TMI Blog2011 (6) TMI 392X X X X Extracts X X X X X X X X Extracts X X X X ..... and 234D of the Act - ground not maintainable as charging of interest under section 234B of the Act is mandatory and consequential in nature. With regard to charging of interest under section 234D of the Act, {ITO v. Ekta Promoters (P.) Ltd.} Held that:- the levy of interest under section 234D is purely a legal ground and chargeable, ground goes against the assessee - 1201 (BANG.) OF 2010 - - - Dated:- 30-6-2011 - SMT. P. MADHAVI DEVI, A. MOHAN ALANKAMONY, JJ. Padamchand Khincha for the Appellant. Etwa Munda for the Respondent. ORDER A. Mohan Alankamony, Accountant Member. - This appeal instituted by the assessee company - Trilogy E Business Software India Pvt. Ltd is directed against the order of the ld. Assessing Officer passed under section 143(3) read with section 144C of the Act for the assessment year 2006-07. 2. The assessee company in its grounds of appeal had raised fifteen grounds in an illustrative and extensive manner. However, in an attentive scrutinizing of the same, it was noticed that the grievances of the assessee are chiefly confined to the following issues, namely: (i) that the impugned order of the Assessing Officer under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... documentation maintained by the assessee and substituting it by his own TP study - This panel is of the opinion that the TPO has followed strict objective criteria for selecting/rejecting comparables. If any information was not made available to the assessee at the time of TP study, the same is made good by the Panel taking note of the assessee's objections at the time of disposal of the reference under section 144C. Since the Panel is of the opinion that the TPO followed objective criteria for not accepting the TP study of the assessee and conducting his own TP study, the objections of the assessee with regard rejection of its TP study by the TPO and the methodology followed by the TPO in conducting his own TP study, the objection of the assessee was not accepted (iii) Exercising of powers under section 133(6) of the Act by the TPO - The objection of the assessee was not accepted since sub-section (7) of section 92CA empowers the TPO to call for any information by exercise of powers under section 131 or133(6) of the Act. (iv) Rejection of some of the filters proposed by the assessee in its own TP study - After going through the reasoning of the TPO and also weighing the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the 'export turnover' when the assessee had not included the same; - in reducing Rs. 2.41 crores [foreign travel, conveyance and training and recruitment expenses incurred in foreign currency] from export turnover for computing relief under section 10A; - in holding that delivery of computer software was in the nature of rendering 'technical services' as defining in Explanation 2 to section 9(1)(vii) disregarding judicial view on the issue; - erred in not reducing the expenses of Rs. 2.99 crores only from the export turnover and not from the total turnover for computing section 10A relief. Directions of the DRP: Since similar disallowances were made by the Assessing Officer while computing total income of the assessee for earlier years and the issue is subjudice, the disallowance as proposed by the Assessing Officer was approved. With regard to levy of interest under section 234D of the Act, the Assessing Officer was directed by the DRP to examine the issue of charging of interest as per the provisions of law while passing the final assessment order. 3.2 In the final assessment order under section 143(3) read with section 144C of the Act on 13-9-2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the comparables would fall between 6.46 per cent and 17.66 per cent. Since the assessee's margin of 11.22 per cent was within the above range, it was concluded that the international transactions relating to software development services are at arm's length; - that the TPO in his show-cause notice proposed to re-determine the arm's length price for software development services and also remarks on assessee's study, new search methodology, comparables proposes and copies of replies received under section 133(6) from other companies for which the assessee filed a detailed reply wherein it had raised various objections to the proposed action of the ld. TPO; - that the TPO in his further show-cause notice dated 21-4-2009 requiring information on intra group cross charges and reimbursements transactions between the assessee and its AE which was duly furnished; that there was no objection by the TPO with respect to these transactions and they have been accepted at values they were undertaken; - in his final order, the ld. TPO had selected 20 companies as comparables and considered six additional companies as comparables from that proposed, out of which two compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iable and accurate adjustment to account for the differences in the enterprises levels; that size was an important facet of an enterprise level difference. Size of an enterprise is thus to be examined for comparability purposes; that significant differences in size of companies remaining unadjusted would impact comparability; - that companies operating on a large scale benefit from economies of scale, higher risk taking capabilities, robust global delivery and business models as opposed to the smaller or medium-sized companies and that size therefore matters. Two companies of dissimilar size, therefore, cannot be assumed to earn comparable margins; - that various Tribunals have taken a stand that the size as one of the selection criteria and especially the Hon'ble Chandigarh Special Bench