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TMI Blog2011 (10) TMI 616X X X X Extracts X X X X X X X X Extracts X X X X ..... Ground No. 2: Erred in applying transfer pricing provisions to the appellant which enjoys tax holiday u/s 10B of the Act. Ground No.31: Erred in rejection of search analysis conducted by the appellant (using database updated as on 11 Jan. 2006) and documentation maintained by the appellant. Without prejdudice to above, the ld AO has erred in not considering the search analysis used by the appellant (using database updated on 25 Aug. 2006) Ground No. 4: Erred in ignoring, without prejudice to above grounds, the fact that 5 companies (submitted by the appellant and also considered comparable companies by the ld. TPO ) can also be considered as final set of comparables for determining the arm s length price of the international transactions. Ground No. 5: Erred in initiating penalty proceedings u/s 271AA of the Act Ground No. 7: Erred in rejecting of all loss making companies while carrying out fresh search. Ground No. 8: Erred in considering inappropriate companies as comparable by carrying out fresh search considering non-contemporaneous data Ground No. 9: Erred in not considering multiple year data for determining the arm s length price Gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S.N. Description of transaction Method Value (in Rs. ) 1. Development and support of software Cost plus 7,13,49,096/- 6.3 The AO referred the documentation of ALP (Arms Length Price) to the Transfer Pricing Officer (TPO). The TPO required the assessee to furnish the copies of the information and documents maintained u/s 92D(1) of the Act read with I.T. Rules 10D(1) and (3). The TPO in his order has mentioned that Annexure V of the transfer price documentation was filed by the assessee alongwith letter dated 23-03-09. As per billing agreement, the assessee company undertook the functions as mentioned in earlier paragraph and the Associated Enterprise was to pay total Revenue cost with 10% mark up. The assessee undertook T.P. Analysis in F.Y. 2004-05, according to which, margin of 3 years average NCP of 8 comparables identified in Prowess was 10.27%. The assessee s margin as per recalculated figure was 11.08%. No fresh search for comparables or analysis using contemporaneous data had been made by the assessee. The assessee charged Cost Plus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 92D of the Act. Thus this rule is for the purpose of information and documents to be kept and maintained u/s 92D. When one has to consider the ALP then one has to use data in analyzing the comparability of uncontrolled transaction with international transaction relating to F.Y. in which international transaction has been entered into. This is mentioned in Rule10D(4). The proviso to Rule 10D(4) is an exception and it was on the assessee to have the material on record that exception is available. As already pointed out, this is with reference to information and documents to be maintained by the assessee. These are useful for the purpose of ascertaining the ALP. It is nowhere mentioned in the Act that information and documents maintained by the assessee are only conclusive information and documents for the purpose of ascertaining the ALP. We therefore, hold that the Revenue authorities are justified in rejecting the analysis undertaken by the assessee to determine the ALP. Such analysis can be considered but it cannot be a binding on the Revenue authorities. 6.7 The assessee has not undertaken search process for the F.Y. 2005-06 and therefore, search process was made by the TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... :- 1. Identification of fresh comparables by the assessee: (i) In the reply dated 26.10.09, the assessee has enclosed the results of search process carried out using Prowess and Capitaline Plus Database, both updated till 25.8.06, for comparables engaged in providing Software development service for F.Y. 2005-06. The assessee claimed that this search was contemporaneous in nature as the same had been carried out for the time which would comply with the T.P. Regulations. A total of 9 Comparable companies were identified by the assesse. The mean weighted average margins of these companies were arrived at 1.6%. (ii) The assessee compared its margin with this mean margin to claim that the same was at arm s length. (iii) Updated margins of the Comparables for F.Y. 2005-06: The assessee objected to use of single year data, and further opposed to using of updated data of comparables for the relevant year. It was claimed that the data which was not available at the time of making the study should not be used as it may lead to anomaly. The selected by way of the above search process, for F.Y. 2005-06. This contained data of 5 companies, as the same was not available i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D. The AO [TPO] may proceed to determine the ALP . On the basis of such material or information or document available with him. The assessee had not undertaken the search process in the relevant year and it was duly informed to it that the comparables identified for the T.P. analysis of the preceding year and their margins are not proper for benchmarking with the margins of the assessee, for the relevant year. Once the TPO is of the opinion that the information or data used in the computation of ALP is not reliable or correct, the TPO is duty bound to determine the ALP in accordance with the provisions of section 92C(1) and (2). Hence, the fresh search undertaken by the TPO is in accordance with the provisions of the Act. However, the scope of this is not available to the assessee. It has to