TMI Blog2014 (4) TMI 930X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in favour of Assessee. Determination of ALP u/s 92C of the Act - Transfer pricing adjustment – Income from software segment, ITES segment and capital advances to AE – Held that:- As already decided that these companies are not to be selected on various reasons, the objections of Assessee s upheld and the TPO/AO is directed to work out the arithmetic mean of PLI on the balance of companies – Decided in favour of Assessee. - ITA No. 1445/Hyd/2010 - - - Dated:- 29-11-2013 - B. RAMAKOTAIAH AND SMT. ASHA VIJAYARAGHAVAN, JJ. For the Appellant : P. Murali Mohan For the Respondent : P. Soma Sekhar Reddy ORDER:- PER : B. RAMAKOTAIAH This is an appeal by Assessee directed against the orders of AO u/s 143(3) of the Act, read with directions of DRP u/s 144C of the Act dated 25-10-2011. The appeal is with reference to the issues on transfer pricing adjustments made by the AO to the incomes under software segment, ITES segment and capital advance to AEs and also adjustments made to claim u/s 10A. 2. Assessee raised detailed grounds running to 26 in appeal and also filed additional grounds running from 27 to 37. When asked to file concise grounds, the learned coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. Alisec Technologies Ltd. 3. Datamatics Financial Services Ltd. 4. Transworks Information Services Ltd. 5. Cosmic Global Ltd. 6. Vishal Information Technologies Ltd. 7. Asit C Mehta Financial Services Ltd. 8. Goldstone Infratech Ltd. 9. Spanco Ltd. 10. Ace Software Exports Ltd. 11. Apex Knowledge Solutions P. Ltd. 12. R Systems International Ltd. 13. Flextronics Software Systems Ltd. Arithmetic mean of the above companies was arrived at 24% (OP/OC) and as operating revenue declared by Assessee is at 9.58%. The TPO recommended the addition of Rs. 27,32,841/- being shortfall u/s 92C of the Act. 5.3 With reference to the software development services in the software development segment, the TPO selected 20 comparables, which are as under: 1. Aztec Software Ltd. 2. Geometric Software Ltd. 3. Infosys Ltd. 4. KALS Info Systems Ltd. 5. Mindtree Consulting Ltd. 6. Persistent Systems Ltd. 7. R Systems International Ltd. 8. Sasken Communications Ltd. 9. Tata Elxsi Ltd. 10. Lucid Software Ltd. 11. Media Soft Solutions Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the interest for adjustment. In this particular case, instead of 14% interest charged by the TPO, we agree for Libor + certain % points, i.e. Libor + 3% for the following reasons. 2. We have gone through the order of the TPO and found severe material deficiencies and inconsistencies in the sand taken by the TPO. Accordingly, we did not accept the decision of the TPO and held that the ALP on interest should be in the range of Libor + certain basis points, depending on some internal CUP available in the tax payer's cases or the external CUP adopted from other cases. 3. Sri F.M. Mohanty, one of the members of the DRP, Hyderabad, had expressed his disagreement with the decision taken. He is of the opinion that it is in appropriate to issue any directions on this matter regarding determination of ALP on loan transactions. 4. Section 144C(5) of IT Act read with sub-section [8] does not mandate the DRP to have any discretion not to issue directions on any particular issue referred to it meaning thereby that any issue referred to it meaning thereby that any issue referred to the DRP has to be disposed off as per the provisions contained in section 144C of the IT Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Rate of interest (% over Libor) 1. Radico Kahitan US $10 1.50 2. Shiva Cement US $ 7 2.50 3. Tata Chemical US S 20 1.00 Arithmetic 1.67 In the first case, the TPO accepts that interest rate at Libor + 200 basis points is treated as arm's length in a case where loan is given to an Indian entity even though interest rates prevailing in India during the relevant time were of the order of 10 to 14% per annum. In the second case, considering that there is no significant difference between the rate of interest paid by the tax payer and the comparables, no adjustment was proposed. In both the above instances the TPO has rightly recognized the principle involved i.e. rate of interest in international transactions is benchmarked against Libor + certain basis points (i.e. interest rates prevailing in international money markets) and not against interest rates prevailing in India. Another most question is whether the TPO would have allowed interest @ 14% p.a. in case it was claimed by the tax payers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in many cases, many issues were appealed against by the Department before the ITAT. There is no consolidated official record of such decisions which are before the ITAT. Before DRP, we have come across about 12 to 15 issues in all the cases put together. On all these issues, there are several departmental appeals pending before the ITAT for adjudication. If the order of TPO is to be accepted on all those issues DRP cannot take any decision otherwise than upholding all the decisions of the TPO even though they are found to be patently wrong. There are no such guidelines issued by the CBDT for the functioning of the DRPs. In any case, if what is suggested by Sri F.M. Mohanty is to be followed, the whole functioning of the DRP would be paralyzed and unworkable and the institution itself becomes redundant. (iv) There is no appeal by the Department against the orders of the DRP. It is a conscious decision taken by the Government of India not to appeal the decisions taken by a panel consisting of 3 senior commissioners. They are expected to decide the issues judiciously and objectively to the best of their knowledge and ability. Whether there is an appeal against such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rency and the transaction is an international transaction, then the transaction would have to be looked upon by applying the commercial principles in regard to international transaction. If this is so, then the domestic prime lending rate would have no applicability and the international rate fixed being LIBOR would come into play. In the circumstances, we are of the view that it LIBOR rate which has to be considered while determining the arm's length interest rate in respect of the transaction between the assessee and the Associated Enterprises. As it is noticed that the average of the LIBOR rate for 1.4./2005 to 31.3.2006 is 4.42% and the assessee has charged interest at 6% which is higher than the LIBOR rate, we are of the view that no addition on this count is liable to be made in the hands of the assessee. In the circumstances, the addition as made by the Assessing Officer on this count is deleted." 