TMI Blog2015 (10) TMI 484X X X X Extracts X X X X X X X X Extracts X X X X ..... s that none of these contentions have been considered by him. We are, therefore, of the view that the order of CIT(Appeals) on this issue should be set aside and the AO/TPO should be directed to examine the details and arrive at the correct working capital adjustment. We hold and direct accordingly. Treating foreign exchange gain or loss and provision for bad debts as non-operating in nature and fringe benefit tax as part of operating cost - Held that:- Exchange Fluctuation gains are required to be added to operating revenue. Following the same, the AO is directed to accept the claim of the Assessee in this regard. As far as provision for bad debts are concerned, the TPO has accepted that the same would be part of operating expenses provided the same is incurred every year for at least three years and the manner in which provision is made is consistent. The Assessee in reply to the query of the TPO on the above aspect has not furnished any details. We are of the view that the Assessee should be afforded opportunity to explain its position on the above and the AO is directed to consider the same in accordance with law. As far as Fringe Benefit Tax (FBT) is concerned, the same was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal sought to press adjudication of only grounds No.6 7 which read as follows:- 6. The learned CIT(A) has erred, in law and in facts, by upholding the action of AO/TPO in accepting/rejecting certain comparables based on unreasonable comparability criteria. 7. The learned CIT(A) has erred, in law and in facts, by not adjudicating the Appellant s plea on the computational errors in the working capital adjustment performed by the learned TPO. 4. The assessee has also filed an application seeking adjudication of an additional ground, which reads as follows:- The learned TPO and the learned AO have erred, in law and in facts, by applying only the lower turnover filter as a comparability criterion and accepting companies having turnover greater than ₹ 200 crores. 5. It has been submitted in the application for admission of additional ground that the application of turnover filter for chosing companies as comaprables for determining the ALP is a well accepted filter as laid down in the decision of the Bangalore Bench of the Tribunal in the case of Trilogy e-business Software India Pvt. Ltd., ITA No.1054/Bang/2011 . The assessee has further submitted that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should be prepared to make good faith showing that their transfer pricing is consistent with the arm s length principle regardless of where the burden of proof lies. 36. The aforesaid decisions and guidelines may not be exactly on identical facts before us but they emphatically show that taxpayer is not estopped from pointing out a mistake in the assessment though such mistake is the result of evidence adduced by the taxpayer. 37. When substantial justice and technical considerations are pitted against each other, the cause of substantial justice deserves to be preferred. For the other side cannot claim to have a vested right in injustice being done due to some mistakes on its part. 38. Accordingly, on facts and circumstances of the case, we hold that taxpayer is not estopped from pointing out that Datamatics has wrongly been taken as comparable. While admitting additional ground of appeal raised by the assessee to require us to consider whether or not Datamatics should be included in the comparable, we make no comments on merit except observing that assessee from record has shown its prima facie case. Further claim may be examined by the Assessing Officer. This course w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee in its TP study, the TPO accepted the companies as comparables viz., Akshay Software Technologies Ltd., Infosys Technologies Ltd., L T Infotech Ltd., Mind Tree Ltd., Persistent Systems Pvt. Ltd., R S Software (India) Ltd., Sasken Communication Technologies Ltd., and Zylog Systems Ltd. The TPO on a search of database chose 3 more companies as comparable companies and finally arrived at a set of 11 comparable companies, which were as follows:- Sl No Name of the Comparable Sales (in Rs.) Cost (in Rs.) Margin 1 KALS Information Systems Ltd. 2,14,04,686 1,87,93813 13.89% 2 Akshay Software Technologies Ltd. 12,23,21,483 11,31,49,350 8.11% 3 Bodhtree Consulting Ltd. 16,05,75,212 9,89,56,821 62.27% 4 R S Software (India) Ltd. 1,49,57,12,634 1,36,01,02,589 9.97% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fair assessment order by the AO. Aggrieved by the order of AO, the assessee preferred appeal before the CIT(Appeals). 14. Before the CIT(Appeals), the assessee sought exclusion of the following companies from the list of comparable companies viz., Bodhtree Consulting Ltd., Infosys Ltd., KALS Information Systems Ltd. and Tata Elxsi Ltd. The assessee also challenged the order of the TPO insofar as it relates to action of the TPO in not treating the foreign exchange gain as part of the operating revenue of the assessee and the comparable companies while working out the profit margins of the assessee and the comparable companies. The assessee also challenged the order of TPO in working out the negative working capital adjustment. 15. The CIT(Appeals) upheld the order of the AO insofar as comparability of 4 companies that were objected to by the assessee before him. With regard to considering the foreign exchange gain as part of the operating profits of the assessee, the CIT(Appeals) following the decision of the Tribunal in the Trilogy e-business Software India Pvt. Ltd. [23 ITR (Trib.) 464] , held that gain foreign exchange fluctuation had to be treated as part of the operatin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO has provided working capital adjustment. As a matter of fact, he has provided it at (-)3.18% which has increased the arm s length mean margin on cost from 25.05% to 28.22%. Before me, it was argued that the appellant is a captive service provider and assumes the less normal risks relating to business and operations and entrepreneurial risks borne by its AES outside India and is therefore insulated from most of the business and operational risks which the comparable companies are exposed to. Therefore, controlled and uncontrolled transactions are comparable only when adjustments with respect to significant differences between them in the risks assumed are made. I have considered the facts and circumstances of the case and