had rejected adoption of the turnover range of one crore on lower end and infinity on the higher end DCIT v. Quark systems Pvt. Ltd. 38 SOT 207. Such a view has been accepted by various Tribunals, viz., (a) Egain Communications Pvt. Ltd. v. ITO 118 TTJ 354 (Pune); (b) M/s. Sony India (P.) Ltd v. DCIT 114 ITD 448 (Del.); (c) DCIT v. Indo American Jewellery Ltd., - ITA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnected with assessment or determination of ALP by the TPO. The alleged lack of opportunity by the TPO to the assessee gets cured by the Panel giving an opportunity of hearing and considering its objections.' (vi) That even the DRP had afforded only one opportunity that too the hearing was for a very minimal duration as many cases were heard by the Panel on the same day; that the assessee was not made known by the DRP that the opportunity of not being heard earlier by the TPO was being cured now and, thus, as admitted by the DRP that the error of not having afforded a sufficient opportunity to the assessee continues, vitiating the entire process whereby making the orders bad in law; Authenticity of the information received: - Rule 10(3) provide that the information specified in sub-rule (1) shall be supported by authentic documents. The TPO, had not, however, established whether the information obtained by way of notice under section 133(6) was authentic and complete; - brushed aside the differences between the annual reports of the comparables and replies received under section 133(6) [for e.g., in the case of Accel] as highlighted by the assessee, the ld. TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fied date; that if subsequent information is permitted to be used, then the ALP would remain fluid and, thus, the assessee may determine ALP on the basis of data existing up to a particular date and the TPO may re-determine the ALP on the data subsequently available and subsequently, the DRP will have to re-determine ALP on the basis of up-dated information; - that the OECD in its TP guidelines discourages use of secret comparables, the data of which is unavailable to the taxpayer; - that the data as available to it may be used for determination of the arm's length price; that the data available subsequently or obtained through notices under section 133(6) should be rejected as such approach adopted by the TPO of using subsequent data was bad in law; - without prejudice, that even adopting the subsequent data as used by the TPO, the assessee's margin satisfy the arm's length range Margin or adoption of various companies as comparables: (i) Megasoft Ltd.: - that Megasoft Ltd. [ML] was selected by the TPO in his final order under section 92CA by adopting the margin at 52.74 per cent in the final computation of the arm's length price without affordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pvt. Ltd. v. ACIT 2010-TII-44 ITAT-BANG.-TP (c) ITO v. M/s. Saunay Jewels Pvt. Ltd. 2010-TII-51-ITAT-MUM.-TP (d) Mentor Graphics (Noida) Pvt. Ltd. v. DCIT 109 ITD 101. (ii) KALS Information Systems Limited - The TPO had considered KALS as a comparable on the ground that it was engaged in software services and its margin was computed at 39.75 per cent. As there were unusual features such as consistent losses in providing training, salary cost etc., the assessee urged that KALS cannot be adopted as a comparable. However, TPO and DRP have considered KALS as a comparables adopting the figures supplied in compliance to notice under section 133(6), that KALS had claimed that 'the core of our business may be classified as that of Pure Software Development service provider', which was contrary to the information available in the Annual report of KALS; that the assessee's request to summon KALS for cross examination was turned down which is against various rulings including that of Kishinchand Chellaram v. CIT 125 ITR 713 (SC). Thus, KALS Information Systems Limited cannot be considered as comparable. (iii) Tata Elxsi Limited - Tata Elxsi Ltd. [TEL] had two segments, viz., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey by the team, each employee was paid Rs. 1 lakh and the balance amount was credited to Profit and Loss account. Since this activity was in the nature of software development service which was the main business of the assessee and the assessee incurred various expenses towards this, the said income should be considered as operating in nature; - that the assessee's margins after considering foreign exchange gain and share in prize money from online competitions, the operating profit/operating cost was worked out at 14.05 per cent; that the margin of the assessee as worked out was greater than the adjusted margin of the comparables after eliminating KALS, Tata Elxsi and Accel. Even at the unadjusted level and without elimination of the above companies, the differential is within the permissible 5 per cent bandwidth and, thus, no adjustment was required to be made to the reported value of the assessee's transactions with its associated enterprises; and - based on all the above, the assessee's transactions with the associated enterprises were at arm's length and the addition made by the TPO which was sustained by the DRP requires to be deleted; Alternative contention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - that the margins of the assessee as computed after considering foreign exchange gain and income from share in prize money from online competition was greater than the adjusted margin of the comparables on the above companies after eliminating KALS, Tata Elxsi, Accel, Infosys Technologies and Mindtree and, thus, no adjustment was required to be made to the reported values of the assessee's transactions with its associated enterprises. Benefit of 5 per cent range: - assuming without admitting that a TP adjustment was to be made, it should be given a standard deduction of 5 per cent as provided under proviso to section 92C(2) before making adjustments for the transfer price; that the following case laws support the assessee's view: (i) Sap Labs India Pvt. Ltd. v. ACIT 2010-TII-44-ITAT-BANG.