9. Further, in the case of Four Soft Ltd. v. Dy. CIT [2011] 142 TTJ 358, the coordinate bench held as follows: "19. We have considered the rival submissions and perused the materials available on record. We do not find any merit in the arguments of the learned departmental ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction u/s 10A, the AO excluded communication expenses from the export turnover. It was the contention that the said expenses should also be excluded from the total turnover. Assessee raised this issue in Ground Nos. 23 24. This issue is covered in favour of Assessee by the Special Bench of the ITAT in the case of ITO v. Saksoft Ltd. [2009] 30 SOT 55 (Chennai) (SB) and also the decisions of other coordinate benches in the case of Prithvi Information Solutions Ltd. in [IT Appeal No. 225/Hyd/2005, dated 12-10-2007] and also in the case of ITO v. D.E. Block India Software (P.) Ltd. [IT Appeal No. 983 984/Hyd/2006, dated 31-12-2007]. In fact, the AO did mention that the issue is pending by way of reference to Hon'ble High Court. Since the issue was decided in favour of Assessee by the Special Bench as well as coordinate benches, we direct the AO to exclude the said communication expenses from the total turnover also and workout the deduction accordingly. Accordingly, Ground Nos. 23 24 are allowed. 12. Ground Nos. 25 26 pertaining to levy of interest u/s 234B and initiation of penalty proceedings u/s 271(1)(c) of the Act, which do not require any adjudication. 13. Ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the list of comparables on the ground that this company acquired Intelenet BPO Services Pvt. Ltd. in Nov. 2005 and also a super normal profit making company. He relied on the following case law: 1. Bangalore ITAT order in the case of Google India (P.) Ltd. (supra) where this company is rejected as comparable to ITES. 2. Hyderabad ITAT order in the case of Capital IQ Information Systems (India) Ltd. (supra) vide Para 11 and 15. 3. Mumbai ITAT order in Teva India(P.) Ltd. (supra) Mumbai. 5. Goldstone Infratech Ltd. The learned counsel for the assessee submission is to exclude the said company from the list of comparables on the ground that this company is engaged in completely different line of business and also having super normal profits. He relied on the following case law: 1. Bangalore ITAT order in the case of Google India(P.) Ltd. (supra) where this company is rejected as comparable to ITES. 2. Hyderabad ITAT order in the case of Capital IQ Information Systems (India) Ltd. (supra) vide Para 15. 3. Mumbai ITAT order in Teva India(P.) Ltd. (supra). 6. Allsec Technologies Ltd. The learned counsel for the assessee submission is to e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hyderabad ITAT order in the case of Trinity Advanced Software Labs. Ltd. 3. Bangalore ITAT order in the case of Genisys Inte grating Systems (India) Pvt. Ltd. 4. Delhi ITAT order in the case of Agnity India Technologies Pvt. Ltd. 5. Hyderabad ITAT order in the case of Deloitte Con sulting India Pvt. Ltd. 15. We have considered the above objections and as coordinate benches have already decided that these companies are not to be selected on various reasons, we uphold the objections of Assessee and direct the TPO/AO to work out the arithmetic mean of PLI on the balance of companies. Grounds raised by Assessee on this issue are allowed. 16. With reference to software segment, Assessee objections are as under: 1. Infosys Ltd. The learned counsel for the assessee submission is to exclude the said company from the list of comparables on the ground that this company is a giant company and is engaged in the development of niche products. He relied on the decision of Hyderabad ITAT in the case of Intoto Software Pvt. Ltd. in ITA No. 1196/Hyd/2010 (32 Taxmann.com 21). 2. Flextronics Software Systems Ltd. The learned counsel for the assessee submission is to e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nctionality and business model. Further, TPO placed a filter of similar year financial ending i.e., March year ending. However, Megasoft Ltd has a different financial year ending compared to Assessee company i.e., December Year ending and ought not to have considered it as a comparable. He relied on the following case law: 1. Hyderabad ITAT order in the case of Capital IQ Information Systems (India) Ltd. (supra). 2. Mumbai ITAT order in Teva India (P.) Ltd. (supra)Mumbai. 3. Americal Express (India)(P.) Ltd. (supra). 17. we have considered various objection in the light of material placed before us. Various coordinate benches have already considered the above objections on similarly placed software development companies. Accordingly, these objections of Assessee are accepted and the TPO directed to exclude the above companies and rework out arithmetic mean of PLI. 18. After working out at the arithmetic mean of PLI, if the range is within + or - 5% as per the proviso to section 92C(2), the AO/TPO is also directed to consider the same. Accordingly, various grounds raised on these two issues are considered allowed. 19. In the result, appeal of Assessee is p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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