TMI Blog2015 (5) TMI 648X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 - ITAT BANGALORE] we find that the decision of the learned CIT (Appeals) in excluding those companies with any RPT is not in keeping with the above decision of the coordinate bench of this Tribunal. Respectfully following the above decision, we hold that the learned CIT (Appeals) was not correct in holding that companies with any RPT have to be excluded from the set of comparable companies, and direct the TPO / A.O. to apply the RPT filter at 15% of total revenues for including / excluding the comparable companies, excluded by the learned CIT (Appeals), in the final set of comparables. - Decided partly in favour of revenue. Companies with Abnormal Profits - CIT (Appeals) excluding companies with profit margin of more than 50% from the final set of comparable companies by holding the profit margin in excess of 50% to be abnormal - Held that:- As find from a perusal of the impugned order that the learned CIT (Appeals) has excluded a number of companies from the list of 12 comparables merely because they have high profits in excess of 50%, without examining whether these companies satisfy the comparability analysis. In this factual matrix, respectfully following the decision of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... approx. ₹ 51 Crores only, following the decision of the co-ordinate bench of this Tribunal in the case of Genisys Integrating Systems (India) Pvt. Ltd. (supra), we direct the Assessing Officer to exclude the above 5 companies from the list of comparable companies. RPT Filter - Four Soft Ltd. - Held that:- As in the case of 24/7 Customer.Com P. Ltd. [2013 (1) TMI 45 - ITAT BANGALORE] has held that companies having RPT in excess of 15% are to be excluded from the list of comparable companies. We, therefore, direct the TPO / A.O. to exclude this company, Four Soft Ltd. from the list of comparables if the RPT of this company is in excess of 15% after verification of the assessee's claim that the RPT is 19.89%. Exclusion of companies on grounds of being functionally different from the assessee - Held that:- As find the learned CIT(A) has not considered and adjudicated on the issues raised by the assessee and the submissions made by the assessee in this regard are not examined. We therefore deem it appropriate to remand the issue of the comparability of the aforesaid five companies, challenged by the assessee on grounds of functional difference, for fresh consideration by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO in not allowing the assessee risk adjustment in the facts and circumstances of this case. - Decided against assessee. Reimbursement of Expenses considered as part of operating cost - Held that:- It is settled principle that if the reimbursements are mere pass through expenses without any service element, then the same should not be added back to the cost base for the purposes of mark up. We, however, find that both the TPO and the learned CIT (Appeals) have decided the issue without examining the details of the expenses involved. The break-up of the said expenses are not given in detail and the claim that these expenses have been actually incurred by the assessee on behalf of the AEs and vice versa have not been examined. We therefore deem it fit to remit the issue to the file of the Assessing Officer / TPO for detailed verification. - Decided in favour of assessee for statistical purposes. Interest u/s. 234 - Held that:- The charging of interest is mandatory and consequential as has been held by the Hon'ble Apex Court in the case of Anjum Hon'ble Ghaswala & Others (2001 (10) TMI 4 - SUPREME Court ) and we therefore uphold the Assessing Officer’s action in c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act vide order dt.27.11.2008 determining the income of the assessee at ₹ 6,790,33,737 as against the returned income of ₹ 29,830 in view of the following additions / disallowances thereto :- (i) Disallowance on account of recomputation of deduction u/s.10A : ₹ 33,63,844. (ii) Transfer Pricing adjustment : ₹ 6,45,40,063. 3. Aggrieved by the order of assessment for Assessment Year 2005-06 dt.27.11.2008, the assessee went in appeal before the CIT (Appeals) - IV, Bangalore. The learned CIT(A) disposed off the assessee's appeal vide order dt.12.9.2011 allowing the assessee partial relief. 4. Aggrieved by the order of the CIT (Appeals) - IV, Bangalore, dt.12.9.2011 for Assessment Year 2005-06, the Revenue is in appeal before this Tribunal raising the following grounds :- IT(TP)A No.1110/Bang/2011 - Revenue s appeal for Assessment Year 2005-06. 1. The order of the learned CIT (Appeals) is opposed to law and facts of the case. 2. The CIT (Appeals) erred in holding that expenditure of ₹ 2,12,28,101 towards daily allowance, ₹ 24,28,829 towards support allowance and ₹ 30,75,083 incurred towards miscellaneous travel exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the learned TPO in the TP Order, without providing an opportunity of being heard to the appellant. c) Arbitrarily arriving at a set of companies as comparable to the Respondent. d) Disregarding application of multiple year / prior year data and holding that current year (i.e. Financial Year 2005-06) data for companies should be used for comparability. e) Upholding the learned TPO s approach of using data as at the time of assessment proceedings. f) Upholding the approach adopted by the learned TPO of collecting selective information of the companies by exercising power granted to him under section 133(6) of the Income Tax Act, 1961 that was not available to the Respondent in the public domain. g) Not providing appropriate adjustment towards the risk differential between the Respondent and the entrepreneurial companies selected as comparables, while determining the arm s length price. 