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M/s. Misys Software Solutions (India) Pvt. Ltd. Versus Income Tax Officer, Ward 12 (1) , Bangalore

2015 (10) TMI 2242 - ITAT BANGALORE

Transfer pricing adjustment - selection of comparable - Held that:- Three companies, namely Aztec Software Ltd., Geometric Software Ltd. and Megasoft Ltd. and KALS Infosystems Ltd. and Accel Telemetrics Ltd. shall be excluded from the set of comparables for the software development services segment of the assessee.

Tata Elxsi Ltd. and Lucid Software Ltd. excluded from the list of comparables for the software development services of the assessee.

Infosys Technologies Ltd. be .....

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h export turnover as well as total turnover while computing the deduction under Section 10A of the Act, as has been prayed by the assessee in its alternate plea

Interest under Section 234B is consequential and mandatory and the Assessing Officer has no discretion in the matter. - I.T.(T.P.) A. No. 1425/Bang/2010 - Dated:- 23-9-2015 - Smt. P. Madhavi Devi, Judicial Member And Shri Jason P. Boaz, Accountant Member For the Appellant : Shri T. Suryanarayana, Advocat For the Respondent : S .....

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s a wholly owned subsidiary of Misys International S.A., Luxembourg, which is part of Misys Group based in U S A. The assessee is engaged in the provision of software development and product support services to its group companies. For Assessment Year 2006-07, the assessee filed its return of income on 27.11.2006 declaring income of ₹ 3,800 after claiming deduction under Section 10A of the Act. The return was processed under Section 143(1) and subsequently the case was taken up for scrutin .....

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r receipt of the order of the TPO u/s.92CA of the Act, the Assessing Officer passed the draft assessment order under Section 143(3) of the Act, incorporating the T.P. Adjustment of ₹ 4,25,58,502 proposed by the TPO. Aggrieved by the draft order of assessment dt.21.12.2009 for Assessment Year 2006-07, the assessee filed its objections thereto before the DRP, Bangalore, which disposed off the assessee's objections vide directions issued u/s.144C(5) rws 144C(8) of the Act dt.17.9.2010. Pu .....

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e is in appeal before the Tribunal raising the following grounds :- Transfer Pricing Related. 1. That on the facts and in the circumstances of the case, the learned ITO, Ward 12(1), Bangalore / the learned Joint Director of Income Tax (Transfer Pricing)-II, Bangalore and the learned Dispute Resolution Panel (the Panel) erred in making adjustment in arm s length price of the appellant s international transactions with related parties by ₹ 42,240,024. 2. That on the facts and circumstances o .....

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learned Panel erred in collecting selective information of the companies by exercising power granted to him under Section 133(6) of the Act that was not available to the appellant in the public domain and relying on the same for comparability purposes. 3.2 That the learned TPO erred in not applying multiple year/prior year data for comparable companies while determining ALP. 3.3 That the learned TPO erred in using data as at the time of assessment proceedings, instead of that available as on the .....

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provided in proviso to section 92C(2) of the Act, while determining the ALP. 3.7 That the learned TPO erred in upholding the erroneous actions of the learned TPO as stated in Grounds 3.1 to 3.6 above. 4. That on the facts and in the circumstances of the case the learned A.O. has wrongly computed the adjustment in ALP post receipt of the directions from the learned Panel, and it is a mistake apparent from record. The total adjustment determined by the learned Panel with regards to the ALP is  .....

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in assuming that the communication expenses of INR 80,91,499 have been incurred for delivery of software outside India. 5.3 That the learned A.O. and the learned Panel, erred in reducing an adhoc amount of communication expenses form the export turnover on the incorrect premise that the Authorised Representative of the assessee has agreed to exclude the said communication expenses. 5.4 Without prejudice to the above, the learned A.O. and the learned Panel, erred in reducing the entire amount of .....

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ellant is in the business of software development as distinct from rendering technical service outside India. 6.3 That the learned A.O. and the learned Panel, erred in reducing an adhoc amount of expenditure incurred in foreign currency from the export turnover on the incorrect premise that the AR of the assessee has agreed to exclude the said foreign currency charges. 6.4 That the learned A.O. and the learned Panel, erred in not appreciating the fact that the expenses incurred in foreign curren .....

