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TMI Blog2015 (11) TMI 66X X X X Extracts X X X X X X X X Extracts X X X X ..... ort oriented and has export turnover in excess of 75% of sales, its foreign currency expenses are less than 50% of sales and therefore the conclusion of the learned CIT (Appeals) to exclude this company by applying the on-site was incorrect. From the record it appears that these submissions/arguments put forth by the assessee have not been examined by the learned CIT (Appeals) and therefore, in the interest of justice and equity, we deem it fit to restore the matter to the file of the learned CIT (Appeals) for examination afresh in the light of the submissions put forth by the assessee and to adjudicate thereon on the comparability of Cherry Soft Technologies Ltd. after affording adequate opportunity to the assessee of being heard and to submit details/submissions in this regard. Working Capital and Risk Adjustment - Held that:- . Keeping in mind the order of the co-ordinate bench of this Tribunal granting the assessee an adhoc 2% adjustment towards working capital and risk differentials, in its order in the assessee's own case for Assessment Year 2003-04, we restore this matter to the file of the Assessing Officer / TPO and direct them to examine and de novo adjudicate on the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company, a 100% subsidiary of Visual Web Inc., USA, is engaged in the business of developing and providing software solutions for the banking industry to its Associated Enterprise (AE). For Assessment Year 2002-03, the assessee filed its return of income on 31.10.2002 declaring total income of ₹ 11,89,020. The return was processed under Section 143(1) of the Income Tax Act, 1961 (in short 'the Act') and the case was subsequently taken up for scrutiny. Since the assessee reported that in the period under consideration it had entered into international transactions with its AE viz. transactions of rendering software development services, to the extent of ₹ 5,95,41,473, the Assessing Officer made a reference under Section 92CA of the Act to the Transfer Pricing Officer ( TPO ) for determining the Arm s Length Price ( ALP ) of these international transactions, after obtaining approval from the CIT - III, Bangalore. 2.2 In its T.P. Study, the assessee adopted the Cost Plus Method (CPM) to justify the price charged by the assessee to its AE in respect of the international transactions between them. The TPO in the order passed under Section 92CA of the Act dt.30.6. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Infosys Technologies Ltd. 50.79 8. L T Infotech Ltd. 15.82 9. Mphasis Ltd. 30.59 10. Quinnox Consultancy Services Ltd. 29.75 11. Satyam Computer Services Ltd. 36.56 12. Virinchi Technologies Ltd. 22.63 13. Visualsoft Technologies Ltd. 42.42 14. Xcel Vision Technologies Ltd. 35.43 15. Eonour Technologies Ltd. 20.70 16. Kshema Technologies Ltd. 24.00 17. Orient Information Technologies Ltd. 12.54 Arithmetic Mean 29.30 3.2.1 The CIT (Appeals) required the assessee to show cause as to why TNMM should not be taken as the MAM and why the ALP should not be computed adju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. Quinox Consultancy Services Ltd. 88.12 6. Motherson Sumi Infotech Ltd. 87.51 7. Aviation Software Devt. Consultancy Ltd. As per notes in Annual Report (b) The learned CIT (Appeals) following the decision of the co-ordinate bench in the case of Genisys Integrating Systems (India) Ltd. (ITA No.1231/Bang/2010 dt.5.8.2011) applied the Turnover Filter of ₹ 200 Crores and excluded the following companies :- S. No. Name of the company Turnover (Rs. in Crores) i) Flextronic Software Systems Ltd. 234.88 ii) Infosys Technologies Ltd. 2603.59 iii) L T Infotech Ltd. 266.69 iv) Satyam Computer Services Ltd. 1731.94 v) iFlex Solutions Ltd. 415.03 (c) The learned CIT (Appeals) exclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uter Services Ltd. and M/s. iFlex Solution Ltd. as a comparable in software development segment. 5. The learned CIT (Appeals) has erred in holding that the TPO should not include uncontrolled comparables having any related party transactions even upto 25%. 6. The learned CIT (Appeals) has erred in holding that M/s. Geometric Software Solutions Ltd. cannot be taken as comparable, being functionally different. 7. The learned CIT (Appeals) has erred in holding that the comparable M/s. Visual Soft Technologies Ltd. is predominantly engaged in the onsite development of software. 8. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT (Appeals) be reversed in so far as the above mentioned issues are concerned and that of the Assessing Officer be restored. 