9911796707
TMI Blog2016 (5) TMI 1498X X X X Extracts X X X X X X X X Extracts X X X X ..... ly owned subsidiary of one M/s. Sunquest, US, and was primarily developing software and providing support to its principal. Sunquest, US, was providing solutions in healthcare services which helped physicians, hospitals and medical practitioners to effectively manage the complexities in healthcare services. For the support services rendered by the assessee, Sunquest, US, was remunerating on cost plus basis. Assessee's financial results for relevant previous year read as under : Operating Revenues* 19,88,17,946 Forex gain ** 2,83,48,688 Total operating revenues 22,71,66,634 Operating Expenses *** 20,34,92,094 Operating (Profit)/Loss 2,36,74,540 Op Profit on cost % 11.63% 03. Whole of the revenue of the assessee came from the software development services rendered to its principal. Though it had also received certain cost reimbursements and expenses from the principal, such reimbursements were considered by the TPO to be at arms length and the adjustments made by him were confined to the software development services. 04. In order to justify its profit on cost of 11.63% assessee had selected 21 comparables. These 21 comparables and their average of operating profit on o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... logies Ltd 12,23,21,483 11,31,49,350 8.11% 3 Bodhtree Consulting Ltd 16,05,75,212 9,89,56,821 62.27% 4 R S Software (India) Ltd. 1,49,57,12,634 1,36,01,02,589 9.97% 5 Tata Elxsi Ltd (segmental) 3,78,43,03,000 3,14,63,15,000 20.28% 6 Sasken Communication Technologies Ltd(seg) 4,05,31,20,000 3,18,69,97,000 27.91% 7 Persistent Systems Ltd 5,19,69,10,000 3,67,52,70,000 41.40% 8 Zylog Systems Limited 7,34,93,51,475 7.81% 9 Mindtree Ltd (seg) 7,93,22,79,326 5,74,06,73,058 5.52% 10 Larsen and Toubro infotech 19,50,83,81,374 15,64,12,76,626 24.72% 11 Infosys Ltd 2,02,64,00,00,000 1.39,17,00,00,000 45.61% Average mean 24.32% 06. Thereafter the AO made a work out of the working capital adjustment as per the formula prescribed in OECD guidelines, 2009. Average working capital adjustment worked out by the TPO came to (-) 5.12 %. However, as per the TPO, average cost of capital for the uncontrolled comparables came to only 1.71%. He therefore restricted the working capital adjustment to 1.71%. Though the assessee requested the TPO to give an adjustment for risk this was not accepted by the TPO for a reason that an accurate adjustment for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he coordinate bench in this case where the assessee concerned was into software development segment. As per the Ld. AR, of M/s. Lam Research (India) P. Ltd, (supra) had two segments, namely, software development segment and ITES segment. With regard to the software development segment, this Tribunal had held that the above mentioned companies were to be excluded. 10. Continuing his arguments, Ld. AR submitted that M/s. Bodhtree Consulting Ltd, was also one among the comparables which were disputed in the case of Lam Research India (P) Ltd (supra). According to him, at para 10 of the said order, it was held by this Tribunal that Bodhtree Consulting Ltd, was not a proper comparable in the software development services segment. 11. Vis-a-vis, Tata Elxsi Ltd, Sasken Communication Technologies Ltd, Persistent Systems P. Ltd, Mindtree Ltd (seg) and Infosys Technologies Ltd, Ld. AR submitted that in the same decision, these were directed to be excluded since the turnover of the said companies exceeded Rs. 200 crores. As per the Ld. AR, assessee's turnover was negligible and came to only Rs. 22.71 crores. As per the Ld. AR, turnover of the above companies was more than ten times of that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d an additional ground before us for application of turnover filter of Rs. 200 crores. By virtue of the Special Bench decision in the case of Quark Systems P. Ltd, (supra), an assessee cannot be deprived of the right to raise such a pleading as additional ground, since the Transfer Pricing is an evolving area. As per the Ld. DR if the turnover filter is to be applied, matter has to be sent to the CIT (A) for consideration since he had not adjudicated the issue. Assessee is seeking application of turnover filter in the case of Tata Elxsi Ltd, Sasken Communication Technologies Ltd, Persistent Systems Ltd, Zylog Systems Ltd, Mindtree Consulting Ltd (seg), L & T Infotech Ltd, and Infosys Ltd. Reliance has been placed by the assessee on the decision of