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arned Panel, erred in not reducing the said communication expenses of INR 80,91,499 and expenses incurred in foreign currency of INR 1,22,50,000 pertaining to the 10A units from the total turnover and not following the rulings of the jurisdictional ITAT. 9. That the learned A.O. and the learned Panel, erred in consequently levying interest under Section 234B of the Act. 3.2 Grounds No. 1 to 4 - pertain to the Transfer Pricing Adjustment made. Grounds No.5 to 8 - pertain to the computation of the .....

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ot being pressed by the assessee, they are rendered infructuous and are accordingly dismissed. Before proceeding to deal with the ground of appeal No. 3.4, the brief facts relating to the T.P. issues are summarized hereunder :- 4.2 The assessee is engaged in the provision of software development and product support services to its group companies. For the year under consideration, the assessee has reported the following international transactions :- Contract Software Development Services Rs.70,2 .....

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he Profit Level Indicator ( PLI ). After conducting the search on the data bases Prowess and Capitaline , the assessee identified 44 companies as comparables with an average profit margin of 11% on cost. As the margin of the assessee at 12% was above the arithmetical mean margin of the comparables, the assessee concluded that its international transactions were at Arm s Length. 4.5 The TPO, however, on examination of the assessee's T.P. Study rejected it for the various reasons given in his .....

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4.67 7. R Systems International Ltd. (Seg) 79.42 22.20 8. Sasken Communication Ltd. (Seg.) 240.03 13.90 9. Tata Elxsi Ltd. (Seg.) 188.81 27.65 10. Lucid Software Limited 1.02 8.92 11. Mediasoft Solutions P. Ltd. 1.76 6.29 12. R S Software (India) Ltd. 91.57 15.69 13. SIP Technologies & Exports Ltd. 91.57 6.53 3.06 14. Bodhtree Consulting Ltd. 5.32 15.99 15. Accel Transmatics Ltd. (Seg.) 8.02 44.07 16. Synfosys Business Solutions Ltd. 4.49 10.61 17. Flextronics Software Systems Ltd. 595.12 27 .....

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.68% Less : Working Capital Adjustment 2.18% Adjusted Mean Margin 18.50% Operating Cost 63,69,56,013 ALP 118.50% of OC 75,47,92,875 Price Shown as received 71,22,34,373 Shortfall being the T. P. Adjustment u/s.92CA 4,25,58,502 4.7 Based on the above computation, the TPO proposed an adjustment of ₹ 4,25,58,502 to the software development services segment of the assessee which was incorporated by the Assessing Officer in the draft order of assessment. The objections filed by the assessee bef .....

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DRP, the submissions put forth by both the learned Authorised Representative for the assessee and the learned Departmental Representative for Revenue and the judicial decisions cited and placed reliance upon. We now proceed to consider the comparability of individual companies objected to by the assessee. Companies whose exclusion from TPO s list of comparables is sought by the assessee. 5.0 Out of the 20 comparable companies finally selected by the TPO, the assessee seeks exclusion of the foll .....

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India Technologies Ltd., Logica Pvt. Ltd. (ITA No.1129/Bang/2011), Ariba Technologies India Pvt. Ltd. in IT(TP)A No.1179/Bang/2014 for Assessment Year 2006-07 and Huawei Technologies India Pvt. Ltd. in IT(TP)A No.1338/Bang/2010) for Assessment Year 2006-07. 6.0 1) Aztec Software Ltd., 2) Geometric Software Ltd. 3) Mega Soft Ltd. 6.1 Aztec Software Ltd. - This company was selected as a comparable by the assessee itself in its T.P. Study. The assessee, however, had objected to the inclusion of th .....

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for Assessment Year 2006-07 (supra). 6.2 Geometric Software Ltd.(Seg.) - The assessee objected to the inclusion of this company in the final set of comparables before the authorities below on the ground that this company had RPT of 19.34%, which is above the limit of 15% specified as the yardstick by different co-ordinate benches of this Tribunal in various cases. In support of the above contention, for exclusion of Geometric Software Ltd., the learned Authorised Representative for the assessee .....

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ordinate benches of this Tribunal in various cases. In support of its contention, for exclusion of this company from the list of comparables, the learned Authorised Representative of the assessee placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of Huawei Technologies India Pvt. Ltd. for Assessment Year 2006-07 (supra). 6.4 Per contra, the learned Departmental Representative supported the order of the TPO including these three companies in the list of comparab .....

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As far as Megasoft Ltd., Aztec Software Ltd., and Geometric Software Ltd., chosen by the TPO as comparables are concerned, it is not in dispute that the related party transactionsof those comparable companies was more than 15%. This Tribunal in the case of 24/7 Customer Com Pvt. Ltd., ITA No.227/Bang/20] (supra), had held that where comparables have related party transactions which are in excess of 15% of its total receipts, then such companies cannot be chosen for the purpose of comparison. Fol .....