find that the working capital adjustment provided by the TPO has a negative impact on adjusted margin and therefore, it cannot be said that a working capital adjustment has been provided in the positive sense. Hence, the Hon ble Tribunal s ruling will not apply in the instant case. Therefore, in my view, the appellant is entitled to risk adjustment as per prevailing norms which shall be worked out by the TPO and granted to the appellant. It is ordered accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asonable 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 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 ICAI TP Guidelines note on this aspect lay down in para 15.4 that a transaction entered into by a ₹ 1,000 crore company cannot be compared with the transaction entered into by a ₹ 10 crore 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 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 differen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 and the companies having a turnover of ₹ 1.00 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 1.00 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 India Private Limited (ITA No. 1171/Bang/2010). It was finally submitted that companies having turnover more than ₹ 200 crores ought to be rejected as not comparable with the Assessee. 16. The ld. DR, on the other hand pointed out that even the assessee in its own TP study has taken companies having turnover of more than ₹ 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ) any information and document relating to an international transaction have not been kept and maintained by the assessee 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espective 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 international transaction if- ( i ) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or ( ii ) reasonably accurate adjustments can be made to eliminate the material effects of such differences. (4) The data to be used in analysing the comparability of an u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o Ltd. 961.09 crores. (8) Infosys Technologies Ltd. 13149 crores. 20. It is the stand of the assessee that applying the aforesaid decision, the following 5 companies whose turnover is more than ₹ 200 crores should be excluded from the list of comparable companies finally chosen by the TPO viz., Tata Elxsi Ltd., Sasken Communication Technologies Ltd., Persistent Systems Ltd., Larsen Toubro Infotech Ltd. Infosys Ltd. 21. We have considered the submissions of the ld. counsel for the assessee and are of the view that in the light of judicial precedent cited by the ld. counsel for the assessee, turnover filter has to be applied in the present case. The assessee s turnover is ₹ 32.84 crores and the assessee cannot be compared with a company whose turnover is more than 200 crores as laid down in the decision referred to above. Following the aforesaid decision, we hold that the aforesaid 5 companies be excluded from the list of comparable companies. 22. The ld. counsel then brought to our notice that Bodhtree Consulting Ltd. and KALS Information Systems Ltd. have been held to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able, when factually it is shown that the said company is a software product company and not a software development services company. 26.3 KALS Information Systems Ltd .:- As far as this company is concerned, it is not in dispute before us that this company has been considered as not comparable to a pure software development services company by the Bangalore Bench of the Tribunal in the case of M/s. Trilogy e-business Software India Pvt. Ltd. (supra) . The following were the relevant observations of the Tribunal:- (d) KALS Information Systems Ltd. 46. 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. It was also submitted that as per the annual repot, the salary cost debited under the software development expenditure was ₹ 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 Priva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CISCO Systems India Pvt. Ltd. (supra) , the very same 11 companies had been chosen by the TPO as comparables, thereby making it clear that the assessee in the present case and CISCO Systems India Pvt. Ltd. have the same business profile. 24. The ld. counsel for the assessee further contended before us that the working capital adjustment worked out by the TPO was incorrect and in this regard submitted as follows:- 34. The Appellant wish to submit before your Hon ble member that, we had provided the learned TPO with the detailed updated margin computation along with working capital adjustment for some of the identified companies. 35. The learned TPO has erred, in law and facts, in computing the benefit on account of working capital adjustment by considering incorrect value of receivables and payables amount for comparable companies and this has resulted in negative working capital adjustment. The summarised details of working capital computation is provided below for your Hon ble member s reference: 36. Further, it would be relevant to note that the Appellant does not bear any working capital risk with regard to transactions with AEs. The Appellant has neither take ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 29. On appeal by the assessee, the CIT(Appeals) following the decision of the Hon ble High Court of Karnataka in the case of CIT v. Tata Elxsi Ltd., 349 ITR 98 (Karn) , held that whatever is excluded from the export turnover, has also to be excluded from the total turnover. 30. Aggrieved by the order of the CIT(Appeals), the revenue is in appeal before the Tribunal. 31. In view of the binding precedent of the judgment of Hon'ble High Court of Karnataka which is the jurisdictional High Court followed by the CIT(Appeals), we do not find any merits in ground No.2 raised by the Revenue and the same is dismissed. 32. As far as grounds No.3 to 5 are concerned relating to treating the gain on account of foreign exchange fluctuation as part of the operating revenue for the purpose of working the profit margins, this Tribunal in the case of Trilogy e-business Software India Pvt. Ltd. (supra) has held as follows:- (B) Treating foreign exchange gain or loss and provision for bad debts as non-operating in nature and fringe benefit tax as part of operating cost: As far as foreign exchange gain/loss being considered as not forming part of the operating cost, the reasoning ..... X X X X Extracts X X X X X X X X Extracts X X X X
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