9911796707
TMI Blog2016 (3) TMI 1200X X X X Extracts X X X X X X X X Extracts X X X X ..... ed software development services to its AE at a price of Rs. 63,05,75,862/-, for which a TP adjustment of Rs. 5,11,73,398/- was made by the Transfer Pricing Officer (TPOP. Since Assessee was eligible for deduction in respect of profits of business of its undertaking u/s. 10A of the Act, it claimed a deduction of an amount of Rs. 10,01,27,164/-. Of the said deduction claimed, the AO made a disallowance of an amount of Rs. 43,89,266/- by re-computing the deduction in respect of the undertaking. 3.1. An assessment order was passed on 28-11-2008 after incorporating the aforesaid TP adjustment. Aggrieved, Assessee filed an appeal before the CIT(A), which came to be partly allowed vide the impugned order dt. 28-10-2011. Transfer Pricing Issues: 4. The only issue in Transfer Pricing matter is the adjustment made to the provisions of software services. Assessee earned 15% margin (OP/TC) on an operating income of Rs. 63.05 Crores and cost of Rs. 54.83 Crores. Assessee selected nine companies in its TP study under TNMM and justified price received. TPO rejected Assessee'sTP study, used various filters and selected 17 comparables with a mean of 26.59%. After providing for working capital a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AR analysis. However, there cannot be rigid rule or percentage fixed in adopting various filters. Generally, a turnover filter is adopted to avoid selection of high end companies (big companies) with that of 'minnows' in the similar line of business. How to adopt the filter depends on each case. Say for example, in the TP analysis of a company having 20 Crores receipts, a company with 2 Crores to 200 Crores can be stated to be within the range i.e., factor of ten as upper and lower limits. In certain cases, the ITAT also accepted turnover filter of 1 Crore to 200 Crores. But the range cannot be fixed, as the facts may vary from case to case. Simply a comparable can not be excluded on upper turnover limit when infact in number of cases Assessees do not raise any objection on inclusion of companies with very small turnovers. The 200 Crores upper limit also cannot be considered in a case whose turnover is, say 300 Crores. Therefore, instead of a fixed 1cr - 200 Crore range, what one has to consider is the turnover/receipts of Assessee and range of upper limit at ten times and lower limit also ten times..i.e., one tenth. Thus, for example the range for a 300 Crores company can be from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of each of the comparable company is as under. Satyam Computers Ltd: 10.1. Out of the above comparables, Satyam Computer Services Ltd., was excluded by CIT(A) on the basis of non-reliability of financial data. Revenue has accepted the same and has not contested. So, the said company has been rightly excluded. Infosys Technologies Ltd., Exensys Software Solutions Ltd 10.2. Ld.CIT(A) has excluded Infosys and Exensys, on the basis of functional dissimilarity and having extraordinary event during the year. Exensys was having extraordinary profits by way of amalgamation of companies during the year. Infosys was excluded having different functionality of products, having high turnover and brand name. Following the decision of Agnity Technologies Vs. ITO of ITAT as approved by the Hon'ble Delhi High Court, Infosys cannot be considered as comparable. The same view was held by Co-ordinate Bench in the case of ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra). Since the orders of Ld.CIT(A) is in agreement with the decision on these two comparables by various Coordinate Benches, we uphold the same. Bodhtree Consu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra) (paras 19- 20, 22-26, 27-30 restively) and in the case of Cordys Software India P. Ltd., in ITA No. 1451/Hyd/2010 dt. 13-06-2014 (supra) at Para No. 13. The analysis by the Co-ordinate Benches is as under: "Sankhya Infotech Limited ('Sankhya') 19. It was submitted by the learned counsel for the Assessee that Sankhya is engaged in the business of development of software products & services and training. The company focuses on the development of niche products for the transport and aviation industry. However, segmental information in relation to the above mentioned activities is not available in public domain. Therefore, as Sankhya engages itself in products and services as well as software training, it cannot be considered as a comparable of the Appellant. The products developed and owned by Sankhya are listed below: (1) SILICONTM Training Suite of Products: The products are a comprehensive enterprise wide training platform that covers the entire spectrum of training in a paperless environment. It comprises of four products:- - SILICONTM LMS (Training Management Information - SILICO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany is objected to by the Assessee on the reason that the said Thirdware Software Solutions Ltd. is engaged in sale of software licence and related services and not a service provider. Referring to the annual report, it was submitted that this comparable was rejected by the ITAT, Pune in the case of Egain Communications Ltd. This company having revenue from product license and earning extraordinary profit due to intangible owns. 15.6. These three comparable above Flextronics Software Limited, Foursoft Limited and Thirdware Software Solution Limited were analysed by the Coordinate Bench of the Tribunal in the case of Intoto Software Solutions Pvt. Ltd. (supra) wherein it has been held as under : "23. The other companies which are objected to by the Assessee are Flextronics Software Limited, Foursoft Limited and Thirdware Software Solution Limited. As far as these three companies are concerned, the learned Counsel appearing on behalf of the Assessee submitted that they are into both software as well as product development. He submitted that the TPO has taken note of the fact these companies are also into product development but has selected these companies as comparables by ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f