undertake the search process at the time of making T.P.Study only. (ii) The assessee has objected to removal of loss-making companies : In this regard it is clarified that the assessee itself had taken out loss-making companies. The margin of loss-making co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee are therefore not acceptable. VII. Sankhya Infotech Ltd.: The assessee considered this company to be functionally different. It generates revenue from product sales and training apart from services. It is clarified that the training component is not related to computer education, but is related to software based simulation products for pilots. Hence, the objection of the assessee is not valid. In light of the above observations the objections raised by the assessee are rejected. VIII. Goldstone Technologies has been identified by the assessee as well. 6.9 In respect of other comparables identified by the assessee, the TPO in his order has recorded the following findings. In its reply dated 26.10.09, the assessee has informed that it has identified 9 comparables on the basis of search process. The process of search, filters applied and functional analysis was annexed with this letter. It was seen that out of 9 comparables, 2 did not satisfy the filter applied by the assessee itself (according to the assessee these had more than 50 crore turnover in 2005-06) and 2 did not have data available for 2005-06. The balance 5 companies were analyzed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on for arriving at arm s length price. In this regard, we bring your Honors kind attention to the ruling of the Hon ble Mumbai Tribunal in case of Haworth India Private Limited Vs DCIT, wherein, the Hon ble Tribunal has held that, 77. Now coming to the case law relied upon by ld. DR which convey that only one comparable is sufficient and it has been held by the Tribunal in other cases that arm length price can be worked out even on the basis of one comparable. In the case of Vedaris Technology Pvt. Ltd. Vs. ACIT (supra) 20 comparables were short listed and mean margin was worked out at 16.585% and out of those only one comparable was left namely Sophia Software Ltd. on the basis of which the arm length price was determined. Here, it is the case of ld. AR that the said case is not applicable to assessee s case as in that case both the parties had accepted one comparable only. But that is not the only basis on which the Tribunal has rested its decision. The other case of similar nature is Parrot Systems TSI India Ltd. vs. DCIT (supra). Moreover, the comparable which has been left was selected by the assessee itself in its TP study and no reason whatsoever is g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted Significantly different functions Company added to the database after the contemporaneous search process Insufficient financial information as annual report not available 2 Cambridge Technology Enterprises Ltd 3 Exensys Software Solutions Ltd Significantly different functions 4 Fortune Infotech Ltd Significantly related party transactions 5 Indium Software (India) Ltd 6 Maveric Systems Ltd Wages / Cost filter rejection criteria 7 Sankhya Infotech Ltd Significantly different functions The Appellant strongly contends not to consider the inappropriate companies as comparables for the reasons as detailed in Annexure A to this submission. 3. Considering the incorrect margins of companies selected by the learned TPO (Ground No 10 of the Grounds of Appeal) The learned TPO/ AO have considered i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DRP for rectification of mistakes apparent from records in not considering the correct operating margins of the comparable companies identified by the learned TPO/ AO Further, the Hon ble DRP forwarded the details filed by the Appellant in connection with the rectification to the learned TPO for his comments. Consequent to the receipt of the learned TPO s report, the Hon ble DRP forwarded the learned TPO's Report to the Appellant providing an opportunity of being heard on the rectification application filed by the Appellant. In this regard, the Appellant filed an additional submission dated 8 April 2011(Page no 324 to 341 of Factual Paperbook I) and also attended the hearing before the Hon ble DRP on 20 July 2011. Annexure A- chart giving the comparative analysis of the companies not accepted by the Appellant as comparables in respect of international transactions of provisions of Software Development Services Sr No Name of the company Facts submitted by the Appellant as reason for rejection Facts modified / Arguments given by the learned TPO in the TP Order Arguments against comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The database keeps adding companies as and when data are available relating to the companies. Accordingly, it is unfair to consider the search analysis Therefore, on account of the above reasons, the company should not be considered as comparable to the Appellant. - 2 Exensys Software Solutions Ltd. ( Exensys ) a) As per the Director s Report for FY 2005-06, it is mentioned that the company has achieved greater success through IT services and BPO wings. The company has forayed into healthcare and insurance services and added four new clients to its credit; b) It is also mentioned in the Management s Discussion Analysis Report for FY 2005-06 that the company has products of its own named Exensys Suite . Exensys Suite, the product of the company is 100 percent customised to meet the growing demands of the domestic Indian market. The company has also achieved phenomenal success in implementing its ERP products for Acalmar Oil and Fats Ltd; c) As per the website of