TMI Blog2013 (11) TMI 189X X X X Extracts X X X X X X X X Extracts X X X X ..... the differential in the margin of the assessee and the comparables is beyond 5% bandwidth recognized in proviso to section 92C(2) of the Act, then adjustment was required to be made to the reported value of the assessee's transaction with its AE. Due to non-availability of full information about the segmental details as to how much was the sale of product and how much was 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 - Neither the TPO nor the DRP have noticed that there was bound to be a difference between the Assessee and Megasoft and the profit arising to the Megasoft as a result of the existence of the software product segment and no finding had been given that reasonably accurate adjustments can be made to eliminate the material effects of such differences - The Assessing Officer/TPO to exclude, after due verification, those comparables from the list with the related party transactions or controlled transactions in excess of 15% of the total revenue for the financial year 2006-07. - IT(TP)A No.845/Bang/2011 - - - Dated:- 22-2-2013 - N BARATHVAJA SANKAR AND G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Operating/Net margin (OP/TC) 11.81% Sl. No. Name of the Company 2005 2006 2007 Average 1 Akshay Software Technologies Limited 7.68% 7.07% NA 7.38% 2 BrelsInfotech Limited 2.46% NA NA 2.46% 3 Dynacons Systems 2.83% 3.17% NA 3.00% 4 MelstarInfotech -9.06% 1.39% NA -3.84% 5 Orientation Information Technology Limited 15.37% -16.66% NA -0.65% 6 Quintegra Solution Limited 12.81% 14.95% NA 13.88% 7 RS Software (India) Limited 8.08% 15.69% 13.55% 14.44% 8 Ranklin Solution 5.80% 7.55% NA 6.68% 9 SIP Technology Exports Limited NA 21.99% NA 21.99% 10 Sankhya Infotech Limited 27.33% 25.81% NA 26.77% 11 Shree Tulsi Online.com Limited 1.75% 2.82% NA 2.29% 12 Systemlogic Solutions Limit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Solutions Pvt. Ltd. 3.66 3.42 16 Megasoft Ltd. 60.23 53.30 17 Mindtree Ltd. 16.90 17.25 18 Persistent Systems Ltd. 24.52 25.34 19 Quintegra Solutions Ltd. 12.56 11.09 20 R S Software (India) Ltd. 13.47 15.01 21 R Systems International Ltd. (Segment) 15.07 15.13 22 Sasken Communication Technologies Ltd. (Segment) 22.17 22.99 23 S I P Technologies Exports Ltd. 13.90 12.58 24 Tata Elxsi Ltd (Segment) 26.51 28.10 25 Thirdware Solutions Ltd. (Segment) 25.12 23.42 26 Wipro Ltd (Segment) 33.65 36.46 ARITHMETIC MEAN 25.14 25.07 Arm's Length Mean Margin 25.14 Less: Working Capital Adjustment 0.07 Adjusted mean margin of the comparables 25.07 Operating Cost 24,68,94,579 Arm's Length Margin 25.07% of Operating Cost Arms Length Price (ALP)125.07% of Oper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs.24,68,94,579/- Operating Profit (Op. Income - Op. Expenses) Rs.2,92,43,800/- Rs.2,93,14,199/- Operating/Net margin (OP/TC) 11.81% 11.87% In arriving at the margin as computed above, the TPO made a reduction of Rs. 6,19,336/- to the operating income of Rs.27,68,28,114/- (as considered by the assessee) on the ground that the said income pertained to profit on sale of assets which would not form part of operating income. However, the assessee, while computing the margin in its TP report, had itself, in the first place not included the said amount of Rs.6,19,336/- in arriving at the operating income of Rs.27,68,28,114/-. Reference may be made to the P L A/c ended 31.03.2007 (page 935 of paper book) where "income from sales" is at Rs.27,68,28,114/-. This excludes "other income" of Rs.7,54,385/-. Schedule 10 to the P L A/c (at page 940 of the paperbook) shows that profit of Rs.6,19,336/- from sale of assets is part of "other income" which was never included in the operating income. Therefore, the reduction made by the TPO is unwarranted. Insofar as operating expenses is concerned, the expenses as computed by the TPO is accepted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties below. It was, further, submitted that the learned TPO had analyzed the various factors, as recorded in his order u/s 92CA of the Act, to arrive at a conclusion that the assessee's international transactions had resulted in an adjustment to the extent of Rs.3,25,82,272/- which has been duly sustained by the DRP in its directions u/s 144C of the Act. It was, therefore, pleaded that there was no infirmity in the order of the AO warranting any interference of this Bench. 3.2.2 We have heard the rival submissions and perused the materials on record. Before we proceed to consider the issues, it is to be mentioned that the line of business of the assessee in this case and that of three case laws (Trilogy E-Business Software India (P.) Ltd. (supra) Telcordia Technologies India (P.) Ltd. (supra) 24/7 Customer Com(P.) Ltd. (supra) are similar, namely, development of software and the size/turnover was also similar to that of the assessee in the instant case. Moreover, the assessment year 2007-08 was subject matter of consideration in the case of Trilogy, E-Business Software India (P.) Ltd. (supra) and Telcordia Technologies India (P.) Ltd. (supra). and the comparables selected by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs.1 crore to 200 crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of Rs.1.00 to 200 crores only should be taken into consideration for the purpose of making TP Study." 