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the TPO s setting a limit of 25% on related party transactions. He objected to the inclusion of comparables being related party transactions in excess of 15% of sales / revenue. In support of this proposition, the learned counsel for the assessee placed reliance on the decision of the Hon'ble Bench of the ITAT, Delhi in the case of Sony India (P) Ltd. reported in 2008-TIOL-439-ITAT-Delhi dt.23.12.2008. The learned counsel for the assessee drew our attention to para 115.3 of the order wherein .....

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nced 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. 17. In view of the above, the aforesaid comparable should also be excluded for the purpose of comparison while determining t .....

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mparable by the TPO and was retained as a comparable even though the assessee objected to its inclusion before the DRP. It is the contention of the assessee that this company is into software products, and training apart from provision of software development services and therefore being functionally different, from the assessee who is purely into provision of software development services, ought to be excluded from the list of comparable companies. In support of this contention for exclusion of .....

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ny is functionally different from the companies engaged in business of providing software development services to its AEs. It is submitted that apart from software development services, this company is engaged in provision of Accel Animation Studies Services in the form of ACCEL IT and ACCEL Animation Services for 2D and 3D Animation. It was also engaged in various business activities, some of which are Ushus Technologies - for off shore development centre for embedded software network system, i .....

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reliance on the decision of the co-ordinate bench of this Tribunal in the case of Huawei Technologies India Pvt. Ltd. for Assessment Year 2006-07 (supra). 7.3 Per contra, the learned Departmental Representative supported the orders of the TPO in including these two companies as comparables to the assessee in the case on hand. 7.4.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial pronouncement relied on by the assessee. We fi .....

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iology E-Business Software India Pvt. Ltd. (supra) has taken a view that these companies are not comparable to the software service provider companies as they are functionally different. The following are the relevant observationsof the Tribunal in this regard :- (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 po .....

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le was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows: 16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products .....

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this aspect, assessee succeeds. Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. 47. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is .....

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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 re .....

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rise system management, embedded system, VLSI designs, CAD/CAM/BPO (iv) Accel Animation Studies software services for 2D/3D animation, special effect, erection, game asset development. 4.3 On careful perusal of the business activities of Accel Transmatic Ltd. DRP agreed with the assessee that the company was functionally different from the assessee company as it was engaged in the services in the form of ACCEL IT and ACCEL animation services for 2D and 3D animation and therefore assessee s claim .....

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be considered as comparable. The ld. DR, on the other hand, relied on the order of the TPO. 50. We have considered the submissions and are of the view that the plea of the assessee that the aforesaid company should not be treated as comparables was considered by the Tribunal in Capgemini India Ltd (supra) where the assessee was software developer. The Tribunal, in the said decision referred to by the ld. counsel for the assessee, has accepted that this company was not comparable in the case of .....

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ate bench of this Tribunal in the case of Huawei Technologies India Pvt. Ltd. for Assessment Year 2006-07 (supra), we hold and direct that these two companies, namely KALS Infosystems Ltd. and Accel Telemetrics Ltd. are to be excluded from the set of comparable companies for the software development services segment of the assessee. 8. (6) Tata Elxsi Ltd. (7) Lucid Software Ltd. 8.1 Both the above companies were selected as comparables by the TPO. Tata Elxsi Ltd. was retained as comparable inspi .....

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mpany apart from providing software development services was also into development of software products such as Muulam which is used for civil engineering structures. It was further submitted that a substantial portion of its capital i.e. upto 39% was employed as product development expenditure. The learned A.R. submitted that in view of the above activities of this company i.e. Lucid Software Ltd., it was functionally different from the assessee in the case on hand who is merely providing softw .....

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ho is into only the business providing of software development services to its AEs. 8.1.3 In support of the assessee s contentions for exclusion of the above two companies from the list of comparable companies to the assessee, the ld. A.R. relied on the decision of the coordinate bench in the case of Huawei Technologies India Pvt. Ltd. for Assessment Year 2006-07 (supra). 8.2 Per contra, the learned Departmental Representative supported the orders of the TPO in including the above two companies .....

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Ltd. chosen by the TPO as comparables, we find that the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India Pvt. Ltd. (supra) while dealing with the case of software services provider like the assessee, considered the comparability of Lucid Software Ltd. with similar software services provider and the Tribunal held as follows :- 7.2 Lucid Software Limited. It has been submitted before us that this company, besides doing software development services, is also involved in deve .....

