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TMI Blog2024 (2) TMI 523X X X X Extracts X X X X X X X X Extracts X X X X ..... lar business in the period similar to assessee's business period 3) The appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of appeal." 3. The brief facts qua the issue of transfer pricing adjustment of Rs. 4,45,29,090/- is that, assessee is engaged in the business of providing range of back office support services. It is a captive service provider for its group entities. During the year, assessee had entered following international transactions with its AEs. Sr. No. Nature of transactions Value of transaction (Rs.) 1 Provision of back office support services (ITES) 30,29,93,009 2 Provision of software development services (IT) 7,39,80,534 4. In the TP study report assessee has benchmarked the above transaction for ITES and IT services by adopting TNMM as Most Appropriate Method. The PLI was net cost plus and computed the operating margin under the BPO/ITES segment at 11.78% and Software/IT segment at 14.87%. The assessee in so far as ITes is concerned has chosen 10 comparables with arithmetic mean of 9.74% and in so far as software services segment, assessee has taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... %) 1 Bodhtree Consulting Ltd. 24.85 2 Akshay Software Technologie Ltd 07.72 3 Lanco Global Systems Ltd 13.78 4 Exensys Software Solutions Ltd 70.68 5 Sankhya Infotech Ltd 27.35 6 Sasken Network Systems Ltd 16.64 7 Gebbs Infotech Ltd 16.52 8 VJIL Consulting Ltd 06.68 9 Four Soft Ltd 24.70 10 Thirdware Solution Limited 66.11 11 Tata Elxsi Limited (Segmental) 24.35 12 Flextronics (Segmental) 32.19 13 L & T Infotech Ltd. 11.72 14 Infosys Ltd 43.49 15 Compulink Systems Ltd 43.62 16 Geometric Software Solutions Co. Ltd. 20.34 17 Visual Soft Technologies Ltd (Segmental) 23.52 18 Sasken Communication Technologies Ltd. (Segmental) 14.42 19 Satyam Computer Systems Ltd. 30.31 20 Zensar Technologies Ltd. 08.76 Arithmetic Mean 27.11 7. Before the ld. CIT (A) assessee had pointed out ld. TPO's error in applying his own criteria in rejecting and choosing his own comparables in the following manner:- 1) Back Office Support Service Segment (ITES) (A) Related Party Transactions > 25% (Spanco Telesystems and Solutions Ltd. The TPO has rejected this company on page number 2 of the TP order and has provided the reasons fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istent stand adopted by the TPO in selecting his own comparable. Vishal Information Technologies Ltd. The TPO has selected the company on page number 4 of the TP order and has prvided the reasons for selection of the comparable as "Engaged in information technology enabled services" In this connection, we wish to submit that employee cost as a percentage of sales is only 0.95% (Which is less than 1.15% of sales). We have attached herewith the working along with the profit and loss account as Annexure 4. S the salary expenses is less than 1.15%, this company should be rejected. (D) Lack of Segmental Data Mphasis BFL Ltd. The TPO on page number 2 of the TP order has provided the reasons for rejection of the comparable as "engaged in software development and software products and information technology enables services, segmental break up of information technology enabled services is not available". Page no. 55 of the annual account of the company, clearly indicates IT and BPO as two segments of the company. The data of each of the segments are available as per attached Annexure 5. The BPO segment profitability (NCP) of the company works out to 13.71%. Since, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er has provided the reasons for rejection of the comparable as "engaged in trading in computer peripherals, system integration services. Page no. 67 of the annual account of the company, clearly indicates IT and BPO as two segments of the company. The data of each of the segments are available as per attached Annexure 7. The BPO segment profitability (NCP) of the company works out to 1.46%. Since, the profitability based on the segmental data is available, this company should be accepted as comparable. (E) Consistent/ chronically loss making Online Media Solutions Ltd The TPO on page number 3 of the TP order has provided the reasons for rejection of the comparable as "consistently loss making". In this connection, we submit as under: From the transfer pricing study submitted to the transfer pricing officer, it is seen that the margins of Online Media for FY 2002-03, FY 2003-04 and FY 2004 05 are as follows: Year Netcost plus mark up) FY 2002-03 5.95 FY 2003-04 4.62 FY 2004-05 (-) 10.10 The copy of the annual report for the year ended 31 March 2005 along with comparative working of profit and loss account for the above mentioned three financial years is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the TP order has provided the reasons for acceptance of the comparable as "engaged in software development" In this connection, we wish to submit that Schedule 12 of the annual report of the company indicates that the company is engaged in the business of software services, software products, exports and revenue from subscription. The data pertaining to revenue as per Schedule 12 is tabulated below for your reference. Particulars Amount (In Rs. ) Sale of License 27,202,087 Software Services 80,602,781 Export 147,425,780 Revenue from Subscription 35,939,678 Total 291,170,326 However, no information on the profitability of each function/ segment for each of this