TMI Blog2015 (8) TMI 980X X X X Extracts X X X X X X X X Extracts X X X X ..... od of computation of deduction under section 10A - Held that:- Taking into consideration the decision rendered by the hon'ble High Court of Karnataka in the case of CIT v. Tata Elxsi Ltd. [2011 (8) TMI 782 - KARNATAKA HIGH COURT] we are of the view that it would be just and appropriate to direct the Assessing Officer to exclude telecommunication charges and travelling expenses incurred in foreign currency both from export turnover and total turnover, as has been prayed for in the alternative by the assessee. - Decided in favour of assessee. Non deduction of TDS - According to the assessee the payment in question was reimbursement of expenses incurred by the non-resident on behalf of the assessee and therefore there was no obligation to deduct tax at source as the payment does not constitute income of the non-resident - assessee did not raise any objection on the proposed addition in the draft assessment order before the Dispute Resolution Panel - Held that:- A perusal of the above provisions of section 144C of the Act makes it clear that the draft assessment order of the Assessing Officer will attain finality to the extent that the assessee does not object to the proposals in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This submission was found to be correct at the time of hearing. With this background we will now consider the factual basis of the present case and the decision rendered referred to by learned counsel for the assessee before us. 5. The assessee is a company. It rendered software development services to its associated enterprise (AE). There is no dispute that the said transaction was an international transaction with an associated enterprise and therefore the price received by the assessee for rendering such services has to pass the arm's length price (ALP) test as laid down in section 92 of the Act. During the financial year 2005-06, the assessee provided software development services to its associated enterprise and was remunerated on a cost plus basis. The total value of international transaction with respect to the provision of software development services by the assessee to its associated enterprise was ₹ 25,95,25,941. 6. In support of the assessee's claim that the price charged by it for services rendered to its associated enterprise was at arm's length, the assessee filed a report as required by the provisions of section 92E of the Act in Form 3EB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,25,941 Shortfall being adjustment under section 92CA ₹ 1,56,54,745 The above shortfall of ₹ 1,56,54,745 is being treated as an adjust ment to the price shown by the taxpayer in its books of account. 9. Against the said adjustment proposed by the Transfer Pricing Officer which was incorporated in the draft assessment order by the Assessing Officer, the assessee filed objections before the Dispute Resolution Panel. The Dispute Resolution Panel rejected those objections and confirmed the transfer pricing adjustment suggested by the Transfer Pricing Officer. The adjustment confirmed by the Dispute Resolution Panel was added to the total income of the assessee by the Assessing Officer in the fair order of assessment. Against the said order of the Assessing Officer, the assessee has preferred the present appeal before the Tribunal. 10. Learned counsel for the assessee brought to our notice that out of the 20 comparable companies chosen by the Transfer Pricing Officer, the following companies will have to be excluded as the turnover of these companies are more than ₹ 200 crores as can be seen from the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 deci sions as the decision of the Special Bench on this aspect would hold the field. Reference was also made to the OECD Transfer Pricing Guidelines, 2010 wherein it has been observed as follows : 'Size criteria in terms of sales, assets or number of employees : The size of the transaction in absolute value or in proportion to the activities of the parties might affect the relative competitive positions of the buyer and seller and therefore comparability.' 12. The Institute of Chartered Accountants of India transfer pricing guidelines note on this aspect lay down in para 15.4 that a transaction entered into by a ₹ 1,000 crores company cannot be compared with the transaction entered into by a ₹ 10 crores company. The two most obvious reasons are the size of the two companies and the relative economies of scale under which they operate. The fact that they operate in the same market may not ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom 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 and Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun and Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of ₹ 1 crore to ₹ 200 crores have to be taken as a particular range and the assessee being in that range having turnover of ₹ 8.15 crores, the companies which also have turnover of ₹ 1 to ₹ 200 crores only should be taken into consideration for the purpose of making transfer pricing study.' 15. It was brought to our notice that the above proposition has also been followed by the honourable Bangalore, Income-tax Appellate Tribunal in the following cases : 1. Kodiak Networks (India) Private Limited v. Asst. CIT (I. T. A. No. 1413/Bang/2010) ; 2. Genesis Microchip (I) Private Limited v. Deputy CIT (ITA No.1254/Bang/20l0). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ale 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 has actually been undertaken does not exceed five per cent. of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm's length price. (3) Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that- (a) the price charged or paid in an international transaction has not been determined in accordance with sub-sections (1) and (2) ; or (b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions ; (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 internatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rores) (1) Flextronics Software Systems Ltd. 848.66 (2) iGate Global Solutions Ltd. 747.27 (3) Mindtree Ltd. 590.39 (4) Persistent Systems Ltd. 293.74 (5) Sasken Communication Technologies Ltd. 343.57 (6) Tata Elxsi Ltd. 262.58 (7) Wipro Ltd. 961.09 (8) Infosys Technologies Ltd. 131.49 12. Respectfully following the aforesaid decision of the Tribunal in the case of Trilogy E-Business Software India P. Ltd. (supra), we hold that the following companies should be excluded from the list of comparable companies. 1. Flextronics Software Systems Ltd. 2. iGate Global Solutions Ltd. 3. Mindtree Ltd. 4. Persistent Systems Ltd. 5. Sasken Communication Technologies Ltd. (Seg.) 6. Infosys Technologies Ltd. 7. Tata Elxsi Ltd. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, the assessee succeeds.' Based on all the above, it was submitted on behalf of the asses see that KALS Information Systems Ltd. should be rejected as a comparable. 22. We have given a careful consideration to the submission made on behalf of the assessee. We find that the Transfer Pricing Officer has drawn conclusions on the basis of information obtained by issue of notice under section 133(6) of the Act. This information which was not available in public domain could not have been used by the Transfer Pricing Officer, when the same is contrary to the annual report of this company as highlighted by the assessee in its letter dated June 21, 2010 to the Transfer Pricing Officer. We also find that in the decision referred to by learned counsel for the assessee, the Mumbai Bench of the Income-tax Appellate Tribunal has held that this company was developing software products and not purely or mainly software development ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsideration, i.e., assessment year 2008-09 and therefore on this basis, this company cannot be considered as a comparable in the case on hand. (v) The relevant portion of the annual report of this company evidences that it is in the business of product development. The learned authorised representative prays that in view of the factual position as laid out above and the decisions of the co-ordinate Benches of the Tribunal in the assessee's own case for the assessment year 2007-08 and other cases cited above, it is clear that this company being into product development cannot be considered as a comparable to the assessee in the case on hand who is a software service provider and therefore this company, i.e., Lucid Software Ltd., ought to be omitted from the list of comparables. 16.2 Per contra, the learned Departmental representative supported the action and finding of the Transfer Pricing Officer in including this company in the list of comparables. 16.3. We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that the company, i.e., Lucid Software Ltd., is engaged in the development of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see offers software development services to its associated enterprises. The Transfer Pricing Officer had rejected the objections of the assessee on the ground that this comparable company has categorised itself as a pure software developer, just like the assessee, and hence selected this company as a comparable. For this purpose, the Transfer Pricing Officer had relied on the information submitted by this company in response to enquiries carried out under section133(6) of the Act for collecting information about the company directly. 7.2. Before us, the learned authorised representative reiterated the assessee's objections for the inclusion of this company from the list of comparable companies on the ground that this company is not functionally comparable to the assessee as it is into software products. It is also submitted that the segmental details of this company are not available and the annual report available in the public domain is not complete. It was further contended that the information obtained by the Transfer Pricing Officer under section 133(6) of the Act, on the basis of which the Transfer Pricing Officer included this company in the final list of comparable c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sis and other relevant facts of the Trilogy E-Business Software India P. Ltd. v. Deputy CIT's case are equally applicable to the facts of the assessee's case also. Unless the facts and the FAR analysis of Trilogy's case is comparable to that of the asses see in the case on hand, comparison between the two is not tenable. (ii) After demonstrating the similarity and the comparability between the assessee and the Triology case, the assessee also needs to demonstrate that the facts applicable to the assessment year 2007- 08, the year for which the decision in case of Trilogy E-Business Software India P. Ltd. v. Deputy CIT (supra) was rendered are also applicable to the year under consideration, i.e., assessment year 2008-09. 