software products. Under section 133(6) of the I.T. Act, the TPO has the power to call for the necessary details from the comparable companies. It is seen that the Assessing Officer/TPO as exercised this power to call for details with regard to the various companies. As seen from the annual report of Foursoft Limited which is reproduced at page 7 of the TPO's Order, the said company has derived income from software licence also and AMCs. 25. As far as Thirdware Software Solution Limited is concerned, we find from the information furnished by the said company that though the said company is also into product development, there are no software products that the company invoiced during the relevant financial year and the financial results are in respect of services only. Thus, it is clear that there is no sale of software products during the year but the said company might have incurred expenditure towards the development of the software products. 26. As far as Flextronics Software Limited is concerned, we find that at page 90 of his Order, the TPO has also observed that the said company has incurred expenditure for selling of products and has incurred R & D expenditure for de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epted by the TPO as a comparable but not the entire software development service. Since company's operations are functionally different as such, the same is not comparable. Further, Assessee is also objecting on the basis of intangible scale of operations. The coordinate bench in the case of Intoto (supra) considered the issue as under in para 22: "22 Tata Elxsi Limited : As regards this company, the learned Counsel appearing on behalf of the Assessee, filed before us the reply of Tata Elxsi Limited to the Addl. CIT (Transfer Pricing), Hyderabad, wherein the concerned Officer has been informed that Tata Elxsi Limited is specialised Embedded Software Development Service Provider and that it cannot be compared with any other software development company. It was submitted that because of the specialisation and also because of diverse nature of its business, it is very difficult to scale-up the operations of Tata Elxsi Limited. In view of this, Tata Elxsi Limited has informed that it is not fair to use its financial numbers to compare it with any other company. The communication dated 25th August, 2009 to the TPO is placed before us. As this communication was not before the TPO at t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o say that Assessee's submissions are valid. The AO is directed to exclude the above comparables and rework out the arm's length margin accordingly. The ground No.8 and additional ground raised by Assessee are considered as allowed". In view of the above, the above three companies are to be excluded. Sasken Network Systems Ltd., R S Software (India) Ltd., Visualsoft Technologies Ltd., and Sasken Communication Technologies Ltd., 10.6 Since there is no objection from Assessee and was selected by TPO, the above companies are retained. Four Soft Ltd., 10.7. The objection by Assessee is that this company is a product company. was analysed and accepted in the case of ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra) para 22. It was held that the said company ahs derived income from software license and AMCs. Since functionality was already analysed, respectfully following the Co-ordinate Benches also, the same was to be excluded. i. Intoto Software India Pvt. Ltd., ITA No. 1196/Hyd/2010; ii. Cordys Software India P. Ltd., ITA No. 1451/Hyd/2010 Geometric Software Solutions Company Ltd.,: 10.8. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the Assessee and these companies and without making adjustment for the dissimilarities brought out by the TPO himself, these companies cannot be taken as comparable companies. The method adopted by the TPO to allocate expenditure proportionately to the software development services and software product activity cannot be said to be correct and reasonable. Wherever, the Assessing Officer/TPO cannot make suitable adjustment to the financial results of the comparable companies with the Assessee company to bring them on par with the Assessee, these companies are to be excluded from the list of comparables. Therefore, we direct the Assessing Officer/TPO to exclude these three companies from the list of comparables". Respectfully following, we exclude the same. 11. That leaves us with another ground in Revenue's appeal about granting deduction (+) or (-) 5% as a standard deduction. Consequent to the amendment brought out to the proviso to Section 92C(2), the Revenue contends that the deduction is not permissible. It relies on Co-ordinate Bench decision in ITO Vs. M/s. Sunquest Information Systems (India) Private Limited, in IT(TP)A No. 1302/Bang/2011 dt. 11-06-2015 (supra) (at para ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion between the margin disclosed by the Assessee and the average mean margin. Therefore, in effect, this marginal relief takes the character of a standard deduction of 5 per cent. For e.g., in a case, average mean of the arm's length price determined by the Transfer Pricing Officer/Assessing Officer is 20 per cent and that one disclosed by the Assessee is 10 per cent. The Assessee will get a standard deduction of 5 per cent and the Assessee's arm's length price will be increased to 15 per cent and thereafter the difference of 5 per cent between 20 per cent and 15 per cent alone shall be added as arm's length price adjustment. This is the theme of the old proviso. But under the newly substituted proviso, the marginal relief of 5 per cent will not Act as standard deduction. If the price determined by the average mean price is 20 per cent and that of the Assessee is 10 per cent., then the difference of 10 per cent is more than 5 per cent and therefore, the Assessee will not get the marginal relief and the entire difference of 10 per cent will be added as the arm's length price adjustment. If the arm's length price determined by the Transfer Pricing Officer/Assessing Officer is 15 per ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