coordinate bench in the case of Lam Research (India) P. Ltd, (supra). Profile of the assessee, as we have already captured in para 02 of this order is one of providing software development services to its principal abroad. Lam Research (India) P. Ltd, (supra) had two segments, namely, software development services and ITES. With regard to software development services, it was providing software development services to its principal called ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 22.72 crores. Obviously the volume of activity of the above mentioned companies were much higher to that of the assessee. It was more than ten times that of the assessee. In the case of Lam Research (India) P. Ltd, (supra) with regard to application of turnover filter, it was held as under at para 13 of the order dt.30.04.2015 : 13. We have heard the rival contentions and perused the material on record. In the case of Yodlee Infotech Pvt. Ltd., (supra), it was held as under : "20. We have to hold that assesseee can seek exclusion of comparables which were a part of its own list, at a later stage, and therefore, we are constrained to reject the line of argument of the learned DR. Coming to the arguments of the learned AR that M/s Tata Elxsi Ltd., M/s Sasken Communication Ltd., M/s Persistent Systems Ltd., M/s L&T Infotech and M/s Infosys Ltd., had turnover in excess of Rs. 200 Crores and were to be excluded, we are of the opinion that turnover filter can be applied for selection of comparables. This has been the view consistently taken by the Co-ordinate Benches of this Tribunal in a number of cases. In the case of M/s Genisys Pvt Ltd Vs DCIT(2011)64 DTR 225 it was held by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D in its TP guidelines. The observation of OCED in para 3.43 of the chapter on guidelines reads as follows : "Size criteria in terms of sales, assets or number of employees : The size of the transaction in absolute value or in proportion to the activities of the parties might affect the relative competitive positions of the buyer and seller and therefore comparability." 8.2 The learned counsel for the assessee submitted that similar observations were also made by ICAI in para 15.4 of TP guidance note. He submitted that TPO's range of Rs. 1 crore to infinity has resulted in selection of companies like M/s Infosys which is having a turnover of Rs. 9,028 crores which is 1,1007 times bigger than the assessee company which has a turnover of Rs. 8.15 crores. He further submitted that NASSCOM has also categorized the companies based on the turnover as follows : 1. Greater than USD 1 billion (approx. Rs. 50,000 crores) 2. Between USD 100 million to USD 1 billion (Rs. 500 crores to Rs. 5,000 crores) and 3. Others having less than USD 100 million (Rs. 500 crores). Thus, the learned counsel for the assessee submitted that an appropriate turnover range should be applied in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee being in that range having turnover of Rs. 8.15 crores, the companies which also have turnover of Rs. 1 to Rs. 200 crores only should be taken into consideration for the purpose of making TP study. The above view was followed by the Co-ordinate Bench of this Tribunal in the case of M/s Bearing Point Business Consulting Pvt. Ltd.,(supra) At paras-5.1 of its order dated 21-12-2012 it was held as under; "5.1 We have heard the rival submissions and perused the materials on record. The TPO had, while selecting the above 26 comparables, applied a lower turnover filter of Rs. 1 Crore but preferred not to apply any upper turnover limit. The size of the comparable is an important factor in comparability. The ICAI TP guidelines note has observed that the transaction entered into by a Rs. 1000 Crores company cannot be compared with the transaction entered into by a Rs. 10 Crores company and the two most obvious reasons are the size of the two companies and related economies of scale under which they operate. The TPO's range had resulted in selection of companies as comparable such as Infosys which was 277 times bigger than that of the assesee. The Bangalore Bench of the Tribunal in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upra). The relevant findings of the Tribunal are extracted as under; "20. In this regard we find that the provisions of law pointed out by the learned counsel for the assessee as well as the directions referred to by the learned counsel for the assessee clearly lay down the principle that the turnover filter is an