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2014 (4) TMI 997

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....laimed as revenue expenditure. However, during the course of hearing, the learned AR submitted that this ground is not urged. Accordingly, this ground is dismissed as 'not pressed.' Ground No.22 is not maintainable as charging of interest u/s 234B of the Act is mandatory and consequential in nature. The remaining grounds raised are listed out for adjudication as under: I. Grounds relating to transfer pricing - computation of ALP: 1. (Ground nos. 8 to 17) : No argument was put-forth on grounds nos.8, 9 and 16. The remaining grounds are condensed as under:- The assessing officer [along with TPO/DRP] had erred in - - performing fresh transfer pricing analysis and adopting inappropriate filters in the fresh transfer pricing analysis; - selecting inappropriate comparables and rejecting unjustifiably the comparables selected by the assessee; - inappropriately computing the operating margins of the comparables and the assessee; - treating fore exchange gain or loss and provision for bad debts as non-operating in nature while computing operating margin of the assessee; - not making proper adjustment for enterprise level and transactional level differences in determining the ALP; -....

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.... the same on the ground that 'since the company follows mercantile system of accounting under mercantile system of accounting, the assessee company is required to make provision for such contingencies in the relevant FY itself. Therefore, for having not made the provisions in that year, for such expenses, in the subsequent years the claim of expenses cannot be allowable. Further, as the expenditure debited are not related to relevant AY, the expenditure so debited amounting to Rs.77,12,144/- is disallowed...' 4. Aggrieved, the assessee has come up with the present appeal. The statement of case and the written submissions made by the learned A R are summarized as under: - that the assessee rendered software development services wholly to its AE and that the assessee adopted Transactional Net Margin Method [TNMM] to justify the price charged in the international transactions; - the assessee had conducted a methodical search process on Capitaline Plus and Prowess database to identify comparable companies; that after adopting various search filters, 17 companies were selected as comparables; and that the arithmetic mean of these comparables was 10.43% and since the assessee's margin....

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.... they operate; - that the TPO's range had resulted in selection of companies like Infosys which was 277 times bigger than the assessee in the turnover; - that an appropriate turnover range should be applied in selecting comparable uncontrolled companies; - that the Bangalore Tribunal in M/s. Genisys Integrating Systems (India) Pvt. 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; - that the said proposition has been followed by the Hon'ble earlier Benches of this Tribunal in the following cases: (i) M/s. Kodiak Networks (I) Pvt. Ltd v. ACIT - ITA No.1413/Bang/2010; (ii) M/s. Genesis Microchip (I) Pvt. Ltd v. 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 Pvt. Ltd v. DCIT - ITA No.1054/Bang/2011 dated 23.11.2012 - based on the above, the companies having turnover more than Rs.200 crores require to be rejected; - That the process adopted for issuance of notice u/s 133(6) of the Act and use of such information by the TPO was inappropriate for the following reasons: (i) that t....

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....ion of this company as comparable; (iii) Celestial Lab Limited: The margin of the company was adopted at 58.356% in the final computation of ALP. This company was rejected in AY 2006-07 since it was engaged in R & D activities. However, based on the reply to the notice u/s 133(6), it was contended that the company was mainly a software development service provider and, therefore, selected as comparable. After verifying the Directors' report, balance-sheet, P & L account etc., it was noticed that this company was not functionally similar to the assessee. As per the annual report, the company's employee cost was less than 25% of the revenue. Accordingly, this company needs to be rejected as comparable. (iv) KALS Information Systems Limited: The margin of this company has been computed at 30.55%. This company is having revenues from both software development and software products. The TPO/DRP has considered this company as a comparables adopting the figures supplied in the reply to notice u/s 133(6). In reply, the company has contended that it is a pure software development company by stating that 'The core of our business may be classified as that of pure software development servi....

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....ength range of the adjusted ALP. (ix) Deduction u/s 10A: While computing deduction u/s 10A, the AO reduced Rs.69,45,076/- from the export turnover. However, the same has not been reduced from the total turnover. It is submitted that what is reduced from export turnover should also be reduced from total turnover. Relies on the findings of the Special Bench in the case of ITO v. Sak Soft (2009) 313 ITR (AT) 353 and the Hon'ble Karnataka High Court in the case of Tata Elxsi Limited; (x) Prior period expenses: that the AO had disallowed Rs.77,12,144/- on the ground that it is prior period expenses without appreciating that same represented short provision, excess provision or no provision of earlier years; (xi) Deduction u/s 10A on disallowance: The assessee's Unit is registered with STPI authorities. Profits of the said STPI unit are eligible for deduction u/s 10A. The AO had, in the assessment order, made certain additions/disallowances. The disallowance made has resulted in enhancement of income of the STPI UNIT. However, deduction u/s 10A has not been allowed in respect of the additions made. Deduction u/s 10A should have been allowed in respect of income assessed. Relies on ca....

