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TMI Blog2015 (6) TMI 1164X X X X Extracts X X X X X X X X Extracts X X X X ..... service provider to its AEs. Application of Related Party Transaction (‘RPT’) filter - Held that:- RPT filter should be considered at 15% of total revenues and companies having RPT in excess of 15% of total revenues are to be excluded from the list of comparables. In this view of the matter, the order of the learned CIT(A) holding that companies are not to be considered as comparables even if they have a single RPT i.e. that the RPT is in excess of 0% is hereby reversed. Power of CIT(A) for enhancement of income - Held that:- Though the CIT (Appeals) has co-terminus power with that of Assessing Officer and can enhance the assessment, however, since he has not issued any show cause notice for enhancement under Section 251(2) of the Act, he cannot reject these two companies from the set of comparables. Therefore to the extent of the rejection of these two companies from the set of comparables, the order of CIT (Appeals) is set aside and the TPO is directed to recompute the ALP after giving effect to the order of the Tribunal in respect of the comparables which are directed to be excluded from the set of comparables. Decided partly in favor of assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... als) - IV, Bangalore. The learned CIT(A) disposed off the assessee's appeal vide order dt.7.9.2012 allowing the assessee partial relief. 3.0 Aggrieved by the order of the CIT (Appeals) - IV, Bangalore dt.7.9.2012 for Assessment Year 2008-09, the assessee has preferred this appeal raising the following grounds :- "1. The Order of the learned Commissioner of Income Tax (Appeals) - IV to the extent prejudicial to the appellant is bad in law. 2. The learned Assessing Officer has erred in making a reference to Transfer Pricing Officer for determining arm's length price without demonstrating as to why it was necessary and expedient to do so. The learned Commissioner of Income Tax (Appeals) - IV has erred in confirming the action of the Assessing officer. 3. The learned Assessing Officer, learned Transfer Pricing Officer and Commissioner of Income Tax (Appeals) - IV have erred in a. passing the order without demonstrating that appellant had motive of tax evasion. b. not appreciating that the charging or computation provision relating to income under the head "Profits & Gains of Business or Profession" do not refer to or include the amounts computed under Chapter X and ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the appellant. PRAYER 7. 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. 8. The learned Assessing Officer has erred in levying interest under section 234B." In the course of appellate proceedings, the assessee filed submissions in paper book in support of the grounds and a compendium of case laws on which the assessee placed reliance. 4. The Grounds raised at S.Nos.1, 2 & 3 are general in nature and not being specifically urged before us, are dismissed as infructuous. Transfer Pricing Issue (Ground Nos.4 to 7) 5.1 In the course of proceedings before us, the learned Authorised Representative submitted a chart explaining the assessee's position regarding the acceptability or otherwise of each of the companies selected by the TPO / CIT (Appeals) as comparable to the assessee. The learned Authorised Representative also submitted that he would only press those grounds on the comparability of indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder :- S.No. Name of the Company Average Unadjusted Margins (%) 1. Akshay Software Technologies Ltd. 6.36 2. Goldstone Technologies Ltd. 22.42 3. Helios & Matheson InformationTechnology Ltd. 39.86 4. Indium Software (India) Ltd. 1.91 5. Lanco Global Systems Ltd. 20.01 6. MAARS Software International Ltd. 0.14 7. Quintegra Solutions Ltd. 19.07 8. R S Software (India) Ltd. 13.41 9. Sonata Software Ltd. 21.87 10. Visu International Ltd. 20.66 Arithmetic Mean 16.57 Since the profit margin of the assessee was 15.61% on operating cost, the assessee held its international transactions relating to rendering of software development services to be at arm's length. 6.2 The TPO, while accepting TNMM as the MAM, as adopted by the assessee, rejected the assessee's T.P. Study for various reasons and embarked on a fresh search for comparables using the data basis 'Prowess' and 'Capitaline'. After issuing show cause notice to the assessee proposing to adopt a fresh set of comparables and considering the objections of the assessee thereto, the TPO selected the final list of 20 comparables, which are as under :- S.No. Name of the Company OP/T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Seg.) 29.77 Average Margin 24.85 The learned CIT(A), however, held that since the average margin of these four companies at 24.85% is higher than the average margin of comparables adopted by the TPO at 23.55%, he upheld the margin of 23.55% adopted by the TPO. 6.3.3 In the year under consideration, the assessee had rental income from sub-letting of property amounting to ₹ 21,74,298 and had claimed expenditure of ₹ 20,77,594 relating thereto. On appeal, the assessee contended that while computing the operating margin of the assessee, the TPO excluded rental income from operating revenue but at the same time included expenditure relating to rental income as part of operating expenditure. The assessee submitted before the learned CIT(A) that expenses relating to rental income should also be excluded from operating cost. The learned CIT(A) accepting the assessee's contentions directed the Assessing Officer to reduce the amount of ₹ 20,77,594 from the operating cost to determine the arm's length price under Section 92CA of the Act. 6.4.1 Before us, the learned Authorised Representative submitted that he would make and put forward arguments / contentions on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties below in including this company in the list of comparables. 