TMI Blog2013 (11) TMI 199X X X X Extracts X X X X X X X X Extracts X X X X ..... was, therefore, directed to exclude the foreign currency expenses from the export turnover and also reduce the same from the total turnover of the assessee while computing the deduction u/s 10A of the Act. Transfer Pricing Adjustment u/s 92C(3) - Software Research and Development - Transfer Pricing – Computation of Arm's Length Price - International transaction – Arm’s Length Price - Assessee provided software research & development support services to its Associated Enterprise - Remunerated on a 'cost plus' basis - assessee adopted the Transactional Net Margin Method TNMM - Comparable - Comparability of the comparable relied upon by the TPO – Turnover filter is an important criterion in choosing the comparables - Inappropriate computation of operating margins of comparables and that of the Assessee - Following Trilogy E-Business Software India (P.) Ltd. Versus Deputy Commissioner of Income-tax[2013 (1) TMI 672 - ITAT BANGALORE]- Circle 12(4). BangaloreTreating foreign exchange gain or loss and provision for bad debts as non-operating in nature and fringe benefit tax as part of operating cost - AO was directed to work out the ALP of the assessee in accordance with the direction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [DRP] for relief. The DRP had, for the reasons recorded in its directions u/s 144C of the Act dated 26.9.2011, virtually upheld the order of the TPO with regard to ALP. In respect of the assessee's claim for exemption u/s 10A of the Act, the DRP, for the reasons recorded in its impugned order under dispute, declined to interfere with the draft order of the AO. Subsequently, the AO, in his final assessment order dated 3.10.2011, determined the assessee's income at Rs. 24,16,52,915/- as proposed in his draft assessment order. 2.2 Aggrieved, the assessee has come up with the present appeal before us. The assessee had filed five concise grounds of appeal and various sub-grounds. Ground nos.1, 2.1, 3.1., and 4.15 are general and no specific adjudication is called for; and, hence, the same are dismissed. Ground Nos.3.2 and 5 and its sub-grounds were not pressed; and, hence, the same are dismissed. The remaining grounds, according to the argument raised by the learned AR, shall be considered chronologically. The issues argued by the learned AR are dealt with as under: I. Deduction u/s 10A of the Act: 3. Briefly, NDS UK had set up its Branch office in India in the name of NDS Limite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y constitutes 48%. Therefore, this condition of forming a unit by way of acquiring plant machinery other than that previously used has not been satisfied. 14. in this context, it is also relevant to refer to sub-clause (7A) of sec. 10A which provides for eligibility of claim to the amalgamated company or the resulting company in the situations of transfer of eligible undertakings by amalgamating or de-merged company in a scheme of amalgamation or demerger. Under this clause, the transfer of old plant machinery of an eligible undertaking or the whole of undertaking to anew owner i.e., amalgamated or the resulting company is specifically allowed for continuance of benefit only in a situation of amalgamation or demerger. However, the other situation of transfer of old plant machinery through slump sale has not been provided in the section. So, assessee's plea that the change in ownership would not take away the benefit of 10A attached to a undertaking cannot be accepted. The assessee's reliance on judgments of Hon'ble High Courts of Calcutta and Chennai will not be of any help in view of the specific provisions of s. 10A mentioned above. An undertaking cannot exist on its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 010; CIT v. Yokogawa India Ltd. [2012] 341 ITR 385 Board's Circular No.1/2013 dated 17.01.2013. It was, therefore, pleaded that since the AO was not justified in denying the assessee's legitimate claim u/s 10A of the Act, the same requires to be allowed. 3.2.1 On the other hand, the learned D R supported the stand of the Assessing Officer. 