TMI Blog2014 (10) TMI 465X X X X Extracts X X X X X X X X Extracts X X X X ..... n by excluding the aforesaid companies from the list of comparable. Selection of comparables – Avani Cimcon Technologies Ltd. – Functionally different unit - Held that:- Following the decision in Telcordia Technologies Pvt. Ltd. v. ACIT [2012 (6) TMI 388 - ITAT MUMBAI] - the Tribunal accepted the assessee's contention that this company has revenue from software product and observed that in the absence of segmental details, Avani Cincom cannot be considered as comparable to the assessee who was rendering software development services only - the margin of this company at 52.59% which represents abnormal circumstances and profits - The reasons given by the Assessee for excluding this company as comparable are found to be acceptable. KALS Information Systems Ltd. - Functionally different from software companies – Held that:- Following the decision in Bindview India Private Limited v. DCIT [2013 (6) TMI 113 - ITAT PUNE] the company is engaged in development of software products and services and is not comparable to software development services provided by the assessee - the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrency from export turnover u/s 10A – Held that:- Following the decision in CIT v. Tata Elxsi Ltd [2011 (8) TMI 782 - KARNATAKA HIGH COURT] - it would be just and appropriate to direct the AO to exclude the sum incurred on telecommunication charges and another sum incurred in foreign currency both from export turnover and total turnover – Decided in favour of assessee. - IT(TP)A No.1203/Bang/2011 - - - Dated:- 11-7-2014 - SHRI N.V. VASUDEVAN, AND SHRI RAJENDRA, JJ. Appellant by : Shri Vishnu Bagra, C.A. Respondent by : Shri C.H. Sundar Rao, CIT-I (DR) O R D E R N.V. Vasudevan, Judicial Member-This appeal by the assessee is against the order dated 4.10.2011 of the ITO, Ward 11(2), Bangalore passed u/s. 143(3) r.w.s. 144C of the Act. 2. Ground No. 1 is general and calls for no specific adjudication. Ground No.2 (a) to (n) raised by the assessee is with regard to the addition to the total income by way of adjustment to the Arms' Length Price ( ALP ) to an international transaction carried out by the assessee u/s. 92CA of the Act. At the time of hearing of the appeal it was submitted that the comparable companies chosen by the TPO and the addition made b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the Profit Level Indicator ( PLI ). The PLI of the assessee was arrived at after segmental analysis and after deducting forex loss from the cost, as follows: Operating Revenue Rs.18,61,98,727 Operating Cost Rs.15,89,78,468 Operating Profit Rs.2,72,79,259 Op.pr/cost% 17.12% 5. The TPO arrived at a final set of 26 comparables. The set of 26 comparables is given as Annexure-I to this order. 6. The assessee raised various objections to the methodology adopted and the reasons assigned by the TPO for rejecting the comparables chosen by the assessee in its TP study. In the course of proceedings before the TPO, notice u/s. 133(6) has been issued to the companies that were chosen as comparable by the assessee as well as the TPO and on the basis of the replies received in response to such notices, certain inferences were drawn by the TPO. The action of the TPO in relying on some of those information was also challenged by the assessee. The TPO finally passed an order u/s. 92CA of the Act and on the basis of the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will have to be excluded as the turnover of these companies are more than ₹ 200 crores and cannot be compared with the Assessee whose turnover is less than ₹ 20 crores: (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. Our attention was drawn to the observations of the Tribunal in the case of Trilogy E-Business Software India (P.) Ltd. (supra) on the application of turnover filter and it was submitted that the aforesaid comparable companies have to be excluded from the final list of comparables selected by the TPO. 9. We have considered the submission of the learned cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into by a ₹ 10 crore company. The two most obvious reasons are the size of the two companies and the relative economies of scale under which they operate. The fact that they operate in the same market may not make them comparable enterprises. The relevant extract is as follows [on Rule 10B(3)]: Clause (i) lays down that if the differences are not material, the transactions would be comparable. These differences could either be with reference to the transaction or with reference to the enterprise. For instance, a transaction entered into by a ₹ 1,000 crore company cannot be compared with the transaction entered into by a ₹ 10 crore company. The two most obvious reasons are the size of the two companies and the relative economies of scale under which they operate. 13. It was further submitted that the TPO's range (Rs. 1 crore to infinity) has resulted in selection of companies like Infosys which is 277 times bigger than the Assessee (turnover of ₹ 13,149 crores as compared to ₹ 47.47 crores of Assessee). It was submitted that an appropriate turnover range should be applied in selecting comparable uncontrolled companies. 14. Reference was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (I) Private Limited v. DCIT (ITA No.1254/Bang/20l0). 3. Electronic for Imaging India Private Limited (ITA No. 1171/Bang/2010). It was finally submitted that companies having turnover more than ₹ 200 crores ought to be rejected as not comparable with the Assessee. 16. The ld. DR, on the other hand pointed out that even the assessee in its own TP study has taken companies having turnover of more than ₹ 200 crores as comparables. In these circumstances, it was submitted by him that the assessee cannot have any grievance in this regard. 17. We have considered the rival submissions. The provisions of the Act and the Rules that are relevant for deciding the issue have to be first seen. Sec.92. of the Act provides that any income arising from an international transaction shall be computed having regard to the arm's length price. Sec.92-B provides that international transaction means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ational transaction have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made in this behalf; or (c) the information or data used in computation of the arm's length price is not reliable or correct; or (d) the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D, the Assessing Officer may proceed to determine the arm's length price in relation to the said international transaction in accordance with sub-sections (1) and (2), on the basis of such material or information or document available with him: 18. Rule 10B of the IT Rules, 1962 prescribes rules for Determination of arm's length price under section 92C: 10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely : (a) to (d)** ** ** (e) transactional net margin method, by whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. (4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into : Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared. 19. A reading of the provisions of Rule 10B(2) of the Rules shows that uncontrolled transaction has to be compared with international transaction having regard to the factors set out therein. Before us there is no dispute that the TNMM is the most appropriate method for determining the ALP of the international transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to the decision of the Hon'ble ITAT Bangalore Bench in the case of Trilogy E-Business Software India (P.) Ltd. (supra) wherein these companies were held to be not functionally comparable with that of a pure software developer like the Assessee. 