4. That the learned CIT (Appeals) erred in upholding the inclusion of reimbursement expenses as part of the operating cost and income in determining the arm s length price by the learned TPO. 5. That consequently the learned Assessing Officer erred in levying interest under sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16. Rico Softech Ltd. (Seg.) 17. Satyam Computer Services Ltd. 18. Seymour Technologies Ltd. 19. Sonata Software Ltd. 20. SQL Star International Ltd. (Seg.) 21. SSI Ltd. (Seg.) 22. Transworld Infotech Ltd. 23. Visesh Infotechnics Ltd. (Seg.) 24. VJIL Consulting Ltd. 7.2 As the average profit margin of the assessee worked out at 12.5% was higher than the arithmetical mean margin of the comparables worked out @ 11% on cost, the assessee held that its international transactions were at arm s length. 8. The TPO s Approach. 8.1 The TPO, after examining the assessee s T.P. Study, rejected the same and proceeded to conduct his own fresh search for comparables using Prowess and Capitaline. The TPO accepted this assessee's adoption of TNMM as the MAM. The TPO adopted the following IT Companies as comparable companies :- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hosen by the TPO, the learned CIT(A) recomputed the TP Adjustment and upheld the TP Adjustment to the extent of ₹ 89,56,666. While deciding on the exclusion of the 13 companies from the 17 comparable companies chosen by the TPO, the learned CIT(A) adjudicated on the following issues as under. 9.2 Companies with Related Party Transactions ( RPF ) The learned CIT(A) relying on the decision of the co-ordinate bench of this Tribunal in the case of Phillips Software Centre Pvt. Ltd. V ACIT (26 SOT 226), held that companies with any RPT are to be excluded from the set of comparable companies and accordingly 12 of the 17 companies selected by the TPO were excluded from the set of comparable companies. As seen from the order of the learned CIT(A) in case of some of the comparable companies, the assessee had argued against their inclusion on grounds of there being functionally dissimilarity also. We find that the learned CIT(A) has not adjudicated on this aspect, as the companies had been excluded from the list of comparables on the ground of RPT. 9.3 Companies with abnormal profits Relying on the various decisions cited in the impugned order, the learned CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny. 8. Geometric Software Solutions Ltd. Software product company. 9. Sankhya Infotech Ltd. -do- 10. Tata Elxsi Ltd. Diversified activities in software development services segment. 11. Thirdware Solutions Ltd. Diversified activities, sale of software license (software products). 10.2 We have heard both parties, perused and carefully considered the order of the TPO under section 92CA of the Act, the order of assessment, the impugned order of the learned CIT(A), the submissions of both the learned Departmental Representative for revenue and the learned Authorised Representative of the assessee, including the judicial decisions cited and placed reliance upon. We now proceed to consider the various issues raised by Revenue and the assessee. Revenue s appeal in IT(TP)A No.1110/Bang/2011 for A.Y. 2005-06. 11. The Grounds raised by Revenue at S.Nos.1, 6 7 are general in nature and no adjudication being called for thereon, are dismissed as infructuo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by the assessee vide letter dt.29.10.2014, the assessee has referred to the decision of the coordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 while making submissions on the RPT filter in the case of Four Soft Ltd.. We find that the co-ordinate bench of this Tribunal, in the aforesaid case, has directed that companies with RPT in excess of 15% of total revenues are to be excluded from the set of comparables. The operative paragraph 13, thereof is extracted hereunder :- 13.0 RELATED PARTY TRANSACTIONS In respect of the ground raised at S.No.1 regarding acceptance of comparable companies having related party transactions as proposed by the TPO, the learned counsel for the assessee argued that the transfer pricing regulations do not stipulate any minimum limit of related party transactions which form the threshold for exclusion as a comparable. In this regard, the learned counsel for the assessee objected to the TPO s setting a limit of 25% on related party transactions. He objected to the inclusion of comparables being related party transactions in excess of 15% of sales / revenue. In support of this proposition, the learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is an issue on which there have been conflicting decisions of various Tribunals. However, the Special Bench of the ITAT, Mumbai in the case of Maersk Global Centres (India) Pvt. Ltd., in ITA No.7466/Mum/2012 has held that companies cannot be excluded from the set of comparables only because the margins are high and the matter in such cases would require further investigation to ascertain the reasons for unusually high profits in order to establish whether the entities with such high profits can be taken as comparables or not. The operative portion of this order at paras 97 to 99 thereof are extracted hereunder :- 97. At the time of hearing before us, both the sides have cited several decisions of the Tribunal in support of their corresponding stand taken on this issue. After going through all these decisions of the Division Benches of this Tribunal, we find that the issue relating to exclusion of high profit margin entities from comparables has been decided in favour of the assessee in the cases cited by Shri Porus Kaka without taking into consideration some vital aspects including the relevant TP Regulations in India. It is observed that the decision initially taken in one c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judge the comparability. 