TMI Blog2015 (7) TMI 491X X X X Extracts X X X X X X X X Extracts X X X X ..... arithmetical mean of the comparable companies. The working of the said computation is filed before us. We direct the AO to verify the same and if found to be correct, then no adjustment is called for. - Decided in favour of assessee for statistical purposes. Reduction of telecommunication expenses and traveling expenditure incurred in foreign currency from the export turnover only while computing the deduction u/s 10A - Held that:- This issue is covered in favour of the assessee in the case of CIT vs. Tata Elxsi (2011 (8) TMI 782 - KARNATAKA HIGH COURT) and respectfully following the same, we direct the AO to exclude telecommunication expenses as well as travelling expenditure incurred in foreign currency both from export turnover as well as total turnover for the purpose of computing deduction u/s 10A of the Act. - Decided in favour of assessee. - IT(TP)A No.1485/Bang/2010 - - - Dated:- 30-6-2015 - Smt. P. Madhavi devi and Shri Abraham P George, JJ. For the Petitioner : Shri Pravin Kishore Prasad, Advocate. For the Respondent : Shri C.H.Sundar Rao, CIT(DR). ORDER Per Smt. P.MADHAVI DEVI, JM: This appeal by the assessee is against the order of the As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne or the other ground and as to how they are covered in favour of the assessee by various decisions of this Tribunal and the High Court. The said chart is taken on record and both the parties are heard on the basis of the submissions in the chart. 4. Having regard to the rival contentions and the material on record, we find that the financial results of the assessee-company for the financial year 2005-06 are as under: Description Amount Operating revenue Rs.18,27,92,804/- Operating Cost Rs.16,54,49,912/- Operating Profit (PBIT) Rs.1,73,42,892/- Operating Profit to Cost Ratio 10.48% The TPO has adopted the following companies as comparables: Sl.No Name of company OP / TC (FY 2006-07) Sales (Rs.Cr.) 1 Aztec Software Limited 18.09 128.61 2 Geometric Software Limited (Seg.) 6.70 98. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing companies to be comparable to the assessee: i) Bodhtree Consulting Ltd. ii) Lanco Global Solutions iii) Mediasoft Solutions P.Ltd. iv) R Systems International Ltd. v) R S Software (India) Ltd. vi) SIP Technologies Exports Ltd. vii) Synfosys Business Solutions Ltd. Viii) Lucid Software Ltd. 6. As regards other companies are concerned, the assessee is challenging them on the turnover filter and RPT filter and also on functional dissimilarity. In support of exclusion of these companies, the assessee is relying upon the decision of the coordinate bench of the Tribunal in the case of M/s.Ariba Technologies India Pvt. Ltd., for assessment year 2006-07 in IT(TP)A No.1179/Bang/2010 dated 19/12/2014. The learned Departmental Representative, however, placed reliance upon the findings of the TPO as well as the DRP for not excluding these companies from the final list of comparables. 7. Having regard to the rival contentions and the material on record, we find that the assessment year before us in the case of the assessee well as in the case of M/s.Ariba Technologies India Pvt. Ltd., (cited supra) is assessment year 2006-07. However, to apply the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction that there should not be any difference between the transactions compared or the enterprises entering into such transaction, which are likely to materially affect the price or cost charged or paid or profit arising from such transaction in the open market. Further it is also necessary to see that wherever there are some differences such differences should be capable of reasonable accurate adjustment in monetary terms to eliminate the effect of such differences. It was his submission that size was an important facet of the comparability exercise. It was submitted that significant differences in size of the companies would impact comparability. In this regard our attention was drawn to the decision of the Special Bench of the ITAT Chandigarh Bench in the case of DCIT v. Quark Systems Pvt. Ltd. 38 SOT 207, wherein the Special Bench had laid down that it is improper to proceed on the basis of lower limit of 1 crore turnover with no higher limit on turnover, as the same was not reasonable classification. Several other decisions were referred to in this regard laying down identical proposition. We are not referring to those decisions as the decision of the Special Bench on this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dentifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which arc loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun Bradstreet Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provides the manner of computation of Arm s length price in an international transaction and it provides:- (1) that the arm s length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely :- (a)comparable uncontrolled price method; (b)resale price method; (c)cost plus method; (d)profit split method; (e)transactional net margin method; (f)such other method as may be prescribed by the Board. (2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm s length price, in the manner as may be prescribed: Provided that where more than one price is determined by the most appropriate method, the arm s length price shall be taken to be the arithmetical mean of such prices: Provided further that if the variation between the arm s length price so determined and price at which the international transaction h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv)the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v)the net profit margin thus established is then taken into account to arrive at an arm s length price in relation to the international transaction. (2) For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010) . Thus, companies having turnover of more than 200 crores have to