TMI Blog2013 (6) TMI 376X X X X Extracts X X X X X X X X Extracts X X X X ..... y E-Business Software India (P.) Ltd.'s case [2013 (1) TMI 672 - ITAT BANGALORE] & Mercedes Benz [2013 (6) TMI 56 - ITAT BANGALORE] are similar, namely, development of software and the size/turnover was also similar to that of the assessee in the instant case. Moreover, the assessment year 2007-08 was subject matter of consideration in the case of Trilogy E-Business Software India (P.) Ltd. (supra) and Mercedes Benz Research Development India (P.) Ltd.'s case (supra) and the comparables selected by the TPO in those cases are identical to that of the instant case. The TPO had, while selecting the above 26 comparables, applied a lower turnover filter of ₹ 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 guidance note has observed that the transaction entered into by a ₹ 1000 crores company cannot be compared with the transaction entered into by a ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to re-examine whether Ishir Infotech Ltd. should be included in the list of comparables. AO/TPO is directed to work out the ALP of the assessee and if found that the differential in the margin of the assessee and the comparable is beyond 5% bandwidth recognized in proviso to section 92C (2) then adjustment is required to be made to the reported value of the assessee's transaction with its AE. It is ordered accordingly - IT(TP) Appeal No. 948 (Bang.) of 2011 - - - Dated:- 28-3-2013 - N. BARATHVAJA SANKAR AND GEORGE GEORGE K, JJ. For the Appellant : Chavali Narayan. For the Respondent : Farhat Hussain Qureshi. ORDER:- George George K, Judicial Member - This appeal, at the instance of the assessee company, is directed against the order of the assessing officer under section 143(3) r. w. s. 144C of the Act dated 23.8.2011. The relevant assessment year is 2007-08. 2. Centillum India Pvt. Ltd. merged with TranSwitch India Pvt. Ltd. (hereinafter referred to as 'assessee company'). TranSwitch India Pvt. Ltd. (assessee) is a capital service provider engaged in the business of rendering software development services to its Associated Enterprises (AE). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f interest u/s 234B of the Act is mandatory and consequential in nature and, thus, this part of the ground is dismissed. However, charging of interest u/s 234D of the Act, it is clarified that the AO was within his realm to charge interest u/s 234D of the Act, in view of the finding of the Hon'ble Tribunal, Delhi Special Bench in the case of ITO v. Ekta Promoters (P.) Ltd [2008] 305 ITR (AT) 1. 4.1.2 Ground No.15 is regarding the initiation of penalty proceedings under section 271(1)(c) of the Act. The challenge to initiation of penalty proceeding is premature and, hence, this ground is also dismissed. Ground Nos. 2 and 3 is with regard to re-computation of deduction under section 10A of the Act. Ground Nos.5 to 13 is regarding transfer pricing issue. We shall now take up the issues argued by the learned counsel for the assessee for adjudication chronologically as under: I. 10A deduction (Ground No.2 3) : 5. The Assessing Officer had re-computed the deduction under section 10A of the Act by holding that the communication expenses (i.e., the lease line charges, broadband charges, foreign travel expenses and insurance expenses) attributable to the delivery of compute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s undertaken by it with its AE. After economic analysis for the determination of the ALP was undertaken and based on the transfer pricing study, the assesse treated its international transaction with its AE is within the Arm's Length range. The net margin on cost earned by the assessee, the comparables selected by the assessee and their arithmetic mean are as follows:- Net margin on cost earned by the assesse Particulars Amount (INR) Revenue Service Income 296,731,922 Foreign Exchange Gain 58,046 Total Operating Revenue 296,789,968 Expenditure Personnel Expenses 184,825,121 Administrative and general expenses 58,143,243 Depreciation 18,855,833 Total Operating Expenditure 261,824,197 Operating profit/ Operating Cost 13.35% Comparable selected by the assessee and their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 24 Tyche Industries Limited 10.62% 25 VJIL Consulting Limited 6.26% 26 VMF Softech Limited 18.39% 27 Visualsoft Technologies Limited 18.73% 28 Zylog Systems Limited 16.32% Arithmetic Mean 14.53% 6.1 The TPO had considered the TNMM, as selected by the assessee, as the most appropriate method in the facts and circumstances of the case. However, the TPO rejected the analysis carried out by the assessee and conducted a fresh economic analysis by selecting 26 comparables. The TPO accepted 8 companies out of assessee's list of comparables and rejected the other twenty companies. Thereafter, the adjusted net margin of the comparable companies (after providing for the working capital adjustment of 1.55%) was worked at 23.59% on operating cost. The net margin of the assessee was determined at 13.04% on operating cost by the TPO (as against 13.35% determin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 21 R Systems International Ltd. (Seg.) 15.07% 22 Sasken Communication Technologies Ltd. (Seg.) 22.16% 23 SIP Technologies Exports Ltd. 13.90% 24 Tata Elxi Ltd.(Seg) 26.51% 25 Thirdware Solutions Limited 25.12% 26 Wipro Limited (Seg.) 33.65% Arithmetic Mean 25.14% Computation of the arm's length price by the TPO Arm's length arithmetic margin (A) 25.14% Less: Working Capital Adjustment (B) 1.55% Adjusted mean margin of the comparables (C) 23.59% Operating cost (D) 26,24,84,197 Arm's length Price (E = D* [100%+C]) 32,44,04,219 Price Charged in International Transaction (F) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of the 26 comparables would be 10.44% after providing for working capital adjustment and factoring in Risk adjustment. Since the assessee's operating margin is at 13.35% (after considering foreign exchange gains), the same would be within the range of +/-5% of the assessee's net margin and thus, no transfer pricing adjustment is required and, therefore, the TP adjustment made by the TPO is liable to be set aside. 6.4.1 On the other hand, the learned DR had supported the findings of the Transfer Pricing Officer and the DRP on these issues. 