TMI Blog2014 (10) TMI 354X X X X Extracts X X X X X X X X Extracts X X X X ..... a comparable then VMF Soft Tech Ltd. which shows the profit margin of 35.70% also should be excluded from the list of comparables - R&D/sales threshold comes to 7% - in the subsequent year ICSA(India) Ltd it cannot be considered as a comparable - We accordingly hold that this cannot be considered as a comparable for determining the Arm's Length Price. Inclusion of SIP Technologies Ltd. – Held that:- No relevant data for AY 2004-05 is available since the company had closed its books of accounts for the year ending 30-09-2004 and subsequently closed its books of accounts only for the year ending 31-03-2006 which is for a period of 18 months - SIP Technologies and Exports Ltd. should not be considered as a comparable and has to be rejected although the same was considered by the assessee itself while preparing the T.P. report - When the TPO rejected certain companies as not comparable, there was no reason why SIP Technologies Ltd. should not be excluded from the list of comparables when the results of the entire year is not available – there is no reason as to why the super profit making company VMF Soft Tech Ltd. should not be excluded from the list of comparables - both these com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0A of the Act – Decided in favour of assessee. - IT APPEAL NO. 1501 (PN) OF 2011 - - - Dated:- 26-6-2014 - SHAILENDRA KUMAR YADAV, AND R.K. PANDA, JJ. Ms. Karishma R. Phatarphekar, Yatin Nageshkar, Kavit Chandak, Shekhar Dhore and Rahul Sawdadkar for the Appellant. A.K. Modi for the Respondent. ORDER R.K. Panda, Accountant Member-This appeal filed by the assessee is directed against the order dated 19-09-2011 passed by the DCIT, Circle-1(1), Pune u/s.143(3) r.w.s. 263 r.w.s. 144C(13) of the Income Tax Act for the Assessment Year 2005-06. 2. Facts of the case, in brief, are that the assessee filed its return of income on 29-10-2005 disclosing total income at ₹ 14,06,984/-. The AO completed the assessment u/s.143(3) on 11-12-2007 determining the total income at ₹ 24,29,550/- by making the following 3 additions : i. Excise duty debonding - ₹ 1,58,310/- ii. Security charges - ₹ 2,32,856/- iii. Travelling, legal, printing other expenses - ₹ 6,31,400/- Since the AO in the instant case had passed the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e development services is at Arm's Length. The TPO examined the bench marking done and comparables adopted by the assessee and noted that some of them were not found to be proper and correct comparables. He noted that the assessee, while benchmarking the comparables, had taken the following 11 companies and has determined the Average Arithmetic mean at 10.30% : Sr.No. Name of the company F.Y. 2004-05 1 ABM Knowledgeware Ltd. (seg) 3.03% 2 Ace Software exports Ltd. 14.55% 3 California Software Co. Ltd. 13.32% 4 Compucom Software Ltd.(seg) 28.55% 5 Cressanda Solutions Ltd. -35.40% 6 Goldstone Technologies Ltd. 4.51% 7 Lanco Global Systems Ltd. 10.49% 8 Ontrack Systems Ltd. 4.35% 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot given segmental data. Regarding Ontrack Systems Ltd. he observed that the segmental data are not given and the company as a whole has functions different from the tested party. In case of Shree Tulsi Online.com Ltd. the TPO noted that segmental data is not available. Further, the company also deals in software systems services and software packages. The company as a whole has functions different from the tested party. The TPO, therefore, rejected the comparables adopted by the assessee and made further search to find more comparables to broad base the data and arrive at proper benchmarking of the international transactions. Accordingly, the TPO adopted the following comparables for benchmarking the international transactions undertaken by the assessee : Sr.No. Name of the company (2004-05) Net cost plus mark up 1 Blue Star Infotech Ltd. 18.08 2 Compucom Softwate Ltd.(Seg) 28.62 3 Computech International Ltd.(Seg) 9.24 4 Geometric Softwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and any other adjustment appropriate to bring the comparable in line with BIPL. The assessee submitted the workings of the adjustments for the set of comparables it had chosen in the TP report. However, the TPO noted that the assessee company was in receipt of interest free loan of ₹ 7,30,87,350/- and that the company being a captive software supplier has little risks. He further noted that there is difference in the credit period that being 112 days for the BIPL and the inventory carrying is of 0 days. In view of the above, the request of the assessee for adjustment for working capital, inventory, market risk etc. were not accepted by the TPO. 3.2 The TPO analysed the provisions of Rule 10B of the Income Tax Rules, 1962 and noted that data to be used for the comparability shall be the data of the financial year in which the transaction has taken place and data for the previous two years could be used only if such data reveals facts which could have an influence on determination of transfer price in relation to the transaction being compared. He observed that the data pertaining to two years prior to the F.Y. 2004-05 does not have any influence on the determination of tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e TPO has not followed any systematic search strategy and merely cherry picked high profit making comparables. It was argued that the TPO has been provided with adequate reasons to not select the concerned companies as comparables for BIPL for A.Y. 2004-05. It was argued that BIPL has followed a detailed search processes providing adequate reasons for selecting and thus finally accepting companies as final comparables. It was argued that the reasons provided for accepting these companies are not correct and not tenable under the law. It was argued that the TPO has rejected the comparables selected by the assessee in the transfer pricing report without any valid reasons. It was argued that suitable adjustments should be made on account of risk and functional differences. Further, benefit of 5% range as provided by proviso to section 92C(2) which was not granted should be allowed. 