TMI Blog2014 (9) TMI 1001X X X X Extracts X X X X X X X X Extracts X X X X ..... COUNTANT MEMBER For the Appellant: Shri Padamchand Khincha, C.A. For the Respondent: Shri Farhat Hussain Qureshi, CIT (D.R) O R D E R Per Shri Jason P. Boaz, A.M.: This appeal by revenue and the cross objections (C.O.) by the assessee are directed against the order of the Commissioner of Income Tax (Appeals)-IV, Bangalore dt.31.10.2011 for Assessment Year 2005-06. 2. The facts of the case, briefly, are as under:- 2.1 The assessee is a company engaged in the business of providing software development services to its Associated Enterprise ( AE ), M/s. Andale Inc., USA. For Assessment Year 2005-06, the assessee filed its return of income on 28.10.2005 declaring income of ₹ 6,179 after claiming deduction ofRs.96,73,313 u/s.10A of the Income Tax Act, 1961 ( hereinafter referred to as 'the Act'). The case was taken up for scrutiny and the Assessing Officer on noticing that in the period under consideration, the assessee had entered into international transactions of providing software development services to its AE amounting to ₹ 11,31,34,171 made a reference u/s.92CA of the Act to the Transfer Pricing Officer (TPO) for determining the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mation Technologies Ltd. 03 22. Kale Consultants Ltd. 07 23. Synergy Log-In Systems Ltd. 08 24. Quintegra Solutions Ltd. 06 The assessee computed the ALP using data from Financial Year 2003-04. Adopting operating profits to operating costs as the Profit Level Indicator ( PLI ), the arithmetic margin of the comparables was computed at 4.75%. After making adjustment of 0.61% on account of loans and assets, the arithmetic margin of the comparables was taken at 4.14% (viz. 4.75 less 0.61). In proceedings before the TPO, the assessee was required to submit various documents. Vide show cause notice dt.23.7.2008 the TPO, proposed to reject certain comparables selected by the assessee, conduct a fresh search applying certain filters, adopt fresh companies as comparables, etc. In these proceedings, the assessee repeatedly sought adjournments and did not furnish its explanations / submissions to the TPO s show cause notice. 2.3 The TPO therefore concluded the proceedings and passed the order u/s.92CA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the ALP of the international transactions. 2.4 The Assessing Officer completed the assessment under section 143(3) of the Act vide order dt.17.12.2008 determining the total income of the assessee at ₹ 1,63,15,559 as against the returned income of ₹ 6,179 in view of the following additions / disallowances, etc. thereto :- 1) T.P. Adjustment : ₹ 1,63,08,116 2) Reduction of deduction u/s.10A of the Act by exclusion of communication expenses of ₹ 14,785 incurred for delivery of software outside India : ₹ 1,264. 3.1 Aggrieved by the order of assessment for Assessment Year 2005-06 dt.17.12.2008, the assessee preferred an appeal before the CIT(Appeals) IV, Bangalore contesting both the TP adjustment and the recomputation of the deduction u/s.10A of the Act. The learned CIT (Appeals) IV, Bangalore disposed off the assessee's appeal by order dt.31.10.2011 allowing the assessee partial relief. 3.2 In the said order, the learned CIT (Appeals) has rendered the following findings :- (a) Following the decision of the co-ordinate bench in the case of Genisys Integrating Systems (India) Pvt. Ltd. (ITA No.1231(Bang)/2010) dt.5.8.2011, the learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The learned CIT (Appeals) erred in holding that profit on cost of the comparable companies, (70.68% 66.09% in cases of M/s. Exensys Software Solutions Ltd. Thirdware Solutions Ltd. respectively) is abnormal without giving reasons how functions discharged, assets deployed and risks assumed of such companies were different from that of the appellant company. 5. The learned CIT (Appeals) erred in holding that the assessee is eligible for a standard deduction of 5% from the Arm s Length Price (ALP) under the proviso to section 92C(2) of the I.T.Act, 1961. 6. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT (Appeals) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored. 7. The appellant craves leave to add, alter, amend and / or delete any of the grounds mentioned above. 5. The assessee has also preferred Cross Objections which are as under :- 1. The order of the learned CIT (Appeals) IV, Bangalore to the extent prejudicial to the respondent is bad in law. 2. The learned CIT (Appeals) IV, Bangalore has erred in confirming the actio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rming Sankhya Infotech Limited as a comparable. c. not appreciating that Tata Elxsi Limited deserves to rejected as a comparable on the ground that it is functionally different from the respondent. PRAYER 7. On an overall consideration of the facts of the case, and the law applicable, the ALP as determined by the Transfer Pricing Officer, as adopted by the Assessing Officer and as modified by the CIT (Appeals) to the extent being prejudicial to the respondent being not correct is to be quashed and the figures as determined and returned by the respondent being correct are to be accepted. 