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2015 (7) TMI 491 - ITAT BANGALORE

2015 (7) TMI 491 - ITAT BANGALORE - TMI - Transfer pricing adjustment - selection of comparable - Held that:- We direct the AO to exclude Infosys Ltd., from the final list of comparables both on the ground of size and diversity of activities as well as turnover of more than ₹ 200 crores.

Exclusion of Flextronics Software Systems Ltd., iGate Global Solutions Ltd. (segment), Mindtree Consulting Ltd., Persistant Systems Ltd., and Sasken Communication Ltd., from the final list of co .....

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rgin on cost was 10.48% and therefore, the international transaction is at armsí 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. - Decided in favour of assessee for statistical purposes.

Reduction of telecommunication expenses and traveling expenditure incurred in foreign currency from .....

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- 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 Assessing Officer u/s 143(3) r.w.s.144C(13) of the Income-tax Act, 1961 [hereinafter referred to as 'the Act' for short] dated 18/10/2010 for the assessment year 2006-07. 2. Brief facts of .....

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d Enterprises (AE) for providing software development services for a sum of ₹ 18,27,80,431/-. He therefore, referred the matter to the Transfer Pricing Officer (TPO) for determination of the ALP u/s 92CA of the Act. The TPO accepted the TNMM selected by the assessee as the Most Appropriate Method (MAP) and proceeded to consider the comparables adopted by the assessee. The assessee had adopted 9 companies as comparables which were rejected by the TPO and the TPO adopted 20 companies as comp .....

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e has raised as many as 9 grounds of appeal, it is stated by the learned counsel for the assessee that the issues raised in ground No.4 are all settled against the assessee in one or the other decisions and, therefore, the assessee is not agitating these grounds at this stage. It is stated by the learned counsel for the assessee that as far as transfer pricing adjustment covered under ground No.1 to 4 are concerned, the assessee is only challenging certain companies which have been adopted by th .....

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rial 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 98.59 3 Infosys .....

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44.07 8.02 16 Synfosys Business solutions Ltd. 10.61 4.49 17 Flextronics Software Systems Ltd. 27.24 595.12 18 Lanco Global Solutions Ltd 5.27 35.63 19 Megasoft Ltd 52.74 56.15 20 iGate Global solutions Ltd.(Seg.) 15.61 527.91 Arithmetic Mean 20.68% 5. The assessee had challenged before the DRP the comparability of the companies taken by the TPO before the DRP. However, the TPO as well as the DRP have not accepted the assessee s objections and have taken the said companies as comparables. The a .....

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n 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 .....

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the business of software development services rendering such services to its AE or group companies. Further, we find that the TPO has adopted the very same 20 companies as comparables in the case of the assessee as well as M/s.Ariba Technologies India Pvt. Ltd.,. Therefore, it is clear that the revenue itself has accepted both the companies to be comparable to each other. Therefore, the decision of the Tribunal in the case of M/s.Ariba Technologies India Pvt. Ltd., is applicable to the facts of .....

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refore functionally not comparable. 9. We find that the Tribunal in the case of M/s.Ariba Technologies India Pvt. Ltd., has considered all these objections of the assessee therein and at para.9 of its order, has upheld the turnover filter by following the decision of the Tribunal in the case of Trilogy E-Business Software India (P) Ltd., For the sake of convenience and ready reference the said findings are reproduced hereunder: 9. We have considered the submission of the learned counsel for the .....

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it was necessary for comparing an uncontrolled transaction with an international transaction 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 .....

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r 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 aspect would hold the field. Reference was also made to the OECD TP Guidelines, 2010 wherein it has been observed as follows:- Size criteria in terms of Sales, Assets or Number of Employees: The size of the transact .....

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h they operate. The fact that they operate in the same market may not make them comparable enterprises. The relevant extract is as follows [on Rule 10B(3)]: Clause (i) lays down that if the differences are not material, the transactions would be comparable. These differences could either be with reference to the transaction or with reference to the enterprise. For instance, a transaction entered into by a ₹ 1,000 crore company cannot be compared with the transaction entered into by a ͅ .....

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ontrolled companies. 14. Reference was made to the decision of the ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010, wherein relying on Dun and Bradstreet s analysis, the turnover of Q 1 crore to Q 200 crores was held to be proper. The following relevant observations were brought to our notice:- 9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that th .....

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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 tu .....

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ange having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study. 15. It was brought to our notice that the above proposition has also been followed by the Honourable Bangalore ITAT in the following cases: 1.M/s Kodiak Networks (India) Private Limited Vs. ACIT (ITA No.1413/Bang/2010) 2.M/s Genesis Microchip (I) Private Limited Vs. DCIT (ITA No.1254/ Bang/20l0). 3.Electronic for Imaging .....

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l submissions. The provisions of the Act and the Rules that are relevant for deciding the issue have to be first seen. Sec.92. of the Act provides that any income arising from an international transaction shall be computed having regard to the arm s length price. Sec.92-B provides that international transaction means a transaction between two or more associated enterprises, either or both of whom are nonresidents, in the nature of purchase, sale or lease of tangible or intangible property, or pr .....

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is an Associated Enterprise. In the present case there is no dispute that the transaction between the Assessee and its AE was an international transaction attracting the provisions of Sec.92 of the Act. Sec.92C 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 .....

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ength 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 has actually been undertaken does not exceed five per cent of the latter, the price at which the international transaction has actually been undertake .....

