TMI Blog2013 (11) TMI 925X X X X Extracts X X X X X X X X Extracts X X X X ..... t he/she needs to examine the 3CEB Report to see the aggregate value of international transactions. In the instant case, as the aggregate value of international transactions based on 3CEB Report filed by the taxpayer before the Assessing Officer, exceeded ₹ 5 Crores, he referred the case to the TPO. Therefore, we see no infirmity in referring the matter to the TPO without forming "a considered opinion". In the light of the above reasoning, the first legal point raised by the assessee, namely, the reference to the TPO by the Assessing Officer without forming "a considered opinion" does not stand the test of law and cannot be sustained, therefore this plea of the assessee is rejected - Following decision of Tally solutions Pvt Ltd. v. DCIT [2011 (9) TMI 196 - ITAT BANGALORE] - Decided against assessee. Selection of comparables TPO conducted fresh search for comparables - Held that:- The income arising from international transactions is to be computed having regard to arm's length price as per the guidelines laid down in section 92C of the Act by adopting one of the laid down methods, at the discretion of the competent authority - No ambiguity or absurd consequence of applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evidence. The onus is on the assessee to establish the need for adjustments on specific issues and how these issues affect comparability. In the instant case, the assessee has not discharged the onus and we are, therefore, constrained to dismiss this ground raised by the assessee - Decided against assessee. - IT Appeal No. 1397 (Bang.) of 2010 - - - Dated:- 15-2-2013 - GEORGE GEORGE K, AND Jason P. Boaz, JJ. For the Appellant K.R. Girish. For the Respondent Farhat Hussain Qureshi. ORDER:- Jason P. Boaz, Accountant Member - This appeal by the assessee is directed against the order of under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (herein after referred to as 'the Act') passed by the Assessing Officer (viz., ITO, Ward 12(2), Bangalore) on 8.10.2010 in accordance with the directions of the Dispute Resolution Panel, (DRP), Bangalore under section 144C(5) r.w.s 144C (8) of the Act dt.22.9.2010. The Assessment Year involved is 2006-07. 2. The facts of the case, in brief, are as under : 2.1 The assessee, an Indian Company engaged in the business of providing software development support services to its holding company and associated e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed by the Assessing Officer of deduction claimed by the assessee under section 10A and the TP order of the TPO stand endorsed by this Panel. The assessment order maybe finalized accordingly. The only area where the proposed draft order is required modified is on account of taking the PLI of M/s. Megasoft Ltd at 51.73% as against 52.74% taken by the TPO and giving consequential working capital adjustment if required. The Assessing Officer can seek the assistance of the TPO for carrying this adjustment in the ALP while finalizing the order. Further, the Assessing Officer may examine the applicability of provisions of section271(1)(c) at the time of finalization of the assessment order. 2.4 Pursuant to the order of the DRP, Bangalore under section 144C(5) r.w.s. 144C(8) of the Act dt.22.4.2010 and in accordance with the directions therein, the Assessing Officer passed the order of assessment under section 143(3) r.w.s. 144C(13) of the Act on 8.10.2010 determining the assessee's income at ₹ 1,66,58,768. 3. Aggrieved by the order under section 143(3) r.w.s. 144C(13) of the Act, dt.8.10.2010 giving effect to the direction of the DRP, Bangalore under section 144C(5) r.w. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparable search undertaken by the TPO is bad in law. (a) The TPO erred on facts and in law in conducting a fresh benchmarking analysis using non-contemporaneous data and substituting the appellant's analysis with fresh benchmarking analysis on his own conjectures and surmises. Thus the appellant prays that the fresh benchmarking analysis conducted by the learned TPO is liable to be quashed. (b) On the facts and in the circumstances of the case, the learned TPO erred in not demonstrating that the motive of the appellant was to shift profits outside of India by manipulating the prices charged in its international transactions which is a is prejudicial to the interests of Revenue-requisite condition to make any adjustment under the provision of Chapter X of the Act. 4. Comparability analysis adopted by the TPO for determination of arm's length price. (a) The AO/TPO grossly erred on facts in benchmarking the transactions of the captive software services of the appellant with companies operating as full fledged entrepreneurs without considering the differences in the functions performed, assets employed and risk undertaken by the appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Assessing Officer/TPO. The Assessing Officer/TPO erred in law and on facts in not allowing appropriate adjustments under Rule 10B to account for, inter alia, differences in (a) accounting practices, (b) marketing expenditure, (c) research and development expenditure, and (d) risk profile between the appellant and the comparable companies. 7. Variation of 5% from the arithmetic mean The Assessing Officer/TPO erred in law in not granting the benefits of proviso to section 92C (2) of the Act available to the appellant. 