6.1 The learned Departmental Representative argued that the learned CIT (Appeals) order was not correct in accepting and applying the turnover filter of ₹ 200 Crores and in applying 0 % RPT filter to exclude companies from the list of comparables. The order of the learned CIT (Appeals) was also assailed by the learned Departmental Representative for allowing the assessee 5% standard deduction u/s.92C(2) of the Act. Reliance was placed on the TPO s order and the synopsis of arguments filed while praying for the restoration of the order of the TPO. 6.2 The learned Authorised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that companies having turnover of more than ₹ 200 Crores should not be considered as a comparables in respect of an assessee having turnover of less than ₹ 200 Crores holding at para 9 of this order as under :- 9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which are making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand 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 32 ITA.No.1231(B)/10 therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... obal Systems Ltd. In this view of the matter, the action of the TPO and CIT(Appeals) in including and retaining these two companies as comparables is not challenged and has attained finality. 11.1 The ground No.2 of revenue s appeal and ground No.6(a) of the assessee's C.O. challenge the order of the learned CIT (Appeals) in directing the Assessing Officer / TPO to exclude the following companies from the list of comparables by applying the RPT filter of more than 0%; as he was of the view that even a single instance of RPT should lead to their rejection from the list of comparables :- i) Geometric Software Solutions Co. Ltd. ii) Sasken Network Systems Ltd. iii) Four Soft Ltd. iv) R.S. Software (India) Ltd. v) Thirdware Solutions Ltd. vi) Tata Elxsi Ltd. (Seg) and vii) Sasken Communications Technologies Ltd. 11.2 We have heard both parties and perused and carefully considered the material on record, including the judicial decisions cited and relied on in the context of the issue of RPT. It was submitted before us, that in the decision of the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in limit should not lead to the rejection of a company as a comparable. The above decision was followed in the decision of another co-ordinate bench in the case of 3DPLM Software Solutions Ltd. in IT(TP)A No.1303/Bang/2013 dt.28.11.2013 holding that companies having RPT in excess of 15% of total revenues should be excluded from the list of comparables. Other decisions that have upheld the application of RPT filter of 15% are :- i) ITO V CRM Services India (P) Ltd. (2011) 14 Taxman.Com 96 (Del) ii) Logica Pvt. Ltd. (TS-131-ITAT-Bang-TP). iii) CSR India (P) Ltd. (2013) 31 Taxmann.Com 265 (Bang) iv) Huawei Technologies India P. Ltd. IT(TP)A No.1338/Bang/2010 v) Wills Processing Services (India) P. Ltd. [TS-49-ITAT-2013 (Mum)] vi) Sakata Inx (India) Ltd. (2012) 21 Taxmann.Com 37 (JP) 11.4 Following the above decisions, we hold that the RPT filter should be considered at 15% of the total revenue and companies having RPT in excess of 15% of total revenues are to be excluded from the list of comparables. In this view of the matter, the order of the learned CIT (Appeals) holding that companies are not to be considered as comparables even if they have a si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the factual matrix, we set aside the issue of examination of the comparability of Geometric Software Solutions Ltd. to the file of the TPO for fresh examination in the light of the submissions of the assessee before us on the application of the RPT filter of 15% of sales and to decide the matter after affording the assessee adequate opportunity of being heard and to file details required. It is ordered accordingly. 11.8 Exensys Software Solutions Ltd. (Revenue s appeal Ground No.4) 11.8.1 This company selected by the TPO was excluded from the list of comparables by the learned CIT (Appeals) for the reason that it was a super profit company having a margin of 70.68% on costs. The learned Authorised Representative further submitted that the above company is also functionally different as it is engaged both in providing software services and BPO services. It is also submitted that the assessee had its own range of software products like Exensys Suite , SD , HRP , QC , exensys financials , asset management module , etc., whereas the assessee in the case on hand is purely a software service provider. The learned Authorised Representative also submitted that, as obser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This company selected by the TPO as a comparable was excluded by the learned CIT (Appeals) on grounds of it being a company having extra-ordinary or abnormal profits of 66.09% during the year under consideration. It was also contended by the assessee that this company was functionally different from the assessee since it was into software products apart from provision of software services. This claim of functional difference of this company vis- -vis the assessee will be dealt with subsequently in this order. 