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2015 (3) TMI 937 - ITAT BANGALORE

2015 (3) TMI 937 - ITAT BANGALORE - TMI - Transfer pricing adjustment - addition made to the total income consequent to determination of Armís Length Price - improper application of the RPT filter by the CIT(A)- Held that:- It is not in dispute before us that this Tribunal, in the cases of 24/7 Customer Pvt. Ltd. [2013 (1) TMI 45 - ITAT BANGALORE ] and and Sony India Private Ltd. [2008 (9) TMI 420 - ITAT DELHI-H] as taken a view that comparables having RPT of upto 15% of total revenues can be co .....

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comparable company(ies) is abnormal - Held that:- The filter of companies dealing in software products and abnormal profits owing to amalgamation of the companies during the relevant period thereby showing abnormal profits was applied to exclude Exensys Software solutions Ltd. Infosys Technologies Ltd., was excluded for reasons of high turnover and high risk profile. Satyam Computer Services Ltd., has to be excluded from the comparable companies for non-reliability of financial data as it was i .....

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t, one comparable viz., Four Soft Ltd., will have to be excluded since the RPT is at 19.89% and thus in excess of 15%. Sathyam Computers Ltd., and Infosys Technologies Ltd., will get excluded for the reason that the financial results are not reliable in the case of Sathyam Computers Ltd., and for the reason that the high turnover, brand value, high risks etc. The remaining 9 comparable companies which were excluded by the CIT(A) by applying the Related Party Transaction filter of 0% related part .....

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015 - Shri N.V. Vasudevan And Shri Abraham P. George JJ. For the Appellant : Shri P.K. Srihari, Addl. CIT(DR) For the Respondent : Shri Pravin Kishore Prasad, Advocate ORDER Per N.V. Vasudevan, Judicial Member IT(TP)A.No.29/Bang/2012 is an appeal by the Revenue against the order dated 4.11.2011 of CIT(A)-IV, Bangalore, relating to AY 2005-06. The Assessee has filed Cross-Objection in C.O.No.49/Bang/2012 against the very same order of the CIT(A). 2. The issue that arises for consideration in the .....

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Assessee. Aggrieved by the relief allowed by the CIT(A), the revenue is in appeal before the Tribunal. Aggrieved by the order of CIT(A) in not applying certain filters while choosing comparable companies the Assessee has filed C.O. 3. The assessee, M/s. Textron India Private Limited (formerly known as Textron Global Technology Center Private Limited) was incorporated on 2nd April, 2004 under the Companies Act, 1956. The Assessee is a wholly owned subsidiary of Textron Group. The Assessee has be .....

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ion of software development and support services to Novell US at a price of ₹ 12,20,32,357/-. 5. 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 .....

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arable 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 profit margins of comparable companies set out in Annexure-I to this order, arrived at arithmetic mean of 24.85% after working capital adjustment and 26.59% before working capital adjustment. The computation of the ALP by the TPO in this regard was as follows:- Computation of Arms Length Price: The arithmetic mean of the Profit Level indicators is taken as the arms length m .....

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Price received vis-à-vis the Arms Length Price: The price charged by the tax payer to its Associated Enterprises is compared to the Arms Length Price as under: Arms Length Price (ALP) At 124.85% of operating cost Rs.13,21,16,970/- Price charged in the international transactions Rs.12,20,32,357 Shortfall being adjustment u/s.92CA ₹ 1,00,84,613 The above shortfall of ₹ 1,00,84,613/- is treated as transfer pricing adjustment u/s 92CA. 8. On appeal by the Assessee, the CIT(A) par .....

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related party transaction, the said companies were excluded from the list of comparable companies. By doing so, the CIT(A) could retain only 5 out of the final 17 comparable companies chosen by the TPO, viz., Bodhtree Consulting Ltd., Lanco Global System Ltd., Sankhya Infotech Ltd., Exensys Software Solution Ltd., and Visual Soft Technology Ltd. In coming to the above conclusion, the CIT(A) followed the decisions of this Hon ble Tribunal in the case of Mentor Graphics (Noida) (P.) Ltd. vs DCIT .....

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hnologies Ltd., get excluded by applying the related party transaction filter. Nevertheless, the CIT(A) held that Satyam Computer Services Ltd., has to be excluded from comparable companies for non-reliability of financial data. In doing so, the CIT(A) followed the decision of this Hon ble Tribunal in Agnity India Technologies v. ITO (ITA 3856/DeI/2010) and SAP India Pvt. Ltd v. ITO [ITA No. 398/8/2008]. Likewise lnfosys Technologies selected by the TPO, was rejected as a comparable based on hig .....

