9911796707
TMI Blog2014 (12) TMI 804X X X X Extracts X X X X X X X X Extracts X X X X ..... 0A. It is the plea of the Assessee that at all times, during the relevant previous year, it was engaged in development of computer software and not rendering any technical services. Without prejudice to its contention that the aforesaid sums should not be excluded from the export turnover while computing deduction u/s.10A of the Act, the Assessee has also made an alternate prayer that if the expenses are reduced from the export turnover, the same should also be reduced from the total turnover and in this regard, has placed reliance on the decision of the Hon'ble Karnataka High Court in the case of CIT v. Tata Elxsi Ltd [2012] 349 ITR 98 (Karn). 4. We have heard the ld. counsel for the assessee and the ld. DR on the issues raised in ground Nos.2 to 4. Taking into consideration the decision rendered by the Hon'ble High Court of Karnataka in the case of CIT v. Tata Elxsi Ltd [2012] 349 ITR 98 (Karn), we are of the view that it would be just and appropriate to direct the Assessing Officer to exclude expenses incurred in foreign currency towards travelling and expenses incurred towards telecommunication both from export turnover and total turnover, as has been prayed for by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee filed a report as required by the provisions of section 92E of the Act in Form 3EB together with detailed analysis. The assessee adopted Transaction Net Margin Method (TNMM) as the most appropriate method for determining the ALP. Operating profits to cost was adopted as the Profit Level Indicator ("PLI"). The PLI of the assessee was arrived at as follows:- Operating Revenue Rs.9,84,50,937 Operating Cost Rs.8,83,97,189 Operating Profit Rs.1,00,53,748 Op.Pr/cost% 11.37% 8. The TPO arrived at a final set of 20 comparables. The set of 20 comparables is given as Annexure-I to this order. 9. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stems Ltd. 209.18 crores (5) Sasken Communication Technologies Ltd. (Seg.) 240.03 crores (6) Infosys Technologies Ltd. 9028 crores 12. Our attention was drawn to the observations of the Tribunal in the case of Trilogy E-Business Software India Pvt. 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. 13. We have considered the submission of the learned counsel for the Assessee and the learned DR. In the case of Trilogy E-Business Software India Pvt. Ltd. (supra), this Tribunal on application of the turnover filter while selecting comparable companies for comparability analysis held as follows:- "(1) Turnover Filter 11. The ld. counsel for the assessee submitted that the TPO has applied a lower turnover filter of Rs. 1 crore, but has not chosen to apply any upper turnover limit. In this regard, it was submitted by him that under rule 10B(3) to the Income-tax Rules, it was necessary for comparing an uncontrolled transaction with an international transaction that there should not be any difference between the transactions compared or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies 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 Rs. 13,149 crores as compared to Rs. 47.47 crores of Assessee). It was submitted that an appropriate turnover range should be applied in selecting comparable uncontrolled companies. 14. Reference was made to the decision of the ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010, wherein relying on Dun and Bradstreet's analysis, the turnover of Rs. 1 crore to Rs. 200 crores was held to be proper. The following relevant observations were brought to our notice:- "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 .ire (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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 nonresidents, 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 the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. Sec.92- A defines what is an Associated Enterprise. In the present case there is no dispute that the transaction between the Assessee and its AE was an international transaction attracting the provisions of Sec.92 of the Act. Sec.92C provides the manner of computation of Arm's length price in an international transaction and it provides:- (1) that the arm's length price in relation to an international tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B. (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 which,- (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in subclause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ule 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 transaction. The disputes are with regard to the comparability of the comparable relied upon by the TPO. 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) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010) . Thus, companies having turnover of more than 200 crores have to be eliminated from the list of comparables as laid down in several decisions referred to by the ld. counsel for the assessee. Applying those tests, the following companies will have to be excluded from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Tribunal's decision of the ITAT in the case of Bindview India Private Limited Vs. 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 selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds." Based on all the above, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for 2D and 3D animation and therefore assessee's claim that this company was functionally different was accepted. DRP therefore directed the Assessing Officer to exclude ACCEL Transmatic Ltd. from the final list of comparables for the purpose of determining TNMM margin." 49. Besides the above, it was pointed out that this company has related party transactions which is more than the permitted level and therefore should not be taken for comparability purposes. The submission of the ld. counsel for the assessee was that if the above company should not be considered as comparable. The ld. DR, on the other hand, relied on the order of the TPO. 50. We have considered the submissions and are of the view that the plea of the assessee that the aforesaid company should not be treated as comparables was considered by the Tribunal in Capgemini India Ltd (supra) where the assessee was software developer. The Tribunal, in the said decision referred to by the ld. counsel for the assessee, has accepted that this company was not comparable in the case of the assessees engaged in software development services business. Accepting the argument of the ld. counsel for the assessee, we hold that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re development and services segment comprises of three sub-services namely : a) Product Design Services i.e. design and development of hardware and software. b) Innovation Design Engineering i.e. Mechanical Design with a focus on Industrial Design; and c) Visual Computing Labs i.e. Animation and Special Effects for Movies and TV. ii) As the software development and services segment comprises of hardware, software and animation services, there is no subservices break-up / information provided in the Annual Report OR the Databases, the learned Authorised Representative contends that this company should be rejected as a comparable as it is functionally different from the assessee. 15.2 Per contra, the learned Departmental Representative supported the orders of the authorities below on this issue. 15.3.1 We have heard both parties and perused and carefully considered the material on record including the judicial decisions relied upon. From the record, we find that this company is predominantly engaged in product designing services and not purely software development services. The references made to the Annual Report by the learned Authorised Representative show that the segment " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are 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 Info systems, R Systems, Sasken Communication and Tata Elxsi. Before DRP the Assessee pointed out that the segmental margin of 23.11% alone should be taken for comparability. The DRP has not given any specific finding on the above plea of the Assessee. Perusal of the order of the TPO shows that the TPO relied on information which was given by this company in which this company had explained that it has two divisions viz., BLUEALLY DIVISION and XIUS-BCGI DIVISION. Xius- BCGI Division does the business of product software (developing software). This company develops packaged products for the wireless and convergent telecom industry. These products are sold as packaged products to customers. While implementing these standardized products, customers may request the company to customize products or reconfigure products to fit into their business environment. Thereupon the company takes up the job of customizing the packaged software. The company also explained that 30 to 40% of the produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es by Megasoft alone should be taken for the purpose of comparison. 24. The learned counsel for the Assessee submitted before us that if the aforesaid 9 comparable companies are excluded from the list of 20 comparable companies chosen by the TPO and segmental results (software development segment) alone of comparable company chosen by the TPO M/S.Megasoft Ltd., is taken for comparability, then the profit margin of the Assessee would be well within the (+) (-) 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 need not be gone into. 25. 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 8 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 he ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