5. Based on the arguments advanced by the assessee the DRP directed the Assessing Officer to exclude M/s.Helios Matheson Information Technology Ltd. and M/s. Saksoft Ltd. from the set of comparables and compute the Arm's Length Price on international transaction in respect of rendering of software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e as under : Particulars Amount (In INR) Data Communication/Internet Access Charges (IAC) (These expenses are not separately recovered from BDC) 4,261,829 Expenses in Foreign Currency Travelling 1,073,451 Employee Training 2,925,222 Membership Subscription 2,31,100 Repairs and Maintenance 2,25,502 TOTAL 34,55,275 GRAND TOTAL 77,17,104 6.3 It was explained that the Internet access charges are incurred to have access to the internet services which is not exclusively used towards the delivery of computer software outside India. It was further explained that no expenditure have been incurred in providing technical services outside India. After verification of the details furnished by the assessee the Assessing Officer observed that the expenses are incurred for travelling, employee training, membership and subscription and repai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of international transaction and making the adjustment of ₹ 20,961,689/-. (4) Erred by cherry picking new/additional comparables with high profits thus high OP/TC. The Id. TPO/AO also erred in including new/additional comparables, without providing a sound/logical search strategy/reasoning. (5) Erred in adding new/additional comparables which differ in functions undertaken, assets employed and risk assumed as compared to appellant; (6) Erred in rejecting comparables selected in TP study report, for FY 04-05 without sound and logical reasons. (7) Erred in rejecting comparables selected in TP study report, on account of loss reported by concerned comparable in a single year i.e. for FY 04-05 and also erred by not excluding companies reporting very high profits after excluding TP report comparable reflecting a loss for a single year; (8) Erred in ignoring the fact that BIPL has been given an interest free loan by its parent company; (9) Erred in ignoring the losses incurred by the parent company Bindview Development Corporation ( BDC ); (10) Erred in not making any adjustments for differences in functions undertaken, assets employed and risks assumed by co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for excess deduction u/s.10B of ₹ 6,50,037/-. (21) Erred in incorrectly reducing the LAC/Telecommunication charges from the Export Turnover of the company; (22) Erred by ignoring the fact that without prejudice to the above ground, if the telecommunication charges are reduced from the export turnover, the same should be also reduced from the total turnover; and 8. The Ld. Counsel for the assessee at the outset submitted that since rectification orders u/s.154 was passed by the TPO on 02-03-2012 as per the directions of the DRP, therefore, she is not pressing grounds of appeal Nos. 1 and 2 for which the Ld. Departmental Representative has no objection. Accordingly, the above 2 grounds by the assessee are dismissed as 'not pressed'. 9. Ground of appeal Nos. 3 to 18 by the assessee relates to addition of ₹ 2,09,61,689/- on account of adjustment of Arm's Length Price on international transaction by the Assessing Officer. 9.1 The Ld. Counsel for the assessee submitted that the Assessing Officer cherry picked new/additional comparables with high profits, thus, high OP/TC without providing sound/legal strategy or reasoning. She submitted that TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Symantec Corporation, US. She submitted that the TPO did not make any adjustments for difference in functions undertaken, assets employed and risks assumed by comparable companies vis-a-vis the assessee thereby comparing the operating profit/total cost of the comparable companies assuming higher business risks as compared to the assessee's captive, risk mitigated operations, without making any adjustment for differences in functions undertaken, assets employed and risk profile. She submitted that the TPO further did not grant the working capital adjustment as the same are necessary for adjusting the difference in functions or terms which give rise to difference in capital intensities for the comparable companies and the tested party. She submitted that working capital adjustments have been allowed by the DRP and the CIT(A) in other cases. Referring to the order of the Tribunal in assessee's own case for A.Y. 2006-07 she submitted that working capital adjustment has been allowed. Referring to the following decisions she submitted that in the said decisions adjustment for working capital have been allowed : i. Mentor Graphics (Noida) (P.) Ltd.'s case (supra) ii. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable also should be excluded from the comparables selected by the TPO/DRP. 9.6 Coming to the ICSA (India) Ltd. she submitted that the above company is also not functionally comparable. She submitted that ICSA's business activities encompass the development of embedded solutions software products and services. The total R D expenditure as a percentage of total turnover is 7.08% which is mentioned to be in embedded solutions. Since R D is carried out for products, embedded solutions, which is a part of software segment, cannot be considered as comparable. She submitted that the above company has developed products that find applications in Energy Management in addition to audit and control solutions with compliant data acquisition systems for power utilities using the GSM network. ICSA has also developed technology solutions for the power sector to identify transmission and distribution losses and major power consumption via GSM. It has abnormal revenue growth of 356% as compared to the previous year. Further, in assessee's own case for A.Y. 2006-07 ICSA was rejected because of crossing the R D/sales threshold of 3%. She submitted that the R D expenses of the above c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the above company is engaged in providing services for data conversions services, CAD, GIS and AM/FM services. Referring to Page 10 and 11 of the Annual report she submitted that the segmental information para mentions that the company is engaged in single segment namely computer software and services exports. The company is engaged in development of software. She submitted that if this company is rejected on the ground that it is in the business of CAD CAM then Geometric Software Solutions Ltd. also should be rejected since it is on the same line of business. She submitted that this company was accepted as a comparable in the preceding A.Y. 2004-05. The business activity of the company has not changed since then. Therefore, this company should be accepted in the final set of comparables. 9.9 As regards the deletion of Cressanda Solutions is concerned she submitted that the TPO excluded the same from the comparables on the ground that the company has incurred losses in the relevant year due to extraordinary reasons like winding up of relationship with clients, filing of bankruptcy by some clients, higher depreciation and finance charges due to infrastructure expansion wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e development services are provided to clients in financial services, life sciences, energy and manufacturing industries. Hence, the company is engaged in development of computer software and services. Referring to page 17 of the Annual report she submitted that business process outsourcing has been mentioned in the future outlook and opportunities segment of the Management discussion Analysis . Further, it also states that the software development would be major source of business. She submitted that the company plans to set up BPO operations in the domains of Finance, Customer support, HR and legal services, Consulting services, Managed services, Testing services can be classified as IT services. For the F.Y. 2004-05 the company is engaged in providing only software services. Referring to page 28 of the Annual report she submitted that revenue recognition confirms that it is into Software Development (Page 32 of the AR). Further, this company was accepted as comparable in the previous assessment year 2004-05. She accordingly submitted that this company should not be excluded from the final list of comparables. 9.11 As regards the exclusion of Ontrack Systems Ltd is concerne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lting and software services which includes e-business solutions, knowledge management, software development etc. It is engaged in providing software solutions like website development, web content development, customised software development, messaging solutions, billing software development etc. It was accepted as a comparable in the preceding assessment year and there has been no change in the business of the company during F.Y. 2004-05. Referring to page 31 of the Annual report she submitted that the company recognises income from software sale, software consultancy and software system services. The company is developing software for marketing in domestic and international markets, therefore, the same should not have been excluded. 9.13 As regards the inclusion of SIP Technologies and Exports Ltd. is concerned she submitted that although the assessee has taken this company as a comparable, however, it was submitted before the DRP that if Cressanda Solutions is not accepted then SIP Technologies Exports Ltd. should also be deleted from the list of comparables considered. She submitted that no relevant data for F.Y. 2004-05 of the company is available. The company had closed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted that the assessee did not furnish the detailed Acceptance-reject matrix, i.e. key words used for selection of comparables from public domain, the number of total companies found, filters applied to reject company on qualitative and quantitative ground etc. He submitted that there is no information about the selection of the final 90 companies for quality analysis. Therefore, the 90 companies selected by the assessee for quality analysis is itself a cherry picking approach. The new comparables selected by the TPO are based on contemporaneous data available in public domain at the time of TP audit report. Referring to the decision of the Bangalore Bench of the Tribunal in the case of Kodiak Networks India (P.) Ltd. vide ITA No.1413/Bang/2010 order dated 27-01-2012 he submitted that there is no bar in law for the TPO to utilise the updated data at the time of T.P. proceedings. Further, the TPO has given detailed reasonings for selection of the comparables. He submitted that out of the 11 comparables selected by the assessee for benchmarking the ALP of software development service transaction, the TPO had rejected 7 comparables giving valid reasons. All the comparables are rej ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of so-called differences. Further, even after providing opportunity by the DRP, the assessee could not demonstrate the differences. Therefore, the above arguments of the assessee cannot be accepted. 