TMI Blog2015 (1) TMI 838X X X X Extracts X X X X X X X X Extracts X X X X ..... .2009 has referred to the fact that the proposal to exclude the aforesaid charges from the export turnover was accepted by the Assessee and therefore the export turnover is being reduced accordingly - Held that:- A perusal of the provisions of Sec.144C of the Act makes it clear that the draft assessment order of the AO will attain finality to the extent that the Assessee does not object to the proposals in the draft assessment order. The DRP is at liberty to consider any issue after due opportunity to the AO and the Assessee. The directions issued by the DRP are binding on the Assessing officer. The above provisions of Sec.144C of the Act which are applicable to the Assessee for the present assessment year, are applicable notwithstanding anything to the contrary under any other provisions of this Act. We are of the view that in the light of the above statutory provisions, the Assessee cannot seek to raise an issue before the Tribunal in respect of which he has not filed any objection before the DRP nor has the DRP considered the issue in exercise of their powers under Sec.144C (8) of the Act. We therefore decline to admit the additional ground for adjudication. - Decided against a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Enterprise (AE). There is no dispute that the said transaction was an international transaction with an AE and therefore the price receive by the Assessee for rendering such services has to pass the Arm s Length price (ALP) test as laid down in Sec.92 of the Act. During the financial year 2005-06, the assessee provided software development services to its AE and was remunerated on a cost plus basis. The total value of international transaction with respect to the provision of software development services by the assessee to its AE was ₹ 17,14,54,932. 4. In support of the assessee s claim that the price charged by it for services rendered to its AE was at arms length, the assessee 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 13.72%. The Assessee in its Transfer Pricing Analysis had selected 6 comparable companies and arrived at an arithmetic mean of the profit margin of the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o directed to be given. The adjustment confirmed by the DRP was added to the total income of the assessee by the AO in the fair order of assessment. Against the said order of the Assessing Officer, the assessee has preferred the present appeal before the Tribunal. 8. The ld. counsel for the assessee brought to our notice that out of the 14 comparable companies chosen by the TPO, the following two companies should be excluded as these two companies viz., KALS Information Systems Ltd. (Sl.No.4 of the final list of comparables of TPO) and M/s. Accel Transmatics Ltd. (seg.) (Sl.No.13 of the list of comparables of TPO) are not functionally comparable with that of the Assessee. In this regard our attention was drawn to the decision of the Hon ble ITAT Bangalore Bench in the case of Trilogy E-Business Software India Pvt.Ltd. (supra) wherein these companies were held to be not functionally comparable with that of a pure software developer like the Assessee. 9. The following were the relevant observations of the Tribunal on the aforesaid comparable companies in the case of Trilogy E-Business Software India Pvt. Ltd.(supra):- (d) KALS Information Systems Ltd. 10. As far as thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable. (e) Accel Transmatic Ltd. 48. With regard to this company, the complaint of the assessee is that this company is not a pure software development service company. It is further submitted that in 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 developme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ATA Elxsi(Seg.) (Sl.No.8 of the final list of comparable chosen by TPO) is concerned, this Tribunal in the case of Logica Pvt.Ltd.(supra) held that this company is not functionally comparable with a software development service provider. The following were the relevant observations of the Tribunal in this regard. 14. As far as comparable at Sl.No.6 24 are concerned, the comparability of the aforesaid two companies with that of the software service provider was considered by the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India Private Ltd. (supra) wherein on the aforesaid two companies, the Tribunal held as follows:- 7.6 Flextronics Software Systems Ltd.: As per the statement of the learned AR, this company is also involved in the development of the software product and is also involved in BPO services, besides joint software consultancies for the use in telecommunication industries. Thus, being product and service company, it cannot be taken as comparable. However, the learned CIT DR has amply controverted the said contention of the learned AR by submitting before us a copy of profit and loss account of the company for the relevant assessment ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctors in which the comparable chosen by the TPO belong and the sector to which the Assessee caters. 