TMI Blog2015 (8) TMI 712X X X X Extracts X X X X X X X X Extracts X X X X ..... are to be excluded from the set of comparable, we hold that the learned CIT (Appeals) was not correct in holding that companies with any RPT have to be excluded from the set of comparable companies, and direct the TPO / A.O. to apply the RPT filter at 15% of total revenues for including / excluding the comparable companies, excluded by the learned CIT (Appeals), in the final set of comparables. - Decided partly in favour of revenue. Turnover Filter of ₹ 200 Crores - Held that:- This Tribunal in the case of Genisys Integrating Systems (India) Pvt. Ltd. (2011 (8) TMI 952 - ITAT BANGALORE) has held that turnover is an important filter of comparability which has to be adopted for determination of ALP and has determined the upper limit of the turnover filter to be applied at ₹ 200 Crores in cases where the turnover of the assessee is less than ₹ 200 Crores. In the case on hand, the turnover of the assessee being approx. ₹ 7.97 Crores only, falls within the range of ₹ 1 Crore to ₹ 200 Crores. Therefore, following the decision of the co-ordinate bench of this Tribunal in the case of Genisys Integrating Systems (India) Pvt. Ltd. (supra), we hold and d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eals) erred in allowing the assessee the benefit of 5% standard deduction and accordingly reverse this order of this issue in view of the retrospective amendment w.e.f. 1.4.2002 brought about by the insertion of Section 92C(2A) of the Act by Finance Act, 2012. - Decided in favour of revenue. - I.T.(T.P) A. No.73/Bang/2012 - - - Dated:- 30-4-2015 - SHRI N.V. VASUDEVAN AND SHRI JASON P. BOAZ, JJ. For The Assessee : Shri V. Sridhar, Advocate. For The Revenue : Shri C.H. Sundar Rao, CIT-I (D.R) ORDER Per Shri Jason P. Boaz, A.M. : These are cross appeals, one by the assessee and one by Revenue, directed against the order of the Commissioner of Income Tax (Appeals)-IV, Bangalore dt.30.11.2011 for Assessment Year 2005-06. The assessee has also filed cross objections in the matter. 2. The facts of the case, briefly, are as under :- 2.1 The assessee company, in the business of providing software development services, filed its return of income for Assessment Year 2005-06 on 29.10.2005 declaring total income of ₹ 24,93,540 after claiming deduction of ₹ 1,50,41,210 under Section 10A of the Income Tax Act, 1961 (in short 'the Act'). The re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ereas such exclusion is permitted to arrive at the export turnover only as per the definitions given in Sec. 10A of the Act and total turnover has not been defined in the section. 3. On the facts and in the circumstances of the case, the learned CIT (Appeals) erred in holding that the TPO erred in not excluding comparables having any related party transactions. 4. The learned CIT (Appeals) erred in holding that the size and turnover of the company are deciding factors for treating a company as a comparable, and accordingly erred in excluding M/s. Infosys Technologies Ltd., M/s. iGate Global Solutions Ltd., Flextronics Software Systems Ltd. and L T Infotech Ltd. and Satyam Software Services Ltd. as comparables. 5. The learned CIT (Appeals) erred in holding that profit on cost of more than 50% of the comparable company(ies) is abnormal without giving reasons how functions discharged, assets deployed and risks assumed of such companies were different from that of the appellant company. 6. The learned CIT (Appeals) erred in holding that the assessee is eligible for a standard deduction of 5% from the ALP under the proviso to Section 92C(2) of the IT Act, 1961. 7. For the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t wrong in disallowing the same in the determination of ALP. 8. The CIT (Appeals) IV erred in excluding the majority of samples while retaining only the few sample in arriving at ALP which according to the appellant was wrong, incorrect and unjustified, erroneous and not sustainable both facts and in law. 9. The CIT (Appeals) IV failed to appreciate that the re-determination of ALP in the recomputation of the adjustment required relating to the transaction with the AEs in the computation of taxable total income was wrong, incorrect, invalid, unjustified, erroneous and not sustainable both on facts and in law. 10. The CIT (Appeals) IV failed to appreciate that there was no proper opportunity was given before passing the impugned order / the TPO s order and any order passed in violation of the principles of natural justice is nullity in law. 11. The appellant craves leave to file additional grounds / arguments at the time of hearing. Transfer Pricing Issues. 6.0 Before proceeding to deal with the above grounds of appeal on T.P. issues, the approach of the TPO vis-a-vis that of the assessee in its T.P.Study submitted before the TPO is briefly summarised as unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . (Seg) 14.41 13. iGate Global Solutions Ltd. (Seg) 4.32 14. Flextronics (Seg) 32.19 15. L T Infotech Ltd. 10.33 16. Satyam Computers Services 29.44 17. Infosys Ltd. 42.83 8.2 The arithmetic mean of these 17 comparables was computed at 26.59%. After allowing working capital adjustment of (-) 0.06%, the adjusted arithmetic mean of these comparables was adopted at 26.65%. The resultant shortfall in the price amounting to ₹ 42,81,608 was taken at the T.P. adjustment to the ALP of the international transactions of the assessee with its AEs and added to the income of the assessee. 