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in accordance with the provisions contained in sub-section (1) of section 92D and the rules made in this behalf; or (c) the information or data used in computation of the arm s length price is not reliable or correct; or (d) the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D, the Assessing Officer may proceed to determine the arm s length price in relation to the said .....

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ely :- (a)……. to (d)…….. (e)transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontro .....

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it 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 spec .....

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(d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction if- (i)none of the differences, if any, between the transactions .....

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nternational transaction has been entered into : Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared. A reading of the provisions of Rule 10B(2) of the Rules shows that uncontrolled transaction has to be compared with international transaction having regard to the factors set out there .....

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parables. The assessee s turnover is Q 47,46,66,638. It would therefore fall within the category of companies in the range of turnover between 1 crore and 200 crores (as laid down in the case of Genesis 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 .....

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in the case of Triology E-Business Software India Pvt.Ltd. (supra), we hold that the following companies (1) Flextronics Software Systems Ltd. 595.12 crores (2) iGate Global Solutions Ltd. 527.91 crores (3) Mindtree Ltd. 448.79 crores (4) Persistent Systems Ltd. 209.18 crores (5) Sasken Communication Technologies Ltd. 240.03 crores (6) Infosys Technologies Ltd. 9028.00 crores whose turnover is above ₹ 200 Crores should be excluded from the list of comparable companies. The AO is directed t .....

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re us at pages 298 to 303 of the paper book filed before us. On perusal of the said decision, we find that the Hon ble High court, at paras.6 to 8 of its decision has held as under: 6. Learned counsel for the Revenue has submitted that the tribunal after recording the aforesaid table has not affirmed or given any finding on the differences. This is partly correct as the tribunal has stated that Infosys Technologies Ltd. should be excluded from the list of comparables for the reason latter was a .....

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and differences mentioned in the tabulated form. The chart has not been controverted. 7. Learned counsel for the appellant Revenue during the course of hearing, drew our attention 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 t .....

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re 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. Details of these companies are mentioned in para 5 of the impugned order. Respectfully following the same, we direct th .....

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he decision of the co-ordinate bench in the case of M/s.Ariba Technologies India Pvt. Ltd., (supra) we have already directed the AO to exclude Infosys Ltd., from the final list of comparables on the ground of turnover being more than ₹ 200 crore. Respectfully following the same, we direct the AO to exclude these other companies also from the list of comparables on the same ground. 12. The assessee further seeks exclusion of KALS Info Systems Ltd., Accel Transmatics Ltd. (segment), Tata Elx .....

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Ltd., is concerned, it is stated by the learned counsel for the assessee that software development business segment of this company is involved in many non-comparable activities such as hardware design, industrial design and engineering and visual computing and therefore it has to be excluded. In support of his contention, he placed reliance upon the decision of this Tribunal in the case of M/s.Ariba Technologies India Pvt. Ltd., The learned Departmental Representative, on the other hand while .....

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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 followin .....

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the salary cost debited under the software development expenditure was Q 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal s decision of the ITAT in the case of Bindview India Private Limited Vs. DCI, ITA No. ITA No 1386/PN/1O wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extr .....

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ted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds. Based on all the above, it was submitted on behalf of the assessee that KALS Informati .....

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lso find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable. (e) Accel 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 .....

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nsmatic 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 services for 2D/3D .....

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ransmatic Ltd. from the final list of comparables for the purpose of determining TNMM margin. Besides the above, it was pointed out that this company has related party transactions which is more than the permitted level and therefore should not be taken for comparability purposes. The submission of the ld. counsel for the assessee was that if the above company should not be considered as comparable. The ld. DR, on the other hand, relied on the order of the TPO. 50. We have considered the submiss .....

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hold that the aforesaid company should be excluded as comparables. 13. The facts and circumstances under which the aforesaid companies were considered as comparable is identical in the case of the Assessee as well as in the case of Triology EBusiness Software India Pvt.Ltd. (supra). Respectfully following the decision of the Tribunal referred to above in the case of Triiology E-Business Software India Pvt.Ltd.(supra), we direct that KALS InfoSystems Ltd. And Accel Transmatic Ltd. be excluded fr .....

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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 mad .....

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paring the profit ratio from product and services. Thus, on these facts, we are unable to treat this company fit for comparability analysis for determining the arms length price for the assessee, hence, should be excluded from the list of comparable parties. 15. In view of the above, the ld. counsel for the assessee fairly admitted that comparable company at Sl.No.6 viz., Flextronics Software Systems Pvt. Ltd. should be taken as a comparable, while comparable at Sl.No.24 viz., Tata Elxsi Ltd. sh .....

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espectively. He stated that this Tribunal, in a number of cases has been holding that if the RPT are more than 15%, then such comparable companies have to be excluded from the final list of comparables. In support of this contention also, the learned counsel for the assessee has placed reliance upon the decision of the co-ordinate bench of the Tribunal in the case of M/s.Ariba Technologies India Pvt. Ltd.. The learned Departmental Representative, however, supported the orders of the authorities .....

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at the company viz., Lucid Software be excluded from the list of 20 comparable arrived at by the TPO. As facts and circumstances before us are similar, respectfully following the same, we direct the AO to exclude these companies also from the final list of comparables. 16. It is stated by the learned counsel for the assessee that if the above companies are excluded from the final list of comparables, the average arithmetical mean of the remaining companies would be 11% and after working capital .....

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