TMI Blog2013 (6) TMI 56X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO adopted the TNMM - Held that:- An identical issue to that of the present one had cropped up in the assessee’s own case for the AY 2006-07 wherein after due consideration of the issue in detail, directed the assessing officer/TPO to consider (1) whether CPM/CUP is the most appropriate method to determine the ALP of the assessee’s international transaction and (ii) whether the foreign exchange gain/loss is arising in the normal course of the business and whether it should be considered as part of operating in nature for both the assessee as well as for the comparable companies. Thus this issue is restored on the files of AO/TPO for fresh consideration. In conformity with the findings of the case of Trilogy E-Business [2013 (1) TMI 672 - ITAT BANGALORE] we are of the considered view that (i) Accel Transmatic 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. Lucid Software Limited - Held that:- As following the order of the Tribunal in the case of Telcordia Technologies India (P.) Ltd. (2012 (6) TMI 388 - ITAT MUMBAI) direct th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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(TP)A No.1222/Bang/2011 - - - Dated:- 22-2-2013 - Shri N. Barathvaja Sankar And Shri George George K,JJ. For the Appellant : Shri Rajan Vora, C.A. For the Respondent : Shri S. K. Ambastha, CIT-I ORDER Per George George K :- This appeal, at the instance of the assessee company, is directed against the order of the Assessing Officer under section 143(3) rws 144C of the Act dated 26.09.2011. The relevant assessment year is 2007-08. 2. The assessee company is in the business of software development and rendering connected services used for improving software being used in automobiles/ aircraft engines manufactured by Daimler AG ( DAG ) or associated enterprise ( AE ). According to the assessee, the services provided by it were for internal consumption of AE, and was compensated on cost plus 5%. During the year under dispute, the assessee had international transaction with its AE to the tune of ₹ 38,53,25,283/-. The Assessing Officer referred the case to the Transfer Pricing Officer (TPO) to determine the Arms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 3) : 4. The Assessing Officer had re-computed the deduction under section 10A of the Act by reducing the foreign exchange expenditure amounting to ₹ 10,18,13,341/- from the export turnover without making a corresponding adjustment to the total turnover (foreign exchange expenses of ₹ 9,59,94,590/- in providing technical services outside India and telecommunication expenses of ₹ 58,18,751/- totaling to ₹ 10,18,13,341/-). In ground no.2 raised, the assessee submits that the above said expenses should not be reduced from the export turnover while computing deduction under section 10A of the Act. Alternatively, in ground no.3, it was submitted that if the above expenses are reduced from the export turnover, an equal amount also be reduced from the total turnover for computing deduction under section 10A of the Act. The alternative submission, according to the learned AR, is squarely covered by the jurisdictional High Court in the case of CIT v Tata Elxsi Ltd. (2012) 349 ITR 98 (Kar.). It was further submitted that in assessee s own case for the assessment year 2002-03, the Hon ble High Court has decided this issue in favour of the assessee by following th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ware development services. The adjustment made by the TPO was affirmed by the DRP and the same was incorporated in the final assessment order. 5.1 No arguments were raised by the learned AR with regard to ground nos.5, 8, 9, 16 and part of ground no.10, namely, the TPO followed inappropriate filters in process of selecting the comparable companies under TNMM - Companies with onsite revenue greater than 75% of export revenue. Companies with different accounting year and Companies with diminishing revenue. Hence, the issues raised in the above grounds are not adjudicated. 5.2 The arguments raised by the learned AR in the course of hearing are considered issue-wise as under:- Objections regarding rejection of CPM/CUP method adopted by the assessee and conducting fresh economic analysis (Ground Nos.6 7) 5.3.1 The written submissions made by the learned AR are summarized as under: - that the assessee had adopted CPM as the most appropriate method to benchmark its international transaction and supplementary analysis was undertaken using CUP method by comparing the man hour rates charged by major software companies in India with rates charged by the assessee; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0/Bang/2012 dated 21.12.2012, after due consideration of the issue in detail, directed the assessing officer/TPO to consider (1) whether CPM/CUP is the most appropriate method to determine the ALP of the assessee s international transaction; and (ii) whether the foreign exchange gain/loss is arising in the normal course of the business and whether it should be considered as part of operating in nature for both the assessee as well as for the comparable companies. [Refer: Para 6 of M.P. Order]. In conformity with the finding of the earlier Bench (supra), this issue is restored on the files of AO/TPO for fresh consideration. It is ordered accordingly. 