TMI Blog2014 (4) TMI 615X X X X Extracts X X X X X X X X Extracts X X X X ..... , the AO/TPO is directed to exclude M/s Infosys Technologies Limited from the list of comparables for determining the ALP – Decided partly in favour of Assessee. The assessee has placed the annual reports of the companies, the TPO should have considered the same and should not have rejected on the ground of non-availability of data in public domain - If information relating to the companies are available with the TPO and if the companies satisfy the filter applied by the TPO then there is no justification for rejecting the companies as comparables – thus, the matter is remitted back to the TPO for fresh adjudication – Decided in favour of Assessee. Mahindra Consulting Limited – Held that:- Assessee contended that as per the annual report of the assessee, there is no related party transactions and whatever related party transactions are there are between the subsidiary company and other companies and not with the assessee company – thus, the matte is required to be remitted back to the TPO to ascertain as to whether actually there is any related party transaction and if at all there is any related party transaction whether they exceeded 25% threshold limit of related party tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts are the assessee formerly known as Vanenburg R D (India) Pvt. Limited, a wholly owned subsidiary of Vanenburg Group BV, Netherlands was incorporated on 3rd July, 1997. The assessee has its registered office at Hyderabad. It provides software development and support services to its group companies (Associated Enterprises (AE). For the services rendered to its AE, the assessee is remunerated on a cost plus mark-up basis. The assessee is also registered with Software Technology Parks of India (STPI) as 100% export oriented unit. For the assessment year under dispute, the assessee filed its return of income on 1-11-2004 declaring total income of Rs.15,27,145/- after claiming deduction u/s 10A of the Act. During the scrutiny assessment proceedings, the Assessing Officer noticing that the international transactions of the assessee with its AE exceeded turnover of Rs.5 crores referred the matter to the Transfer Pricing Officer u/s 92CA of the Act for determining the ALP. The TPO from the TP study submitted along with return filed by the assessee noticed that the assessee had shown reported revenue earned from international transaction with its AE as under: (i) Software devel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted out of 11 comparables selected by the TPO. Further, the CIT (A) also worked out the net margin of three comparables out of the remaining '8'. As a result of which the average net margin of 8 comparables finally retained by the CIT (A) worked out to 24.56% and accordingly the CIT (A) after allowing deduction at 2% towards working capital adjustment determined the ALP of international transaction at Rs.37,44,30,857/- as against the price of Rs.32,63,76,762/- shown by the assessee. This resulted in a shortfall of Rs.4,80,54,095/- which was directed to be treated as the income of the assessee. Being aggrieved of the aforesaid direction of the CIT (A), the assessee is in appeal before us. 4. At the very outset, the learned AR submitted that he does not want to press ground Nos. 1,2,7,8 and 9. In view of such submission, these grounds are dismissed as not pressed. 5. Ground No.3 reads as under: On the facts and in the circumstances of the case and in law, the learned CIT (A) erred in confirming the use of following filters in undertaking the comparative analysis: Different year ending filter; and Application of one side turnover filter. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d also have fixed an upper limit while applying the turnover filter. In that view of the matter, Infosys Technologies Limited cannot be considered to be a comparable to the assessee. Different benches of the Tribunal have also expressed similar view. In fact, the Hon'ble Delhi High Court vide judgment dated 10-7-2013 in case of CIT v. Agnity India Technologies (P.) Ltd. ITA 1204 of 2011 upheld the order of the Income-tax Appellate Tribunal, Delhi Bench holding that big companies like Infosys cannot be treated as comparable to small captive service providers like the assessee. In the aforesaid view of the matter, we direct the Assessing Officer/TPO to exclude M/s Infosys Technologies Limited from the list of comparables for determining the ALP. Hence, this ground of the assessee is partly allowed. 