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2015 (6) TMI 321 - ITAT AHMEDABAD

2015 (6) TMI 321 - ITAT AHMEDABAD - TMI - Transfer pricing adjustment - rejection of benchmarking approach adopted/contemporaneous documentation maintained by the appellant - selection of comparable - Held that:- From the results of Bodhtree Consulting Ltd. it is seen that there is drastic fluctuation in the operating margins with a high of 80.15% in F.Y. 06-07 and low of -4.46% in F.Y. 10-11. We find that Special Bench of Tribunal in the case of Maersk Global Centres India Pvt. Ltd. [2014 (3) T .....

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td (2015 (1) TMI 466 - ITAT PUNE)

E-Infochip Bangalore Ltd.'s annual accounts of the company, with respect to the segment information it is stated that the company is primarily engaged in software development and I.T enabled services which is considered the only reportable business segment as per Accounting Standard AS-17 “segment reporting” prescribed in Companies (Accounting Standard) Rules, 2006. We thus find that no segmental information is available, thus to be excluded from the .....

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DCIT passed u/s. 143(3) r.w.s. 144C of the Act for A.Y. 2009-10. 2. The relevant facts as culled out from the material on record are as under. 3. Assessee is a company stated to be engaged in providing captive software development services to its Associate Enterprise (AE) Eclipsys USA. Assessee electronically filed its return of income for A.Y. 2009-10 on 29.09.2009 declaring total income of ₹ 1,98,18,930/-. Thereafter Assessee revised its return of income on 23.07.2010 declaring total in .....

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er u/s. 92CA(3) dated 18.01.2013 was made by TPO by making an upward adjustment in Arms Length Price (ALP) and by virtue of which an amount of ₹ 11,09,37,862/- was added to the total income of the Assessee. Thereafter a draft order was passed u/s. 143(3) r.w.s. 144C(1) r.w.s. 92CA(3) on 15.03.2013 by making transfer pricing adjustment of ₹ 11,09,37,862/- against which Assessee preferred the reference before Dispute Resolution Panel (DRP). Hon ble DRP passed order u/s. 144C(5) r.w.s. .....

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aid order of A.O, Assessee is now in appeal before us and has raised the following ground;- 1. The Ld Assessing Officer ('AO') pursuant to the directions of the Ld. Dispute Resolution Panel ('DRP') erred in rejecting the benchmarking approach adopted/contemporaneous documentation maintained by the appellant and thereby making a transfer pricing adjustment of ₹ 4,12,15,474 to the income of the appellant by holding that the international transaction of provision of software d .....

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ional quantitative/qualitative filters for identifying comparables) and gathering data not available in the public domain by initiating the proceedings under section 133(6) of the Act. 2.2 introducing additional companies (by conducting a fresh search) which are functionally non-comparable to the appellant's business operations and having abnormal profit margins, thereby resulting in incorrect selection of comparables. 2.3 rejecting companies functionally similar to that of the appellant' .....

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s and the appellant as provided by the appellant, without providing any cogent reasons, and disregarding the provisions of Rules 10B(a) and (3) read with Rule l0C of the Rules. In doing so, the Ld DRP / AO erred in: 4.1 failing to capture that the appellant is a routine captive service provider as against the comparable companies selected by the Ld TPO which include entrepreneurial companies and hence an adjustment is necessary; 4.2 disregarding the provisions of Rules 10B(2) and 10B(3) read wit .....

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iled by the appellant for rectifying certain mistakes made by the Ld. TPO/AO in computing the revised TP adjustment workings as per the Directions passed by the Ld DRP. 4. Before us, at the outset ld. A.R. submitted that though various grounds have been raised but the only issue is with respect to transfer pricing adjustment. 5. Before us, ld. A.R. reiterated the submissions made before TPO, DRP and further submitted that during the year under review, Assessee had rendered software services to i .....

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sessee was arrived at 14.45%. Since the price charged in the international transactions by the Assessee was higher than the arithmetical mean price, the price charged in the international transactions by the Assessee was treated as at arms length by the Assessee. TPO though agreed that TNMM method was the most appropriate method but did not agree to arms length nature of the international transactions related to provision of software services as demonstrated by the Assessee in its TP study repor .....

