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TMI Blog2016 (3) TMI 1269X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee, then the said two concerns may be so selected in the final set of comparables. - ITA No.1800/PN/2013, ITA No.299/PN/2015, ITA No.399/PN/2015 - - - Dated:- 31-3-2016 - MS. SUSHMA CHOWLA, JM AND SHRI PRADIP KUMAR KEDIA, AM For The Assessee : Shri Nikhil Pathak For The Revenue : Shri M.K. Biju, JCIT ORDER PER SUSHMA CHOWLA, JM: Out of this bunch of three appeals, one appeal filed by the Revenue is against the order of CIT(A)-IT/TP, Pune , dated 31.07.2013 relating to assessment year 2010-11 against order passed under section 143(3) of the Income-tax Act, 1961 (in short the Act ). The cross appeals filed by the assessee and the Revenue are against the order of CIT(A)-13, Pune, dated 15.01.2015 relating to assessment year 2010-11 against order passed under section 154 r.w.s. 250 of the Act. 2. This bunch of three appeals relating to the same assessee on issue of transfer pricing adjustment were heard together and are being disposed of by this consolidated order for the sake of convenience. 3. The Revenue in ITA No.1800/PN/2013 has raised the following grounds of appeal:- 1. The order of the learned Commissioner of Income-tax (Appeals) is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers adopted by the A.O. without appreciating that since all the facts were on record, the learned CIT(A) could have himself given the finding regarding comparability of the various companies. 3] The learned CIT(A) erred in holding that interest cost should be excluded from the operating cost while determining the operating margin of the assessee company and the comparable entities. 4] The learned CIT(A) erred in not allowing appropriate risk adjustment towards the differences in market risk, price risk, credit risk, warranty risk, business risk, etc. undertaken by the comparable entities and the assessee company while computing the ALP of the international transactions entered into by the assessee. 5. The Revenue in ITA No. 399/PN/2015 has raised the following grounds of appeal:- 1 The order of the learned Commissioner of Income Tax (Appeals) is contrary to law and to the facts and circumstances of the case. 2 The learned Commissioner of Income Tax (Appeals) grossly erred in holding that the companies such as CAT Technologies, Exensys Software Solutions Ltd., Kirtee Software Technologies Ltd., Netripples Softwares Ltd., Silverline Technologies, Spry Resou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and other ITES services to its associate enterprises. The assessee was a captive service provider to its associate enterprise M/s. Avalara INC. During the year under consideration, the assessee had entered into international transaction of providing services for software development and ITES support services to its associate enterprises to the tune of ₹ 3,30,32,398/-. The assessee had applied TNMM method for establishing arm's length price of international transaction. The assessee had applied Operating Profit / Operating Cost and had determined the PLI at 9.57%. The OP / OC ratio in respect of list of comparables selected by the assessee was 6.77% and as such, it was claimed that the international transaction entered into by the assessee was at arm's length. The Assessing Officer during the assessment proceedings noted that the assessee had merely applied three search criteria for arriving at the final set of comparables i.e. (i) companies which were primarily engaged in activities relating to computer software; (ii) companies having financial data for the period ending 31.03.2010 and (iii) companies engaged in similar service line. The Assessing Officer was of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Company s Name % OP/OC 1 Acropetal Technologies Ltd. 37.30 2 Bodhtree Consulting Limited 29.07 3 Compucom Software 34.52 4 Infosys Tech 51.26 5 Kals Information Sysystem Ltd. 11.89 6 Larson and Toubro Infotech Ltd. 23.76 7 Sonata Software Ltd. 32.16 8 Tata Elxi 15.15 9 ThinkSoft Global Services Ltd. 12.69 10 Thirdware Solutions Ltd. 27.15 11 Persistent System Ltd. 29.83 Arithmetic Mean 27.71% 9. The OP/OC margins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. Applying the said ratio, the CIT(A) directed the Assessing Officer to exclude companies having turnover of more than ₹ 200 crores and hence, Bodhtree Consulting Ltd., Infosys Technologies Ltd., Larsen Toubro Infotech Ltd., Sonata Software Ltd., Tata Elxi Ltd. and Persistent Systems Ltd. were excluded from final list of comparables. 