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2015 (5) TMI 720 - ITAT DELHI

2015 (5) TMI 720 - ITAT DELHI - TMI - Transfer pricing adjustment - exclusion of three comparables namely Larsen and Tourbo Infotech Ltd., Persistent Systems Ltd. and Mindtree Ltd.- Held that:- This issue is no longer res-integra. The Hon’ble High Court [2013 (7) TMI 696 - DELHI HIGH COURT] upholding the decision of Tribunal in the case of the appellant for A.Y. 2006-07 has held that a giant company in the area of development of software which assumed all risks leading to higher profits is not c .....

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in principle with the proposition laid down by the ld CIT(A), in excluding such companies from the list of comparables in which RPT are more than 25%. However we find no discussion in the assessment order about the determination of the percentage of RPT in the case of ICRA Techno Analytic Ltd. Under such circumstances we direct the AO to determine the RPT percentage of this company afresh as per law after giving opportunity to the assessee. In case if the RPT margin is less than 25%, the ICRA s .....

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Assessment Year 2008-09. At that time the assessee did not contest the inclusion of this company and allowed it to remain as a comparable. However this year, just because profit margin is higher, this company does not cease to become a comparable. Therefore we find no infirmity in the order of the ld CIT(A) and we uphold the same.

Disallowance u/s 14A - Held that:- in the instant year though Rule 8D is applicable, yet since the AO has not recorded any satisfaction in terms of section .....

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essee and revenue have preferred the present appeals against the impugned order dated 30.1.2013 passed by the Commissioner of Income Tax (Appeals) XX, New Delhi for A.Y. 2009-10 2. The grounds raised by the assessee read as under: 1 The learned Commissioner of Income Tax (Appeals) erred both on facts and in law in confirming the addition of ₹ 93,58,086/- to the income of the appellant out of an addition of ₹ 1,72,01,288 made by the learned Assessing Officer by holding that its intern .....

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he Rules ) as well as fresh search; 1.2 Including companies having high margin/volatile operating profit margins in the final comparables for benchmarking a low risk captive nit such as the appellant (disregarding judicial pronouncements on the issue); 1.3 Modifying the results of economic analysis carried out by the appellant in the TP documentation by conducting a further analysis on the 17 comparables given in the TP documentation based on application of the following additional/revised filte .....

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ith related party transactions ( RPT ) up to 25% of their sales 1.4 Disregarding multiple year/prior years data as used by the appellant in the TP documentation and holding that current year (i.e. FY 2008-09) data for comparable companies should be used despite the fact that the same was not necessarily available to the appellant at the time of preparing its TP documentation; 1.5 Ignoring the fact that the appellant is entitled to tax holiday under section 10B of the Act on its profits and there .....

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ered fresh search comparables in the final comparables set, as provided by the appellant. 3 The learned CIT(A) has grossly erred both on facts and in law in not appreciating the business/commercial reality that since the appellant is remunerated on an arm s length cost plus basis, i.e. it is compensated for all its operating costs plus a pre-agreed mark-up based on a benchmarking analysis, the appellant undertakes minimal business risks as against comparable companies that are full-fledged risk .....

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hancement of ₹ 1,72,01,288/- by the Assessing Officer to ₹ 93,58,086/- on account of determination of ALP b) Whether the ld. CIT(A) has erred on facts and in law in holding that Larsen and Toubro Infotech Ltd., Persistent Systems Ld. and Mind Tree Ltd. should be excluded from the list of comparables c) Whether the ld. CIT(A) has erred on facts and in law in holding that ICRA Techno Analysis Ltd. and E2E Infotech Ltd. should be included in the list of comparables. 4. Brief facts are: .....

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the following international transactions with its AEs which were duly reported in the accountant s report (Form No. 3CEB) filed alongwith the return of income: Sr. No. Description of International transactions Amount (In Rs.) 1 Provision of CSD/IT Services 14.45 crores 2 Assets provided on loan/returnable basis by the Ade 11.18 lacs 5. The summary of the benchmarking analysis of the TP report, as stated in the CIT(A) order, is as under: Particulars CSD/IT services Most Appropriate Method Transa .....

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2008-09 i) Aditya Birla Minacs IT Services Ltd. 4.01% ii) Akshay Software Technologies Ltd. 8.23% iii) Bodhtree Consulting Ltd. 64.04% iv) E2E Infotech Ltd. 13.80% v) FCS Software Solutions Ltd. 15.61% vi) ICRA Techno Analytics Ltd. 10.94% vii) Indus Networks Ltd. -4.25% viii) LGS Global Ltd. 18.88% ix) Larsen & Toubro Infotech Ltd. 20.50% x) Mindtree Ltd. 27.60% xi) Persistent Systems Ltd. 37.55% xii) SIP Technologies & Exports Ltd. -54.71% xiii) Synetairos Technologies Ltd. 26.10% xiv .....

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nst the assessee are as follows: Sr. No. Company Name OP/TC Margin using data for FY 2008-09 i) Akshay Software Technologies Ltd. 8.23% ii) Bodhtree Consulting Ltd. 64.04% iii) LGS Global Ltd. 18.88% iv) Larsen & Toubro Infotech Ltd. 20.50% v) Mindtree Ltd. 27.60% vi) Persistent Systems Ltd. 37.55% Arithmetic Mean 29.47% 8. On appeal the CIT(A) rejected the objections of the assessee vis-à-vis the 4 filters by the AO namely export sales/sales, diminishing revenue, employee cost and RP .....

