9911796707
TMI Blog2015 (6) TMI 1164X X X X Extracts X X X X X X X X Extracts X X X X ..... view of the international transactions reportedly entered into by the assessee in the period under consideration, the Assessing Officer made a reference under Section 92CA of the Act to the Transfer Pricing Officer ('TPO') for determining the Arm's Length Price ('ALP') thereof, after obtaining the approval of the CIT (Appeals) - I, Bangalore. The TPO vide order under Section 92CA of the Act dt.31.10.2011 proposed a T.P. Adjustment of Rs. 1,23,18,582 to the ALP of international transactions in respect of software development services rendered by the assessee. The Assessing Officer then passed a draft under assessment under Section 143(3) rws 144C of the Act dt.15.12.2011. The assessee, on receipt thereof, informed the Assessing Officer that it would prefer to file an appeal before the concerned CIT (Appeals) and requested that the final order of assessment be passed. The Assessing Officer passed the final order of assessment under Section 143(3) rws 144C of the Act for Assessment Year 2008-09 on 2.1.2012 determining the assessee's taxable income at Rs. 1,24,15,282; which included the T.P. Adjustment of Rs. 1,23,18,582 to the ALP of international transactions in respect of the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, learned Transfer Pricing Officer and Commissioner of Income Tax (Appeals) - IV have erred in: a. Performing fresh transfer pricing analysis and adopting inappropriate filters in doing fresh transfer pricing analysis. b. adopting companies as comparables even though they are not comparable to the appellant. c. Not appreciating that the law does not compel adopting many (or any minimum) companies as comparables and that the appellant could justify the price paid/charged on the basis of any one comparable only. d. not making proper adjustment for enterprise level and transactional level differences between the appellant and the comparable companies. e. treating provision for bad debt as non-operating in nature. 6. The learned Commissioner of Income Tax (Appeals) - IV has erred in a. changing the filters applied by the TPO without giving an opportunity of being heard to the appellant. b. rejecting the companies having offshore revenues less than 75% of the total software development revenues without giving an opportunity to the appellant and without demonstrating the appropriateness of this filter. c. rejecting companies having related party transactions without ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the above observations, we now briefly examine the grounds of appeal at S.Nos.4 to 7 raised on T.P. Issues. 5.2.1 Ground No.4 (a to d) are general in nature and since these grounds have not been urged before us, they are dismissed as infructuous. 5.2.2 Ground No.5 (a to e) is raised in respect of the inclusion of certain companies as comparables by the TPO/CIT (Appeals) and the exclusion of certain other companies by the learned CIT(A). As we will be examining and considering the comparability or otherwise of the individual companies as raised by the assessee before us, there is no requirement for specific adjudication on specific issues raised. 5.2.2 Ground No.6 (a to d) relates to the unilateral modification of certain filters and inclusion / exclusion of certain comparables by the learned CIT(A). as we will be examining and considering the comparability or otherwise of the individual companies as raised by the assessee before us, there is no requirement for specific adjudication on specific issues raised. 5.2.4 Ground No.7 is general in nature and therefore no adjudication is called for thereon. 6.0 Assessee's T.P. Study. 6.1 As per the T.P. Study, carried out by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pment services segment of the assessee was computed by the TPO at 14.07% on total cost. After granting working capital adjustment at 0.11%, the TPO computed the T.P. Adjustment of Rs. 1,23,18,582 to the ALP of international transactions entered into by the assessee in the period relevant to Assessment Year 2008-09. 6.3.1 On appeal, before the learned CIT(A), the assessee filed submissions raising various objections regarding the application of filters by the TPO. A summary of the CIT (Appeals) findings while disposing off the assessee's appeal, are as under :- (i) The learned CIT(A) applied the turnover filter of Rs. 1 Crore to Rs. 200 Crores and rejected 8 companies from the final set of TPO's comparables; (ii) The learned CIT(A) applied the related party transactions (RPT) filter at 0% and thereby rejected 11 companies as comparables; (iii) the learned CIT(A) rejected Celestial Bio Labs Ltd. as a comparable on the ground that it is functionally different from the assessee; (iv) The learned CIT(A) applied 95% off shore revenue filter and rejected 8 companies as comparables; (v) The learned CIT(A) did not accept any of the companies proposed by the assessee. 6.3.2 Finall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e comparable companies so highlighted by the assessee in its chart. 8. e-Zest Solutions Ltd. 8.1 This company was selected by the TPO as a comparable. Overruling the assessee's objections that it was functionally different, the TPO included this company as a comparable on the ground that as per the information received under Section 133(6) of the Act, this company is engaged in software development services and satisfies all filters. 