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data for testing the markup for services rendered by Assessee, rejected certain quantitative filters applied by the Assessee and introduced certain new quantitative filter, included certain additional comparables which were not considered by the Assessee. Based on the aforesaid approach, revised set off comparables was considered by TPO and the addition on account of international transactions was made. 6. Before us, the ld. A.R. submitted that for making comparable study, TPO had included certa .....

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Bangalore Ltd. (94.43%). He submitted that the aforesaid two companies which have been included by TPO needs to be excluded as they cannot be considered as comparable companies in the T.P. study. With respect to exclusion of E-Infochip Bangalore Ltd. as comparable, ld. A.R. submitted that it is a company whose activities cannot be compared with that of Assessee as E-Infochip Bangalore Ltd. was primarily engaged in software development and I.T enabled services. He pointed to the information of it .....

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margins. He pointed to page 124 of the paper book which had the tabulated results of the company from F.Y. 05-06 to F.Y. 10-11. He submitted that the Hon ble Bangalore Tribunal also in the case of Mindtech India Ltd. vs. DCIT (IT(TP)A No. 70/Bangalore/2014 order dated 21.08.2014) at para 16 of the order had excluded Bodhtree Consulting Ltd. from the final list of comparables. The ld. A.R. also submitted that the Hon ble Pune Tribunal had also in the case of PTC Software (India) Pvt. Ltd vs. DCI .....

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e in the present case with respect to determination of ALP in the case of international transaction entered into by the Assessee. It is an undisputed fact that for determining arms length nature of international transaction Assessee had selected TNMM method as the most appropriate method which has also been accepted by the TPO as the most appropriate method. In the T.P. study carried out by TPO, fresh criteria were applied by TPO and the 2 companies, which were not considered as comparable by As .....

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dia Pvt. Ltd. in ITA No. 7466/Mum/2012 order dated 07.03.2014 had considered a question as to whether companies having abnormal profits should be excluded as a comparable. The Hon ble Special Bench took the view that it has to be shown that the high profit margin does not reflect the normal business conditions and only in such circumstances high profit margin companies can be excluded. It was further held that in such circumstances it would require further investigation to ascertain the reasons .....

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igation should be to ascertain as to whether earning of high profit reflects a normal business condition or whether it is the result of some abnormal conditions prevailing in the relevant year. The profit margin earned by such entity in the immediately preceding year/s may also be taken into consideration to find out whether the high profit margin represents the normal business trend. The FAR analysis in such case may be reviewed to ensure that the potential comparable earning high profit satisf .....

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analysis with its high profit margin reflecting normal business condition should not be rejected solely on the basis of such abnormal high profit margin." 8. We find that the Bangalore Bench of Tribunal in the case of Mindtech India Pvt. Ltd. (supra) had excluded Bodhtree Consulting from the final list of comparable by holding as under:- 16. We have considered the rival submissions. The Special Bench of the ITAT in the case of Maersk Global Centres had an occasion to deal with the question .....

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as comparable or not. In the light of the aforesaid decision of the Special Bench and in view of the admitted position that the assessee follows Fixed Price Project model where revenues from software development is recognized based on software developed and billed to clients, there is a possibility of the expenditure in relation to the revenue being booked in the earlier year. The results of Bodhtree from F.Y. 2003 to 2008 excluding F.Y. 2007 as given by the learned counsel for the assessee wer .....

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assessee. We hold and direct accordingly. 9. We also find that Bodhtree Consulting Ltd. as a comparable was excluded by the Pune Tribunal in the case of PTC Software (India) Pvt. Ltd (in ITA No. 336/PN/2014 order dated 31.10.2014) by holding as under;- 29. The assessee further has assailed the inclusion of Bodhtree Consulting Ltd. appearing at item No.6 in the list of comparables selected by the TPO. The said company was selected as a comparable by the TPO because in assessment year 2008-09, Bo .....

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s that admittedly it had selected the said company in the preceding year as a comparable because it was functionally comparable in the said year. However, because of the fluctuating profits shown by the assessee which varied in the range of 80.15% to -4.46%, the said company was not to be picked up as a comparable. 31. The Bangalore Bench of the Tribunal in M/s. Mindteck (India) Ltd. (supra) had considered the oscillating profits declared by the said concern i.e. Bodhtree Consulting Ltd. and hel .....