8. In ground No.4, the assessee has objected to rejection of the following companies selected as comparable by the assessee. (i) Bangalore Softsell Limited (ii) Cherrysoft Technologies Ltd., (iii) Future Software Ltd., and (iv) Mahindra Consulting Limited 9. Briefly the facts relating to the issue are, the assessee in its TP documentation had selec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they are purely in the nature of reimbursement. However, the assessee is required to establish by producing necessary evidences that they are in the nature of reimbursements only. In aforesaid view of the matter, we direct the TPO to consider afresh as to whether the aforesaid company can be treated as comparable to the assessee after taking into consideration all materials and after affording a due opportunity of being heard to the assessee. Cherrysoft Technologies Limited and Future Software Limited-With regard to the aforesaid two companies, the learned AR submitted that the assessee in its TP documentation has selected the aforesaid two companies as comparables as they satisfy all the filters applied by the TPO and the annual reports are available in public domain which was provided to the TPO as well as CIT (A) during the proceedings before them. The learned AR relying upon the decision of Special Bench of the Income-tax Appellate Tribunal, Chandigarh in case of Dy. CIT v. Quark Systems (P.) Ltd. [2010] 38 SOT 307 submitted that every information has to be considered in the process of determination of ALP so that a fair view is adopted. It was thus submitted by the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by the TPO. 14. The learned DR, on the other hand, supported the reasoning of the TPO and CIT (A) in this regard. 15. We have heard the submissions of the parties and perused the materials on record. It is the specific contention of the learned AR that as per the annual report of the assessee, there is no related party transactions and whatever related party transactions are there are between the subsidiary company and other companies and not with the assessee company. Therefore, considering the aforesaid submissions of the assessee, we are of the view that the matter requires to be examined afresh by the TPO to ascertain as to whether actually there is any related party transaction and if at all there is any related party transaction whether they exceeded 25% threshold limit of related party transaction to turnover filter adopted by the TPO. The issue is therefore remitted to the file of the Assessing Officer/TPO for examining the same afresh after affording a reasonable opportunity of being heard to the assessee. Hence, this ground is treated as allowed for statistical purposes. 16. Ground No.5 raised by the assessee reads as follows: On the facts and in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 71.99%. As can be seen in the TP report, the TPO had computed the net profit margin of the aforesaid company at 72.38%. During the appeal proceedings before the CIT (A), the assessee specifically objected to the profit margin adopted at 72.38% of VMF Softech Limited by contending that bad debts and provision for bad debts and advances should be considered as part of the operating cost. On the basis of the aforesaid contention of the assessee, the CIT (A) called for remand report from the Assessing Officer. As can be seen from para-6 of the remand report submitted by the TPO a copy of which was placed before us, the TPO re-computed the net profit margin of VMF Softech Limited on the basis of annual report which worked out at 4.37%. However, the CIT (A) in the order passed by him did not accept the net profit margin worked out to 4.37% by the TPO by observing that the computation made by the TPO is erroneous and himself proceeded to compute the net profit margin at 71.99%. However, the CIT (A) has not given any reason why the computation made by the TPO in the remand report is erroneous. In such view of the matter, we remit the issue back to the file of the TPO for fresh determinatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art of the sale proceeds of exporter-assessee. The foreign exchange fluctuations income cannot be excluded from the computation of the operating margin of the assessee company . Following the aforesaid decision of the Bangalore Bench of the Tribunal, the Hyderabad Bench of the Tribunal held in the case of Four Soft Ltd. (supra) in the following manner- 16. With regard to the exclusion of gain on account of foreign exchange fluctuation while computing the net margin, as claimed by the assessee, we find that the exchange fluctuation gains arise out of several factors, for instance, realisation of export proceeds at higher rate, import dues payable at lower rate. Since the gain or loss on account of exchange rate fluctuation arises in the normal course of business transaction, the same should be considered while computing the net margin for the international transactions with the associated enterprises of the assessee. Our view in this behalf is fortified by the decisions of the Bangalore Bench of the Tribunal in the case of SAP Labs India Ltd. supra and Bombay bench of the Tribunal in the case of Deutsche Bank A.G. v. Dy. CIT [2003] 86 ITD 431 Respectfully ..... X X X X Extracts X X X X X X X X Extracts X X X X
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