important criteria in choosing the comparables. The assessee's turnover is Rs. 47,46,66,638/-. It would therefore, fall within the category of companies in the range of turnover between 1 Crore and 200 Crores (as laid down in the case of Genesis Integrating Systems (Ind.) Pvt. Ltd., Vs DCIT ITA NO.1231(Bang)/2010) Thus, companies having turnover of more than 200 Crores have to be eliminated from the list of comparables as laid down in several decisions referred to by the learned counsel for the assessee. Applying those tests, the following companies will have to be excluded from the list of 26 comparables drawn by the TPO viz., Turnover Rs. 1) Flextronics Software Systems Ltd., 848.66 Crores 2) iGate Global Solutions Ltd., 747.27 Crores 3) Mindtree Ltd., 590.39 Crores 4) Persistent Systems Ltd., 293.74 Crores 5) Sasken Communication Tech.Ltd., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In such circumstances, we are of the opinion that assessee can very well plead for exclusion of these companies from the list of comparables. 20. Coming to Bodhtree Consulting Ltd, argument of the assessee is that it is functionally dissimilar. In the case of Lam Research India P. Ltd, (supra), comparability of Bodhtree Consulting Ltd, was an issue. In the software development services segment, it was held as under by this Tribunal at para 18 of its order : Bodhtree Consulting Ltd.:- As far as this company is concerned, it is not in dispute that in the list of comparables chosen by the assessee, this company was also included by the assessee. The assessee, however, submits before us that later on it came to the assessee's notice that this company is not being considered as a comparable company in the case of companies rendering software development services. In this regard, the ld. counsel for the assessee has brought to our notice the decision of the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. v. ITO, ITA No.7633/Mum/2012, order dated 6.11.2013. In this case, the Tribunal followed the decision rendered by the Mumbai Bench of the Tribunal in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f this company has been provided. Attention was drawn to the fact that in the profit & loss account of the audited accounts, the cost of services has been shown as an expenditure and in Schedule 15 to the Notes to Accounts, it has been elaborated as follows:- Cost of services: Cost of services: Cost of Services - Overseas 2,77,32,337 Cost of Services - Domestic 2,58,40,435 Transcription charges 3,97,389 Web Designing Charges 1,64,602 Staff Welfare 11,43,144 Staff Training 3,63,496 Contribution to PF & ESI 15,47,906 Gratuity 13,04,894 Ex Gratia 0 HRD Expenses 3,10,871 5,88,05,074 (iii) It was submitted by the ld. counsel for the assessee that the TPO ignored the contribution to PF & ESI, Gratuity and Ex Gratia payments and arrived at the employee cost. According to the ld. counsel for the assessee, doing so was not proper. If all the employee costs are properly considered, then this company can pass the filter applied by the TPO for excluding it. (iv) We have considered the submission of the ld. counsel for the assessee and are of the view tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Apex Court against the judgment of Hon'ble jurisdictional High Court, we cannot say that Hon'ble jurisdictional High Court judgment should not be followed. We are of the opinion that CIT (A) was justified in giving directions which were in accordance with the law laid down by the Hon'ble jurisdictional High Court in Tata Elxsi Ltd (supra). Grounds 2 and 3 are dismissed. 27. Vide its ground 4, Revenue is aggrieved on the directions of the CIT (A) to give a risk adjustment to the assessee. CIT (A) had directed the TPO to give risk adjustments at prevailing norms suitable / applicable to the assessee. As per the CIT (A), there was no working capital adjustment actually given by the TPO since the adjustment carried out was negative in its impact. On this issue what we find is that TPO at para 3.7 of his order had clearly stated that working capital adjustment is restricted to 1.71% considering the uncontrolled comparables selected by him. However, in the actual working of the adjustment u/s.92CA of the Act, reproduced by us at para six above, working capital adjustment has been made at (-) 5,12% . In such a situation, we cannot say that risk adjustment directed by the CIT (A) was in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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