98. As noted by the Division Benches of the Tribunal in the cases discussed above, the OECD guidelines suggest quartile method which excludes the companies that fall in the extreme quartiles for comparability and there is deviation in this respect in T.P. Regulations in India which specify the Arithmetic Mean for determining the ALP. Nevertheless, the OECD TP Guidelines have considered and dealt with the situation of extreme results in the context of comparability consideration in section A.7.3 of chapter III and it is suggested in para 2.63 that where one or more of potential comparables have extreme results consisting loss or unusual high profits, further examination would be needed to understand the reasons for extreme results. After taking into consideration this guidance provided in OECD Transfer Pricing Guidelines and on analyzing the decisions rendered by the Division benches of this Tribunal on this issue after taking into consideration inter alia the T.P. Regulations in India as discussed above, we are of the view that the potential comparables cannot be excluded merely on the ground that their profit is abnormally high. In our opinion, the mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of whether such companies are to be included or excluded from the final set of comparables will depend on the facts and circumstances of each case; in as much as a potential comparable company earning abnormally high profits margins should trigger further investigation as to whether earning of high profits reflects a normal business condition or whether it is the result of some abnormal condition prevailing in the relevant period to establish whether it can be taken as a comparable or not. The comparable company satisfying the comparability analysis with its high profit should not be rejected solely on the basis of such abnormally high profit margins. 14.2.3 We find from a perusal of the impugned order that the learned CIT (Appeals) has excluded a number of companies from the list of 12 comparables as listed out on page 15 of the impugned order merely because they have high profits in excess of 50%, without examining whether these companies satisfy the comparability analysis. In this factual matrix, respectfully following the decision of the Special Bench of the ITAT, Mumbai in the case of Maersk Global Centres (India) Pvt. Ltd.(supra), we hold that the learned CIT (Appeals) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen, the assessee shall not be entitled to exercise the option as referred to in the said proviso. 15.2.3 The new section 92C(2A) of the Act mandates that if the Arithmetic Mean Price falls beyond + / - 5 % from the price charged in international transactions, then the assessee does not have any option referred to in section 92C(2)of the Act. Thus, as per this amendment, it is clear that the + / - 5 % variation is allowed only to justify the price charged in the international transactions and not for adjustment / standard deduction purposes. The aforesaid amendment has settled the issue and accordingly the 5% standard deduction is not allowable to the assessee in the case on hand. The various judicial decisions cited pertain to the period prior to the retrospective amendment by way of insertion of section 92C(2A) of the Act by Finance Act, 2012 and are therefore not of any help to the assessee. In this view of the matter, we hold that the learned CIT (Appeals) erred in allowing the assessee the benefit of 5% standard deduction and accordingly reverse this order of this issue in view of the retrospective amendment w.e.f. 1.4.2002 brought about by the insertion of Section 92C(2A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned CIT (Appeals) had adjudicated on the issue of RPT filter and abnormal profit margins and deleted 13 comparables form the list of 17 comparables chosen by the TPO. It was, however, observed that the learned CIT (Appeals) has not adjudicated on other issues like the upper limit of the turnover filter, abnormal events, RPT filter @ 15%, non-comparability as some of the companies chosen by the TPO are product companies, etc. 18.4.2 Before us, the assessee had submitted detailed submissions on each of the 11 companies which as per the assessee are required to be excluded from the set of 17 comparable companies adopted by the TPO. The learned Authorised Representative submitted that the assessee accepts 6 of the comparable companies adopted by the TPO at S.Nos.1, 2, 5, 8, 11 and 12 of the TPO s list of 17 comparable companies. The assessee has filed a chart giving the reasons why these 11 companies are required to be excluded and the judicial decisions of various Tribunals in support of its contentions. 19. Turnover Filter of ₹ 200 Crores. 19.1 The learned Authorised Representative of the assessee has furnished a chart wherein the names of the 5 companies which have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be excluded from the list of comparables on the ground that its RPT was 19.89%, since the co-ordinate bench of the Bangalore Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (supra) has held that companies having RPT in excess of 15% are to be excluded from the list of comparables. It is submitted that the co-ordinate bench followed the decision of the Delhi Bench of the ITAT in the case of Sony India (P) Ltd. reported in 2008-TIOL-439-ITAT-Delhi dt.23.12.2008. The learned Authorised Representative contends that in view of the above this company ought to be excluded from the final set of comparables. 