TMI Blog2013 (3) TMI 658X X X X Extracts X X X X X X X X Extracts X X X X ..... ack The assessee co. is involved in undertaking of the required coding of the programs and it is also responsible for physical testing of the products such as integration testing, software testing, system testing, performance and regression testing etc - The size of the comparable is an important factor in comparability process - Tata Elxsi and Flextronics are functionally different from that of the assessee and hence they deserve to be deleted from the list of six comparables and hence there remains only four companies as comparables Held that:- Assessee incurred net foreign exchange loss incurred in the normal course of carrying on the business operations as 'operating' in nature and thus included as part of 'total operating costs' - profit/loss on foreign exchange fluctuation is treated as part of operating cost - Decided in favor of revenue - I.T.A No. 1076/Bang/2011 - - - Dated:- 29-3-2013 - SHRI. N. BARATHVAJA SANKAR, VICE PRESIDENT AND SHRI. GEORGE GEORGE K. JUDICIAL MEMBER For the Appellant: Shri. Rajan Vora, CA For the Respondent: Shri. Farhat Hussain Qureshi, CIT-II, DR O R D E R PER N. BARATHVAJA SANKAR, VICE PRESIDENT : This is an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... draft assessment order and the same were confirmed by the DRP. 04. In the transfer pricing study undertaken by the assessee, the TNMM was determined as the most appropriate method to determine the ALP of the product replacement services transaction. In order to identify companies which are comparable to the assessee, a search was conducted on Prowess (a database compiled and managed by The Centre for Monitoring Indian Economy), and Capitaline Plus (a database compiled and managed by Capital Market Publishers) for obtaining publicly available financial information of companies in India engaged in similar business activity as that of the assessee. For the companies identified as comparables, the weighted average of operating profit earned on value added costs were computed using the financial data pertaining to the financial years 2004-05, 2005-06 and 2006-07 (wherever available), which was available to the assessee at the time of complying with the transfer pricing documentation requirements. In computing the margins earned by the assessee, the cost of spares delivered to the customers have been treated as pass through costs . Based on the search criteria/filets adopted by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ointred Telecom Pvt. Ltd 12.83% Arithmetic mean 18.60% Based on a new comparable search and using RPM as the most appropriate method with a PLI of Gross profits/total sales, the TPO has determined an adjustment of ₹ 20,28,61,348 to the assessee's income vide order u/s.92CA(2) of the Act, dated.28.10.2010. 06. Against the proposed additions by the Assessing Officer, the assessee filed its objection before the DRP, who after considering the submissions and providing an opportunity of being heard to the assessee, upheld the approach of the TPO. As per the DRP, there is functional comparability when the TPO compares the product replacement segment with companies engaged in trading of networking products. As per the DRP, the use of logistics service provider companies as comparables to product replacement segment is not appropriate. Based on the directions of the DRP, the Assessing Officer passed the present order. Aggrieved by the TPO's order, the assessee is in appeal before us with this issue. 07. The learned counsel for the assesee submitted as follows : The learned TPO ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Transaction Net Margin Method is to be regarded as the most appropriate method which has been rightly adopted by the Appellant (Refer to para no.7.3 and 7.4 pg.21 to 23 of the order). The comparables as selected by the Appellant in its transfer pricing report are performing similar functions and are therefore appropriate (Refer to para no.8, Pg.24 to 25 of the order). Given the above, we wish to submit that the Appellant has adopted a similar approach in relation to AY 2007-08 as adopted in the transfer pricing analysis for AY 2006-07. Accordingly, in relation to the product replacement services transaction, the decision/ principles of the Hon'ble Bangalore Tribunal's ruling pertaining to AY 2006-07 should also be applicable for AY 2007-08, given the similar facts and circumstances of the case. Reliance is placed on the following in support of the above contention: Case law Page no. of paper book for head notes/relevant pages Cisco Systems (India) Private Limited v. DCIT (Appellant's own case) ITA No.1410/Bang/2010) 333 to 359 Mentor Graphics (Noida) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market and the adjusted price arrived at is taken to be n arm s length price in respect of the property transferred or services provided in the international transaction; Thus, it can be seen that in this method a comparison has to be with transaction of a comparable in an uncontrolled market conditions i.e with a unrelated third party in a free market. In the case before us, there is no such comparable uncontrolled transaction to be compared with the transactions of the