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TMI Blog2013 (6) TMI 376X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessing officer referred the case to the Transfer Pricing Officer (TPO) to determine the Arm's Length Price (ALP). The TPO, after examining the details furnished by the assessee, passed an order under section 92CA of the Act dated 27.8.2010, by making an adjustment of Rs. 2,76,72,297/- in respect of software development services. The assessing officer thereafter passed a draft assessment order on 18.11.2010, assessing the total income of the assessee at Rs. 3,12,46,899/-. In the draft assessment order, the following additions were made while computing the total income of the assessee: (a) Adjustment to arm's length price to the tune of Rs. 2,76,72,297/- with reference to TPO's order in respect of international transaction dealt by the assessee with its AE; & (b) the reduction of the amount of Rs. 17,32,230/- being the lease line charges, Rs. 4,29,869/- being the broadband charges, Rs. 78,26,397/- towards the foreign travel expenses and Rs. 80,115/- towards the insurance expenses which directly attributable to the export of software were excluded from the export turnover only and the deduction u/s 10A was recomputed, according to which, the addition was arrived at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely, 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 ruling of the Hon'ble jurisdictional High Court in the case of CIT v Tata Elxsi Ltd. [2012] 349 ITR 98/204 100 (Kar.). 5.1 The learned DR was unable to controvert the submissions made by the learned AR. 5.2 We have heard the rival submissions and perused the materials on record. The Hon'ble jurisdictional High Court, in the case cited supra, had held that when the expenses are reduced from the export turnover while computing deduction under section 10A of the Act, the same should also be reduced from the total turnover in order to maintain parity between the numerator and the denominator. In the light of the above judgment, we direct the Assessing Officer to reduce the said sum from the export turnover as well as from the total turnover while computing deduction under section 10A of the Act. It is ordered accordingly. In the result, ground no.3 is allowed. Since we have decided th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MindTree Consulting Limited 16.60% 15 Orient Information Technology Limited 2.68% 16 Quintegra Solutions Limited 11.93% 17 R S Software (India) Limited 12.19% 18 S I P Technologies and Exports Limited 25.25% 19 Sasken Communication Technologies Limited 17.71% 20 Sasken Network Systems Limited 16.19% 21 Satyam Computers Services Limited 29.27% 22 TVS Infotech Limited -4.81% 23 TransworldInfotech Limited 26.34% 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% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... within the parameters, if certain comparable are excluded by following the reasoning of the orders of the Tribunal; namely, * Genesis Microchip (I) (P.) Ltd. Dy. * Trilogy E-business Software India (P.) Ltd. v. Dy. (Bang.); * Mercedes Benz Research Development India (P.) Ltd. v. Dy. CIT [IT (T.P.) Appeal No.1222(Bang.) of 2011, dated 22-2-2013.] (I) Turner Filter & Functional Dissimilarity 6.4 It was submitted that the 8 comparables are to be rejected from the TPO's list on account of the turnover filter. The learned AR relies on the following orders of the Tribunal for the above proposition:- (i) Assessee's own case for assessment year 2006-07 Centillium India (P.) Ltd. v. Dy. (ii) Genesis Microchip (I) (P.) Ltd.'s case (supra) (iii) Trilogy E-Business Software India (P.) Ltd.'s case (supra) It was, further, submitted that 4 companies are to be excluded on account of functional dissimilarity. For the above argument, the learned AR relied on the orders of the Tribunal in the cases of Trilogy E-Business Software India (P.) Ltd. and Mercedes Benz Research Development India (P.) Ltd. (supra). It was submitted that Ishir Infotech Ltd. (the comparable of the TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tor in comparability. The ICAI TP guidance note has observed that the transaction entered into by a Rs. 1000 crores company cannot be compared with the transaction entered into by a Rs. 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 which was 277 times bigger than that of the assessee. The Bangalore Bench of the Tribunal in the case of Genisys Integrating Systems (India) (P.) Ltd. v. Dy. relying on Dun and Bradstreet's analysis had held that turnover range of Rs. 1 crore to 200 crores is appropriate. The said proposition has been followed in various orders of this Tribunal in the following cases: (i) Assessee's own case for AY 2006-07 Centillium India (P.) Ltd's case (supra) (ii) Genesis Microchip (I) (P.) Ltd's case (supra); (iii) Electronics for Imaging India (P.) Ltd v. Dy. CIT [ITA NO.1171/Bang/2010] & (iv) Trilogy E-Business Software India (P.) Ltd.'s case (supra) 6.5.2 In the case of Genisys Integrating Systems (India) (P.) Ltd. (supra), relying on Dun and Bradstreet' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the list of comparables as laid down in several decisions referred to by the ld. counsel for the assessee. Applying those tests, the following companies will have to be excluded from the list of 26 comparables drawn by the TPO viz. Turnover Rs. (1) Flextronics Software Systems Ltd. 848.66 crores (2) iGate Global Solutions Ltd. 747.27 crores (3) Mindtree Ltd. 590.39 crores (4) Persistent Systems Ltd. 293.74 crores (5) Sasken Communication Technologies Ltd. 343.57 crores (6) Tata Elxsi Ltd. 262.58 crores (7) Wipro Ltd. 961.09 crores (8) Infosys Technologies Ltd. 13149.00 crores". 