9.1 In the impugned order, the learned CIT(A) after considering the submissions of the assessee disposed off the assessee's appeal excluding certain companies chosen by the TPO as comparables to the assessee. While deciding on the exclusion of certain companies from the 17 comparable companies chosen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nco Global Ltd. should be excluded from the set of comparable companies on grounds of low margins. 9.5 Computation of Deduction u/s.10A of the Act. In respect of the assessee's claim for deduction u/s.10A of the Act, the learned CIT(A) relying on the decision of the Hon'ble High Court of Karnataka in the case of Tata Elxsi Ltd. (349 ITR 98) and of the Special Bench of the Chennai ITAT in the case of Sak Soft Ltd. (313 ITR 353), directed the Assessing Officer to recompute the same by reducing from the total turnover , the communication expenses by which the export turnover has been reduced. 10.1 In the proceedings before us, the learned Departmental Representative challenged the impugned order of the learned CIT(A) on the issue of RPT, upper turnover filter and abnormal profit, raised at Grounds 3, 4 and 5 of the appeal; placing reliance on later decisions of the co-ordinate benches of this Tribunal in support of the stand of revenue. On the contrary, the learned Authorised Representative of the assessee assailed the impugned order of the learned CIT(A) in confirming part of the TP Adjustment and submitted paper books containing case laws and other details w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esentative supported the impugned order of the learned CIT(A) on this issue, submitting that the issue is now covered in favour of the assessee by the decision of the Hon'ble High Court of Karnataka in the case of Tata Elxsi Ltd. (supra). The learned A.R. contends in view of this, Revenue s appeal on this Ground is liable to be dismissed. 12.3 We have heard the rival submissions and perused and carefully considered the material on record. We find, as submitted by the learned Authorised Representative, that the Hon'ble High Court of Karnataka in the case of Tata Elxsi Ltd. (supra) has held that while computing the deduction under section 10A of the Act, if the export turnover in the numerator is to be arrived at after excluding certain expenditure, then the same expenditure should also be excluded from the total turnover also. Respectfully following the same, we dismiss this ground of revenue and direct the Assessing Officer to exclude the expenditure incurred in foreign currency towards daily allowance, support allowance and travel both from export turnover as well as from total turnover for computing deduction under section 10A of the Act. Accordingly, Ground No.2 raise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty transactions vis- -vis sales and not profit since profit of an enterprise is influenced by large number of other factors . Respectfully following the decision of the Tribunal in the case of Sony India (P) Ltd (supra), the Assessing Officer / TPO are directed to exclude after due verification those comparables from the list with related party transactions or controlled transactions in excess of 15% of total revenues for the financial year 2003-04. 13.2.2 In the light of the above decision of the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (supra), we find that the decision of the learned CIT (Appeals) in excluding those companies with any RPT is not in keeping with the above decision of the co-ordinate bench of this Tribunal. Respectfully following the above decision, we hold that the learned CIT (Appeals) was not correct in holding that companies with any RPT have to be excluded from the set of comparable companies, and direct the TPO / A.O. to apply the RPT filter at 15% of total revenues for including / excluding the comparable companies, excluded by the learned CIT (Appeals), in the final set of comparables. Consequently Ground No.3 rai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing that size and turnover are deciding factors for treating a company as a comparable. 14.3 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial decisions cited and placed reliance upon. We find that a co-ordinate bench of this Tribunal in the case of Genisys Integrating Systems (India) Pvt. Ltd. (supra) has held that turnover is an important filter of comparability which has to be adopted for determination of ALP and has determined the upper limit of the turnover filter to be applied at ₹ 200 Crores in cases where the turnover of the assessee is less than ₹ 200 Crores. In the case on hand, the turnover of the assessee being approx. ₹ 7.97 Crores only, falls within the range of ₹ 1 Crore to ₹ 200 Crores. Therefore, following the decision of the co-ordinate bench of this Tribunal in the case of Genisys Integrating Systems (India) Pvt. Ltd. (supra), we hold and direct that only those companies having a turnover of ₹ 1 Crore to ₹ 200 Crores be taken as comparable companies and consequently uphold the decision of the learned CIT (Appeals) in excluding the above mentioned fiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of more than one comparables is to iron out the effect of extreme cases and find the profit margin as a representative of the whole lot. It was also held by the Tribunal that the higher or lower profit rate has not been prescribed as the determinative factor in the relevant Rules i.e. Rule 