12. The following were the relevant observations of the Tribunal on the aforesaid comparable companies in the case of Trilogy E-Business Software India (P.) Ltd. (supra): '(b) Avani Cimcon Technologies Ltd. 39. As far as this company is concerned, the plea of the Assessee has been that this company is functionally different from the assessee. Based on the information available in the company's website, which reveals that this company has developed a software product by name DXchange , it was submitted that this company would have revenue from software product sales apart from rendering of software services and therefore is functionally different from the assessee. It was further submitted that the Mumbai Bench of the Tribunal to the decision in the case of Telcordia Technologies Pvt. Ltd. v. ACIT - ITA No.7821/Mum/2011 wherein the Tribunal accepted the assessee's contention that this company has revenue from so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luding 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. (d) KALS Information Systems Ltd. 46. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual repot, the salary cost debited under the software development expenditure was ₹ 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal's decision of the ITAT in the case of Bindview India Private Limited v. DCI, ITA No. ITA No 1386/PN/1O wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows: 16. Another issue relating to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts has been treated as deferred revenue expenditure and the same has been written off in 10 years equally yearly installments from the year in which it is incurred. iii. An amount of ₹ 11,692,020/- has been debited to the Profit and Loss Account as Deferred Revenue Expenditure (page 30 of PB-II). This amounts to nearly 8.28 percent of the sales of this company. It was therefore submitted that the acceptance of this company as a comparable for the reason that it is into pure software development activities and is not engaged in R D activities is bad in law. 43. Further reference was also made to the decision of the Mumbai Bench of the Tribunal in the case of Teva Pharma Private Ltd. v. Addl. CIT - ITA No.6623/Mum/2011 (for AY 2007-08) in which the comparability of this company for clinical trial research segment. The relevant extract of discussion regarding this company is as follows: The learned D.R. however drew our attention to page-389 of the paper book which is an extract from the Directors report which reads as follows: 'The Company has developed a de novo drug design tool CELSUITE to drug discovery in, finding the lead molecules for drug discove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T concluded that this company is owner of IPR, it has software for discovery of new drugs and has developed molecule to treat cancer. In the ultimate analysis, the ITAT did not consider this company as a comparable in clinical trial segment, for the reason that this company has diverse business. It was submitted that, however, from the above extracts it is clear that this company is not into software development activities, accordingly, this company should be rejected as a comparable being functionally different. 45. From the material available on record, it transpires that the TPO has accepted that up to AY 06-07 this company was classified as a Research and Development company. According to the TPO in AY 07-08 this company has been classified as software development service provider in the Capitaline/Prowess database as well as in the annual report of this company. The TPO has relied on the response from this company to a notice u/s.133(6) of the Act in which it has said that it is in the business of providing software development services. The Assessee in reply to the proposal of the AO to treat this as a comparable has pointed out that this company provides software products ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Mumbai Tribunal Decision of Capgemini India (F) Ltd v Ad. CIT 12 Taxman.com 51, the DRP accepted the contention of the assessee that Accel Transmatic should be rejected as comparable. The relevant observations of DRP as extracted by the ITAT in its order are as follows: In regard to Accel Transmatics Ltd. the assessee submitted the company profile and its annual report for financial year 2005-06 from which the DRP noted that the business activities of the company were as under. (i) Transmatic system - design, development and manufacture of multi function kiosks Queue management system, ticket vending system (ii) Ushus Technologies - offshore development centre for embedded software, net work system, imaging technologies, outsourced product development (iii) Accel IT Academy (the net stop for engineers)-training services in hardware and networking, enterprise system management, embedded system, VLSI designs, CAD/CAM/BPO (iv) Accel Animation Studies software services for 2D/3D animation, special effect, erection, game asset development. 4.3 On careful perusal of the business activities of Accel Transmatic Ltd. DRP agreed with the assessee that the company was fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) / (-) 5% range of the arithmetic mean of the remaining comparable companies and therefore the price received by the Assessee would be considered as at Arms Length. He prayed for a limited direction to the TPO on the lines set out above and determine the ALP. It also submitted that the other issues raised by the Assessee in the grounds of appeal No.2 need not be gone into. 15. We are of the view that the prayer sought for by the learned counsel for the Assessee is acceptable and accordingly, the TPO is directed to compute ALP after excluding the 12 comparable companies dealt with in this order. The TPO is also directed to take only the software development segment margin of the comparable company M/S.Megasoft Ltd., as was directed and held in the case of Trilogy E-Business Software India (P.)Ltd. (supra). 16. Grounds No.3 and 4 raised by the Assessee project the grievance of the Assessee regarding the action of the learned Assessing Officer and Honorable Dispute Resolution Panel excluding a sum of ₹ 32,29,985/- incurred on telecommunication charges and another sum of ₹ 71,35,610/- incurred in foreign currency from export turnover on the ground that these expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X
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