Exensys, it is engaged into providing various software Products and services. d) The company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioned company ought to be rejected. b) This Company was not thrown up in the search analysis carried out at the time of complying with the transfer pricing regulations by the Appellant. However, the same was thrown up at the time of search conducted by the learned TPO. Thus, it is clear that the said company was added to the database after the search run and so keeping the impossibility of performance in mind, this Company should not be accepted as a comparable company. Wage / cost ratio of the aforesaid company is more than 59.95%, therefore the company is acceptable. Search process applied by the learned TPO is same as that of Assessee, therefore claim of the Assessee is not tenable. No basis / evidence / computation have been provided by the learned TPO in rejecting the observation about wages / cost ratio provided by the Appellant. The computation of wage / cost ratio of Marveric for FY 2005-06 is less than the filters as applied by both, the learned TPO and the Appellant. The search process conducted by the learned TPO is based on data available ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifferent product/service lines. d) As per an article issued by the Ministry of External Affairs on India Perspective in Oct 2004 (www.mea.gov.in/indiaperspective/2004/102004.pdf), it is clearly mentioned that Sankhya develops software products for the aviation industry. The relevant extract of the article is as follows: .Sankhya Infotech in Hyderabad is one of three companies in the world to develop a complete package of software that delivers 3-D animation for flight simulators to teach pilots aircraft technologies . (page 17 of the article) e) Based on all of the above, it is apparent that the company generates its revenues from product sales and training apart from services. As the revenue break up is not available for product, training and services income, this company cannot be considered as a comparable and should be rejected as functionally different . Training component pertains to software based simulation services for pilots. No basis / evidence / comparabilit y analysis have been provided by the learned TPO in rejecting the observations submitted by the Appellant with the help of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... data of preceding two years. One is not required to consider the data of number of years. Without understanding the comparable case of company, one has to apply filter for cases having abnormal profit or abnormal losses for exclusion. It was therefore, submitted by the ld. CIT ld DR that transfer pricing adjustment is made by the AO on the basis of the direction of the DRP and the same should be confirmed. 6.12 We have heard both the parties. The objections of the assessee for not allowing use of multiple years of data for the purpose of determination of ALP stands decided against the assessee in the case of Mentor Graphics Noida (P) Ltd. 109 ITD 101, Aztec Software, 294 ITR 322 and the recent decision of ITAT Delhi Bench in the case of ST Microelectroncis (P) Ltd. vide order dated 3-06-2011 in ITA No.1806,1807/Del/2008. The expression shall used in the Rule makes it clear that it is mandatory to use current year data first and if any circumstances reveal an influence on the determination of ALP in relation to the transaction being compared than other datas for period not more than two years prior to such financial year may be used. Hence, the TPO was justified in directing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sankhya Infotech Ltd. 25.58 Akshay Software Technologies Ltd. 7.07 Lanco Global Systems Ltd. (LGS) 5.38 Quintegra Solutions Ltd. 15.21 SIP Technologies Exports Ltd. 21.75 6.15 If the 05 companies are excluded then arithmetic mean will come to 11.85% and if discounting of 5% margin is allowed then margin will come to 6.26% as against 11.08% shown by the assessee. The chart is reproduced as under:- Integrated Decisions and Systems (India) (P) Ltd. Assessment year 2006-07 Sensitivity analysis after exclusion of inappropriate companies of the TPO S.N. Name of the company TPO s Set of comparables Unadjusted margin as per transfer pricing order Correct Margins Correct margins with working capital adjustment 1 Cmabridge Technology Enterprises Ltd. 26.46% 25.93% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ength price does exceed 5%, then the price adopted by assessee should be disturbed. Therefore, adopting arm s length price at the end of the AO on the fact of the present case, in our considered view, was not justified. There should be some material to suggest that the price shown by the assessee are not justified. Merely on the basis that material has been sold to one of the associate, does not prove that the price shown by assessee are on lower side. In view of these facts and circumstances, we are of the view that addition made on the basis of Arm s Length Price at the end of the AO was not justified and the ld. CIT (A) was also not justified in confirming the addition made by AO. Accordingly, the addition of ₹ 13,15,210/- is deleted. 6.17 From the above discussion, we dismiss the ground of appeal no. 4 and 8 and ground of appeal no 10 and 13 are allowed. The result is that there will be no adjustment in ALP and Ground No. 11 and 12 become academic and therefore, it is not necessary to adjudicate upon these grounds of appeal. Thus the adjustment directed by the DRP as per order u/s 144C is deleted and the AO will not make any transfer pricing adjustment. 7. In the ..... 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