9911796707
TMI Blog2012 (12) TMI 1018X X X X Extracts X X X X X X X X Extracts X X X X ..... ices on the basis of the order passed under section 92CA(3) of the Act by the Transfer Pricing Officer ("the TPO"). 3. That the assessing officer/the TPO erred on facts and in law in considering the current year data only of the comparable companies disregarding the multiple year data used by the appellant. 3.1 That the assessing officer/the TPO erred on facts and in law in not appreciating that use of single year data of the comparable companies may not adequately capture the market and business cycle reflected in the industry. 4. That the assessing officer/the TPO erred on facts and in law in applying additional filters of percentage of wages to sale, declining sales, NFA/Sales ratio, without appreciating that the 'selection or rejection' should be based on FAR analysis and not merely on financial results. 4.1 That the assessing officer/the TPO erred on facts and in law in considering (i) Saksoft Limited, (ii) Datamatics Technologies Ltd. and (iii) 3D PLM Software Ltd. having abnormally high profit margin as comparable companies for undertaking benchmarking analysis applying TNMM. 4.2 That the assessing officer/TPO erred on facts and in law in not appreciating that M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9. Without prejudice the assessing officer/the TPO erred on facts in considering the total operating cost of the appellant at Rs. 49,40,57,000 as against the actual operating cost of Rs. 48,26,77,000. 10. Without prejudice, that the assessing officer/the TPO erred in law in not allowing variation to the extent of (+/:-)5%, while determining the arm's length price of the 'international transactions', in terms of proviso to section 92CA(2) of the Act. 11. That the assessing officer erred on facts and in law in reducing the communication expenses to the extent of Rs. 1,79,10,869 from the export turnover for computation in terms of clause (iv) of Explanation 2 of section 10A of the Act while computing deduction under that section. 11.1 That the assessing officer erred on facts and in law in not appreciating that only 5% internet charges of the communication expenses is attributable to the export of software outside India. 11.2 Without prejudice that the assessing officer erred on facts and in law in making the adjustment of communication expenses, viz., link charges of Rs. 1,79,10,869 attributable to delivery of computer software outside India from "the export turnover" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the operating profit margin (OP/OC%) of the appellant company with the margin of the remaining comparable companies as follows: Sl. No. Name of the company Financial Year OP/TC 1 California Software Co. Ltd. 2006-07 22.36% 2 Neilsoft Ltd. 2006-07 14.69% 3 NSEIT Ltd. 2006-07 13.66% 4 Applabs Technologies Pvt. Ltd. 2006-07 18.17% 5 Kale Consultants Ltd. 2006-07 13.15% 6 Saksoft Ltd. 2006-07 51.10% 7 Datamatics Technologies Ltd. 2006-07 39.83% 8 3D PLM Software Ltd. 2006-07 48.46% Average Mean 27.67% 3.6 Accordingly, the TPO in the order passed under section 92CA(3) of the Act had computed an adjustment of Rs. 78,794,571/- on account of the difference in the margin of the comparable companies and the appellant company, as under: Total cost incurred by assessee 494,058,000 Is a [email protected]% 630,762,571 Revenue shown 551,968,000 Difference 78,794,571 3.7 The Dispute Resolution Panel ('DRP') upheld the order of the TPO and accordingly, the assessing officer on the basis the order of the DRP passed the final order. 4. We have heard the rival contentions and perused the records. At the outset, ld. Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oposed by the TPO should be deleted for this reason alone. 5. On the other hand Ld. Departmental Representative principally did not have any serious objection to the proposition as above. 5.1 Ld. Departmental Representative referred to the decision of the Tribunal in the case of M/s. American Express India (P) Lt., ITA No. 4240/D/2009, A.Y. 2003-04, dated 18-05-2012. The relevant para of the tribunal's order is as under:- "16. From the above, it is evident that learned CIT(A) has totalled up the amount received from the related parties for rendering of services together with the payments made to related parties which became Rs. 323.23 lakhs. He compared the same with the total operating expenses which were Rs. 4448.71 lakhs. If the total operating expenses are being compared, then they can be compared only with the total operating expenses paid to the related parties. The amount received from related parties for rendering services can be compared only with the total receipt of Hinduja TMT from rendering of services. Therefore, apparently, the working of learned CIT(A) is incorrect." 5.2 Referring to the above order, Ld. Departmental Representative submitted that capital in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of different controlled transactions that cannot be appropriately compared on an aggregate basis with those of an independent enterprise. Similarly, when analysing the transactions between the independent enterprises to the extent they are needed profits attributable to transactions that are not similar to the controlled transactions under examination should be excluded from the comparison. Finally, when profit margins of an independent enterprise are used the profits attributable to the transactions of the independent enterprise must not be distorted by controlled transactions of that enterprise." 5.6 It was further submitted that the OECD Transfer Pricing guidelines further in para 2.79 provides in this regard as under: 2.79 Similarly, when analysing the transactions between the independent enterprises to the extent they are needed, profits attributable to transactions that are not similar to the controlled transactions under examination should be excluded from the comparison. Finally, when net profit indicators of an independent enterprise are used the profits attributable to the transactions of the independent enterprise must not be distorted by controlled transactions of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee accordingly submitted that an enterprise is to be considered as uncontrolled for the purpose of benchmarking analysis, if the ratio of related party transactions (i.e. transactions of sales and purchase on revenue as well as capital account having a bearing on profitability of the enterprise) to relevant base, i.e. sales or cost does not exceed the limit of 25%. Hence, he submitted that Saksoft limited, Datamatics Technologies Limited, 3DPLM Software Solutions Ltd. and California Software Limited, considered as the comparable companies by the TPO in the assessee's case have related party transactions exceeding 25% the same are to be excluded from the set of comparable companies for applying TNMM. 5.13 We have carefully considered the submission and perused the records. In this case for benchmarking the international transaction the assessee has considered TNMM as the most appropriate method and considered itself to be the tested party with operating profit/operating cost (OP/OC%) as the profit level indicated. In the search process the assessee has considered 8 comparables companies in the transfer pricing documentation with OP/OC of 11.70%. Since the operating pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction. 