8. Interest under section 234B of the Act The learned Assessing Officer has erred in levying interest under section 234B of the Act amounting to ₹ 30,65,040. 9. Penalty under section 271(1)(c) The learned Assessing Officer has erred in initiating penalty proceedings under section 271(1)( c ) of the Act. 10. Directions issued by the Hon'ble DRP (a) The Hon'ble DRP has erred in law and facts in not taking cognizance of the objections filed by the appellant in relation to the draft assessment order issued by the Assessing Officer/TP order. (b) The Hon'ble DRP err ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said section to mandate that, what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. Though when a particular word is not defined by the legislature and an ordinary meaning is to be attributed to the same, the said ordinary meaning to be attributed to such word is to be in conformity with the context in which it is used. When the statute prescribes a formula and in the said formula, 'export turnover' is defined, and when the 'total turnover' includes export turnover, the very same meaning given to the export turnover by the legislature is to be adopted while understanding the meaning of the total turnover, when the total turnover includes export turnover. If what is excluded in computing the export turnover is included while arriving at the total turnover, when the export turnover is a component of total turnover, such an interpretation would run counter to the legislative intent and impermissible. If that were the intention of the legislature, they would have expressly stated so. If they have not chosen to expressly define what the total turnover means, then, when the total turnover includes export turnover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 004-05. The assessee adopted the following filters in its search for comparables for its T.P. Study. (i) Companies for which sufficient financial data is not available to undertake the analysis were excluded. (ii) Companies that have ceased business operations or are currently inactive were excluded. (iii) Companies undertaking different functions compared to the tax payer were excluded. (iv) Companies that do not have significant (less than 25%) foreign exchange earnings were excluded. (v) Companies which have been making persistent operating losses were excluded. (vi) Companies that have substantial transactions with related parties ( 25%) were excluded. (vii) Companies that had exceptional year(s) of operations were excluded. (viii) Companies engaged in software development were treated as comparables in respect of their verticals of software. (ix) Companies that are duplicated in the data base with different names or engaged to form another company were excluded. 5.2 The above search yielded a set of 36 comparables which are listed as under : Margin Analysis. Unadjusted margins of comparable compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 58.70 26. Sasken Communciation Technologies Limited 14.35 27. Sasken Network Systems Limited 16.19 28. Satyam Computers Services Limited 29.13 29. Software Technology Group International Limited 15.39 30. Sonata Software Limited 15.31 31. Subex Systems Limited 6.39 32. Transworld Infotech Limited 26.34 33. Tyche Industries Limited 10.62 34. VJIL Consulting Limited 6.47 35. V M F Softech Limited 18.70 36. Visualsoft Technologies Limited 29.02 Arithmetic mean 12.04 The operating margin of the assessee as per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 18.09 2. Geometric Software Limtied (Seg) 98.59 6.70 0 6.70 3. Infosys Limtied 9028.00 40.38 0 40.38 4. KALS Info Systems Limited 1.97 39.75 0 39.75 5. Mindtree Consulting Limited 448.79 14.67 0 14.67 6. Persistent Systems Limited 209.18 24.67 0.05 24.71 7. R Systems International Ltd (Seg) 79.42 22.20 0 22.20 8. Sasken Communication Ltd (Seg) 240.03 13.90 0 13.90 9. Tata Elxsi Ltd (Seg) 188.81 27.6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g adjustment of ₹ 1,62,97,697 by the TPO vide his order under section 92A(1) r.w.s. 92C of the Act dt.26.10.2009. 6. We have heard both parties, carefully perused and considered the order of the TPO under section 92CA of the Act, the orders of assessment, the directions of the DRP, the submissions of the assessee / learned counsel for the assessee, judicial decisions relied on by the assessee. We now proceed to examine the various issues raised by the assessee. 7. Adjustments to Arms Length Margin 7.1 In the ground raised at 2(a), it is contended that the final order of the Assessing Officer is bad on facts and in law and is in violation of the principles of natural justice. Alternately, it is also contended that the Assessing Officer's order is bad in law since he did not issue any show cause notice under section 92C(3) of the Act. 7.2 We have heard both the learned counsel for the assessee and the learned Departmental Representative and carefully perused the record. After due consideration, we find no merit in the claim of the assessee that adequate opportunity of being heard was not afforded to it thereby violating the principles of natural justice. Except ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uggest that the Assessing Officer should hear the assessee or record reasons before making a reference to the TPO nor is there anything to suggest that the Assessing Officer should ask the assessee whether he should himself proceed to determine the arm's length price or should involve the TPO