Tax Management India. Com
Law and Practice  :  Digital eBook
Research is most exciting & rewarding


  TMI - Tax Management India. Com
Follow us:
  Facebook   Twitter   Linkedin   Telegram

TMI Blog

Home

2015 (7) TMI 214

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... nfo Drive Software Limited as comparable taken by the TPO/TRP - Held that:- employee cost as per the financial statements of M/s. Info Drive Software Ltd. is ₹ 164.05 lacs whereas the total cost is 927.61 lacs (Page 617 of Paper Book). On the said basis, according to the appellant since the employee cost is 17.69% which is less than the filter of 25% applied by the TPO, therefore the same should be excluded. We therefore, direct the AO/TPO to verify the claim of the appellant as to the computation of percentage at 17.69% and if the said computation is correct then the said comparable of M/s. Info Drive Software Ltd. be excluded from the list of comparables. So far as objection raised by the learned DR as well as the DRP that this company has been taken as comparable at the time of filing TP study is not maintainable in light of the recent judgment of the Hon’ble Delhi High Court in the case of Chryscapital Investment Advisors (India) (P) Ltd. vs. DCIT [2015 (4) TMI 949 - DELHI HIGH COURT ] - Decided in favour of assessee for statistical purposes. Assessing Officer passed order under section 154 of the Act determining the adjustment at ₹ 2,13,67,552/- in terms of the .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... ee company s case the learned assessing officer erred in cherry picking the comparables which is not justified, as the learned assessing officer has not provided the information regarding the date of search and the date of database used. 5. That on facts and in the circumstances of the assessee company s case the Learned Dispute Resolution Panel erred in sustaining the order of the learned Transfer Pricing officer in selecting following companies as comparable companies even when these companies did not meet the comparability criteria with respect to: a) Related Party Transaction Filter the following companies i) Tech Mahindra Ltd. that has a RPT of 58.15% of its total revenue. ii) Infodrive Software Limited has a RPT of 59.23% of its total revenue. b) Employee Cost filter Infodrive Software Limited s employee cost is 18 % of its total operating costs as against 25% employee cost filter taken by the Ld. TPO. c) The functional and product profile of such companies was different and such companies were operating in different segments and they are : (i) Aricent Technologies (Holding) Limited (ii) Tech Mahindra Ltd. (iii) Infodrive Software Limited (iv .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... al transaction. 8. That on the facts and in the circumstances of the assessee company s case the Learned Dispute Resolution Panel erred in sustaining the order of the learned Transfer Pricing officer in using entirely different set of companies as comparable companies as mentioned in the transfer pricing order dated 23.01.2013 made under section 92CA(3) of the Act when there were ample comparables available as per Transfer Pricing Study conducted by the assessee company. 9. That on the facts and in the circumstances of the assessee company s case the Learned Dispute Resolution Panel erred in sustaining the order of the learned Transfer Pricing Officer in rejecting the comparable companies as identified and selected by the assessee company without having a valid reason for the same. 10. That on the facts and in the circumstances of the assessee company s case the Learned Dispute Resolution Panel erred in sustaining the order of the learned Transfer Pricing Officer in rejecting following companies as comparable companies even when these companies meet the comparability criteria in comparison with the assessee company. (i) CG VAK Software and Exports Limited (ii) Axis-I .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... s incorporated as 100% export oriented undertaking under the Software Technology Park Scheme of the Government of India. It is a wholly owned subsidiary of M/s. SSP SIRIES Solutions Ltd., UK (SSP (UK)). It is a captive service provider and is engaged in providing support services for development and maintenance of software to SSP (UK). In the instant assessment year, the appellant furnished a return of income on 22.9.2009 declaring Nil income after claiming exemption under section 10A of the Act. As per the Transfer Pricing document furnished by the appellant, the tax payer had entered into an international transaction for provision of software services of the value of ₹ 18,90,20,954/-. The arms length price of the international transaction was determined by the tax payer by applying transactional net marginal method (TNMM) and adopting operating profit to operating income (OP/OI) as profit level indicator (PLI). The PLI of tax payer was arrived at 13.05% on revenue (pages 97 of Paper Book); whereas average PLI of the comparables was arrived at 15.99% (page 95 of Paper Book) as per the TP document. Further, as per the TP document, the tax payer claimed that it did not underta .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... 5 KPIT Cummins Infosystem Limited (Consolidated) 21.56 6 Larsen Turbo Infotech 21.33 7 Mindtree Ltd. 27.36 8 Persistent Systems Ltd. 37.77 9 R.S. Software (I) Ltd. 10.15 10 Tech Mahindra Limited (Consolidated Seg) 35.35 11 Think Soft 16.56 12 Thirdware Solutions Limited 37.27 Average 31.48% 5 On the aforesaid basis, the TPO made an adjustment of ₹ 2,70,87,490/- in the manner as under: S.No. Particulars Amount 1. Price received 18,90,20,954 2. Total cost 16,43,66,021 3. ALP at a margin of 31.48% 21 .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... 3. ALP at a margin of 28% 21,03,88,507 4. Price received 18,90,20,954 5. Difference 2,13,67,552 8 Before us, learned counsel for the appellant shri Gautham Jain submitted that Ground no. 6 and Ground no. 5(b) would be sufficient to meet the issue involved in the instant appeal. It was submitted that if the said grounds are allowed then other grounds would become academic in nature as the margin would come within the range and no adjustment would be warranted. Thereafter, the learned counsel submitted that TPO at page 2 of the order has incorrectly determined the OP/OC margin of the appellant at 13.05% whereas the correct margin should be 15.01%. An additional ground in support of the above arithmetic error was also filed by the counsel on the date of hearing. He contended that this additional ground is on account of an arithmetical error at the end of the TPO and therefore, all facts in support of the additional ground are already on record and since it is merely an arithmetic error, additional ground be con .