9. The appellant craves leave to add, to alter, to amend or to delete any of the grounds that may be urged at the time of hearing of the appeal. Assessee's appeal in IT(TP)A No.651/Bang/2012 for A.Y. 2002-03. 4.2 Aggrieved by the order of the CIT (Appeals) IV, Bangalore dt.21.3.2012 for Assessment Year 2002-03, the assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Tax (Appeals) IV, while passing the Order, has erred in a. changing the filters proposed in his own notice without giving an opportunity of being heard to the appellant. b. not appreciating that insignificant related party transaction cannot be held to have significant influence on profitability of comparable companies. c. Adopting Kshema Technologies and Xcel Vision Technologies Limited as comparable. d. rejecting Cherry Soft Technologies Limited, which was proposed as comparable by the appellant under TNMM, on unjustifiable grounds. 8. Without prejudice to the above, the benefit of the +/-5% range as per the proviso to section 92C (2) should be given. PRAYER 9. On an overall consideration of the facts of the case, and the law applicable, the ALP as determined by the Transfer Pricing Officer, as adopted by the Assessing Officer and as modified by the CIT(A) being not correct is to be quashed and the figures as determined and returned by the appellant being correct are to be accepted. 10. The learned Assessing Officer has erred in levying interest under section 234B and section 234D. 5.0 We have heard the rival contentions an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cally examined and considered later. 7.4 Ground No.7(a) to (d) are raised in respect of the inclusion of certain companies as comparables by the TPO and exclusion of certain other comparables and the application of certain filters. As we will be examining and considering the comparability or otherwise of the individual companies as raised by the assessee before us, the same would address and dispose off this ground. 7.5 Ground No.8 this ground is raised regarding the non-allowance of benefit of + / - 5% as per the proviso to Section 92C(2) of the Act. This ground is now more of an academic nature, as subsequent to the amendment of the Income Tax Act, 1961 w.r.e.f. 1.4.2002 by the introduction of the clarificatory amendment by way of insertion of Section 92C(2A) by Finance Act, 2012, the assessee is not entitled to the benefit of 5%. In this view of the matter, this ground raised by the assessee is not maintainable and is accordingly dismissed. 8. Related Party Filter ( RPT ) 8.1 Ground No.7(b) of the assessee's appeal and Ground No.5 of Revenue s appeal challenge the view of the learned CIT (Appeals) in directing the Assessing Officer / TPO to exclude companies fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % 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 impact of the related party transactions vis- -vis sales and not profit since profit of an enterprise is influenced by large number of other factors . Respectfully following the decision of the Tribunal in the case of Sony India (P) Ltd (supra), the Assessing Officer / TPO are directed to exclude after due verification those comparables from the list with related party transactions or controlled transactions in excess of 15% of total revenues for the financial year 2003-04. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was ₹ 2,36,70,748 while the salary cost was ₹ 58,48,177 which constituted 24.70% of the turnover and therefore failed the salary cost filter of 25% adopted by the learned CIT (Appeals) himself. 9.1.2 It was submitted that the salary cost of the assessee in the case on hand was more than 60% of turnover and hence a company having 24.70% of salary cost is not comparable and ought to be excluded from the list of comparables. It was sub mitted that at para 7 of the impugned order, the learned CIT (Appeals) although factually accepting that the company fails the employee cost filter of 25% applied by him, states that it should be accepted as a comparable as salary cost is almost 25%. The learned Authorised Representative submitted that as this company fails the employee cost filter of 25% applied by the learned CIT (Appeals), this company ought to be excluded from the list of comparables. 9.2 Per contra, the learned Departmental Representative supported the orders of the learned CIT (Appeals) in including this company in the list of comparables to the assessee. 