assessee with its AE. Therefore, the CUP method is not applicable. (b) Resale Price Method (RPM) by which the price at which property purchased or services obtained by the enterprise from an associated enterprise is re-sold or are provided to an related enterprise (emphasis provided by us) is identified and such resale price is reduced by the amount of a normal gross profit margin accruing to the enterprise or to an unrelated enterprise from the purchase and resale of the same or similar property or from obtaining and providing the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch the net profit margin realized by an enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise and is compared to net profit margin realized by an unrelated enterprise from an uncontrolled transaction or a number of such transactions and the adjustments for the difference is made. The assessee has adopted the transactional net margin method, as the most appropriate method as seen above. We have already found that the other methods prescribed / by Rules are not applicable to the facts of the case before and / therefore, the TNMM method is the most appropriate method for computing the ALP relating to the international transactions of the assessee with its associated enterprise. 8. Coming to the next issue i.e selection of comparables, we find that, the Rule- l0B of sub-rule-2 3 clearly provides the criteria to be considered in selection of comparables. One of the important criteria is the FAR analysis i.e functions performed, assets employed and risks undertaken by the assessee as well as the comparable companies. In the submissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen undertakes the development of the required software. Cisco India's activities include undertaking of the required coding of the programs and it is also responsible for physical testing of the products such as integration testing, software testing, system testing, performance and regression testing etc., However, all the Intellectual Property Rights in relation to the software development activities undertaken by Cisco India remain with Cisco Technology Inc. The software development services are provided pursuant to the agreement entered into with Cisco Technology Inc. As a compensation for software development services, Cisco India is remunerated on a cost plus 10 per cent mark-up basis on the costs incurred for the provision of these services. 12 The segmental results derived in respect of the software services, as per P L account as per the TPO's order at page 4 of his order : Operating income .. ₹ 8081456750 Operating cost .. ₹ 4419077526 Operating profit .. ₹ 662379234 Profit % on cost .. ₹ 14.99% Turnover of appellant in relation to software development services is ₹ 508 crores. 13. In the transfer pricing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13 Meistar information Technologies limited 1.30% 14 MindTree Consulting Limited 16.60% 15 Orient Information Technology Limited 2.68% 16 Quintegra Solutions Limited 11.93% 17 R S Software (India) Limited 12.19% 18 S I P Technologies and Exports Limited 25.25% 19 Sasken Communication Technologies Limited 17.71% 20 Sasken Network Systems Limited 16.19% 21 Satyam Computers Services Limited 29.27% 22 TV S Infotech Limited - 4.8 1% 23 Transworld Infotech Limited 26.34% 24 Tyche Industries Limited 10.62% 25 VJIL Consulting Limited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arized in the following lines. He relied on the decisions of this Tribunal in the case of Triology E-business Software India Ltd., Genesis Integrating System India Ltd., and submitted that in the above said decisions, classification of companies on the basis of net sales or turnover are upheld and the Hon'ble Tribunal has held that, considering the Indian scenario, the classification made by Dun Bradstreet is more suitable and reasonable. As per the ratio laid down, comparables having turnover between ₹ 200 crores to ₹ 2,000 crores needs to be considered in the case of the assessee as the revenue of the assessee is ₹ 508 crores. On application of the principles of the aforesaid decisions, there would only be 6 comparables as below, out of the set of 26 comparables as identified by the TPO: Sl.No. Company Name Turnover as per TPO Gross Margins as per TPO 1. Flextronics Software Systems Ltd., (Seg.) 848.66 25.31% 2. iGate Global Solutions Ltd., 747.27 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iGate Global Solutions Ltd 747.27 7.49 10 Infosys Technologies Ltd 13,149.00 40.30 11 Ishir Infortech Ltd. 7.42 30.12 12 KALS Information Systems Ltd. 2.00 30.55 13 LGS Global Ltd. 45.39 15.75 14 Lucid Software Ltd 1.70 19.37 15 Media Soft Solutions Pvt. Ltd 1.85 3.66 16 Megasoft Ltd 139.33 60.23 17 Mindtree Ltd 590.35 16.90 18 Persistent Systems Ltd 293/75 24.52 19 Quintegra Solutions Ltd 62.72 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. Electronic for Imaging India P. Ltd., ITA.1171/Bang/2010 4. M/s. Trilogy E-Business Software India P. Ltd., v. DCIT ITA.1054/Bang/2011, dated.23.11.2012 18. Applying the reasoning given by us as above and the orders of this bench as above, only the six companies the list of which is given below are to be considered as comparables and the balance 20 cases are to be eliminated from the list of 26 comparables : Sl.No. Company Name Turnover as per TPO Gross Margins as per TPO 1. Flextronics Software Systems Ltd., (Seg.) 848.66 25.31% 2. iGate Global Solutions Ltd., 747.27 7.49% 3. Mindtree Ltd., (Seg.) 590.35 16.90% 4. Persistent Systems Ltd., 293.75 24.52% 5. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comprising of royalty income as well as regular software services income, for which revenue break-up is not available. He finally submitted that this was a good reason to exclude this company also from the list of comparables. 20. On the other hand, the learned DR supported the order of the lower authorities regarding the inclusion of Tata Elxsi and Flextronics Software Systems Ltd., in the list of comparables. He reiterated the the contents of para 14.2.25 of the TPO's order. He also read out the following portion from the TPO's order : Thus as stated above by the company, the following facts emerge : 1. The company's software development and services segment constitutes three sub-segments i) product design services; ii) engineering design services and iii) visual computing labs. 2. The product design services sub-segment is into embedded software development. Thus this segment is into software development services. 3. The contribution of the embedded services segment is to the tune of ₹ 230 crores in the total segment revenue of ₹ 263 crores. Even if we consider the other two sub-segments pertain to IT enabled servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... included as part of 'total operating costs'. This approach had been adopted in determining the margins of the assessee as well as the comparable companies' margins as identified in the TP report. The TPO while computing the margins of the comparable companies had excluded the foreign exchange fluctuations (gains/losses) as being 'nonoperating' in nature. However, in determining the margins earned by the assessee, the TPO had considered net foreign exchange loss incurred by the assessee as being 'operating' in nature, included as part A of the total operating costs and the transfer pricing adjustment had been made thereafter. The learned representative for the assessee submitted that if foreign exchange fluctuation losses are not considered as part of 'operating expenses' in the case of comparable companies, then the same approach needs to be consistently applied in the case of the assessee as well. Otherwise, this would lead to a different and inconsistent approaches as adopted for determining the net margins earned by the assessee and that of the comparable companies. In relation to the above inconsistent approach, the assessee had also filed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re incurred in foreign currency as being attributable to delivery of computer software outside India ; iv) The learned Assessing Officer has erred in law and in fact by not considering the plea of the appellant that it does not provide any technical services outside India and therefore foreign currency expenditure incurred by the appellant should not be reduced from 'export turnover' for the purposes of computing the deduction under the Act ; v) The learned Assessing Officer has erred in law and in fact by not considering the plea of the appellant that if expenses such as lease line charges, telephone charges (landline), internet charges and foreign currency expenditure, if reduced from 'export turnover' should also be reduced from 'total turnover' for computing the deduction under section 10A of the Act ; vi) The learned Assessing Officer has erred in law and in fact by disallowing the staff advances written off as a non-deductible loss, in computing the taxable income under the Act. 27 The facts relating to this issue are that the Assessing Officer proposed certain additions/disallowances to the total income on account of the following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Profits of the business X Export turnover of the undertaking Total turnover (Export turnover + domestic turnover) 11. In that view of the matter, we do not see any error committed by the Tribunal in following the judgements rendered in the context of Section 80HHC in interpreting Section 10A when the principle underlying both these provisions is one and the same. Therefore, we do not see any merit in this appeals. In a nutshell, this issue has been decided in favour of the assessee by the Hon'ble High Court for the assessment year 2004-05. Respectfully following the same, we also allow these grounds of appeal of the assessee. 29. The next issue raised by the assessee in respect of levy of interest u/s.234D is consequential in nature. We direct the Assessing Officer to give consequential relief. 30. Though certain other grounds are also raised by the assessee and written submissions are also given on those grounds, as the same were not seriously argued before us, we are not going into those grounds. In other words, according to the learned chartered accountant, if the above directions of this Tribunal are given effect to, that itself would being the adjusted ..... X X X X Extracts X X X X X X X X Extracts X X X X
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