3.3.2 The above view has been followed in the recent order of the Tribunal in the case of Trilogy E-Business Software India (P.) Ltd. (supra). The relevant findings of the Tribunal are extracted as under: "20. In this regard we find that the provisions of law pointed out by the ld. counsel for the assessee as well as the decisions referred to by the ld. counsel for the assessee clearly lay down the principle that the turnover filter is an important criteria in choosing the comparables. The assessee's turnover is Rs. 47,46,66,638. It would theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent services business. Accepting the argument of the ld. counsel for the assessee, we hold that the aforesaid company should be excluded as comparables". B. Avani Cimcon Technologies Ltd: The selection of this company as comparable by the TPO was rejected by the earlier Bench of the Tribunal in Trilogy E-Business for the reasons that- "41. We have given a careful consideration to the submissions made on behalf of the Assessee and are of the view that the same deserves to be accepted. The reasons given by the Assessee for excluding this company as comparable are found to be acceptable. The decision of ITAT (Mumbai) in the case of Telcordia Technologies Pvt. Ltd. v. ACIT (supra) also supports the plea of the assessee. We therefore accept the plea of the Assessee to reject this company as a comparable". C. Celestial Labs. Ltd: This Company was also selected by the TPO as comparable. However, on due consideration of the issue, the earlier Bench of this Tribunal in Trilogy E-Business had opined that this company cannot be as comparable on the ground that - "45 . We are of the view that in the light of the submissions made by the Assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are product. The learned AR has tried to distinguish by pointing out that product development expenditure in this case is around 39% of the capital employed by the said company, and, therefore, such a company cannot be considered as tested party. Even as per the information received in response to notice under section 133(6), the company has described its business as software development company or pure software development service provider. This information itself is very vague as the segmental details of operating revenue has not been made available to examine how much is the ratio of sale from software product and sale of software service and development. Looking to the fact that it has developed a software product named as "Muulam" which is used for civil engineering structures and the product development expenditure itself is substantial vis- -vis the capital employed by the said company, this criteria for being taken as comparable party, gets vitiated. For the purpose of comparability analysis, 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 ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... down the plea of the assessee that M/s. Megasoft Ltd should be rejected as comparable. However, the Tribunal accepted the alternative submission of the assessee that the segmental profit margin is to be reckoned with instead of entity level margin and held that the profit margin of 23.11% which is the margin of the software service segment be taken for comparability. The discussion and the findings of the Bench with regard to the acceptance of the alternative submission of the assessee to adopt the segmental margin of 23.11% are reproduced below: "37. The next plea of the Assessee is that if at all this company is considered as a comparable then the segmental margin of 23.11% (which is the margin for software service segment) alone should be considered for comparability. On the above submission, we find that the TPO considered the segmental margin (Software service segment) in the case of Geometric, Kals Info systems, R Systems, Sasken Communication and Tata Elxsi. Before DRP the Assessee pointed out that the segmental margin of 23.11% alone should be taken for comparability. The DRP has not given any specific finding on the above plea of the Assessee. Perusal of the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... result of the existence of the software product segment and no finding has been given that reasonably accurate adjustments can be made to eliminate the material effects of such differences. For this reason, we are inclined to hold that the profit margin of 23.11% which is the margin of the software service segment be taken for comparability .". 3.4.6 In conformity with the findings of the earlier Bench (supra), we are of the considered view that the TPO was justified in selecting M/s. Megasoft Ltd as comparable. However, the AO/TPO is directed to take segmental margins of 23.11% for comparability. It is ordered accordingly. (iii) Related party transaction: 3.5 Ishir Infotech Limited: The assessee had objected to the inclusion of Ishir Infotech Limited as a comparable being related party transaction in excess of 15% of total sales/revenue. The TPO had set a limit of 25% on the related party transaction. According to the assessee, the recent order of the Tribunal in the case of 24/7 Customer Com (P.) Ltd. (supra) had held that if comparable company has related party transaction exceeded 15% of the total sales/revenue, the same should not be comparable. 3.5.1 The learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e total revenue for the financial year 2006-07. It is to be mentioned here, Geometric Ltd. is also to be removed from the comparable list, since that company was having RPT at 19.98% (going by assessee's own calculation), however, no argument was raised for its exclusion by the assessee, probably, on account of low margin of Geometric Ltd. (IV) Calculation of operating income and net margin 3.6 The TPO had made a reduction of Rs.6,19,336/- to the operating income of Rs.27,68,28,114/- (as considered by the assessee) on the ground that the said income pertains to profit and sale of asset, which would not form part of the operating income. According to the assessee, in the TP study, while arriving at the operating income of Rs.27,68,28,114/-, the assessee had specifically excluded further income amounting to Rs.7,54,385/-, which includes a sum of Rs.6,19,336/- (Schedule 10 to the P L account). Therefore, it was contended, reduction made by the TPO is unwarranted. If Rs.6,19,336/- is not excluded, the operating/net margin of the assessee would be at 12.2% instead of 11.87% fixed by the TPO. 3.6.1 The learned DR present was duly heard. 3.6.2 We have heard the rival submissi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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