10.3 As regards the argument of the Ld. Counsel for the assessee that net working capital adjustment was not granted although same was necessary for adjusting the differences in functions or terms which give rise to differences in capital intensities for the comparable companies and the tested party, he submitted that this issue was also not raised before the TPO/Assessing Officer or DRP. He submitted that the working capital adjustments cannot be provided automatically. The assessee is required to point out the differences which are likely to materially affect the price or cost charged or paid in or the profit arising from such transactions in the open market and then the computation of reasonably accurate adjustment is to be furnished to eliminate the material effects of such differences. However, in the instant case, the assessee never furnished the computation of reasonably accurate adjustment. Since the assessee was already having sufficient funds and no debtors were locked, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gy Park Scheme and enjoyed an exemption from tax on its profits in India he submitted that this argument of the assessee cannot be accepted as correct. Referring to the decision of the Bangalore Special Bench of the ITAT in the case of Aztec Software and Technology Services Ltd. Vs. ACIT reported in 107 ITD 141 he submitted that the Tribunal in the said decision has held that in view of the specific provisions of first proviso to section 92C(4), deduction under Chapter VIA is not available on most of the transfer pricing adjustment. Motive of shifting of profits or actual shifting of profits are not necessary criteria for application of the transfer pricing provisions. Further, it is not only the matter of profit only but of assets also because if correct amount of profit would have come, it could have increased the assets. He accordingly submitted that the order of the TPO/Assessing Officer/DRP being in accordance with law should be upheld. 10.7 So far as the argument of the Ld. Counsel for the assessee that related party transactions in the case of Compucom Software Ltd. for the A.Y. 2004-05 are 58.40% and hence this is not a comparable case he submitted that this comparable w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M Knowledgeware Ltd. should be accepted as a comparable cannot be accepted. He accordingly submitted that the order of the Assessing Officer should be upheld. 11. The Ld. Counsel for the assessee in her rejoinder submitted that the assessee in its TP study report had given the details of search procedure and the results of comparable companies along with the summary of search criteria used and the analysis of the comparable companies under quantitative and qualitative criteria. Further, the assessee had also furnished the detailed accept-reject matrix for 90 companies. He submitted that if the TPO rejects companies on his own using RPT/Sales criteria, he should have rejected Compucom along with California Software. Referring to the decision of the Mumbai Bench of the Tribunal in the case of Frost Sullivan India (P.) Ltd. (supra) vide ITA No.2073/Mum/2010 she submitted that the Tribunal in the said decision has held that there is no basis for only excluding the loss making companies and not excluding the high profit making companies or companies which are not at all comparable considering their size, volume of turnover and other factors. Similar view has been taken in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itional pointer to get the overall picture of the comparable vis-a-vis the assessee. 11.2 So far as the argument of the Ld. Departmental Representative regarding inclusion of certain companies and exclusion of the comparables selected by the assessee is concerned she submitted that those are not based on sound and legal principles. The assessee has correctly done its TP analysis by taking the comparables. She accordingly submitted that the TP analysis done by the assessee being in accordance with law should be upheld and the adjustment made by the Assessing Officer to the ALP of the international transaction should be deleted. 12. We have considered the rival arguments made by both the sides, perused the orders of the TPO/AO/DRP and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find in the instant case the assessee is engaged in the export of network security and administrative software solutions which are developed exclusively for the parent company BDC. We find for the purpose of determining the Arm's Length Price the assessee benchmarked 11 comparables and determined the Average Arithmetic Mean at 10.3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the list of comparables. 15. Another issue raised is regarding the inclusion of ICSA (India) Ltd. as a comparable by the TPO. The inclusion of the said comparable is assailed by the assessee on the ground that the turnover of the said company exceeds ₹ 50 crores and further that the Research and Development expenses of this company is in excess of 3% of sales. The detailed factual analysis on this aspect is placed at pages 183 to 184 of the Paper Book. The TPO has included the said company on the ground that it is in the business of software and embedded system development activity and such type of service is what is provided by the assessee company also. In this case, the summary of search strategy reveals that assessee has excluded comparables wherein the sales are less than Rs One crore and also where the sale are in excess of ₹ 50 crores. The filters so set-up by the assessee are sought to be justified n the ground that the turnover of the assessee is ₹ 24.48 crores from software development services. We have examined the case set-up by the assessee and find that no reasons have been advanced by the TPO to do away