9.5.3 It is a well-settled principle that the assessee is required to perform FAR analysis for each year and it is quite possible that the FAR analysis can be different for each of the years. That being so, the principle applicable to one particular year cannot be extrapolated automatically and made applicable to subsequent years. To do that, it is necessary to first establish that the facts and attendant factors have remained the same so that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Benches of the Tribunal in the assessee's own case for the assessment year 2007-08 (supra) and in other cases like Trilogy E-Business Software India P. Ltd. v. Deputy CIT (supra) are applicable to the year under consideration as well. 7.5. Per contra, the learned Departmental representative supported the order of the Transfer Pricing Officer/Dispute Resolution Panel for inclusion of this company Avani Cincom Technologies Ltd. in the final set of comparables. 7.6.1. We have heard both parties and perused and carefully considered the material on record. It is seen from the record that the Transfer Pricing Officer has included this company in the final set of comparables only on the basis of information obtained under section 133(6) of the Act. In these circumstances, it was the duty of the Transfer Pricing Officer to have necessarily furnished the information so gathered to the assessee and taken its submissions thereon into consideration before deciding to include this company in its final list of comparables. Non-furnishing the information obtained under section 133(6) of the Act to the assessee has vitiated the selection of this company as a comparable. 7.6.2. We al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is functionally different from the assessee and that it fails the employee cost filter. The Transfer Pricing Officer, however, brushed aside the objections raised by the assessee by stating that the objections of functional dissimilarity has been dealt with in detail in the transfer pricing order for the assessment year 2007-08. As regards the objection raised in respect of the employee cost filter issue, the Transfer Pricing Officer rejected the objections by observing that the employee cost filter is only a trigger to know the functionality of the company. 9.2. Before us, the learned authorised representative contended that this company is not functionally comparable, as the company is into bio-informatics software product/services and the segmental break- up is not provided. It was submitted that : (i) This company is engaged in the development of products in the field of bio-technology, pharmaceuticals, etc., and therefore is not functionally comparable to the assessee ; (ii) This company has been held to be functionally incomparable to software service providers by the decision of the co-ordinate Bench of this Tribunal in the assessee's own case for the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pricing Officer as well who seems to have selected this company as a comparable based on the reasoning given in the Transfer Pricing Officer's order for the earlier year. It is evidently clear from this, that the Transfer Pricing Officer has not carried out any independent FAR analysis for this company for this year, viz., assessment year 2008-09. To that extent, in our considered view, the selection process adopted by the Transfer Pricing Officer for inclusion of this company in the list of comparables is defective and suffers from serious infirmity. 9.4.2. Apart from relying on the afore cited judicial decisions in the matter (supra), the assessee has brought on record substantial factual evidence to establish that this company is functionally dis-similar and different from the assessee in the case on hand and is therefore not comparable and also that the findings rendered in the cited decisions for the earlier years, i.e., assessment year 2007-08 is applicable for this year also. We agree with the submissions of the assessee that this company is functionally different from the assessee. It has also been so held by co-ordinate Benches of this Tribunal in the assessee's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ign services and in technology consulting services including product development consulting services. These services, the learned authorised representative contends, are high end information technology enabled services normally categorised as knowledge process outsourcing ('KPO') services. It is further submitted that this company has not provided segmental data in its annual report. The learned authorised representative submits that since the annual report of the company does not contain detailed descriptive information on the business of the company, the assessee places reliance on the details available on the company's website which should be considered while evaluating the company's functional profile. It is also submitted by the learned authorised representative that knowledge process outsourcing services are not comparable to software development services and therefore companies rendering knowledge process outsourcing services ought not to be considered as comparable to software development companies and relied on the decision of the co-ordinate Bench in the case of Capital IQ Information Systems (India) P. Ltd. v. Deputy CIT (Inter national Taxation) in I. T. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ading in software and giving licences for use of software. In this regard, the learned authorised representative submitted that : (i) This company is engaged in product development and earns revenue from sale of licences and subscription. It has been pointed out from the annual report that the company has not provided any separate segmental profit and loss account for software development services and product development services. (ii) In the case of E-Gain Communications P. Ltd. (2008-TII-4- ITAT-PUNE-TP), the Tribunal has directed that this company be omitted as a comparable for software service providers, as its income includes income from sale of licences which has increased the margins of the company. The learned authorised representative prayed that in the light of the above facts and in view of the aforecited decision of the Tribunal (supra), this company ought to be omitted from the list of comparables. 15.2. Per contra, the learned Departmental representative supported the action of the Transfer Pricing Officer in including this company in the list of comparables. 15.3. We have heard the rival submissions and perused and carefully considered the material on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 45/Bang/2011) on the ground that the 'related party transactions' (RPT) is in excess of 15 per cent. The learned authorised representative submitted that for the current period under consideration, the related party transactions is 18.3 per cent. and therefore this company requires to be omitted from the list of comparables. 19.2. Per contra, the learned Departmental representative supported the action of the Transfer Pricing Officer in including this company in the list of comparables as this company was a pure software development service provider like the assessee. 19.3. We have heard both parties and perused and carefully considered the material on record. We find that the co-ordinate Bench of this Tribunal in the assessee's own case for the assessment year 2007- 08 in I. T. A. No. 845/Bang/2011 has excluded this company from the set of comparables for the reason that related party transactions is in excess of 15 per cent. following the decision of another Bench of this Tribunal in the case of 24/7 Customer.Com.Pvt. Ltd. v. Deputy CIT in I. T. A. No. 227/Bang/2010 . As the facts for this year are similar and material on record also indicates that related party ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total turnover and in this regard has placed reliance on the decision of the hon'ble Karnataka High Court in the case of CIT v. Tata Elxsi Ltd. [2012] 349 ITR 98 (Karn) wherein the hon'ble court held that whatever is excluded from the export turnover should also be excluded from the total turnover for the purpose of computing deduction under section 10A of the Act. The main prayer as well as the alternate prayer was rejected by the Assessing Officer as well as the Dispute Resolution Panel. 31. We have heard learned counsel for the assessee and the learned Departmental representative on the issues raised in ground No. 6. Taking into consideration the decision rendered by the hon'ble High Court of Karnataka in the case of CIT v. Tata Elxsi Ltd. [2012] 349 ITR 98 (Karn), we are of the view that it would be just and appropriate to direct the Assessing Officer to exclude telecommunication charges and travelling expenses of ₹ 6,57,92,778 incurred in foreign currency both from export turnover and total turnover, as has been prayed for in the alternative by the assessee in ground No. 6. In view of the acceptance of the alternative prayer in ground No. 6, we are of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee shall, within thirty days of the receipt by him of the draft order,- (a) file his acceptance of the variations to the Assessing Officer ; or (b) file his objections, if any, to such variation with,- (i) the Dispute Resolution Panel ; and (ii) the Assessing Officer. (3) The Assessing Officer shall complete the assessment on the basis of the draft order, if- (a) the assessee intimates to the Assessing Officer the acceptance of the variation ; or (b) no objections are received within the period specified in sub-section (2). (4) The Assessing Officer shall, notwithstanding anything contained in section 153, pass the assessment order under sub-section (3) within one month from the end of the month in which,- (a) the acceptance is received ; or (b) the period of filing of objections under sub-section (2) expires. (5) The Dispute Resolution Panel shall, in a case where any objec tion is received under sub-section (2), issue such directions, as it thinks fit, for the guidance of the Assessing Officer to enable him to complete the assessment. (6) The Dispute Resolution Panel shall issue the directions referred to in sub-section (5), after considering t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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