8.4.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial decision cited. We find that the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has excluded this company from the list of comparables, holding that this company is into rendering of product development services and high end technical services in the category of KPO services and therefore cannot be considered as a comparable to an assessee rendering purely software development services. The relevant portion of this order of the co-ordinate bench at para 14.4 thereof is extracted hereunder :- "14.4 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the list of comparables only on the basis of the statement made by the company in its reply to the notice under section 133(6) of the Act. It appears that the TPO has not examined the services rendered by the company to give a finding whether the services performed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew of the above cited judicial pronouncement (supra), this company be excluded from the list of comparables. 9.3 Per contra, the learned Departmental Representative supported the orders of the authorities below in excluding this company in the final list of comparables. 9.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncement cited and placed reliance upon. We find that a co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has excluded this company as being comparable to a software service provider as it was into developing of software products holding as under at para 10.4 of its order :- "10.4 We have heard both parties and perused and carefully considered the material on record. We find from the record that the TPO has drawn conclusions as to the comparability of this company to the assessee based on information obtained u/s.133(6) of the Act. This information which was not in the public domain ought not to have been used by the TPO, more so when the same is contrary to the Annual Report of the company, as pointed out by the lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n even before the CIT(A) or raised any additional ground of appeal in the present appeal in respect of the inclusion of Bodhtree Consulting Ltd. and Lucid Software Ltd. as a comparable, the objections raised by the assessee in this regard, at this stage, ought to be rejected as they are not maintainable. 10.3 We have heard both parties and perused and carefully considered the material on record. Admittedly, as pointed out by the ld. D.R., there is no disputing the fact that the assessee had never objected to the inclusion of these companies in the set of comparables in earlier proceedings both before the TPO and the CIT(A). It is also seen that even in the grounds of appeal raised before us, the assessee has not raised any additional grounds challenging the inclusion of these two companies in the list of comparables. In this factual matrix, since no cause of grievance arises to the assessee from the impugned order, or any of the order of the authorities below, on the inclusion of these companies as comparables, this claim of the assessee is not maintainable as there is no adverse finding in the impugned orders requiring us to adjudicate thereon. We, therefore, finding that the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal in the case of 3DPLM Software Solutions ltd. (supra). The learned Authorised Representative further submitted that another company, namely Softsol India Ltd. has been omitted as a comparable in the decision of the co-ordinate bench of the Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for the reason that its RPT is in excess of 15%. The learned Authorised Representative prayed that in view of the above, R Systems International Ltd. should be included in the list of comparables. 11.3.1 We have heard both parties and perused and carefully considered the material on record, including the judicial decisions cited and relied on in the context of the issue of RPT. It was submitted before us that, in the decision of a co-ordinate bench of this tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 dt.9.11.2012, it was held that RPT filter should be applied at 15%. In doing so, the co- ordinate bench followed the decision of the ITAT, Delhi Bench in the case of Sony India P. Ltd. (2008-TIOL-439-ITAT-Del) wherein it was held that companies having RPT in excess of 15% of total revenues are to be excluded from the list of comparables. The relevan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les. Following the above decisions, we hold that the RPT filter should be considered at 15% of total revenues and companies having RPT in excess of 15% of total revenues are to be excluded from the list of comparables. In this view of the matter, the order of the learned CIT(A) holding that companies are not to be considered as comparables even if they have a single RPT i.e. that the RPT is in excess of 0% is hereby reversed. 11.3.3 The assessee has pleaded before us that the learned CIT (Appeals) has wrongly rejected 12 companies selected by the TPO as comparables by applying 0% RPT filter and therefore these 12 companies should be included in the set of comparables for the purpose of determining the ALP in respect of the international transactions of the assessee. It is pertinent to note that out of these 12 companies which are now sought to be included in the set of comparables, the assessee has raised the objections against inclusion of ten of these companies before the TPO. The TPO has reproduced the objections raised by the assessee in para 3.5.2 of the impugned order passed by the TPO wherein the assessee raised the objections in respect of 15 companies, this includes 10 co ..... 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