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TMI Blog2021 (1) TMI 947X X X X Extracts X X X X X X X X Extracts X X X X ..... re CIT(A) on the ground of functional comparability. CIT(A) has however excluded this company on the basis of export turnover filter. It is also the claim of the Assessee that the related party transaction in the case of the aforesaid company was more than 25%. As far as the request of the Revenue that the export sales to turnover of this company is 92% and therefore passes the test of export turnover filter being at least 75% or more of the total turnover. We are of the view that the comparability of this company has not been properly analyzed and hence the comparability of this company is set aside to the TPO/AO to be considered afresh on both the functional filter as well as RPT and export turnover filter. Exclusion of Mindtree Ltd. from the list of comparable companies - Assessee has no objection to its inclusion in the list of comparable companies of the TPO. Hence, this company is directed to be included in the list of comparable companies. Exclusion of M/s. Datamatics Global Services Ltd. - Assessee sought exclusion of this company before CIT(A) on the ground that this company is functionally different from that of the Assessee. CIT(A) has however in his order exclude ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (A) For the Appellant : K.R. Vasudevan, Advocate For the Respondents : Pradeep Kumar CIT (DR) ORDER N.V. Vasudevan, Vice President IT(TP)A. No. 1081/Bang/2019 is an appeal by the assessee while ITA No. 1007/Bang/2019 is an appeal by the Revenue. Both these appeals are directed against the order dated 28.02.2019 of CIT(A)-2, Bengaluru, relating to assessment year 2012-13. 2. The only issue that arises for consideration in these cross appeals is with regard to determination of Arm's Length Price(ALP) in respect of international transaction of rendering of Software Development Services by the Assessee to its Associated Enterprise (AE). The Assessee is a company engaged in the business of providing contract Software Development Services (SWD Services). The Assessee rendered SWD services to its AE. The transaction of rendering software development services by the Assessee to its AE was a transaction with an Associated Enterprise (AE) and was therefore an international transaction. As per the provisions of Sec. 92 of the Income Tax Act, 1961 (Act), income from international transaction has to be computed having regard to Arm's Length Price (ALP). 3. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al transaction of rendering of SWD services by the Assessee to its holding company as follows: Computation of arm s length price by the TPO and adjustment made: Arm s Length Mean Mark-up 22.63% Less: Working Capital Adjustment 0.11% Adjusted mean mark-up of the comparables 22.52% Operating Cost ₹ 51,79,45,502 Arm s Length Price 122.52% of Operating Cost ₹ 63,45,86,829 Price Received ₹ 57,06,66,385 Shortfall being adjustment u/s. 92CA ₹ 6,39,20,444 5. The difference between the price charged by the Assessee and the ALP determined by the TPO viz., ₹ 6,39,20,444/- was added to the total income by the AO in his draft assessment order dated 11.3.2016 as addition on account of shortfall being adjustment u/s. 92CA of the Act. 6. The Assessee did not file objections to the draft assessment order by the AO before the Disputes Resolution Panel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purpose of comparing Assessee's profit margin with that of the comparable companies, the Assessee has filed the present appeal before the Tribunal raising several grounds of appeal. However at the time of hearing the learned counsel for the Assessee pressed for adjudication of only Ground No. 11 and 13 of the grounds of appeal. These grounds of appeal read as follows: 11. The learned AO/learned TPO/Hon'ble CIT(A) erred in not considering foreign exchange gain/loss as operating in nature in computing the operating profit to operating cost of the Appellant and the comparable companies. 13. The learned AO/learned TPO/Hon'ble CIT(A) has grossly erred in accepting the following companies as comparable to the Appellant: Genesys International Corporation Ltd. Infosys Ltd. Larsen Toubro Infotech Ltd. Persistent Systems Ltd. Spry Resources India Pvt. Ltd. 8. As far as Ground No. 13 raised by the Assessee is concerned, the learned counsel for the Assessee submitted that he does not want to press for exclusion of the company Spry Resources India Pvt. Ltd., from the list of comparable companies chosen by the TPO. With regard to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofile of the Assessee and that of the Assessee in the case of Agilis Technologies India (P) Ltd., is identical in as much as the said company was also involved in providing SWD services to its AE and the TPO had chosen some comparable companies which were also chosen by the TPO in the case of the Assessee for the purpose of comparability. In the aforesaid decision the Tribunal held on the comparability of the 3 companies which the Assessee seeks to exclude as follows: (a) Infosys Ltd., was excluded from the list of comparable companies by following the decision of the Hon'ble Delhi High Court in the case of CIT Vs. Agnity India Technologies (2013) 36 taxmann.com 289 (Delhi). The discussion is contained in paragraphs 4.5 to 4.7 of the Tribunal's order. The Tribunal accepted that Infosys Ltd. is a giant risk taking company and engaged in development and sale of software products and also owns intangible assets and therefore not comparable with a software development service provider such as the Assessee in that case. (b) Larsen Toubro Infotech Ltd., was excluded from the list of comparable companies by relying on the decision of the Delhi Bench of ITAT in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Assessee this company is engaged in providing Geographical Information Services comprising of Photogrammetry, Remote Sensing, Cartography, Data Conversion, state of the art terrestrial and 3D geocontent including location based and other computer based related services. Page-38 of the Annual report 2012 containing the above description was brought to the notice of the TPO. Attention of the TPO was invited to the directors report to the shareholders at page ii of the annual report 2012, wherein the Directors have informed the shareholders that the company continued in its journey to be innovators and leaders in the fields of location based services related geo platforms and advanced survey techniques. There is no segmental reporting because it is stated in the annual report that this company is only in one segment viz., GIS based services and therefore there is no requirement of segmental reporting. It was also submitted that this company owns substantial intangibles equivalent to 10.42% of its total turnover. 32. The TPO however has regarded this company as a comparable company by observing that this company develops software for mapping and geospatial services and operates ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets would not be significant. Rule 10B(2) of the Income Tax Rules, 1962 (Rules) specifically provides that for the purposes of sub-rule (1) of Rule 10B, the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:-- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; In the given facts and circumstances, we are of the view that Genesys International Corporation Ltd., cannot be considered as a comparable company and the said company should be excluded from the final list of comparable companies. We hold accordingly. 9. Respectfully following the decision of the Tribunal we hold that the aforesaid 4 companies be excluded from the final list of comparable companies for the purpose of arriving at the arithmetic mean of comparable companies for the purpose of comparison with the profit margins. 10. As far as the comparable company ICRA Techno Analytics Ltd., challenged by the Reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmunication Technologies Ltd., is concerned, we find that the CIT(A) excluded this company after finding that this company was functionally different. The revenue in Gr. No. 4 does not challenge the finding of CIT(A) but has raised a vague ground that comparability need not be exact and that the requirement of law is only similar companies. We are of the view that the functional comparability not having been disputed, the plea taken by the revenue deserves to be rejected. 14. As far as Gr. No. 11 raised by the Assessee with regard to treatment of foreign exchange gain as part of the operating profit of the Assessee we find that in Assessee's own case for AY 2010-11 2011-12 in IT(TP) A/No. 2642 2643/Bang/2017, this Tribunal by its common order dated 31.7.2019 held that as follows: 24. Now regarding the remaining the issue in respect of TP analysis i.e. consideration of foreign exchange fluctuation gain/loss as operating in nature for the purpose of computation of margin of the assessee as well as the comparable companies as per ground no. 11, we would like to observe that such foreign exchange fluctuation gain/loss of the tested party or of the comparables can be con ..... X X X X Extracts X X X X X X X X Extracts X X X X
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