be eliminated from the list of comparables as laid down in several decisions referred to by the ld. counsel for the assessee. Applying those tests, the following companies will have to be excluded from the list of 26 comparables drawn by the TPO viz., Turnover Q (1)Flextronics Software Systems Ltd. 848.66 crores (2) iGate Global Solutions Ltd. 747.27 crores (3)Mindtree Ltd. 590.39 crores (4) Persistent Systems Ltd. 293.74 crores (5) Sasken Communication Technologies Ltd. 343.57 crores (6) Tata Elxsi Ltd. 262.58 crores (7) Wipro Ltd. 961.09crores (8) Infosys Technologies Ltd. 13149 crores 10. Respectfully following the aforesaid decision of the Tribunal in the case of Triology E-Business Soft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to the order passed by the TPO and it is pointed out that based upon the figures and data made available, the TPO had treated a third company as comparable when the wage and sale ratio was between 30% to 60%. By applying this filter, several companies were excluded. This is correct as it is recorded in para 3.1.2 of the order passed by the TPO. TPO, as noted above, however had taken three companies, namely, Satyam Computer Service Ltd., L T Infotech Ltd. and Infosys Technologies as comparable to work out the mean. 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 Technologies 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 that the assessee had furnished details of workables in respect of 23 companies and the mean of the comparables worked out to 10%, as against the margin of 17% shown by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only. Therefore, according to the learned Departmental Representative, the said company is comparable to the assessee. He has drawn our specific attention to page 105 of the transfer pricing order where this fact is recorded by the TPO. 13. Having regard to the rival contentions and the material on record, we find that being the very same assessment year viz., 2006-07 in the case of M/s.Ariba Technologies India Pvt. Ltd. this Tribunal had occasion to go into the comparability of these companies with the said company and the Tribunal has held it to be functionally dissimilar from the similar activity of software development service. We find that the Tribunal, at para.12 13 of its order, has held as under: 12. The following were the relevant observations of the Tribunal on the aforesaid comparable companies in the case of Triology E-Business Software India Pvt.Ltd.(supra): (d) KALS Information Systems Ltd. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccel Transmatic Ltd. 48. With regard to this company, the complaint of the assessee is that this company is not a pure software development service company. It is further submitted that in a Mumbai Tribunal Decision of Capgemini India (F) Ltd v Ad. CIT 12 Taxman.com 51, the DRP accepted the contention of the assessee that Accel Transmatic should be rejected as comparable. The relevant observations of DRP as extracted by the ITAT in its order are as follows: In regard to Accel Transmatics Ltd. the assessee submitted the company profile and its annual report for financial year 2005-06 from which the DRP noted that the business activities of the company were as under. (i) Transmatic system - design, development and manufacture of multi function kiosks Queue management system, ticket vending system (ii) Ushus Technologies - offshore development centre for embedded software, net work system, imaging technologies, outsourced product development (iii) Accel IT Academy (the net stop for engineers)- training services in hardware and networking, enterprise system management, embedded system, VLSI designs, CAD/CAM/BPO (iv) Accel Animation Studies software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . IT (TP) 1129/Bang/2011 AY 07-08) wherein on the comparability of the aforesaid company, the Tribunal held as follows:- 14. As far as comparable at Sl.No.6 24 are concerned, the comparability of the aforesaid two companies with that of the software service provider was considered by the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India Private Ltd. (supra) wherein on the aforesaid two companies, the Tribunal held as follows:- 7.7.Tata Elxsi Limited.: From the facts and material on record and submissions made by the learned AR, it is seen that the Tata Elxsi is engaged in development of niche product and development services, which is entirely different from the assessee company. We agree with the contention of the learned AR that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company fit for comparability analysis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustment it would come be 8.11%, whereas the assessee s operating margin on cost was 10.48% and therefore, the international transaction is at arms length price being within + or -5 of the average arithmetical mean of the comparable companies. The working of the said computation is filed before us. We direct the AO to verify the same and if found to be correct, then no adjustment is called for. 17. As regards ground Nos.5 to 8 are concerned, we find that these are against the reduction of telecommunication expenses and traveling expenditure incurred in foreign currency from the export turnover only while computing the deduction u/s 10A of the Act. The learned counsel for the assessee submitted that the assessee is praying for the alternative relief of excluding the said expenditure both from export turnover as well as total turnover as held by the Hon ble High Court of Karnataka in the case of CIT vs. Tata Elxsi (349 ITR 98). 18. Having regard to the rival contentions and the material on record, we find that this issue is covered in favour of the assessee by the judgment of the Hon ble High Court of Karnataka (cited supra) and respectfully following the same, we direct th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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