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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 ..... Similarly, in software services, the assessee s price is Rs. 7,39,80,534/- whereas +/-5% range comes between Rs. 7,18,98,974/- to Rs. 7,94,67,787/-. Accordingly, no adjustment can be made. Thus, we do not find any infirmity in the order of the ld. CIT (A) and the same is confirmed. Accordingly, the appeal of the Revenue is dismissed. - SHRI AMIT SHUKLA, JUDICIAL MEMBER SHRI S RIFAUR RAHMAN, ACCOUNTANT MEMBER For the Appellant : None For the Respondent : Ms. Shilpa N.C. ORDER PER AMIT SHUKLA (J.M): The aforesaid appeal has been filed by the Revenue vide order dated 07/06/2010 passed by CIT(A)-15, Mumbai for the quantum of assessment passed u/s.143(3) for the A.Y. 2005-06. 2. In the grounds of appeal, Revenue has raised following grounds:- 1) On the facts and in the circumstances of the case as well as in law, the Id CIT(A) has erred in deleting the addition of Rs. 4,45,29,090/- made by the AO to the appellant's income based on the provisions of section 92(1) of the Act. 2) On the facts and in the circumstances of the case as well as in law, the Id.CIT(A) has erred in accepting comparable who are either engaged in difference typ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... included. It was submitted that criteria followed by the ld. TPO for rejection of comparables of the assessee and adopting his own comparable were as under:- (A) Related Party Transactions (RPT) 25% (B) Export Income NIL (C) Salary 1.15% of turnover (D) Lack of Segmental Data (E) Consistent/ chronically loss making. (F) Exceptional/Extra-ordinary event. (G) Software Development comparables used as Back office support comparables. 6. It was further submitted that the ld. TPO himself was not consistent in adopting the same yardstick while rejecting assessee s comparables and introducing his own comparables for the purpose of benchmarking the ITES and IT segment. The comparables chosen by the ld. TPO in IT segment were as under:- Sr. No Name of the Company Operating Margin (%) 1 Allsec Technologies Ltd 28.07 2 Tulsyan Technologies Ltd (Cosmic Global) 18.75 3 Saffron Global 24.97 4 Wipro BPO Solutions Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 for rejection of the comparable as Fails related party filters and in the next column on the same page TPO has contradicted it by stating No RP (meaning no Related Party) in the column of % of revenue from related party to total revenue . Further, TPO has not provided % of related party tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, s egmental 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 profitability based on the segmental data is available, this company should be accepted as comparable. CS Software Enterprises Ltd. The TPO on page number 2 of the TP order has provided the reasons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ual 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hould be accepted as comparable. (D) Lack of Segmental Data Thirdware Solutions Limited (IT) The TPO on page number 9 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 Annexur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... logies 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 it is seen that the company has positive net cost plus mark up of 9.27%. The copy of the relevant pages of annual report is attached herewith as Annexure 16 It is thus evident that ASM Technologies Ltd. is not a consistently loss making company and TPO's ground of rejection is 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age number 9 of the TP order has provided the reasons for acceptance of the comparable as The company recognizes its income from software services only In this connection, we wish to submit that the annual accounts of the company are not reliable due to the financial fraud scam which has been discovered in the case of this company. In fact, all the financial statements are being under reconstruction. Further, the auditors of Satyam Computers have withdrawn their audit report pursuant to the confessions to the financial fraud made by the chairman 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 / sig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that once, the TPO has adopted certain criteria/yardsticks for accepting/rejecting a company, he is bound to uniformly apply the same criteria while selecting his own set of source of financial information from the database. He should have referred comparables. The fundamental weakness of the TPO's order has been in adopting an inconsistent approach while applying the accept/reject filters of the comparables. It appears that the TPO has confined itself to the primary to the secondary source of information also like annual accounts/Directors report/website the company etc. to ensure that filters /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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Ltd 20.34 2 Sasken Communication Technologies Ltd 14.42 3 Visualsoft Technologies Ltd 23.52 4 Zensar Technologies Ltd 8.76 5 Blue Star Infotech Ltd 13.18 6 Mphasis BFL 18.33 7 CMC Ltd 10.10 8 Computech International Ltd 8.98 9 ASM Technologies Ltd 12.68 10 Astro Bio Systems Ltd -2.66 11 Megasoft Ltd -5.23 12 R S Software Ltd 7.61 13 Goldstone Technologies Ltd 3.76 14 Cepha Imaging Pvt Ltd 48.35 15 Ace Software Exports Ltd 14.55 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O 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. CIT (A) the arithmetic mean in ITES segment comes to 13.73% and in IT segment comes to 17.51%. In that case, in ITES segment margin shown by the assessee and margin which has been determined falls within the tolerance limit of +/- 5% as provided in proviso to Section 92CA which was applicable prior to 01/10/2009, then assessee s price of Rs. 30,29,93,009/-, which is well within the tolerance range, because -5 comes to Rs. 29,28,59,642/- and +5% comes to 32,36,86,978/-. Thus, ld. CIT (A) has correctly held that in such a case, no adjustment is called for. 11. Similarly, in software services, the assessee s price is Rs. 7,39,80,534/- whereas +/-5% ra ..... X X X X Extracts X X X X X X X X Extracts X X X X
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