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the CIT(A) is as under: Sr. No. Company Name OP/TC Margin using data for FY 2008-09 i) Akshay Software Technologies Ltd. 8.23% ii) Bodhtree Consulting Ltd. 64.04% iii) LGS Global Ltd. 18.88% Larsen & Toubro Infotech Ltd. Deleted Mindtree Ltd. Deleted Persistent Systems Ltd. Deleted iv) ICRA Techno Analytic Ltd. 10.94% v) E2E Infotech Ltd. 13.80% Arithmetic Mean 23.18% 9. Accordingly the ALP was computed as below: Computation of amount of adjustment As per AO order As per CIT order Operating .....

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Ltd. and Mindtree Ltd. and inclusion of two comparables (Ground No. (c)) namely ICRA Techno Analytic Ltd. and E2E Infotech Ltd. 11. So far as exclusion of three comparables i.e. Larsen and Tourbo Infotech Ltd., Persistent Systems Ltd. and Mindtree Ltd., it is noted that before the CIT(A) the assessee contended that during the financial year 2008-09, it has a turnover of approx. ₹ 14.45 crores which cannot be compared with certain companies having turnover of more than 200 crores. Support w .....

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lant. The Ho ble ITAT in the case of the appellant itself has held that high turnover companies should not be included in the list of comparables. Larsen & Toubro Infotech Ltd., Persistent Systems Ltd. and Mindtree Ltd. are certainly high turnover companies as can be seen from the above table. Respectfully following the order of the ITAT in the appellant s case, I hold that these three companies should be excluded from the list of comparables. 13. Having considered the rival submissions and .....

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nder: 8. It is a common case that Satyam Computer Services Ltd. should not be taken into consideration. The Tribunal for valid and good reasons has pointed out that Infosys Tchnologies Ltd. cannot be taken as a comparable in the present case. This leaves L&T Infotech Ltd. which gives us the figure of 11.11%, which is less than the figure of 17% margin as declared by the respondent-assessee. This is the finding recorded by the Tribunal. The tribunal in the impugned order has also observed tha .....

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ion, and it was considered as a comparable in assesse s own case for assessment year 2006-2007 which was upheld by the Tribunal and the said order of the Tribunal had already been upheld by the Hon ble High Court (supra) and so we direct the inclusion of the Larsen & Toubro infotech Ltd in the list of comparable. 15. Mind tree could not have been excluded simply because of high turnover only, if otherwise similar. There is no dispute that Mind tree is functionally similar. Ld AR could not pl .....

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ble High Court, thus the issue about exclusion of persistent system Ltd, while making TP adjustments in it s case stands settled in view of these decisions in its own case. Therefore we do not find any necessity to interfere this company s exclusion. 17. Having regard to the factual position and respectfully following the judgment of the Hon ble High Court we partly allow the ground raised by the revenue and uphold the exclusion of persistent system Ltd, and direct inclusion of Larsen & Toub .....

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is correct and therefore this company should be included in the set of comparables as the sole ground for rejection of this comparable was the calculation of RPT. The margin of this comparable was presented before the AO during the course of assessment proceedings which was at 10.94%. E2E Infotech Ltd. In this case, the AO has stated that there is no information about RPT and therefore this company should be rejected as a comparable. The turnover of the E2E Infotech Ltd. for the current year is .....

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nless the companies voluntarily disclose RPT even in the absence of legal requirement, then only such information will be available in a public database or in audited accounts. Absence of this data does not mean that this company fails RPT filter. Therefore, I am of the considered view that the AO was not right in rejecting E2E Infotech Ltd., as a comparable company. Therefore, this company should be brought back to the list of comparables. The margin of this comparable was presented before the .....

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not disclosed RPT computation, where turnover is less than ₹ 50 crores. 20. Having considered the rival submissions, we agree in principle with the proposition laid down by the ld CIT(A), in excluding such companies from the list of comparables in which RPT are more than 25%. However we find no discussion in the assessment order about the determination of the percentage of RPT in the case of ICRA Techno Analytic Ltd. Under such circumstances we direct the AO to determine the RPT percentag .....

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he revenue. 23. Taking up assessee appeal in ITA No. 1780/D/2013, the ld. counsel contended vis-à-vis Ground No. 1, 2, 3 that out of the set of five comparables selected by the CIT(A) M/s Bodhtree Consulting Ltd. be excluded. 24. In this regard we notice that before the CIT(A) the appellant in this regard contended as under: Further, the appellant submits that during the FY 2008-09, Bodhtree Consulting Ltd. ( Bodhtree ) had a high growth rate of 67% in its revenue as compared to the previ .....

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77; 162 lahs (15.5% of revenue) in the previous year. The net profit after tax was ₹ 583.52 lakh (33.5% of revenue) as against ₹ 140.74 (13.5% of revenue) in the previous year. The net profit for the year includes prior period adjustments of ₹ 24.61 lakhs (previous year ₹ 0.94 lakhs). It is submitted that high profit companies such as Bodhtree deserve to be excluded from the final set of comparable companies particularly for benchmarking cost plus captive units that canno .....

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losses or in unusually high profits. Thus, to summarize, rejecting all loss-making companies on the basis of arbitrary/unsound inferences/presumptions and retaining high margin companies would tantamount to a travesty of the concept of arm s length principle Therefore, Bodhtree (which is making supernormal growth and earning abnormally high profits during the FY 2008-09) is not an appropriate comparable and should be excluded from the final set of comparable companies. 25. However the CIT(A) ha .....

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hese two are separate average concepts commonly used in mathematics and statistics. The argument of the appellant confuses these two mathematical tools. The Indian Transfer Pricing Law does not recognize the intermediate/inter quartile range. The margin of the comparables is the end product and not the starting point of comparability. Therefore, the extreme profit or loss making companies can be rejected if the inter quartile range is being used instead of simple average. Only comparing the marg .....

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