT and ACCEL animation services for 2D and 3D animation and therefore assessee s claim that this company was functionally different was accepted. DRP therefore directed the Assessing Officer to exclude ACCEL Transmatic Ltd. from the final list of comparables for the purpose of determining TNMM margin. 49. Besides the above, it was pointed out that this company has related party transactions which is more than the permitted level and therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital i.e. upto 39% was employed as product development expenditure. The learned A.R. submitted that in view of the above activities of this company i.e. Lucid Software Ltd., it was functionally different from the assessee in the case on hand who is merely providing software development services to its AEs. 8.1.2 In respect of Tata Elxsi Ltd., the learned A.R. submitted that this company is engaged in development of niche products and development services and also in research and development activities which has resulted in the creation and ownership of IPRs. In view of the above activities of this company i.e. Tata Elxsi Ltd., the ld. A.R. submits that this company is functionally different and ought to be excluded from the list of comparables to the assessee who is into only the business providing of software development services to its AEs. 8.1.3 In support of the assessee s contentions for exclusion of the above two companies from the list of comparable companies to the assessee, the ld. A.R. relied on the decision of the coordinate bench in the case of Huawei Technologies India Pvt. Ltd. for Assessment Year 2006-07 (supra). 8.2 Per contra, the learned Departmental Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofitability in the sale of product would be entirely different from the company, who is involved in service sector. Therefore, this company cannot be treated as having same function and profitability ratio. In our view, due to non-availability of full information abut the segmental details as to how much is the sale of product and how much is from the services, therefore, this entity cannot be taken into account for comparability analysis for determining arm s length price in the case of the assessee. 15. In view of the aforesaid decision of the Mumbai Bench of the Tribunal, which is in relation to A.Y. 2006-07, we are of the view that Lucid Software Ltd. and Tata Elxsi Ltd. are also to be excluded as comparables while determining the ALP of the international transaction impugned in this appeal. 8.3.2 As far as the company Tata Elxsi Ltd., is concerned, following the decision of the coordinate bench of this Tribunal in the case of Huawei Technologies India Pvt. Ltd. for Assessment Year 2006-07 (supra), we hold and direct that this company be excluded from the list of comparables for the software development services of the assessee. It is ordered accordingly. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulting Ltd., Persistent Systems Ltd., and Sasken Communication Ltd. chosen by the TPO as comparables, it is not in dispute that the turnover of these companies is more than ₹ 200 Crores. The turnover of the assessee in the present case is 114.13 Crores (Approx.). It has beenheld by this Tribunal in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) that companies with a turnover of more thn ₹ 200 Crores cannot be taken as comparables while determining the ALP in the case of companies having turnover of less than ₹ 200 Crores. The following are the relevant observations of the Tribunal in this regard :- (1) Turnover Filter 11. The ld. counsel for the assessee submitted that the TPO has applied a lower turnover filter of Q 1 crore, but has not chosen to apply any upper turnover limit. In this regard, it was submitted by him that under rule 10B(3) to the Income-tax Rules, it was necessary for comparing an uncontrolled transaction with an international transaction that there should not be any difference between the transactions compared or the enterprises entering into such transaction, which are likely to materially affect the price or cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of Q 1 crore to Q 200 crores was held to be proper. The following relevant observations were brought to our notice:- 9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which .ire (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 non-residents, 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. Sec.92-A defines what is an Associated Enterprise. In the present case there is no dispute that the transaction between the Assessee and its AE was an international transaction attracting the provisions of Sec.92 of the Act. Sec.92C provides the manner of computation of Arm s length price in an international transaction and it provides:- (1) that the arm s length price in relation to an international transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Q 47,46,66,638. It would therefore fall within the category of companies in the range of turnover between 1 crore and 200 crores (as laid down in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010) . Thus, companies having turnover of more than 200 crores have to be eliminated from the list of comparables as laid down ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt of Karnataka in the case of Tata Elxsi Ltd. (supra), we are of the view that it would be just and appropriate to direct the Assessing Officer that communication charges and expenses incurred in foreign currency are to be excluded from both export turnover as well as total turnover while computing the deduction under Section 10A of the Act, as has been prayed by the assessee in its alternate plea at Ground raised at No.8. In view of the acceptance of the alternate plea of the assessee, we are of the view that no adjudication is called for on Ground No.7 as to whether the aforesaid expenditure are required to be excluded from export turnover. 11. Ground No.9 Charging of interest under Section 234B of the Act. 11.1 In this Ground, the assessee challenges the action of the Assessing Officer in charging the assessee interest under Section 234B of the Act. The charging of interest under the aforesaid sections is consequential and mandatory and the Assessing Officer has no discretion in the matter. This proposition has been upheld by the Hon'ble Apex Court in the case of Anjum Hon'ble Ghaswala Others (252 ITR 1) (SC) and in this view of the matter, we uphold the Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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