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ankhya Infotech Ltd., and M/s. Visual soft Technologies Ltd., would be 17.3525% (before working capital adjustment) worked out as follows: 24.85% + 13.65% + 27.39% + 23.52% = 89.41/ 4 = 22.3525%. After working capital adjustment, the arithmetic mean of the comparable companies would be 22.3525% - 1.74% = 20.6125%. After 5% standard deduction under proviso to Sec.92CA(2) allowed by the CIT(A), the arithmetic mean would be 15.6125% as against the Assessee s profit margin of 15.32%. Therefore there .....

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general and hence not reproduced) as follows-: (2) On the facts and in the circumstances of the case, the learned CIT(A) erred in holding that the TPO erred in not excluding comparables have any related party transactions. (3) The ld.CIT(A) erred in holding that profit on cost of more than 50% of the comparable company(ies) is abnormal without giving reasons how functions discharged, assets deployed and risks assumed of such companies were different from that of the appellant company. (4) The l .....

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e not reproduced):- (2) That the learned CIT(A) erred by not taking cognizance of the fact that the Respondent was engaged in Engineering Design Services. (3) That in making an adjustment to the Respondent s transfer price, on the facts and in the circumstances of the case, the learned CIT(A) erred in: (a) Arbitrarily rejecting filters applied by the Respondent while undertaking the TP Study. (b) Modifying filters applied by the learned TPO in the TP order, without providing an opportunity of be .....

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ndent and the entrepreneurial companies selected as comparables, while determining the arm s length price. 13. We have heard the rival submissions. As far as the grounds of appeal of the Revenue are concerned, ground No.2 with regard to improper application of the RPT filter by the CIT(A), it is not in dispute before us that this Tribunal, in the cases of 24/7 Customer Pvt. Ltd. (ITA No.227/Bang/2010), and Sony India Private Ltd. reported in (2009) 315 ITR (80) 150 (Del.) and various other cases .....

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round No.3 raised by the Revenue is misconceived and the issue does not arise out of the order of the CIT(A). As we have already seen the CIT(A) rejected some of the comparable companies chosen by the TPO by applying related party transaction filter. The filter of companies dealing in software products and abnormal profits owing to amalgamation of the companies during the relevant period thereby showing abnormal profits was applied to exclude Exensys Software solutions Ltd. Infosys Technologies .....

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ts of the present case, we are of the view that the CIT(A) rightly excluded Exensys Software Solutions Ltd., Infosys Technologies Ltd., and Satyam Computers Ltd., from the list of comparable companies. 15. As regards ground No.4 raised by the revenue, the CIT(A) followed the decision of the ITAT Delhi in the case of Agnity India Technologies v. ITO (ITA 3856/DeI/2010) in coming to the conclusion that Infosys Technologies Ltd., is not comparable for the reason of its size, turnover and brand. The .....

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2) of the Income-tax Act by the Finance (No.2) Act, 2009, the second ground of appeal (Ground No.3 in the appeal filed by the Revenue) may have to be allowed. Consequently it is held that if the difference between the arithmetic mean of the profit margins comparable companies ultimately retained and the profit margin of the Assessee is more than 5% than no deduction under the proviso to Sec.92C(2) of the Act could be allowed to an Assessee. 17. In view of the conclusion above that exclusion of c .....

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5%. Sathyam Computers Ltd., and Infosys Technologies Ltd., will get excluded for the reason that the financial results are not reliable in the case of Sathyam Computers Ltd., and for the reason that the high turnover, brand value, high risks etc. The remaining 9 comparable companies which were excluded by the CIT(A) by applying the Related Party Transaction filter of 0% related party transaction will now have to be included. Their comparability with the Assessee in terms of other filters will be .....

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ental information in relation to the above mentioned activities is not available in public domain. Therefore, as Sankhya engages itself in products and services as well as software training, it cannot be considered as a comparable of the Appellant. The products developed and owned by Sankhya are listed below: (1) SILICONTM Training Suite of Products: The products are a comprehensive enterprise wide training platform that covers the entire spectrum of training in a paperless environment. It compr .....

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he Annual report substantiating that the company also engages in different activities is reproduced below: 2. Activities The company as engaged in the business of development of Software Products & Services and training. The production of software is not capable of being expressed in any generic unit and hence 11 is riot possible to give the information as required by certain clauses of paragraphs 3.4C and 4 D of Part II of Schedule VI of the Companies Act, 1956. The Delhi Tribunal in ITO v. .....

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ar that this company Sankhya cannot be regarded as a comparable. The same is directed to be excluded from the list of comparable companies. 21. The learned counsel for the Assessee submitted before us that two of the comparable companies out of the 12 excluded by the CIT(A) by applying RPT filter and which gets included in the comparable companies because of 15% RPT being adopted as threshold limit for excluding companies for the purpose of comparability , viz., Four Soft Ltd., and Thirdware Sol .....