service is available. The profit and loss account and annexure evidencing the same is attached as Annexure 12. In the absence of segmental data of software services, this company should be rejected. Mphasis BFL Ltd. The TPO on page number 2 of the TP order has provided the reasons for rejection of the comparable as "engaged in software development and software products and information technology enables services, segmental break up of information technology enabled services is not available". Pag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s erroneous. Since, the company is not consistent loss making, the company should be accepted as comparable. Astro Bio Systems Ltd. The TPO on page number 7 of the TP order has provided the reasons for rejection of the comparable as "consistently loss making". On review of the annual report of the company for the year ended March 2003 and March 2004, it is seen that the company has a positive net cost plus mark up of 18.29% and 4.21% respectively. It is only for the year ended March 2005, the company has a negative net cost plus mark-up of (-) 2.66 percent. The copy herewith as Annexure 17. It is thus evident that the company is not a consistently loss making company as claimed by the TPO and TPO's ground of rejection is erroneous. Since, the company is not consistent loss making, this company should be accepted as comparable. Megasoft Ltd. The TPO on page number 6 of the TP order has provided the reasons for rejection of the comparable as "consistently loss making" For the year ended December 2003, Megasoft has a positive net cost plus mark up of 5.83%. It is only for the year ended December 2004, the company has a negative net cost plus mark-up of (-) 5.33 perc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hairman of the company. The supporting to above is attached as Annexure 20. Since, the data of the company is influenced by exceptional/ extraordinary event, this company should be rejected as comparable. Exensys Software Solutions Ltd. The TPO on page number 8 of the TP order has selected this company as comparable. On perusal of the annual report at page no. 16 it is seen that company itself have admitted as under: "as "exceptional year of operations" due to the fact that another company (Holool India Limited) has amalgamated with the company with effect from April 01, 2004, which has had a material / significant impact on the results of expenses for the financial year ended March 31, 2005" On page 16 of the annual report, it is mentioned in the Director's report under the "Performance Review" and "Operational Review" that- "During the year under review your company had earned an income of Rs 737.79 lacs which consists of an Export Turnover of 691.76 Lacs. This was possible with the Amalgamation of Holool India Limited with the company M The Company entered into a scheme of amalgamations with M/s Holool Andia Limited to get benefit by the advanced late ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s /criteria it had adopted applies equally to the comparables selected by it. As is evident from the detailed examination of comparables there are inconsistencies which cannot be ignored. Transfer Pricing is a fact intensive judgmental exercise and cannot be done in a cursory manner. Transfer Pricing cases typically require a more in depth analysis of the facts and underlying economics of a particular related party transaction compared to other tax issues. 5.11 In fact while verifying the facts it was seen that in respect of one of the comparables rejected by the TPO on the ground of Consistent loss making viz. ASM Technologies Ltd., it is seen that the company is in fact having NCP of 9.27% for the single year 2005. The same is true in case of RS Software Ltd., which the TPO has also rejected on the ground of consistent loss making company, whereas it is seen that the company is making profit of NCP at 7.61% for the single year 2005. Since, the TPO himself has considered single year margin, he ought not to have rejected these comparables especially when these companies have made profit in the current year; In nutshell it is seen that the TPO has not been consistent in his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 78/-(+5%). The appellants price is Rs. 30,29,93,009/- is within this Range under proviso to Sec. 92C(2). Whereas in the software services the corresponding ALP worked out after applying 5% range comes to Rs. 7,18,98,974 / (-5%) and Rs. 7,94,67,787(+5%). The appellants price at Rs. 7,39,80,534/- is within the range under proviso to Sec. 92C(2). As such there is no scope for any adjustments. 9. None appeared on behalf of the assessee. Since it is an old matter, therefore, we are deciding the appeal on merits after hearing the ld. DR. 10. After considering various documents placed before us in the form of paper book and finding given by the ld. TPO and ld. CIT (A), we find from the assessee's contention before the ld. CIT(A) regarding inclusion of comparables by the ld. TPO and the exclusions of other comparables on merits as incorporated above, that ld. TPO had adopted certain criteria for rejection of comparables which has been highlighted above. If those criteria itself are adopted on the comparables which has been chosen by the ld. TPO and applying the filters adopted by him on the final set of comparables selected by him under ITES and IT segment, then as noted by the ld. C ..... X X X X Extracts X X X X X X X X Extracts X X X X
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