3.3 We have carefully considered the rival submissions, perused the relevant materials on record and also documentary evidences produced by the learned A R in the shape of voluminous paper books. It is an un-denying fact that the said STPI unit was earlier owned and run by the IBO of NDS UK which was purchased by the assessee. This has been evidenced through a Business Purchase Agreement dated March, 30, 2006. Moreover, the STPI Unit was transferred on a going concern basis. This fact has been explicitly mentioned in the Business Transfer Agreement dated 30.3.2006, the relevant portions of which are extracted as under: "WHEREAS: Both the parties have agreed that the business activities of the Branch of NDS Limited in India (herein after referred to NDS Limited's Indian Branch) as shall be carried out by NDS Services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rly possible to state that there was no violation of the conditions laid down in sec 10A(2)(iii) as well." 3.3.2 Further, the Hon'ble jurisdictional High Court, in the case of Yokogawa India Ltd. (supra), after analyzing the issue comprehensively and also extensively quoting the provisions of section 10A of the Act, had ruled that "The relief under this section is with reference to the STP undertakings and not to the assessee. In other words, the relief travels with the undertaking irrespective of who owns the same". 3.3.3 The CBDT in its recent Circular No.01/2013 dated 17.1.2013 has clarified as under: "(iv) Whether tax benefits under sections 10A, 10AA and 10B would continue to remain available in case of a slump-sale of a Unit/undertaking: The vital factor in determining the above issue would be facts such as how a slump-sale is made and what is its nature. It will also be important to ensure that the slump sale would not result into any splitting or reconstruction of existing business. These are factual issues requiring verification of facts. It is, however, clarified that on the sole ground of change in ownership of an undertaking, the claim of exemption can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparables. Using operating profit margin basis on cost as a profit level indicator and the data for the Financial Years 2004-05, 2005-06 and 2006-07, the operating net margin based on cost on the comparables was arrived at 14.49%. The details of the comparables selected by the assessee and their margin are as under: Company name 2005 2006 2007* Weighted Average Bodhtree Consulting Limited 24.19 15.73 - 19.10 California Software Company Limited 11.57 4.50 9.01 7.75 CMC Limited 10.10 17.28 15.76 14.61 Compucom Software Limited 18.74 19.98 25.19 21.74 Computech International Limited 8.78 3.12 5.88 5.59 KPIT Cummins Infosystems Limited 12.87 12.16 12.94 12.68 Larsen Toubro Infotech Limited 11.42 13.24 15.93 14.13 Mascon Global Limited 8.95 8.31 17.17 12.48 Mindtree Consulting Limited - 13.70 17.52 15.83 Quintegra Solutions Limited 10. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s comparables, their arithmetical mean and the calculation of the ALP of the assessee are as under:- Sl. No. Name of the Company Sales (Rs. Cr.) OP to Total cost % 1 Accel Transmatic Ltd.(Segment) 9.68 21.11% 2 Avani Cimcom Technologies Ltd. 3.55 52.59% 3 Celestial Labs Ltd. 14.13 58.35% 4 Datamatics Ltd. 54.51 1.38% 5 E-Zest Solutions Ltd. 6.26 36.12% 6 Flextronics Software Systems Ltd. (Segment) 848.66 25.31% 7 Geometric Ltd. (Segment) 158.38 10.71% 8 Helio Matheson Information Technology Ltd. 178.63 36.63% 9 iGate Global Solutions Ltd. 747.27 7.49% 10 Infosys Technologies Ltd. 131.49 40.30% 11 Ishir Infotech Ltd. 7.42 30.12% 12 KALS Information Systems Ltd. 2.00 30.55% 13 LGS Global Ltd. (Lanco Global Solutions Ltd.) 45.39 15.75% 14 Lucid Software Ltd. 1.70 19.37% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are summarized below:- "2.3 Provision of software development services Given the above background, with respect to the provision of software development services, the Appellant, during the course of hearing has placed reliance on the Honourable Bangalore Income-tax Appellate Tribunal's ("ITAT") ruling in the case of Trilogy E Business Software India Private Limited v. DCIT (ITA No.1054/Bang/2011) dated November 23, 2012. 2.3.1 Companies rejected on account of turnover filter In the aforesaid ruling, the Honourable ITAT has rejected the following companies selected as comparable companies by the transfer pricing officer as not comparable on application of turnover filter. No. Company Name Turnover (Crores) Order Reference 1 Flextronics Software Systems limited 848.66 Refer page 15 and 16 of the aforesaid Bangalore ITAT's order 2 Igate Global Solutions Ltd. 747.27 3 Infosys Technologies Ltd. 13,149.00 4 Mindtree Ltd. 590.35 5 Persistent Systems Ltd. 293.74 6 Sasken Communication ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. (ITA No.105/Bang/2011) 1 Accel Transmatic Limited 9.68 21.11 1.27 -The company has revenue from software products also, hence in the absence of segmental details, the company cannot be considered as a comparable company. '- Margin of the company represents abnormal circumstances and profits. '- Reliance was placed on Telcordia Technologies India Pvt. Ltd. (ITA No. 7821/ Mum./ 2011) (Mumbai ITAT). '- Please refer page 27 and 28 of the order. 2 Avani Cimcon Technologies Limited 3.55 - Biotech company, hence rejected as a comparable company. '- Reference was made to Teva Pharma Pvt. Ltd. (ITA No. 6623/ Mum./ 2011) (Mumbai ITAT). '- Please refer page 30 to 33 of the order. 