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TMI Blog2014 (11) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... that the international transaction, pertaining to provision of software services ('IT services') to the associated enterprise ('AE'), are not at arm's length under the Income-tax Act, 1961 ('the Act'). 2. On the facts and in the circumstances of the case, the Ld. AO/DRP erred in modifying the benchmarking analysis, as conducted by the appellant using Transactional Net Margin Method (TNMM') for benchmarking its international transactions pertaining to provision of software services to the AE, and thereby modifying the set of comparables. In doing so, the Ld AO/DRP specifically erred in: a) conducting selective fresh analysis by applying certain additional quantitative / qualitative filters for identifying the comparables resulting in cherry picking of comparables which contradicts with the principles of conducting search (for comparables) in a scientific manner; b) rejecting companies functionally similar to that of the appellant's business operations of provision of software services from final set of comparables (identified based on the fresh search conducted by the appellant on a without prejudice basis); c) completely disregarding the fres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng such services, assessee is remunerated by the parent company on a cost plus mark up basis. 5. For the assessment year 2009-10, assessee filed a return of income declaring an income of Rs. 2,06,44,601/-. Since assessee had undertaken certain international transactions with its Associate Enterprises, the Assessing Officer made a reference to the Transfer Pricing Officer (in short TPO) u/s 92CA(1) of the Act in order to determine the arm's length price of the international transactions entered by the assessee with its Associate Enterprises. The TPO passed an order u/s 92CA(3) of the Act on 29.01.2013 determining an adjustment of Rs. 4,25,48,240/- to the stated value of the international transactions of software services rendered by the assessee to its Associate Enterprise so as to bring it to the level of arm's length price. Subsequently, the TPO has passed a rectification order u/s 92CA(5) r.w.s. 154 of the Act dated 20.03.2013 on an application by the assessee, whereby the adjustment to the stated value of the international transactions has been reworked at Rs. 1,96,89,494/-. On the basis of the order of the TPO, the Assessing Officer passed a draft assessment order on 25.03.201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computed at 18.02% and since the same compared favorably with the arithmetic mean of the comparable, it was contended that the international transactions of software services rendered to the Associate Enterprise was at a arm's length price. The TPO has not disturbed the selection of TNMM method as the most appropriate method for the purposes of determining the arm's length price of international transactions. The TPO has differed with the assessee on adoption of certain comparables in the final set of comparables. The TPO has considered the single year financial data of 2008-09 of the comparable concerns for the purposes of carrying out the comparability analysis. Be that as it may, the TPO has selected the following final set of comparables for the purpose of carrying out the comparability analysis:- Sr. No. Company After allowing working capital adjustment 1. L G S Global Ltd. 10.26% 2. FCS Software Solutions Ltd. 7.64% 3. Mindtree Ltd. 38.18% 4. Bodhtree Consulting Limited 64.48% 5. Persistent System Ltd. 34.1% 6. Larsen & Turbo Infotech Ltd. 18.23% ARITHMETIC MEAN 28.82% 9. In terms of the aforesaid, the TPO determined the arithmetic mean of the margins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lusion at the present stage. 13. We have carefully considered the rival submissions. Ostensibly, the controversy as to whether abnormal profit-making concerns ought to be excluded from the list of comparables or not, has been a subject matter of consideration by the Special Bench of the Tribunal in the case of Maersk Global Centres (India) Private Ltd. Vs. ACIT vide ITA No.7466/Mum/2012 dated 07.03.2014. The relevant observations of the Special Bench are as under: "In generality, we are of the view that the answer to this question will depend on the facts and circumstances of each case inasmuch as potential comparable earning abnormally high profit margin should trigger further investigation in order to establish whether it can be taken as comparable or not. Such investigation should be to ascertain as to whether earning of high profit reflects a normal business condition or whether it is the result of some abnormal conditions prevailing in the relevant year. The profit margin earned by such entity in the immediately preceding year/s may also be taken into consideration to find out whether the high profit margin represents the normal business trend. The FAR analysis in such case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be excluded as a comparable. The Special Bench after considering several aspects held in para 88 of its order that the potential comparable companies cannot be excluded merely on the ground that their profit is abnormally high. The Special bench held that in such cases it would require further investigation to ascertain the reasons for unusually high profit and in order to establish whether the entities with such high profits can be taken as comparable or not. In the light of the aforesaid decision of the Special Bench and in view of the admitted position that the assessee follows Fixed Price Project model where revenues from software development is recognized based on software developed and billed to clients, there is a possibility of the expenditure in relation to the revenue being booked in the earlier year. The results of Bodhtree from FY 2003 to 2008 excluding FY 2007 as given by the learned counsel for the assessee were also perused. Perusal of the same shows, that there has been a consistent change in the operating margins. The chart filed by the assessee in this regard is given as an annexure to this order. It appears to us that the revenue recognition method followed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee for exclusion of Bodhtree Consulting Ltd on the ground that the profit margins of the said concern are fluctuating widely and are abnormally high for the period under consideration. Ostensibly, the financial data of the succeeding years which has been pressed into service by the assessee to demonstrate abnormal profit trends of the said concern was not available with the assessee at the time of carrying out its Transfer Pricing Study. Therefore, having regard to the facts and circumstances of the present case, in our view, assessee has justifiably demonstrated that the concern M/s. Bodhtree Consulting Ltd. is liable to be excluded from the final set of comparables, even though the said concern was considered as a comparable initially in its Transfer Pricing Study. Therefore, on this aspect, we conclude by holding that the concern, M/s. Bodhtree Consulting Ltd. be excluded from the final list of comparables for carrying out the comparability analysis. We hold so. 18. At the time of hearing, it was stated by the learned Representative for the appellant that if the assessee was to succeed on its plea of the exclusion of Bodhtree Consulting Limited from the final set of com ..... X X X X Extracts X X X X X X X X Extracts X X X X
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