5.4 Without prejudice to the methodology adopted, it was submitted by the learned AR that even if the TNMM is adopted, the assessee s margin would be within the parameters, if certain comparables are excluded by following the reasoning of the orders of the Tribunal; namely, M/s Genesis Microchip (I) Private Limited - ITA No.1254/Bang/2010; Trilogy E-business Software India Pvt. Ltd. ITA No.1054/Bang/2011 dated 23.11.2012; Telcordia Technologies India Private Limited-ITA No.7821/Mum/2011 24/7 Customer Com Private L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of higher turnover, it would be more realistic to adopt a band rather than a rigid range; Functionally different: - that even in case of software products, software development was required for customization and up-gradation; that the assessee which was into contract software R D services had not stated whether it was developing software for running automobiles or merely using software products such as CAD CAE to develop designs of engines, bodies or their parts for the automobiles of the AE Company; that if that be the case, it would result in a product although for specific use of the AE; - that in Telecordia, Avani was excluded for lack of information regarding the percentages of software product and software services in its export to AE; - that the matter be remanded to TPO to examine the functions and segments in details of these comparables; and that the TPO may also consider other software R D comparables in the field of automobiles such as Bosch Ltd., Mitsubishi etc., Comparable proposed by the assessee: - that the assessee sought to exclude (i) Ishir and (ii) Lucid following the decisions of other Tribunals (supra), however, it had not demonstrat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. DCIT ITA NO.1254/Bang/2010; (iii) Electronic for Imaging India Pvt. Ltd ITA NO.1171/Bang/2010; (iv) M/s. Trilogy E-Business Software India Private Ltd. v. DCIT ITA No.1054/Bang/2011 dated 23.11.2012. 5.6.3 In the case of M/s.Genisys Integrating Systems (India) Pvt. Ltd. v. DCIT (supra), relying on Dun and Bradstreet , has observed as under: 9. .we find that the TPO himself has rejected the companies which are making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which are l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Limited; iGate Global Solutions Limited; Mindtree Limited; Persistent Systems Limited; Sasken Communication Technologies Limited; Tata Elxsi Limited; Wipro Limited; Infosys Technologies Limited. It is ordered accordingly. (ii) Functional Dissimilarity 5.7.1 We shall now deal with the improper selection of comparables by the TPO for the reasons that they were functionally different. A. Accel Transmatic Ltd. (Seg): The selection of this company as comparable by the TPO was duly considered by the Tribunal in the case of Trilogy E-Business and the reason recorded in its finding 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable . In conformity with the findings of the coordinate Bench of the Tribunal in the case of Trilogy E-Business, we are of the considered view that (i) Accel Transmatic 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 The above company has been rejected as comparable in the case of Telcordia Technologies Pvt. Ltd. v. ACIT (supra) . The submissions and the finding of the Hon ble Mumbai Tribunal 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... teen companies in TPO list are retained as comparables:- Sl. No. Name of the company 1. Datamatics Limited 2. E Zest Solutions Limited 3. Geometric Ltd. (seg) 4. Helios Matheson Information Technology Ltd 5. Ishir Infotech 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) The above companies have been retained as comparables in conformity with the findings of the earlier Bench in the cases of Trilogy E- Business and Telcordia Tech ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... akin to software development) internally and that the portion 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f ₹ 7,42,09,887/-. It is ordered accordingly. II) Foreign Exchange gains/Loss impact (ground no.12) 5.8 The Tribunal in the case of Trilogy E-Business had directed that the foreign exchange gain or loss should be considered as operating revenue or cost while computing the operating margin of the asssessee as well as the comparable. The relevant finding of the Tribunal read as follows: 79 (B) . As far as foreign exchange gain/loss being considered as not forming part of the operating cost, the reasoning of the revenue is that such loss or gain cannot be said to be one realized from international transaction though they may form part of the gain/loss of the enterprise and therefore they should be excluded while determining operating cost. On the above issue we find that the Bangalore Bench of ITAT in the case of Sap Labs India (P) Ltd. Vs. ACIT (2011) 44 SOT 156 (Bang.) has taken the view that Foreign Exchange Fluctuation gains are required to be added to operating revenue. Following the same, the AO is directed to accept the claim of the Assessee in this regard . 5.8.1 In confo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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