17. We have considered the submissions of the ld. counsel for the assessee and the ld. DR. We are of the view that the comparables which are sought to be excluded by the ld. counsel for the assessee have been held to be not comparable with the case of software service provider, in as much as these companies did not satisfy the functional similarity test. E.g., in the case of company at Sl.No.2 of the list of comparables chosen by the TPO viz., Avani Cincom Technologies Ltd., this Tribunal had taken a view that income of this company from rendering software services and sale of software was not available and therefore this was rejected as a comparable company. Similarly, in the case of Celestial Labs Ltd., the Tribunal took a view that this company was engaged in R D activity and cannot be compared with a software service provider. It is thus clear that the reason given by the Tribunal in the cases referred to by the ld. counsel for the assessee will equally apply to the present case also. We therefore accept the submissions made on behalf of the assessee and hold that companies at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the decisions of the co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 and other cases cited above, it is clear that this company being into product development cannot be considered as a comparable to the assessee in the case on hand who is a software service provider and therefore this company i.e. Lucid Software Ltd., ought to be omitted from the list of comparables. 16.2 per contra, the learned Departmental Representative supported the action and finding of the TPO in including this company in the list of comparables. 16.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that the company i.e. Lucid Software Ltd., is engaged in the development of software products whereas the assessee, in the case on hand, is in the business of providing software development services. We also find that, co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 (IT(TP)A No.845/Bang/2011), LG Soft India Pvt. Ltd. (supra), CSR India Pvt. Ltd. (supra); the ITAT, Mumbai Bench in the case of Telecordia Technologies India Pvt. L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and therefore to be excluded from the export turnover while computing deduction under section 10A. The Assessee in the additional ground has made prayer that expenses that are reduced from the export turnover 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) wherein the Hon ble Court held that whatever is excluded from the export turnover should also be excluded from the total turnover for the purpose of computing deduction u/s.10A of the Act. It is the prayer of the learned counsel for the Assessee that the aforesaid ground is a legal ground and can be adjudicated on facts available on record and therefore in keeping with the decision of the Hon ble Supreme Court in the case of NTPC Vs. CIT 229 ITR 383 (SC), the additional ground sought to be raised should be admitted for adjudication. 18. We have considered the submission of the learned counsel for the Assessee as set out above on admission of additional ground of appeal. We find that the AO in the draft assessment order dated 10.12.2009 the AO has referred to the fact that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r caused to be made by, it. (7) . (8) The Dispute Resolution Panel may confirm, reduce or enhance the variations proposed in the draft order so, however, that it shall not set aside any proposed variation or issue any direction under sub-section (5) for further enquiry and passing of the assessment order. Explanation.-For the removal of doubts, it is hereby declared that the power of the Dispute Resolution Panel to enhance the variation shall include and shall be deemed always to have included the power to consider any matter arising out of the assessment proceedings relating to the draft order, notwithstanding that such matter was raised or not by the eligible assessee. (9) .. 10. Every direction issued by the Dispute Resolution Panel shall be binding on the Assessing Officer. 19. A perusal of the above provisions of Sec.144C of the Act makes it clear that the draft assessment order of the AO will attain finality to the extent that the Assessee does not object to the proposals in the draft assessment order. The DRP is at liberty to consider any issue after due opportunity to the AO and the Assessee. The directions issued by the DRP are binding on the Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee 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 15.02%. 24. The TPO arrived at a final set of 11 comparable companies. The set of 11 comparable companies and their profit margin are given as Annexure-2 to this order. 25. 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. The TPO finally passed an order u/s. 92CA of the Act and on the basis of the comparables set out in Annexure-2 to this order, arrived at arithmetic mean of 24.32%. After factoring the working capital adjustment of 0.31%, the adjusted arithmetic mean was determined at 23.95%. The computation of the ALP by the TPO in this regard was as follows:- 12.3 Computation of Arms Length Price: The arithmetic mean of the Profit Level indicators is taken as the arms length margin. (Please see Annexure B For details of computation of PLI of the comparables). Based on this, the arms length price of the software development se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness 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. The learned DR relied on the order of the DRP. 29. 