9.3.1 We have heard the rival contentions and perused and carefully considered the material on record. On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is from on-site revenue operations and rejected this company as a comparable. The assessee submits that the export revenue of Cherry Soft Technologies Ltd. is in excess of 75%, foreign currency expenses at ₹ 2.11 Crores are less than 50% of sales and therefore logically the on-site revenue cannot be more than 75% of sales. In view of this, applying the learned CIT (Appeals) s on-site revenue filter of 75%, this company ought to be included in the list of comparables. 10.3 Per contra, the learned Departmental Representative supported the order of the learned CIT (Appeals) in rejecting this company as a comparable. 10.4 We have heard the rival contentions and perused and carefully considered the material on record. As seen from the record, the learned CIT (Appeals) applied the on-site revenue filter of 75%. According to the assessee, the company is export oriented and has export turnover in excess of 75% of sales, its foreign currency expenses are less than 50% of sales and therefore the conclusion of the learned CIT (Appeals) to exclude this company by applying the on-site was incorrect. From the record it appears that these submissions/arguments put forth by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the year under consideration in the light of the Tribunal s order for Assessment Year 2003-04 (supra) after affording the assessee adequate opportunity of being heard and file details/submissions in this regard. It is ordered accordingly. 12. In the result, the assessee's appeal for Assessment Year 2002-03 is partly allowed. Revenue s Appeal in IT(TP)A No.782/Bang/2012 for A.Y. 2002-03 13. The Grounds raised at S.Nos.1 to 3, 8 and 9 are general in nature and not being specifically urged before us, no adjudication is called for thereon. 14. Ground No.4 : Turnover Filter. 14.1 Revenue contends that size, turnover and brand of the company are not deciding factors for treating companies as comparables as they do not follow a definite plan. In this regard, the learned Departmental Representative placed reliance on the decision of Capgemini India Pvt. Ltd. V ACIT in ITA No.786/Bang/2011 and sought the reinstatement of the following companies, which had turnover in excess of ₹ 200 Crores, in the list of comparables :- Turnover (Rs. in Crores) (i) M/s. Flextronics Software Systems Ltd. Rs.23 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... including the judicial decisions cited. Following the decision of the coordinate bench in the case of Genesys Integrating Systems (India) Pvt. Ltd. (supra), we hold and direct that the above 5 companies, listed at para 14.1 of this order, having turnover of more than ₹ 200 Crores, should be excluded from the list of comparable companies. Consequently, Ground No.4 raised by Revenue stands dismissed. 15.0 Ground No.5 RPT Filter. 15.1 This Ground already stands disposed off along with the assessee's ground at S.No.7(b) at para 8.3 to 8.5 of this order, wherein the following companies have been excluded from the set of comparable companies as they have RPT in excess of 15%, by following the decision of the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2012 :- (i) Geometric Software Solutions Ltd. 16.25%. (ii) Quinnox Consulting Services Ltd. 88.12% (iii) Motherson Sumi Infotech and Designs Ltd. 87. 51% Consequently, Revenue s Ground No.5 is partly allowed. 16. Ground No.6 : Geometric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s evident from its diversified activities that this company is functionally different and dis-similar from the assessee in the case on hand, who is a mere provider of software development services. Consequently, Ground No.6 raised by Revenue is dismissed. 17. Ground No.7 : Visualsoft Technologies Ltd. 17.1 In this Ground, Revenue contends that this company ought to be included in the list of comparables as it passes the on-site revenue filter of 75% applied by the learned CIT (Appeals). 17.2 Per contra, the learned Authorised Representative for the assessee supported the impugned order of the learned CIT (Appeals) in rejecting / excluding this company from the list of comparables to the assessee. The learned Authorised Representative drew the attention of the bench to para 3 on page 20 of the impugned order where the learned CIT (Appeals) has observed that since this company has incurred 56% of its expenditure as onsite software development, it is clear that this company, i.e. Visual Soft Technologies Ltd. is predominantly engaged in on-site development of software and also observed that the assessee is also into R D activities. It was submitted by the learned Authorised R ..... 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