6.5.4 In view of the above said reasoning and the orders of the Benches of Bangalore Tribunal cited supra, the following 8 companies will have to be eliminated from the list of comparable selected by the TPO, namely: * Flextronics Software Systems Limited; * iGate Global Solutions Limited; * Infosys Technologies Limited. * Mindtree Limited; * Persistent Systems Limited; * Sasken Communication Te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t this company was basically/admittedly in clinical research and manufacture of bio products and other products, there is no clear basis on which the TPO concluded that this company was mainly in the business of providing software development services. We therefore accept the plea of the Assessee that this company ought not to have been considered as comparable". D. KALS Information System Ltd (Seg): 6.6.4 Incidentally, the selection of this company as comparable by the TPO was rejected by the Tribunal in the case of Trilogy E-Business Software India (P.) Ltd.'s case (supra) on the premise that the information obtained by the TPO by issuance of notice u/s 133(6) of the Act was not, however, available in public domain. The reasons recorded, for appreciation of facts, are extracted hereunder: "47. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is essential that the characteristics and the functions are by and large similar as that of the assessee company and T.P. analysis/study can be made with fewest and most reliable adjustment. If a company has employed heavy capital in development of a product then profitability in the sale of product would be entirely different from the company, who is involved in serve sector. Therefore, this company cannot be treated as having same function and profitability ratio. In our view, due to non-availability of full information about the segmental details as to how much is the sale of product and how much is from the services, therefore, this entity cannot be taken into account for comparability analysis for determining arms length price in the case of the assessee". 6.6.7 The objections raised by the assessee for inclusion of Lucid Software Ltd. as a comparable by the TPO is placed at pages 782 to 793 of the paper book-III filed by the assessee. We find identical objection has been raised against the inclusion of Lucid Software in case of Telcordia Technologies. Since the facts and the assessment year are identical, following the order of the Tribunal in the case of Telcordia Tech ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pecific finding on the above plea of the Assessee. Perusal of the order of the TPO shows that the TPO relied on information which was given by this company in which this company had explained that it has two divisions viz., BLUEALLY DIVISION and XIUS-BCGI DIVISION. Xius-BCGI Division does the business of product software (developing software). This company develops packaged products for the wireless and convergent telecom industry. These products are sold as packaged products to customers. While implementing these standardized products, customers may request the company to customize products or reconfigure products to fit into their business environment. Thereupon the company takes up the job of customizing the packaged software. The company also explained that 30 to 40% of the product software (software developed) would constitute packaged product and around 50% to 60% would constitute customized capabilities and expenses related to travelling, boarding and lodging expense. Based on the above reply, the TPO proceeded to hold that the comparable company was mainly into customization of software products developed (which was akin to software development) internally and that the port ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st of Ishir InfoTech Ltd. It was stated that professional fee paid is payment made to external third parties for the performance of their services on company's behalf and not salary paid to the employee's of the organization. The learned counsel placed reliance on the order of Bangalore Tribunal in the case of Mercedes Benz Research Development India (P.) Ltd. (supra) in support of his contention. 6.8.1 The learned DR present was duly heard. 6.8.2 We have heard the rival submissions and perused the materials on record. The Bangalore Tribunal in the case of Mercedes Benz Research Development India (P.) Ltd. (supra) has restored the issue to the file of Assessing Officer/TPO for fresh consideration. The relevant finding of the Tribunal in the case of Mercedes Benz Research Development India (P.) Ltd. (supra) reads as follows:- "5.7.2. (On page 28)** ** ** We have heard the rival submissions and perused the materials on record. The Bangalore Tribunal in the case of 24x7 Customer.com Pvt. Ltd. (supra) excluded vishal information technologies from the list of comparables for the reason that the company was outsour ..... X X X X Extracts X X X X X X X X Extracts X X X X
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