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....ems Ltd.(Seg.) (13) LGS Global Ltd. (Lanco Global Solutions Ltd.) (14) Lucid Software Ltd (15) Mediasoft Solutions Pvt. Ltd (16) Megasoft Ltd.(Seg.) (17) Mindtree Ltd. (18) Persistent Systems Ltd. (19) Quintegra Solutions Ltd (20) R.S. Software (India) Ltd (21) R Systems International Ltd (seg) (22) SIP Technologies & Exports Ltd (23) Thirdware Solutions Ltd (Seg) (24) Tata Elxsi Ltd. (Seg.) (25) Sasken Communication Technologies Ltd. (Seg.) (26) Wipro Ltd. (Seg.) For the year under consideration, the operating cost in the case of Trilogy E-Business was Rs.43.16 crores whereas the assessee's operating cost for the same period was Rs.41.46 crores. The cost base of the assessee and Trilogy E-Business being similar, we are of the considered view that the order of the Tribunal in the case of Trilogy E Business is squarely applicable to the assessee's case. The objections raised by the assessee are dealt with chronologically as under: I. Turnover filter: 5.1 We have heard the rival submissions and perused the materials on record. The TPO had, while selecting the above 26 above comparables, applied a lower turnover filter of Rs.1 crore but preferred not to apply any uppe....

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....lassification 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 1.00 to 200 crores only should be taken into consideration for the purpose of making TP Study." 5.1.2 The above view has been followed in the recent order of the Tribunal in the case of Trilogy E -Business (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 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) Page 16 of 29 ITA 16 No.1124/Bang/2011 Pvt. Ltd....

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....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 Assessee and the fact that 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 so....

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....rts Ltd 14. Thirdware Solutions Ltd (Seg) 5.2.3 The above companies have been retained as comparables in conformity with the findings of the earlier Bench in the case of Trilogy E- Business (supra). It is to be noted that in the case of Trilogy E-Business, the Tribunal turned 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% is 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 In....

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....te 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 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 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...........". 5.2.4 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. Forex gain/loss impact: 5.3 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 fol....

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....he AO/TPO's level, the same is remitted back to the file of the AO/TPO with a direction to examine the veracity of the assessee's claim and to take appropriate decision in correctly computing the working capital adjustment. It is ordered accordingly. IV. Risk adjustment: 5.5 According to the assessee, it is operating in a risk mitigated environment. It was submitted that the risk assumed by it are lesser than those assumed by the companies in an uncontrolled condition, therefore, an adjustment for risk is to be granted. The reasoning for the above submission is that higher the risk, the higher the profit. 5.5.1 In the instant case, TPO in his order has computed the adjustment for risk differential Table at pages 179 and 180 of the order passed u/s 92C of the Act indicate margins were reduced by 0.73% to factor in the risk differentials. The TPO, however, after computing the risk differentials did not give effect to the same on the premise that the single customer risk of the assessee is more to off set the effect of the risk differentials as above. In this connection, the earlier Bench of this Tribunal in the case of M/s Intellinet Technologies India Pvt. Ltd v. ITO in ITA No.12....

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....computation and if found that the differential in the margin of the assessee and the comparables is beyond 5% bandwidth recognized in proviso to s. 92C (2) of the Act, then adjustment is required to be made to the reported value of the assessee's transaction with its AE. It is ordered accordingly. U/s 10A of the Act. 6. While computing deduction under section 10A of the Act, the Assessing Officer reduced Rs.69,45,076/- from the export turnover. However, the same has not been reduced from the total turnover. As a result of recomputation of deduction, the claim under section 10A of the Act was reduced to Rs.6,37,73,510/- as against Rs.6,48,95,788/-. 6.1 In this regard, the assessee's submission is that the Assessing Officer while reducing from the export turnover the above said expenses and the same ought to be also reduced from the total turnover. It was argued that the issue in question is squarely covered by the judgment of the Hon'ble jurisdictional High Court in the case of CIT v M/s Tata Elxsi Ltd. & Others [(2012) 247 CTR (Kar.) 334)]. 6.2 The learned DR present was unable controvert the submission made by the learned AR. 6.3 We have heard the rival submissions and peruse....