8.2 Before us, the learned Authorised Representative submitted that this company be excluded from the list of comparables as it is functionally different from the assessee as it is engaged in e-Business Consulting Services' which are high end ITES, categorised as knowledge process outsourcing ('KPO') Services which are not comparable to the purely software development services rendered by the assessee. The learned Authorised Representative submitted that this company was excluded from the list of comparables by the order of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) holding that this company is to be excluded from the list of comparables since it provides KPO services which are not comparable to p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oresaid decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), we direct the A.O./TPO to exclude this company from the list of comparables as it is functionally different form the assessee in the case on hand who is rendering purely software development services. It is ordered accordingly. 9. Kals Information Systems Ltd. (Seg) 9.1 This company has been selected by the TPO as a comparable. The assessee had objected to the inclusion of this company on the ground that it is functionally different from the assessee; being into product development and also because the segmental details, relied on by the TPO, have not been provided in the Annual Report of the company with regard to software development services and software products revenue. The TPO, however, rejected the objections of the assessee and included this company in the final set of comparables. 9.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee and ought to be excluded from the list of comparables as it is into software products, unlike the assessee in the case on hand who only a software service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In this view of the matter, we hold that this company i.e. KALS Information Systems Ltd., is to be omitted from the list of comparable companies. It is ordered accordingly." 9.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), we direct the Assessing Officer to exclude this company from the final set of comparables as it is functionally different from the assessee in the case on hand, who is only a software service provider to its AEs. 10. Bothtree Consulting Ltd. and Lucid Software Ltd. 10.1 These two companies have been selected as comparable companies to the assessee by the TPO; the inclusion of which was never objected to by the assessee both before the TPO and the ld. CIT(A). The assessee has also not objected to the inclusion of these companies in the list of comparables, as can be seen from the grounds of appeal raised in Form 36B before this Tribunal. However in the course of proceedings before us, the learned Authorised Representative raised objections to the inclusion of these companies as comparables for various reasons given in its submissions. 10.2 Per contra, the learned Departmental Rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) Avani Cincom Technologies Ltd. (ii) LGS Global Ltd. (iii) Flextronics Software Systems Ltd. (iv) i-Gate Global Solutions Ltd. (v) Infosys Technologies Ltd. (vi) Mindtree Ltd. (vii) Persistent Systems Ltd. (viii) R. Systems International Ltd. (Seg) (ix) Softsol India Ltd. (x) Tata Elxsi Ltd. (xi) Thirdware Solutions Ltd. (xii) Wipro Ltd. 11.2.1 The learned Authorised Representative submitted that RPT filter should be applied at 15% of the total revenue and only those companies having RPT in excess of 15% of total revenues are to be excluded from the list of comparable companies. It was submitted by the learned Authorised Representative that out of the above 12 companies, 4 comparables namely 1) Avani CincomTechnologies Ltd. 2) R. Systems International Ltd. 3) Softsol India Ltd. and 4) Thirdware Solutions are rejected as comparable companies only on the ground that they have RPT in excess of 0%. The remaining 8 companies (supra) are also rejected as comparables for various other reasons such as turnover filter, off shore revenues being less than 75%, etc. 11.2.2 The learned Authorised Representative further contended that out of the 4 comparables named ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ITAT, Delhi in the case of Sony India (P) Ltd. reported in 2008- TIOL-439-ITAT-Delhi dt.23.12.2008. The learned counsel for the assessee drew our attention to para 115.3 of the order wherein the Tribunal has held that - "We are further of the view that an entity can be taken as uncontrolled if its related party transactions do not exceed 10 to 15% of total revenue. Within the above limit, transactions cannot be held to be significant to influence the profitability of the comparables. For the purpose of comparison what is to be judged is the impact of the related party transactions vis-à-vis sales and not profit since profit of an enterprise is influenced by large number of other factors" Respectfully following the decision of the Tribunal in the case of Sony India (P) Ltd (supra), the Assessing Officer / TPO are directed to exclude after due verification those comparables from the list with related party transactions or controlled transactions in excess of 15% of total revenues for the financial year 2003-04." 11.3.2 The above decisions acknowledge that RPT upto a certain limit should not lead to the rejection of a company as a comparable. The above decision of the co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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