11.9.3 We have carefully considered the submissions made by the assessee seeking the exclusion of this company as a comparable for the reason that it has high profits of 66.09% during the year under consideration. A similar matter of super profits was considered by a co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. reported in ITA No.227/Bang/2010 dt.9.11.2012 with the comparability of a company Ultra Marine Products Ltd. In that case, the Tribunal had held that a comparable company cannot be eliminated just because it was a loss making unit or had earned higher profits and it was for the assessee to demonstrate with material evidence to su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparability thereby automatically eliminating outliners whereas in the Arithmetic Mean Method all companies that are in the sample are considered, without exception, and the average of all the companies are considered as ALP. Therefore as a general rule that companies with abnormal profits should be excluded may be in line with the principles enumerated in the OECD guidelines, but cannot be said to be in tune with Indian TP regulations. The assessee has not been able to establish or demonstrate with any evidence any reason to support the proposition that the profit of the comparable company was abnormally high. It must not be overlooked that high profits reflect better business sense and practices also. The net Arithmetic Mean margin of 36.49% was arrived at after taking into account both 63.27% and also 3.44% which is the lowest in the relevant ITES industry. We also find from the material on record that this company has a clearly demarcated call centre segment and segmental results are available in the audited financial statements of the company. We, therefore, see no reason why the M/s. Ultra Marine Pigments Ltd should not be considered as a comparable and therefore reject the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ual Report. The learned CIT (Appeals) excluded this company from the list of comparables for the reason that it had RPT transactions in excess of 0%. This finding of the learned CIT (Appeals) has been considered at paras 11.1 to 11.4 of this order and reversed by us following the decisions of the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (supra) and in the light of many other decisions of various benches of Tribunals across India as listed out at para 11.3 of this order (supra) wherein the RPT filter has been applied at 15%. 11.10.2 On appeal before the learned CIT (Appeals), the assessee had also put forth the submission that even in the software development segment, Tata Elxsi Ltd. is engaged in diverse activities such as software development and services and Systems Integration and Support. It is submitted that the software development service segment is further sub-divided into highly specialised areas like product design services, designs and engineering services and visual computing labs. It was contended that these diverse activities of this company in the software development services alone, makes meaningful comparison difficult wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, to product development and is not a pure software development service company like the assessee. It is submitted by the learned Authorised Representative that this company was rejected as a comparable to a software service provider for being functionally dissimilar by the decision of the ITAT, Delhi in the case of Colt Technology Services India Pvt. Ltd. in ITA No.609/Bang/2011 C.O. No.81/Bang/2011 dt.23.10.2012 for Assessment Year 2005-06 since it was found from a review of schedule 4 of its books of accounts on fixed assets that it owned its own IPR s in respect of software products developed by it and focused on development of niche products in the transportation and aviation industry etc. 11.11.2 We have heard both parties and perused and carefully considered the material on record. In the case on hand, it is seen from the TPO s order that no objection to the adoption of this company as a comparable was furnished by the assessee to the TPO in reply to the TPO s show cause notice and therefore TPO included it as a comparable to the assessee. The aforesaid objections raised by the assessee, have been put forth only before the learned CIT (Appeals) and now before us. It i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not have the option referred to in section 92C(2) of the Act. Thus, it is clear that, as per this amendment, that the + / - 5% variation is only to justify the price charged in international transactions for ALP adjustment purposes and not for being allowed standard deduction of 5%. The aforesaid amendment has therefore settled the issue and accordingly the 5% benefit of standard deduction is not allowable to assessee. In this view of the matter, we reverse the finding of the learned CIT (Appeals) in holding that the assessee is eligible for standard deduction of 5% from the ALP as per the proviso to section 92C(2) of the Act. The various judicial decisions relied on by the learned CIT (Appeals) to come to the finding he did, pertain to the period prior to the retrospective amendment in section 92CA(2A) of the Act and are not applicable to the assessee's case. In view of the amendment brought about by the Finance Act, 2012 by introduction of the clarificatory amendment of section 92CA(2) of the Act w.r.e.f. 1.4.2002, the issue has been settled and therefore the assessee is not entitled to the benefit of 5% standard deduction from the ALP of international transactions. A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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