for this purpose. The reference is a step in the collection of material which might be useful for making assessments. No violation of any civil rights of the assessee is involved here. Mere reference does not tantamount to any adverse assessment or use of adverse material. Moreover, by virtue of Board Instruction No.3 of 2003 dt.20.5.2003 the CBDT decided that whenever the aggregate value of international transactions exceeds ₹ 5 Crores, the case should be picked up for scrutiny and reference under section 92CA be made to the TPO. Thus, it is mandatory for the Assessing Officer to refer all the cases whenever the aggregate value of international transactions is more than ₹ 5 Crores. These instructions are binding on all Assessing Officers. In these cases, there is no need for the Assessing Officer to make a prima facie opinion, except that he/she needs to examine the 3C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordinate benches of the Bangalore Bench in the cases of - (i) Aztech Software Technology Services Ltd reported in 107 ITD 141 (Bang) (SB) and (ii) Phillips Software Centre Pvt Ltd reported in (2008-TIOL-471-ITAT-BANG). The Tribunal was of the view that the decision of the Special Bench of the Tribunal in the case of Aztech Software Technology Services Ltd (supra) would prevail and held that it is not necessary for the TPO to demonstrate tax avoidance and diversion of income for invoking the provisions of section 92C and 92CA of the Act. In the case of Coca Cola India Inc v. ACIT reported in 309 ITR 194 (P H), the Hon'ble Punjab Haryana High Court dealt with the matter of anti-avoidance and T.P. in detail and held that it is not necessary for the Assessing Officer/TPO to demonstrate that profits are shifted out of India in order to determine the arm's length nature of any international transaction. In para 52 of the judgment their Lordships have held that - The income arising from international transactions is to be computed having regard to arm's length price as per the guidelines laid down in section 92C of the Act by adopting one of the laid down me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the assessee's T.P. Study, rejection of filters applied by the assessee, data utilized by assessee, reasons and requirement for adoption of additional filters, etc from page 11 onwards of his order dt.26.10.2009 warranting a fresh search for comparables and culminating in the T.P. adjustment for ALP of international transactions for the relevant period. The assessee / learned counsel for the assessee have failed to put forward any specific arguments to establish that the TPO's action were baseless as alleged. In this view of the matter, we are of the opinion that the TPO was right in rejecting the T.P. Study submitted by the assessee. Comparables in Distpute 9.3 The assessee as per its T.P. Study / Documentation selected 36 comparables. Out of these, the TPO in this T.P. Audit rejected 29 of these comparables and accepted only the remaining six of them as acceptable comparables. The TPO as per his T.P. Study/Audit selected 14 new companies. Therefore, the TPO finally selected a list of 20 comparables in the T.P. order. Before us, the assessee has raised objections to the following six comparables selected by the T.P.O. (i) Infosys Technology Limited. (& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ader, Infosys enjoys significant benefits on account of marketing intangibles and intellectual property rights owned by it, filing over 20 patents and generating over 82 invention disclosures during F.Y. 2005-06. The learned counsel for the assessee argued that size is an important facet of an enterprise - level difference and submitted that size as one of the selection criteria for comparables has been approved by various Benches of the ITAT, and also recommended by the OECD in its T.P. Guidelines. Hence, the learned counsel for the assessee contended that an appropriate turnover range should be applied in selecting a comparable as has been held by the co-ordinate bench of this Tribunal in the case of M/s. Genysys Integrating Systems India (P) Ltd v. DCIT in ITA No.1231/Bang/2010 dt.5.8.2010 wherein the Bench was of the view that size matters in business and pointed out that at para 9 on page 32 thereof held that : 9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which hire (sic) making losses as comparables. This shows that there is a limi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ores and we find that this filter is squarely applicable to the case on hand since the assessee's turnover is ₹ 17.40 Crores only. Therefore, respectfully following the decision of the co-ordinate Bench of this Tribunal in the case of Genysys Integrating Systems (India) P. Ltd (supra), we direct the Assessing Officer/TPO that in the instant case only those companies having turnover of between ₹ 1 Crore to ₹ 200 Crores be considered for being taken as comparable and consequently to exclude Infosys Technologies Ltd form the set of comparables in the instant case. 9.5.1 Accel Transmatics Ltd ('Accel') The assessee objected to this company being taken as a comparable in the instant case on the following grounds : (a) Erroneous margin computation by the TPO. It is the contention of the assessee that the TPO computed the margins of this comparable on the basis of the reply furnished by the said company under section 133 (6) of the Act and did not consider the figures appearing in the Annual Report