6.5 We have heard the rival submissions and perused the materials on record. Before we proceed to consider the issues, it is to be mentioned that the line of business of the assessee in this case and that of two case laws Trilogy E-Business Software India (P.) Ltd. (supra). Mercedes Benz Research Development India (P.) Ltd. (supra) are similar, namely, development of software and the size/turnover was also similar to that of the assessee in the instant case. Moreover, the assessment year 2007-08 was subject matter of consideration in the case of Trilogy E-Business Software India (P.) Ltd. (supra) and Mercedes Benz Research Develo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which are loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of ₹ 1 crore to 200 crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200 crores only should be taken into consideration for the purpose of making TP Study. 6.5.3. The above view has been followed in the recent order of the Tribunal in the case of Trilogy E-Business Software India (P.) Ltd. (supra). 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 ld. counsel for the assessee as well as the decisions referred to by the ld. counse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding is extracted as under: 50. We have considered the submissions and are of the view that the plea of the assessee that the aforesaid company should not be treated as comparables was considered by the Tribunal in Capgemini India Ltd (supra) where the assessee was software developer. The Tribunal, in the said decision referred to by the ld. counsel for the assessee, has accepted that this company was not comparable in the case of the assessees engaged in software development services business. Accepting the argument of the ld. counsel for the assessee, we hold that the aforesaid company should be excluded as comparables . B. Avani Cimcon Technologies Ltd: 6.6.2 The selection of this company as comparable by the TPO was rejected by the earlier Bench of the Tribunal in Trilogy E-Business Software India (P.) Ltd.'s case (supra) for the reasons that- 41. We have given a careful consideration to the submissions made on behalf of the Assessee and are of the view that the same deserves to be accepted. The reasons given by the Assessee for excluding this company as comparable are found to be acceptable. The decision of ITAT (Mumbai) in the case of Telcordia Technolo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic Ltd (Seg); (ii) Avani Cimcon Technologies Ltd; (iii) Celestial Labs. Ltd., (iv) KALS Information Systems Ltd (seg) cannot qualify as comparables in the case of the assessee under consideration. It is ordered accordingly. (E) Lucid Software Limited 6.6.6 The above company has been rejected as comparable in the case of Telcordia Technologies India (P.) Ltd. v. Asstt. and the recent order of the Tribunal in the case of Mercedes Benz Research Development India (P.) Ltd. (supra). The submissions and the finding of the Hon'ble Mumbai Tribunal in Telcardia Technologies India (P.) Ltd.'s case (supra) is reproduced below:- 7.2 Lucid Software Limited: It has been submitted before us that this company, besides doing software development services, is also involved in development of software product. The learned AR has tried to distinguish by pointing out that product development expenditure in this case is around 39% of the capital employed by the said company, and, therefore, such a company cannot be considered as tested party. Even as per the information received in response to notice under section 133(6), the company has described its business as software de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... E Zest Solutions Limited 3 Geometric Ltd. (seg) 4 Helios Matheson Information Technology Ltd 5 IshirInfotech Ltd 6 LGS Global Ltd (Lanco Global Solutions Ltd) 7 Mediasoft Solutions Pvt. Ltd 8 Megasoft Ltd (Seg) 9 Quintegra Solutions Ltd 10 R S Software (India) Ltd 11 R Systems International Ltd (Seg) 12 SIP Technologies Exports Ltd 13 Thirdware Solutions Ltd (Seg) 6.6.9 The above companies have been retained as comparables in conformity with the findings of the earlier Benches in the cases of Trilogy E-Business Software India (P.) Ltd. (supra), Telcordia Technologies India (P.) Ltd. (supra) and Mercedes Benz Research Development India (P.) Ltd. (supra). (F) Megasoft Limited: 6.7 It is to be noted that in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ortion of the revenue from development of software sold and used for customization was less than 25% of the overall revenues. The TPO therefore held that less than 25% of the revenues of the comparable are from software products and therefore the comparable satisfied TPO's filter of more than 75% of revenues from software development services. Having drawn the above conclusion, the TPO did not bother to quantify the revenues which can be attributed to software product development and software development service but adopted the margin of this company at the entity level. In terms of Rule 10B(3)(b) of the Rules, an uncontrolled transaction shall be comparable to an international transaction if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 38. Neither the TPO nor the DRP have noticed that there is bound to be a difference between the As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (page 22 of 24/7 Customer.com Pvt. Ltd.). In the light of above order of the Tribunal, the issue is restored to the file of the Assessing Officer/TPO to examine whether professional fees paid amounting to ₹ 3,41,09,398/- in the case of Ishir Info Tech is for the work outsourced. If the said amount is paid for the work outsourced, Ishir Infotech will not qualify 25% employee cost filter as salary paid, excluding the professional fee paid is only ₹ 17,48,310/- compared to operating revenue of ₹ 7,42,09,887/-. It is ordered accordingly . 6.8.3 Since the facts and the assessment years are identical, in conformity with the above order of the Tribunal in the case of Mercedes Benz Research Development India (P.) Ltd. (supra) we direct the Assessing Officer/TPO to re-examine whether Ishir Infotech Ltd. should be included in the list of comparables. 7. It was the contention of the learned counsel for the assessee that after excluding eight companies on account of turnover filter and six companies on functional dissimilarity, the assessee's margin would be within the range of +/-5% of margin of following 12 companies retained as comparables. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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