13. With regard to other two companies i.e. Bodhtree Consulting Ltd. and Compucom Software, the CIT(A) stated that these two also fail the filter of minimum 75% of revenue from export and hence, the same were also to be excluded from final set of comparables. In respect of Bodhtree Consulting Ltd., the CIT(A) held that it also did not fulfill the turnover filter of ₹ 1-200 crores. The CIT(A) further allowed adjustment on account of working capital in accordance with provisions of the Act. The CIT(A) further observed after giving effect to these adjustments, the assessee s profit margins would fall within +/- 5% of average margins of comparable companies and accordingly, the adjustment made on account of transfer pricing would be deleted. 14. The Revenue is in appeal against the order of CIT(A). 15. The learned Departmental Repre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions and perused the record. The limited issue arising before us is in relation to transfer pricing adjustment made in the hands of assessee with regard to selection of comparables for benchmarking the international transaction entered into by the assessee. The assessee is a captive service provider to its associate enterprise M/s. Avalara INC. During the year under consideration, the assessee had entered into international transaction of provision of software development and other ITES services to the tune of ₹ 3,30,32,398/-. The assessee had applied TNMM method and the PLI of the assessee worked out to 9.57% by adopting OP/OC as indicator. The assessee had picked up certain concerns as comparables and was of the view that its international transaction was at arm's length. The Assessing Officer on the other hand, revised the filters to be applied and consequently, selected 11 concerns as comparable whose arithmetic mean of operating margin was 27.71%. Consequently, the Assessing Officer made an addition under section 92C of the Act to the tune of ₹ 54,78,990/-. Before the CIT(A), the grievance of the assessee was against selection of concerns as comparable. It was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... passed by the CIT(A) under section 154 of the Act. 20. The assessee had moved an application for rectification which is placed at page 312 of the Paper Book. Under the said rectification application, the assessee was aggrieved by non-adjudication of certain grounds of appeal on the surmise that if in case, three issues raised in the appeal were decided in favour of the assessee, then no addition would be sustained after giving appeal effect. It was pointed out by the learned Authorized Representative for the assessee that even if the appeal effect in respect of three issues were given, the addition of ₹ 20,29,200/- would be sustained out of total addition of ₹ 54,78,990/-. The assessee further stressed that it had clarified that two companies namely R.S. Software (India) Ltd. and Datamatics Global Services Ltd. have satisfied all the filters applied by the Assessing Officer and hence, the same may be considered as comparable entities in this year. The CIT(A) passed an appellate order, against which the assessee is in appeal before us. 21. The limited issue which arises in the appeal filed by the assessee is that whether the two concerns i.e. R.S. Software (India) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of aforesaid concerns in case these companies were part of accept reject matrix and the issue of rejection of the said concerns in the transfer pricing report by the assessee stands modified since the filters which were applied by the assessee in the transfer pricing report has not been applied by the Assessing Officer. The issue has been setaside to the file of Assessing Officer, who shall decide after giving reasonable opportunity of hearing to the assessee and we direct the Assessing Officer to look into these aspects and then determine whether the said concerns are to be picked up for benchmarking international transaction of the assessee. The learned Authorized Representative for the assessee pointed out that one concern i.e. Silver Line Technologies has to be excluded from the final list of comparables as it follows different financial year i.e. from 01.07.2009 to 30.06.2010, whereas the financial year of the assessee ends by 31.03.2010. In this regard, reliance was placed on the ratio laid down by Pune Bench of Tribunal in Dover India (P.) Ltd. Vs. DCIT (2015) 59 taxmann.com 53 (Pune Trib.). We find merit in the claim of assessee in this regard. However, since the issue ..... X X X X Extracts X X X X X X X X Extracts X X X X
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