20.2 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial decisions cited and placed reliance on. As contended by the assessee, the co-ordinate bench of this Tribunal, in the case of 24/7 Customer.Com P. Ltd. (supra) at para 13 of its order, has held that companies having RPT in excess of 15% are to be excluded from the list of comparable companies. We, therefore, direct the TPO / A.O. to exclude this company, Four Soft Ltd. from the list of comparables if the RPT of this company is in excess of 15% after verifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the assessee company is a pure software development services provider. In support of its arguments for exclusion of this company from the list of comparables, the assessee placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of Sap Labs India Pvt. Ltd., in ITA No.398/Bang/2008 dt.30.8.2010 for Assessment Year 2003-04. 22.1.5 (4) Sankya Infotech Ltd. The assessee contends that this company ought to be excluded from the list of comparables since it is functionally different, as it is mainly a software product company developing niche products for the aviation and transportation industry in the areas of simulation, e-learning and training whereas the assessee in the case on hand is purely into provision of software development services. In support of its contentions for exclusion of this company form the list of comparables, the assessee placed reliance on the decision of the co-ordinate bench of the ITAT, Jaipur in the case of Integrated Decisions Systems India (P) Ltd., in ITA No.271/JP/2011 dt.31.10.2011 for Assessment Year 2006-07. 22.1.6. (5) Thirdware Solutions Ltd. The assessee contends that this company ought to be excluded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee and the applicability of the judicial decisions cited by the assessee to the facts of the assessee's case in the period under consideration. It is ordered accordingly. 23. Ground No.3(d) - Multiple Year Data. 23.1 This ground of the assessee's C.O. is regarding the use of multiple year data by the assessee for comparability, which has been rejected by the TPO and whose decision has been upheld by the learned CIT(A). 23.2 This ground was not urged before us in the appellate proceedings. Even otherwise, this ground is liable to be dismissed. Rule 10B(4) of the IT Rules, 1962 specifies the requirement regarding data to be used for analysing the comparability of an uncontrolled transaction with an international transaction which reads as under :- Rule 10B(4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction 56a[or a specified domestic transaction] shall be the data relating to the financial year in which the international transaction 56a[or the specified domestic transaction] has been entered into : Provided that data relating to a period not being more than two years prior to such financi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the fresh search process for comparable companies. 24.2 This issue is general in nature and was not urged before us in appellate proceedings. As regards the data used by the TPO while determining the ALP, we find that it is in accordance with the provisions of section 92D of the Act, which requires that every person who has entered into international transactions maintain information and documentation thereof. Rule 10B(4) of the Rules provided that the information and documentation specified u/R 10B(1) and 10B(2) should as far as possible be contemporaneous and should exist latest by the specified data referred to in section 92F(4) of the Act, which has the same meaning as due date in Explanation 2 to section 139(1) of the Act. The Act has not specified any cut off date up to which only the information in the public domain has to be taken into consideration by the TPO while arriving at the ALP or making T.P. Adjustments. Both the assessee and Revenue being bound by the provisions of the Act and Rules are required to take into consideration contemporaneous data relevant to the previous year in which the international transaction has taken place. The assessee is obliged to ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e basis of quantification for such claim so that it can be considered. In the case on hand the assessee has failed to do so, both before the TPO and also at the appellate forums. While it is true that in certain cases the co-ordinate benches of this Tribunal have held that the TPO ought to consider allowing risk adjustment to bring the assessee on par with the margin of the comparables and with which we have no quarrel, in the case on hand, we find that except for raising the claim for risk adjustment, the assessee ;has failed to substantiate the claim with any quantification so that it can be basis for examination by the TPO In a recent decision of the co-ordinate bench in the case of CISCI Systems (India) P. Ltd., in IT(TP)A No.271/Bang/2014, the bench noted that risk adjustment was not allowed by TPO for the reason of chance of proper basis for quantification. Since such quantification was placed before the Tribunal, the bench directed the TPO to examine and consider the assessee's claim. In the case on hand it is not so. We are, therefore, of the opinion that in the case on hand, the assessee has failed to make its case for being allowed risk adjustment and concur with the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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