of the company. (b) Abnormal profits The learned counsel for the assessee submitted that the profit of this comparable at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in this regard. It is the DRP that had given a finding that 'Accel' has to be excluded from the set of comparables for Capgemini India (P) Ltd which has been noted by the Tribunal. The Tribunal has not given any specific finding in regard to this comparable, leave alone any general proposition that 'Accel' cannot be taken as a comparable for any software service provider. The only conclusion that can be drawn from the decision in the case of Capgemini India (P) Ltd is that 'Accel' is not a comparable for Capgemini. No general proposition can be made out that 'Accel' cannot be a comparable for any software service provider. After all, the data base relied upon by both the assessee and the TPO has categorized this company as a 'software service provider' as this company was thrown up as a comparable in the search process of the TPO with the key words being 'computer software'. The contention that 'Accel' cannot be taken as a comparable for any software service provider will amount to negating the classification done by the data base, for which no evidence has been brought on record. Hence, we are of the view that, it is untenab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elied on by the learned counsel for the assessee, has ruled that there is no bar to considering companies either with abnormal profits or abnormal losses as comparables as long as they are functionally comparable. At para 35 of the said order the Tribunal held that .. a general rule that companies with abnormal profits should be excluded may be in tune with the principles of enunciated in OECD Guidelines but cannot be said to be in tune with Indian T.P. Regulations. However, if there are specific reasons for abnormal profits or losses or other general reasons as to why they should not be regarded as comparables, then they can be excluded for comparability. It is for the assessee to demonstrate existence of abnormal factors. A similar view has been upheld by another co-ordinate bench of this Tribunal in the case of 24/7 Customer Care Pvt. Ltd. in ITA No.227/Bang/2012 at para 17.8 thereof. In the instant case, the assessee has not been able to establish or demonstrate with any evidence any reason to support the proposition that the profit of the comparable 'Accel' was abnormally high. It must also not be overlooked that high profits also reflect better business sense and p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... served about Tata Elxsi that :- . it is seen that this company is engaged in the development of niche product and development services, which is entirely different from the appellant. We agree with the contention of the learned counsel for the assessee that the nature of the product developed and the services provided by the company are different from the appellant as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company fit for comparability analysis for determining the arms length price for the appellant, hence, should be excluded from the list of comparable parties. 9.6.2 We have heard both parties, have perused and carefully considered the material on record and the judicial decision cited. We find force in the contention of the assessee, that as held by the Mumbai Tribunal in the case of Telecordia Technologies India Pvt Ltd (supra), Tata Elxsi are engaged in development of niche products and development services are functionally different from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d contends that 'KALS' is a product development company basing his assessment on the details, which he claims were culled out of the Annual Report of 'KALS'. As per the extract submitted by the assessee, there is mention in the Annual Report of 'KALS' that it is into development of software and software products. Since as per these extracts of the Annual Report, 'KALS' does software development services, the view of the TPO that it qualifies to be a comparable cannot be dismissed off hand. On a specific reference by the TPO, 'KALS' has clarified that it is in the business of software development. Therefore, the contention of the assessee that 'KALS' be excluded from the list of comparables cannot be accepted. At the same time, the issue as to whether the business of the 'KALS' is predominantly software development or development of software products needs to be examined carefully. In these circumstances, we are of the view, that in the fitness of things, the issue of the suitability of taking 'KALS' as a comparable be remanded back to the file of the Assessing Officer/TPO for fresh consideration in accordance with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account aggregation industry. As per the Master Services Agreement (MSA) signed between the assessee and Yodlee, US. (i) Yodlee, USA has engaged the assessee for the provision of software development, implementation and maintenance of computer software programme's . (ii) Yodlee, USA would be the exclusive owner of all the Intellectual Property Rights (IPRs)of the software products (including any product developed in connection with the performance of software services under the MSA). Therefore, from the assessee's T.P. Study and the MSA, it is clear that the assessee group deals with both product development and professional services and the assessee renders services