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ch cases it would require further investigation to ascertain the reasons for unusually high profit and in order to establish whether the entities with such high profits can be taken as comparable or not. In the light of the aforesaid decision of the Special Bench and in view of the admitted position that the assessee follows Fixed Price Project model where revenues from software development is recognized based on software developed and billed to clients, there is a possibility of the expenditure .....

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fit margins of this company. In the given circumstances, we are of the view that it would be safe to exclude Bodhtree Consulting from the final list of comparables chosen by the assessee. We hold and direct accordingly." 32. Further, the Pune Bench of Tribunal in Cummins Turbo Technologies Ltd., UK, Vs. Dy.DIT, had on similar issue of exclusion of abnormal profit making concern held as under:- "8. We have carefully considered the rival stands on this aspect. In the context of the contr .....

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profit margin should trigger further investigation in order to establish whether it can be taken as comparable or not. Such investigation should be to ascertain as to whether earning of high profit reflects a normal business condition or whether it is the result of some abnormal conditions prevailing in the relevant year. The profit margin earned by such entity in the immediately preceding year/s may also be taken into consideration to find out whether the high profit margin represents the norma .....

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pose of determining the arm's length price of an international transaction. Otherwise, the entity satisfying the comparability analysis with its high profit margin reflecting normal business condition should not be rejected solely on the basis of such abnormal high profit margin." In terms of the aforesaid discussion of the Special Bench, it is quite clear that the concerns earning abnormal high profit margins cannot be excluded from the list of comparables unless appropriate investigat .....

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appellant has furnished before us the operating margin trends of the said concern over the five financial years i.e. for the three preceding years and one succeeding financial year. Notably, for the financial year under consideration, the margin of the said concern is 34.71 % whereas for the preceding three financial years of 2003-04, 2004-05 and 2005-06 it is -6.47%, -69.07% and -44.21% respectively and for the subsequent financial year of 2007-08, the margin is 3.67%. The aforesaid clearly su .....

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earned counsel for the assesses has referred to the Annual Report of the said concern for the financial year under consideration to point out that the company has acknowledged a growth of 132.86% in its revenue generation as compared to the immediately preceding financial year. In our considered opinion, there is no material to say that the high profit margin of 34.71 % declared by the said concern in the instant financial year is a normal business trend. Ostensibly, the financial results of eit .....

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would involve consideration of multiple year data of the comparable whereas the transfer pricing analysis is required to be done based on the singular financial year data i.e. financial year data of the comparables relevant to the year in which the international transactions have been entered into. In our considered opinion, the aforesaid plea of the Revenue is untenable having regard to the issue in question. No doubt, sub-rule (4) of rule 10B of the Income Tax Rules, 1962 (in short "the R .....

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prices in relation to the tested transaction. We are only pointing out the aforesaid to say that the proposition being canvassed by the Revenue that data of the financial year in which the international transaction has been entered into, alone and alone, is to be used is not an absolute proposition. Needless to say, the objective of carrying out the comparability analysis is to determine the arm's length price of an international transaction by means of examining similarly placed uncontrolle .....

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the year under consideration is an abnormal business trend, and, accordingly the said concern is liable to be excluded. Therefore, we do not find any force in the plea of the Revenue to retain the said concern in the final list of comparables. 10In conclusion, we set-aside the order of the CIT(A) on this aspect and direct the Assessing Officer to exclude Informed Technologies India Ltd. from the final list of comparables." 33. The Mumbai Bench of the Tribunal in NetHawk Networks India Pvt. .....

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first it was engaged in the sale of software products and no segmental data was available. However, on the other hand, the said company was picked up by the assessee as a comparable in the financial year 2008-09. We find that the profits declared by the said concern ought to be considered while selecting the said comparables. The perusal of the results shown by the said company reflected high margins in certain years and very low in other years, which do not reflect normal business conditions. .....

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and the value stated value of the income would fall within +/- 5% margin and therefore, in terms of section 94C(2) of the Act, no further adjustment in the international transactions would be required to be made, though the assessee during the course of hearing had raised various arguments in respect of exclusion of other companies and inclusion of certain companies selected by way of fresh search, but the same are rendered an academic and are not being adjudicated for the present as we have up .....

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