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... uired to consider the question of law arising from facts which are on record in the assessment proceedings, there is no reason why such a question should not be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability of an assessee. 12 Having regard to the above factual and judicial position, we admit the above ground of appeal raised by the appellant. Further on consideration of the facts, we direct the Assessing Officer to recompute the OP/OC by adopting the operating profit at ₹ 2,46,79,428/- and operating cost at ₹ 16,43,66,021/-. The additional ground is therefore, allowed for statistical purposes. 13 Ground No. 6 of the grounds preferred by the appellant relates to the claim of the appellant that DRP and TPO have erred in computing the net margin by considering foreign exchange gain/loss as non operating item. 14 Having considered the rival submissions, we find that the issue is no longer res-integra and stands concluded by the decision of the Coordinate Bench in the case of Westfalia Separator India Pvt. Ltd. vs. ACIT ITA No. 4446/D/02 for Assessment year 2003-04 wherein it has been held as unde .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... upported the action of the authorities below only on the ground that DRP has rejected the contention of the appellant by observing as under: The operating income/expenditure was never defined in any of the legislation so far. It was the conventional wisdom which went into the components of operating income/expenditure while calculating the operating profit. However, the position has changed since the notification of CBDT issued on 18.9.2013. This is the notification on Safe Harbour Rules . Rule 10TA(j)(k) and (l) define the concept of operating expense , operating revenue and operating profit respectively. According to this Rule, loss or income arising on account of foreign currency fluctuations are excluded from the calculation of operating expense and operating income respectively. Therefore the TPO was correct in excluding forex items from the calculation of operating profit. This objection of the assessee is rejected. 16 We find that the aforesaid basis that foreign exchange gain/loss should be treated as non-operating item is based on the notification of CBDT issued on 18.9.2018 on safe harbour. However, such a contention has been rejected in the aforesaid or .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... of total cost. The assessee has objected to the use of the employee cost filter. The assessee believes that there is no rational basis for application of this filter and fixing the threshold of 25%. The assessee must understand that employee cost is a factor the software development segment. It has been held in the case of Vedaris Technologies Ltd. by the ITAT Delhi that companies that have lower levels of employee cost may not be software developers. They may be involved in other activities like trade of software products etc. Such a differentiation will not be achieved by applying this filter in the ITES segment. Therefore, this filter shall be used in this segment. The asessee must understand that filters like this one may be described as diagnostic tools . The objective of such tools is to arrive at a set of comparables that is closest to the assessee in functions. The entire process of selection of comparables cannot be left to the stage of qualitative analysis. This will only increase the element of subjectivity in the process, which is not good for the robustness and credibility of the process. The major part of the job has to be left to the quantitative filters. The use of .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... dividend income in its return for the year in question but there is no estoppel in the Income tax Act and the assessee having itself challenged the validity of taxing the dividend during the year of assessment in question, it must be taken that it had resiled from the position which it had wrongly taken while filing the return. Quite apart from it, it is incumbent on the income-tax department to find out whether a particular income was assessable in the particular year or not. Merely because the assessee wrongly included the income in its return for a particular year, it cannot confer jurisdiction on the department to tax that income in that year even though legally such income did not pertain to that year. 21 Also Special Bench of Tribunal in the case of DCIT vs. Quark Systems 132 TTJ 1 upheld by jurisdictional High Court in the case of CIT vs. Quark Systems India (P) Ltd. 244 CTR 542 (P H) has held as under: 34. In the case of CIT v. V.MR.P. Firm, Muar [1965] 56 ITR 67 , the following observations of Their Lordships of Supreme Court are as under : The decision in Amarendra Narayan Roy v. CIT AIR 1954 Cal. 271 has no bearing on the question raised before us. There the .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... g that assessee from record has shown its prima facie case. Further claim may be examined by the Assessing Officer. This course we adopt as objection to the inclusion of Datamatics as comparable has been raised now and not before revenue authorities. Therefore, we deem it fit and proper to remit the matter to the file of the Assessing Officer for consideration of claim of the taxpayer and make a de novo adjudication of the arm s length price after providing reasonable opportunity of being heard to the assessee. We order accordingly. 22 Thus, in view of the above judicial and factual position, ground raised is allowed for statistical purposes. 23 According to the appellant, as a result of the above, i.e. treatment of foreign exchange gain/loss as operating item and exclusion of Info Drive Software Ltd. from the list of comparables , the margin of the comparables would be determined at 19.87% in the manner hereunder: S.No. Name of comparable Margin (%) 1. Aricent Tech (Consolidated) 25.77 2. Cat Technologies 41.69 .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

 

 

 

 

Quick Updates:Latest Updates