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 (P) 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 ₹ 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 the enterprises entering into such transaction, which are likely to materially affect the price or cost charged or paid or profit arising from such transaction in the open market. Fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ₹ 1 crore to ₹ 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 should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransaction 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 transaction shall be determined by any of the following methods, being the most appropriate method, having regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rice 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 open market; (iv) the net profit margin realised by the enterprise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 ₹ 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 the list of 26 comparables drawn by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO in the final list of comparables should not be regarded as comparable for the reason that it has been held to be not comparable by the ITAT Bangalore Bench in the case of Mindteck (India) Ltd. Vs. DCIT IT(TP)A.No.70/Bang/2014 order dated 21.8.2014 for AY 09-10. We have considered the submission and we find that this tribunal in the case of Mindtech (India) Ltd. (supra) has held as follows on the comparability of Bodhtree Consulting Ltd. with a software development service provider: 14. The next aspect that was canvassed by the learned counsel for the assessee was with regard to the exclusion of the following comparables from the list of final comparables chosen by the TPO : 1. Bodhtree Consulting Ltd : As far as this company is concerned, the submission of the learned counsel for the assessee was that this company made extra ordinary profits during the previous year. Our attention was drawn to the fact that the operating profit / operating cost of this company jumped from 17% for F Y 2007-08 to 56% in FY 2008- 09. It dipped in FY 2009-10 to 40% and in FY 2010-11 it became (-) 2% and 5% in FY 2011-12 and finally touched (-) 9% in FY 2012-13. Our attention was dra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luctuation in the profitability margin of such entity. Merely because of such fluctuations, an entity engaged in the development of software, being functionally comparable to the assessee, cannot be rejected only on this ground. 14. The learned counsel for the assessee drew our attention to the fact that Bodhtree Consulting admittedly follows a fixed price project model whereby revenues from software development is recognized based on software and billed to clients. In such business model expenditure for developing software would be billed in an earlier year but the revenue would be recognized in a subsequent year. It was his submission that this fact is recognized by the DRP in its order. According to him this circumstance would be sufficient to show that the margin reflected of this company does not reflect the normal business condition. 15. The learned DR placed reliance on the reason given by the DRP in its order. 16. We have considered the rival submissions. The Special Bench of the ITAT in the case of Maersk Global Centres (supra) had an occasion to deal with the question as to whether high profit margin making companies should be excluded as a comparable. The Speci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usion of the very same company before the Tribunal. The Special Bench held as follows: Contention that DM was taken as one of the comparables by the taxpayer and no objection to its inclusion was raised before the TPO or before the CIT(A) in appeal and therefore, the taxpayer should not be permitted to raise additional ground and ask for exclusion of the above enterprise in the determination of the average margins is not sustainable. In the first place, these are initial years of implementation of transfer pricing legislation in India and taxpayers as well as tax consultants were not fully conversant, with this new branch of law when proceedings were initiated or even at appellate stage. Besides, Revenue authorities, including TPO were required to apply statutory provisions and consider for purposes of comparison functions, assets and risks (turnover), profit and technology employed by the tested party and other enterprises taken as comparable. Statutory duty is cast on them to undertake above exercise. This has not been done in this case. Prima facie, as per the material, DM does not appear to be comparable. Even if the taxpayer or its counsel had taken DM as comparable in its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncurred by the non-resident on behalf of the Assessee and therefore there was no obligation to deduct tax at source as the payment does not constitute income of the non-resident. The AO however held that the Assessee did not substantiate that the payment in question was reimbursement. Accordingly addition was made by the AO to the total income of the Assessee invoking provisions of Sec.40(a)(ia) of the Act. The Assessee did not raise any objection on the proposed addition in the draft assessment order before the DRP. 39. The AO while computing deduction u/s.10A of the Act excluded internet charges and expenses incurred in foreign currency on foreign travel from the export turnover. The Assessee did not file any objection to this proposal in the draft assessment order before the DRP. 40. Before the Tribunal the Assessee has raised ground No. 3 4 in which the Assessee seeks to challenge the aforesaid addition and method of computation of deduction u/s.10A of the Act. The first question is whether the Assessee is entitled to do so. We have while deciding identical ground in AY 06-07 held that the Assessee cannot seek to raise a ground which he had not agitation before the DRP. Fo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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