10B(2) and 10B(3) to make a case incomparable. The Tribunal observed that the profit rate in any case cannot be such determinative factor in itself as it is a consequence of the effect of the various factors. In the case of 24/7 Customer.Com Pvt. Ltd. (supra), the Bangalore Bench of this Tribunal considered the relevant OECD guidelines in this respect and held that the exclusion of companies with abnormal profits from the comparables may be in line with the principles enumerated in the OECD guidelines, but the same cannot be said to be in tune with the Indian TP Regulations. The Tribunal noted that there was a deviation in the TP Rules specifically from OECD guidelines by specifying the arithmetic mean for determining the ALP as against the quartile method suggested in the OECD guidelines which excludes the companies that fall in the extreme quartiles for comparability. To the similar effect is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estion has become infructuous in so far as the case of the assessee before the Special Bench is concerned and the same therefore no more survives for consideration in the present case. In generality, we are of the view that the answer to this question will depend on the facts and circumstances of each case inasmuch as potential comparable earning abnormally high 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 normal business trend. The FAR analysis in such case may be reviewed to ensure that the potential comparable earning high profit satisfies the comparability conditions. If it is found on such investigation that the high margin profit making company does not satisfy the comparability analysis and or the high profit margin earned by it does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Standard deduction 5% . 16.1 Ground No.6 of revenue s appeal contends that the impugned order of the learned CIT (Appeals) is erroneous in granting standard deduction of 5% in computing the ALP of the international transactions, by citing various judicial pronouncements. 16.2.1 We have heard the rival contentions of both the learned Departmental Representative for revenue and the learned Authorised Representative of the assessee. The fact of the matter is that the assessee sought for the benefit of + / - 5% standard deduction as per the proviso to section 92C(2) of the Act, which was granted by the learned CIT (Appeals) citing several judicial decisions in support of this proposition. Prior to the amendment made by Finance (No.2) Act, 2009 and Finance Act, 2012, the proviso to section 92C(2) of the Act provided that the ALP would be taken to be the Arithmetic Mean ( AM ) or at the option of the assessee, a price which may vary from the AM by an amount not exceeding 5% of such AM. Thus, the ALP was + / - 5% of such AM. 16.2.2 This issue is now more of academic nature and the judicial decisions cited and relied on by the learned CIT (Appeals) in the impugned order are not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esentative of the assessee submitted that these grounds are not being pressed. In view of these grounds not being pressed, they are rendered infructuous and are accordingly dismissed. 20.1 Grounds No.5 6 are related to Miscellaneous Income . In Ground No.5, the assessee has assailed the decision of the authorities below in excluding miscellaneous income for arriving at the operating margin without granting the assessee opportunity to present its case and also in holding so, without assigning any reasons whatsoever for their decisions in the matter. In Ground No.6, the assessee contends that miscellaneous income should be considered for arriving at the operating margin in the determination of ALP of international transactions. 20.2 We have considered the submissions made. On a perusal of the orders of the Assessing Officer / TPO, we find that there is no discussion or finding therein on the issues raised by the assessee. In this view of the matter, in the interest of equity and justice, we remand the matter back to the file of the Assessing Officer / TPO to examine the matter and decide the issue in accordance with law after affording the assessee adequate opportunity of be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1, 2, 4, 5, 8, 9, 10, 11 and 12 of the TPO s list of 17 comparable companies. The assessee has filed a chart giving the reasons why the other 8 companies are required to be excluded and the judicial decisions of various Tribunals in support of its contentions. 23.0 Turnover Filter of ₹ 200 Crores. 23.1 The learned Authorised Representative of the assessee has furnished a chart wherein the names of the 5 companies which have turnovers in excess of ₹ 200 Crores in the relevant period are indicated. It is submitted that in the relevant period, the assessee's turnover is approximately ₹ 7.97 Crores only. It was contended that these companies with turnover in excess of ₹ 200 Crores ought to be excluded from the list of comparables as held by the co-ordinate bench of this Tribunal in the case of Genisys Integrating Systems (India) Pvt. Ltd. reported in 152 TTJ 215. 23.2 While dealing with Revenue s appeal we have already adjudicated on this issue at para 14.1 to 14.3 of this order and the same holds good in respect of the assessee's submissions. 24. RPT Filter Four Soft Ltd. 24.1 Before us, the assessee made detailed submissions to the effe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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