3 Celestial Labs Ltd. 14.13 4 Datamatics Ltd. 54.51 1.38 2.39 5 E-Zest Solutions Ltd. 6.26 36.12 0.26 Rejected on application of turnover filter of Rs. 1 to Rs. 200 Crores. Please refer page 15 and 16 of the order. 6 Flextronics Software Systems Ltd. 848.66 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 25 Thirdware Solutions Ltd. 36.08 25.12 3.87 Rejected on application of turnover filter of Rs. 1 to Rs. 200 Crores. Please refer page 15 and 16 of the order. 26 Wipro Ltd. 9,616.09 Average margin of the comparables accepted (%) 19.29 2.75 Margin after working capital adjustment (%) 16.54 Operating profit/operating cost of the appellant company (%) 14.41 4.3.1 The learned DR on the other hand has given a rebuttal, which reads as follows:- (I) Position on Software Development Services (TP Adjustments):- The assessee in his last arguments on the issue has now raised the ground of applicability of turn over filter on the basis of case of E Triology Business Software India Pvt. Ltd. v. DCIT (ITA No. 1054/B/2011) dated 23.11.2012. (a) The first and foremost condition to be satisfied by the assessee is to demonstrate as to how the activities especially the nature of its software activity is similar to that of M/s E Triology Business Software India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tio. Accordingly, the contention of the learned AR is rejected that this company cannot be taken as a comparable case. In view of the information provided by the learned CIT DR obtained from the public domain, we hold that the 'Celestial Labs Limited' is a good comparable case, whose operating profit can be taken for comparability analysis in determining the arms length price for the assessee. Accordingly, the Assessing Officer is directed to include this company for comparability analysis. It may please be appreciated that if the Bangalore ITAT has followed the decision of Mumbai ITAT in the case of Teclordia for rejecting Avani Cincom then the Bangalore ITAT ought to have followed the decision of Mumbai ITAT in the very same case of Telcordia for accepting Celestial Labs Limited. The functional profile of both Trilogy E Business Software India Private Limited and Telcordia Technologies Limited is the same. Further the finds of Hon'ble ITAT Bangalore, in rejecting Celestial Labs Limited relying upon Teva Pharma are also not correct. It may appreciated that Teva Pharma was engaged in the business of providing contract research, business development, phar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilter: 4.4.1 The assessee had not applied any turnover filter in its transfer pricing study. The TPO, however, has concluded a fresh transfer price study by selecting 26 companies as comparables with a turnover of more than Rs. 1 crore thus applying a lower turnover filter of Rs.1 crore. The TPO has failed to apply upper turnover filter as held in various Tribunal's rulings. The size of the comparable is an important factor 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. DCIT ITA No.1231/Bang/2010 relying on Dun and Bradstreet's analysis had held that turnover range of Rs. 1 crore to Rs. 200 crores is appropriate. The said proposition has followed by the earlier Benches of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he principle that the turnover filter is an important criterion in choosing the comparables. The assessee's turnover is Rs.47,46,66,638. It would therefore fall within the category of companies in the range of turnover between 1 crore and 200 crores (as laid down in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010) . Thus, companies having turnover of more than 200 crores have to be eliminated 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 crores" 4.4.4 In view of the above said reaso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rables in the case of the assessee under consideration. It is ordered accordingly. 4.5.2 After excluding from the TPO's list of comparables, the companies having turnover exceeding Rs. 200 crores and two companies which are functional dissimilar to that of the assessee, the following 16 companies in TPO list are retained as comparables: Sl. No. Name of the Company 1 Accel Transmatic Ltd.(Segment) 2 Datamatics Ltd. 3 E-Zest Solutions Ltd. 4 Geometric Ltd. (Segment) 5 Helio Matheson Information Technology Ltd. 6 Ishir Infotech Ltd. 7 KALS Information Systems Ltd. 8 LGS Global Ltd. (Lanco Global Solutions Ltd.) 9 Lucid Software Ltd. 10 Media Soft Solutions Pvt. Ltd. 11 Megasoft Ltd. 12 Quintegra Solutions Ltd. 13 R S Software (India) Ltd. 14 R Systems International Ltd. (Segment) 15 S I P Technologies Exports Ltd. 16 Thirdware Solutions Ltd. (c) Megasoft: 4.6 It is to be noted that in the case of Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 is bound to be a difference between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r comparables using the data for the year end March 05, Mar 06 and Mar 07 was 6.32%. The details of computation of arithmetical mean of the comparables are as under : Company name Mar-05 Mar-06 Mar-07 Weighted average Crisil Research and Information Services Ltd. 8.68 5.19 - 6.48 Cyber Media Events Ltd. 0.52 9.53 - 2.77 IDC (India) Ltd. 11.71 14.50 - 13.40 Times Infotainment Media. 