-TP (ii) Philips Software Centre Pvt. Ltd. 26 SOT 226 (iii) MSS India Pvt. Ltd. 32 SOT 132 (iv) Customer Services India (P.) Ltd. v. ACIT 30 SOT 486 (v) Development Consultants (P.) Ltd. v. DCIT 23 SOT 455 (vi) Sony India (P.) Ltd. 315 ITR 150 (vii) TNT India Pvt. Ltd. v. ACIT 10 Txmann.com 161. That the Hon'ble Bangalore Bench in the case of SAP Labs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee are summarized as under: "(i) the TPO had applied a lower turnover filter of Rs. 1 crore, but, not applied the upper turnover limit on the ground that there was no relationship between sales and margins which, according to the assessee, contrary to the guidelines laid down in rule 10B(3); (ii) the TPO had not provided the basis of selection of companies for issuance of notice under section 133(6) of the Act and also it was not clear as to whether all the responses received have been incorporated in the CD supplied to the assessee; (iii) as the initial details provided to the assessee, e.g., Megasoft Ltd. was rejected on the ground that it fails RPT filter and employee cost filter; (iv) in initial show-cause notices, the TPO had detailed the process adopted, however, in disclosing the process exercise of its powers under section 133(6) and the information obtained there-under, it was being secretive and only relevant information was provided which, according to the assessee, leads to bias in choosing the comparables; (v) when DRP's attention was drawn to this lapse of the TPO, the DRP opined that 'there was a fatal error in the process connected with assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... himself has listed various differences between software product company and software service company; (xi) In the cases of iGate Global, Geometric, KALS Info Systems, R. Systems, Sasken Communication, Tata Elxsi Comparables, the TPO had used segmental margins for comparability purposes where the revenues from software development exceed 75 per cent of total revenues of the entity. Considering Megasoft at the entity level would be inconsistent with the TPO's position in case of other comparables. In case of Megasoft, the margins at the entity level were higher than that at the segment level whereas in case of other comparables e.g., KALS, Sasken, Tata Elxsi, iGate etc., margins at the segment level were higher. This shows the approach of the TPO was arbitrary and without basis. 5.3 On a decisive examination of the relevant records, perusal of impugned orders of TPO, DRP and also submission of the ld. A.R, the following lacunae have been noticed, namely: "(i) the TPO had applied a lower turnover filter of Rs. 1 crore, but, not applied the upper turnover limit on the ground that there was no relationship between sales and margins which, according to the assessee, contrary to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there were inconsistencies in selecting the companies as comparables; (v) On the margin or adoption of various companies as comparable, it was the case of the assessee that Megasoft Limited was selected by the TPO in his final order under section 92CA of the Act without giving an opportunity of hearing at any time to the assessee and when the assessee had protested before the DRP the selection of Megasoft Limited as comparable by the TPO, the DRP, brushing aside the assessee's objection, had justified the TPO's stand; (vi) The assessee also opposed the TPO's stand in considering KALS Information Systems Limited, Tata Elexsi Limited, Accel Transmatic Limited etc., as comparables which has been summarily rejected by the TPO as well as DRP; (vii) With regard to computation of margins of the assessee under 'Foreign Exchange Gain', the ld. TPO had, perhaps, treated the same as non-operating income which is quite contrary to the finding of the Hon'ble Bench in the case of SAP Labs India Private Limited v. ACIT 6 ITR (Trib.) 81 (Bang.) wherein it was held that foreign exchange gain needs to be considered as being operating in nature while determining arm's length price. The find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were not recovered from the customers and also did not form part of export turnover as the assessee was not engaged in providing technical services outside India. In this connection, we recall the finding of the Hon'ble ITAT, Chennai Special Bench in the case of ITO v. Sak Soft Ltd. [2009] 30 SOT 55 wherein the Hon'ble Special Bench made it unambiguously that "53 ..the freight, telecom charges or insurance attributable to the delivery of articles or things or computer software outside India or the expenses, if any, incurred in foreign exchange in providing the technical services outside India are to be excluded both from the export turnover and from the total turnover which are the numerator and the denominator respectively in the formula ." In conformity with the finding of the Hon'ble Special Bench referred supra, we decide this issue in favour of the assessee. 5.3-2 Taking into account the facts and circumstances with regard to the remaining short-comings as listed out in the fore-going paragraphs and also a fact that the assessee has been deprived of its rightful opportunity to put-forth its view on the issues which have been dealt with at the levels of TPO and DRP and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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