to both the divisions, including product development. The MSA between Yodlee, USA and the assessee envisages product development by the assessee and this aspect does not appear to have been examined by the TPO. 9.8.5 Regarding the assessee's objections to the 'use of data collected under section 133(6)' of the Act on the ground that it is 'secret data', we find from the record that the TPO has forwarded the details received from Megasoft under section 133(6) of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cs Software Systems Ltd ('Flextronics') The assessee objects to the inclusion of this company as a comparable on the ground that it is not functionally comparable. It is also contended that the company is engaged in both development of software products and software consulting services and the same has been reported in a single segment which has been adopted by the TPO. It is the contention of the assessee that 'Flexitronics' develops software products and provide software consulting services for use in the telecommunication industry and also sells telecommunication equipment and provides services on business process outsourcing (BPO) and therefore derives revenue from sale of products (developed software) services (IT and BPO) and commission on sale of telecommunication equipment. It is submitted that 'Flextronics' has two reportable segments - (a) product and services; and (b) BPO services. It is contended that the BPO segment is not comparable segment for the assessee, but that the BPO segment has been taken along with the product and services segment for the purpose of comparability by the TPO, which is not correct. 9.9.2 Per con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ian T.P. Regulations. It is only the proviso to Rule 10B(4) that makes an exception in allowing the use of data of the two preceding years, if and only if it is established that the data reveals facts which could have an influence on the determination of transfer price. The mandatory requirement of law for the use of data of the current financial year cannot be dispensed with. ERRONEOUS DATA USED BY A.O/T.P.O 10.1.1 In the ground raised at S.No.5(a), the assessee contends that the TPO has erred in using data that was not contemporaneous and which was not available in the public domain when the assessee did its T.P. Study. 10.1.2 The ground raised has been carefully perused. As regards the data used by the TPO while determining the ALP, we find that it is to be as per the provisions of section 92D of the Act that every person who has entered into international transactions is required to maintain information and documentation thereof. Rule 10B(4) provides that the information and documents as specified under Rule 10B(1) and 10B(2) should as far as possible be contemporaneous and should exist latest by the specified date referred to in section 92F(4) which has the same mea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eing compared. 10.2.3 The use of the word shall in the main provision of the Rule makes it abundantly clear that the use of data of the current financial year (i.e. of the financial year in which the international transaction was actually entered into) is a mandatory requirement of law in the comparability analysis to be undertaken as per Indian T.P. Regulations. It is only the proviso to Rule 10B(4) that makes an exception in allowing the use of data of the two preceding years, if and only, if it is established that the data reveals facts which could have an influence on the determination of transfer price. The mandatory requirement of law for the use of data of the current financial year cannot be dispensed with even if the relevant data was not available to the assessee in the public data base at the time of preparation of the T.P. Report. Non-availability of information in the public data base can at best be relevant to explain the discharge of the assessee's obligation of maintaining the prescribed documentation under section 92D(i) of the Act r.w. Rule 10D of the IT Rules, 1962. However, such non-availability will not dispense with the mandatory requirement of Rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt, or for that matter for adjustments for accounting practices, research and development expenditure or marketing expenditure. No case has been made out by the assessee by virtue raising this ground that any of the adjustments sought for are warranted. It cannot be anybody's case that an adjustment has to be necessarily granted whenever or wherever there is difference between the tested party and the comparables. An adjustment for risks etc is a valid principle for comparability, but whether this case entails such an adjustment would depend on the facts of the case. However, in the instant case mere claim for adjustments for risks, research and development expenditure, market expenditure etc serves no purpose as it is not backed by any cogent or clinching evidence. The onus is on the assessee to establish the need for adjustments on specific issues and how these issues affect comparability. In the instant case, the assessee has not discharged the onus and we are, therefore, constrained to dismiss this ground raised by the assessee. Variation of 5% from arithmetic mean. 12.1 In this ground raised at S.No.7, the assessee contends that the action of the TPO, in not granting ..... X X X X Extracts X X X X X X X X Extracts X X X X
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