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as the segmental details of operating revenue has not been made available to examine how much is the ratio of sale from software product and sale of software service and development. Looking to the fact that it has developed a software product named as Muulam which is used for civil engineering structures and the product development expenditure itself is substantial vis-à-vis the capital employed by the said company, this criteria for being taken as comparable party, gets vitiated. For th .....

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ility ratio. In our view, due to non-availability of full information abut the segmental details as to how much is the sale of product and how much is from the services, therefore, this entity cannot be taken into account for comparability analysis for determining arm s length price in the case of the assessee. 15. In view of the aforesaid decision of the Mumbai Bench of the Tribunal, which is in relation to A.Y. 2006-07, we are of the view that Lucid Software Ltd. and Tata Elxsi Ltd. are also t .....

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n respect of the company Lucid Software Ltd., we find that the assessee has not raised any objection to its inclusion before any of the lower authorities at any stage of proceedings. It is also seen that even before us, the assessee has neither raised any specific ground for exclusion of this company in the Form 36 filed before us nor raised any additional ground seeking its exclusion. The assessee has not given any explanation or reason for not raising any objection to this company in the earli .....

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ee contended that this company is a giant company, an industry leader with significant brand value, brand related profits, R&D activity resulting in owning of IPRs, on site presence and huge turnover of approx. ₹ 13,149 Crores in this year and therefore, being functionally different, is clearly not comparable to an assessee who is only providing software development services to its AEs, as is the assessee in the case on hand. In support of this contention, the learned Authorised Repres .....

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y the assessee. We find that a coordinate bench of this Tribunal in the case of Huawei Technologies India Pvt. Ltd. for Assessment Year 2006-07 (supra) has, inter alia, excluded this company from the list of comparables holding as under at paras 10 & 11 thereof :- 10. Insofar as Infosys Ltd., Flextronics Software Systems Ltd., iGate Global Solutions Ltd., Mindtree Consulting Ltd., Persistent Systems Ltd., and Sasken Communication Ltd. chosen by the TPO as comparables, it is not in dispute th .....

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this regard :- (1) Turnover Filter 11. The ld. counsel for the assessee submitted that the TPO has applied a lower turnover filter of Q 1 crore, but has not chosen to apply any upper turnover limit. In this regard, it was submitted by him that under rule 10B(3) to the Income-tax Rules, 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 transac .....

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ies 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 re .....

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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 mat .....

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nfinity) has resulted in selection of companies like Infosys which is 277 times bigger than the Assessee (turnover of ₹ 13,149 crores as compared to ₹ 47.47 crores of Assessee). It was submitted that an appropriate turnover range should be applied in selecting comparable uncontrolled 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 Brads .....

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erstand 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 r .....

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ification 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 tha .....

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he other hand pointed out that even the assessee in its own TP study has taken companies having turnover of more than Q 200 crores as comparables. In these circumstances, it was submitted by him that the assessee cannot have any grievance in this regard. 17. We have considered the rival 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 .....

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en two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. Sec.92-A defines what 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 p .....

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led 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 suc .....

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s 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 subsection (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 .....

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mination of arm s length price under section 92C:- 10B. (1) For the purposes of sub-section (2) of section 92C, 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, in the following manner, namely :- (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 .....

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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 .....

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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 forc .....

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en 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 uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international 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 w .....

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omparable relied upon by the TPO. 20. In this regard we find that the provisions of law pointed out by the ld. counsel for the assessee as well as the decisions referred to by the ld. counsel for the assessee clearly lay down the principle that the turnover filter is an important criteria in choosing the comparables. 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 .....

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.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. 961.09 crores. (8) Infosys Technologies Ltd. 13149 crores. 9.3.2 Following the aforesaid decision of the co-ordinate bench of this Tribunal in the case of Huawei Technologies India Pvt. Ltd. for Assessment Year 2006-07 (supra), we hold and direct that Infosys Technologies Ltd. be excluded from the set of com .....

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A of the Act. Without prejudice to its above contention that the aforesaid sums should not be excluded from the export turnover, while computing the deduction under Section 10A of the Act, the assessee in Ground No.8 has also made an alternate plea that the expenses that are reduced from export turnover should also be reduced from total turnover, placing reliance on the decision of the Hon'ble Karnataka High Court in the case of CIT V Tata Elxsi Ltd. (2012) 349 ITR 98 (Kar). 10.2 We have hea .....

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