5.16 A reading of the above clearly shows that under the said Rules the net margin of the assessee required to be compared to an unrelated enterprise from a comparable uncontrolled transaction. Thus it follows that comparables having high ratio of related party transaction cannot be taken a comparable. This proposition is also supported by the following case laws:- i) Sony India Pvt. Ltd. vs. DCIT 114 ITD wherein the tribunal has held as under:- We are further of view that an entity can be taken as uncontrolled if its related party transaction du not exceed 10 to 15% of total revenue, Within the above limit, transactions cannot be held to be significant to influence the profitability of comparable. For the purposes of comparison, what is to be judged is the impact of the related party transaction vis-a-vis sales and not profit since profit of an enterprise is influenced by large number of other factors. The TPO and on appeal, the learned CIT (Appeals) did not substantiate the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO. Even if the percentage of RPT to total revenue is not 97% but is more than 25%, even then, this comparable cannot be considered as un-controlled comparable and the same has to be excluded from the list of comparables finally selected by the TPO. But for the same, the factual aspect has to be examined as to how much percentage of RPT to total revenue is there in the case of this comparable i.e. 3D PLM Software Ltd. Hence, we set aside the assessment order and restore the entire matter to the file of the Assessing Officer for a fresh decision after examining the factual aspect of this claim of the assessee and after obtaining fresh directions from DRP. If it is found that the percentage of RPT to total revenue in the case of this comparable i.e. 3 DPLM Software is more than 25% then this comparable should be excluded from the list of comparables selected by the TPO and the average mean should be worked out after excluding this comparable and if the same is within plus minus 5% of the profit margin declared by the assessee then no transfer pricing adjustment is required to he made. iii) Tribunal decision in the case of Philips Software Pvt. Ltd. vs. ACIT (I.T.A. No. 218/Ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India Pvt. Ltd. 14.36% 5.20 From the above, we hold that since the operating profit margin (OP/OC%) of the assessee at 14.36% is within the safe harbor range of +/- 5% of the average of (OP/OC) of comparable companies at 14.92% the international transaction undertaken by the assessee should be considered at arm's length, and the adjustment proposed by the TPO is unwarranted. 6. Ground No. 11 to 11.2 On these issues Assessing Officer referred to the definition of export turnover as per explanation 2(iv) of section 10A. Export turnover means that the' consideration in respect of export by the undertaking of articles or things-or computer software received in, or bought into, India by the assessee in convertible foreign exchange in accordance with sub-section(3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the article or thing or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India. 6.1 Considering the above, definition the Assessing Officer asked the assessee to give the details of any freight, telecommunication charges and insu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... One of the team gets in touch with the client to understand customer's need through site visit, video/voice conferencing and emails. They also get in touch with the clients, when the software is developed and transmitted to the customers. Therefore, admittedly, only 5% of the internet charges i.e. Rs. 2,19,867 (5% of 43,97,525) is attributable to the delivery of software outside India. Further, it is also submitted that no insurance expense are attributable to the delivery of software as seen from the above table. 8.1 Ld. Counsel of the assessee submitted that that even if any freight, telecommunication or insurance expense during the year, are reduced from the export turnover, such sums will also have to be reduced from the total turnover of the company for the purpose of computation of deduction u/s. 10A. 8.2 Ld. Counsel of the assessee further placed reliance on the decision of Supreme Court in the case of C.I.T. vs. Lakshmi Machine Works : 290 ITR 667, rendered in the context of section 80HHC of the Act, wherein, the formula for calculation of deduction is similar to that of section 10A of the Act. The Apex Court, in that case held that excise duty and sales tax etc. whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urnover as well as total turnover. 9. Ld. Departmental Representative relied upon the order of the Assessing Officer in this regard. 10. We have carefully considered the submissions and perused the records. We note that it is the contention of the assessee company that only 5% of the internet charges are attributable to the delivery of software to client, hence, full amount of the above expenses should not be taken into consideration for calculating the export turnover as per Explanation 2(iv) of Section 10A of the I.T. Act. However, we note that there is no cogent basis in the above assertions made by the assessee. However, we agree with the contention that freight telecommunication or insurance expenses during the year are reduced from the export turnover, then such sum will also have to be reduced from the total turnover of the company for the purpose of computation of deduction u/s. 10A. 10.1 Analogy in this regard can be drawn from Hon'ble Apex Court decision in the case of C.I.T. vs. Lakshmi Machine Works : 290 ITR 667. Though this decision was rendered in the context of section 80HHC, this formula for calculation of deduction is similar to that of section 10A of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