with the filter adopted by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opriate method (TNMM), nor any parameters of selection have been challenged before us by the learned counsel for the taxpayer. As regards the question of not considering profit/losses of Wellwin Industry Ltd., for the period ending March 31, 2004, it is an admitted position that results of that enterprise for the relevant period are not available. The party after September, 2003 maintained accounts for 18 months and closed its account only on March 31, 2005. The company did not maintain separate accounts for the period March 31, 2004. The taxpayer did try to work out the alleged losses of the concern for the period ending March 31, 2004 on some basis by taking average of profits but was unable to show to the revenue authorities that figures so arrived at were correct and reliable for comparison. During the course of hearing of the appeal, we had also asked the ld. Counsel to give working of results of the concern for the relevant period on some sound basis, but the ld. Counsel showed his inability to do so. He conceded that results of the concern are not available in the public domain. If that is the position, we see no force in the objection of the taxpayer to non inclusion of Wel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he relevant year due to extraordinary reasons like winding up of relationship with clients, filing of bankruptcy by some clients, higher depreciation and finance charges due to infrastructure expansion. If this logic according to Assessing Officer is accepted, then we find no reason as to why the super profit making company VMF Soft Tech Ltd. should not be excluded from the list of comparables. Since both these companies were taken by the assessee as comparables, therefore, in our opinion similar view should be taken for both the comparables. 12.8 We find the Delhi Bench of the Tribunal in the case of Sapient Corpn. (P.) Ltd. (supra) at para 8.1 of the order has observed as under : 8.1 Now it is the contention of the assessee that when loss making companies were taken out from the comparables by the TPO, the super profit earning company, Zenith Infotech Ltd. should also be removed from the comparables. Ld. counsel of the assessee further claimed that this company does not satisfy TPO's own additional filters. It has been submitted that Zenith Infotech Ltd. has shown abnormal high profit margin. It has been submitted that Zenith Infotech Ltd. is predominantly software pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not appear to be comparable. Even if the taxpayer or its counsel had taken Datamatics as comparable in its I P audit, the taxpayer is entitled to point out to the Tribunal that above enterprise has wrongly been taken as comparable. In fact there are vast differences between tested party and the Datamatics. The case of Datamatics is like that of Imercius Technologies representing extreme positions. If Imercius Technologies has suffered heavy losses and, therefore, it is not treated as comparable by the tax authorities, they also have to consider that the Datamatics has earned extraordinary profit and has a huge turnover. Besides differences in assets and other characteristics referred to by Shri Aggarwal. The Income-tax Appellate Tribunal is a fact-finding body and, therefore, has to take into account all the relevant material and determine the question as per the statutory regulations.' 12.11 Similar view has been taken by the Mumbai Bench of the Tribunal in the case of Frost Sullivan India (P.) Ltd. (supra) where it has been held that if abnormal loss making companies are excluded abnormal profit making companies are also to be excluded. 12.12 Respectfully following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Compucom Software Ltd.(seg) 28.62% 3 Computech International 9.24% 4 Geometric Software Solutions Ltd. 29.99% 5 Goldstone Technologies Ltd. 3.53% 6 Orient Information Techno Ltd. 15.29% 7 Visual Soft Technology 23.52% 8 Ontrack Systems Ltd. 4.35 TOTAL 117.57 AVERAGE (ARITHMETIC MEAN) 14.69% 12.16 We find in the A.Y. 2006-07 the Tribunal in assessee's own case has considered +/-5% safe harbour provided under 92C(2) of the I.T. Act. Further, the submission of the Ld. Counsel for the assessee that during A.Y. 2006-07 the AO himself has allowed working capital adjustment to the assessee could not be controverted by the Ld. Departmental Representative. Considering the above and considering the fact that the Arithmetic Mean of the assessee shown at 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igure of 'export turnover', but did not make similar adjustment from the figure of 'total turnover'. The Revenue sought to justify this action on the plea that in terms of the definition of the expression 'export turnover' in Explanation 2 (iv) to section 10A the legislature has made a specific exclusion of freight and insurance charges, whereas, no such prescription was available in the section for the purposes of the 'Total turnover'. The Hon'ble High Court negated the aforesaid argument and held that the expression 'Export turnover' cannot have a different meaning when it forms a constituent part of the 'Total turnover' for the purposes of the application of the formula contained in section 10A(4) of the Act. The following discussion contained in para 7 of the judgment is worthy of notice: 7. The submission which has been urged on behalf of the Revenue is that while freight and insurance charges are liable to be excluded in computing export turnover, a similar exclusion has not been provided in regard to total turnover. The submission of the Revenue, however, misses the point that the expression 'total turnover' has ..... X X X X Extracts X X X X X X X X Extracts X X X X
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