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o.1280/Hyd/2010 Assessment Year 2005-2006 order dated 12.2.2014. 22. We have considered his submission and find that the ITAT Hyderabad Bench on identical facts, held that the aforesaid two companies viz., Four Soft Ltd., and Thirdware Solutions Ltd., are not comparable companies in Software Development Services companies. The following were the relevant observations:- 15.4. FOURSOFT LIMITED : This comparable is objected on the same reason as this company is involved in product development and o .....

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licence and related services and not a service provider. Referring to the annual report, it was submitted that this comparable was rejected by the ITAT, Pune in the case of Egain Communications Ltd. This company having revenue from product license and earning extraordinary profit due to intangible owns. 15.6. These three comparable above Flextronics Software Limited, Foursoft Limited and Thirdware Software Solution Limited were analysed by the Coordinate Bench of the Tribunal in the case of Into .....

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duct development but has selected these companies as comparables by applying the filter of more than 70% of its revenue being from software development services. The learned Counsel submitted that the functions of these companies are different from the assessee who was into sole activity of software development for its associated enterprise. He submitted that the TPO has allocated the expenditure in the proportion of the revenue of these companies from software services and software products and .....

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r the segmental details are not available, then the said companies should not be taken as comparables. For this purpose, he placed reliance upon the decision of the Bangalore Tribunal in the case of First Advantage Offshore Services Pvt. Ltd. vs. The DCIT in ITA.No.1252/Bang/2010 wherein these companies were directed to be excluded from the list of comparables. 24. The learned D.R. however, supported the Orders of the authorities below. 25. Having heard both the parties and having gone through t .....

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lopment service provider as comparables unless the segmental details are available. Even if he has adopted the filter of more than 75% of the revenue from the software services for selecting a comparable company, he ought to have taken the segmental results of the software services only. The percentage of expenditure towards the development of software products may differ from company to company and also it may not be proportionate to the sales from the sale of software products. Under section 1 .....

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furnished by the said company that though the said company is also into product development, there are no software products that the company invoiced during the relevant financial year and the financial results are in respect of services only. Thus, it is clear that there is no sale of software products during the year but the said company might have incurred expenditure towards the development of the software products. 27. As far as Flextronics Software Limited is concerned, we find that at pa .....

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e proportionately to the software development services and software product activity cannot be said to be correct and reasonable. Wherever, the Assessing Officer/TPO cannot make suitable adjustment to the financial results of the comparable companies with the assessee company to bring them on par with the assessee, these companies are to be excluded from the list of comparables. Therefore, we direct the Assessing Officer/TPO to exclude these three companies from the list of comparables". Re .....

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CIT(A) by applying RPT filter and which gets included in the comparable companies because of 15% RPT being adopted as threshold limit for excluding companies for the purpose of comparability. It was his submission that this company will however, have to be excluded as this company was held to be not comparable with an Assessee such as the Assessee in the present case providing software development services by the ITAT Hyderabad Bench in the case of CNO IT Services (India) Pvt. Ltd. (Formerly kno .....

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software development services segment in his T.P. analysis and assessee s objection is that the software development services segment itself comprises of three subservices namely (a) product design services (b)design engineering services and (c) visual computing labs. It was submitted that these services are not akin to assessee software services and segmental information of only product design services could have been accepted by the TPO as a comparable but not the entire software development s .....

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erned Officer has been informed that Tata Elxsi Limited is specialised Embedded Software Development Service Provider and that it cannot be compared with any other software development company. It was submitted that because of the specialisation and also because of diverse nature of its business, it is very difficult to scale-up the operations of Tata Elxsi Limited. In view of this, Tata Elxsi Limited has informed that it is not fair to use its financial numbers to compare it with any other comp .....

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g a reasonable opportunity of being heard to the assessee. Keeping the assessee s objections and the decisions of the Coordinate Bench, prima facie, we are of the view that TATA Elxsi Limited is functionally different and has incomparable size to that of the assessee. Further, we are unable to verify whether the segmental profits adopted by the TPO pertain to entire software development services or pertain to limited service akin to assessee services. Since, these aspects are not clear from the .....

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TT Data India Enterprise Application Services Pvt. Ltd., ITA No.1612/Hyd/2010 order dated 23.10.2013 and in a subsequent ruling in the case of Invensys Development Centre (India) Pvt. Ltd., ITA No.1256/Hyd/2010 order dated 28.2.2014, held that TATA Elxsi is not functionally comparable with that of a software development service provider such as the Assessee. 27. In view of the aforesaid decision rendered on identical facts and circumstances, we are of the view that TATA Elxsi Ltd., should be exc .....

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