2.62 - - 2.62 Arithmetic mean 5.88 9.77 - 6.32 5.5.1 Since the net profit of the assessee was 15% and that of comparables being at 6.32%, the assessee stated the amount received from its associated enterprises for service rendered under this segment was at arms length price (ALP). 5.2 The TPO accepted the TNNM as the most appropriate method. However, he rejected the comparables selected by the assessee. The final comparables adopted by the TPO and its margin are as under : Sl No. Name of the company Operating revenues for FY 2006-07 Operating cost for AY 2006-07 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o draw Your Honour's attention to the fact that the Appellant is not rendering services in the nature of commission agency. Commission agents are agents who conclude contracts by themselves or on behalf of some third party. The key feature for an agency is binding principal. If the mentioned feature is missing, there would be no agency and so no comparison to agents. In this regard, we wish to submit that NDS Pay-TV is not an agent of the associated enterprises to whom it renders pre-sales support and marketing services. Accordingly, categorization of the services rendered by NDS Pay-TV as being in the nature of commission agency services is inappropriate. 2.4.2 Selection of ICC International Agencies Limited by TPO Super Profits With regard to the comparables selected by the TPO, the Appellant wishes to submit that the margin computed for ICC International, selected as a comparable by the TPO, cannot be considered as comparable to the Appellant due to the detailed reasons enumerated during the course of hearing and in our submissions filed in this regard on July 2, 2012. Further, the Appellant wishes to draw your Honour's attention to the fact that the TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ile of the assessing authority with a direction to verify as to whether the similar transactions of the assessee with associated enterprises have been accepted by the TPO for the assessment year 2007-08 and 2008-09 and if it is found to be true, then the AO is directed to adopt the TP analysis conducted by the assessee for the relevant assessment year also to be at ALP and make the assessment accordingly.." As could be seen from the above extract, the Honourable ITAT has held that there has to be a continuity in the approach of the Revenue and once a transaction has been accepted to be at ALP in a subsequent year, the same should be applied for the prior year as well. In this regard, it is submitted that the Appellant's international transactions for the AY 2008-09 have been accepted to be at ALP. Copy of the order is enclosed as Annexure 4. It is therefore requested that the conclusion arrived at for the AY 2008-09 by the TPO be applied for the current AY 2007-08 as well. The above principle is applicable in case of pre-sales support and marketing services as well." 5.3.1 The learned DR in his rebuttal had submitted as under : (iii) Position on P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices rendered by the assessee as being in the nature of commission agency is inappropriate. Notwithstanding the above, in the TP study conducted by the assessee, the comparables were selected to include also the business as commission agents. Therefore the TPO cannot be faulted for selecting as comparables, the companies which are engaged in commission agency business. 5.4.2 At this juncture, we recall the submission made by the learned AR that the assessee's international transaction in this segment for the assessment year 2008-09 had been accepted to be ALP and therefore the conclusion arrived for assessment year 2008-09 by the TPO should also be applied to the current assessment year 2007-08 as well. In this context, the Hon'ble Tribunal in the case of Lenovo (India) (P.) Ltd. v. ACIT(ITA 1457/Bang/2010) had, inter alia, observed as under : "12 .. Another fact worth noting is that the similar transaction with the associated enterprises for the subsequent years have been considered by the TPO and have been accepted without any ALP adjustments. There has to be a continuity and uniformity in the approach of the Revenue towards an issue and particu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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