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ACIT Versus Starent Networks India Pvt. Ltd.

2016 (6) TMI 249 - ITAT PUNE

Transfer pricing adjustment - turnover filter application - Held that:- CIT(A) directed the TPO to adopt the turnover filter of ₹ 1 crore to ₹ 100 crores. Further, the submission of the Ld. Counsel for the assessee that in the subsequent year the turnover filter criteria of ₹ 1 crore to ₹ 100 crores shown by the assessee has been accepted by the TPO and the DRP could not be controverted by the Ld. Departmental Representative. Further, we do not find any merit in the groun .....

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TPO in A.Y. 2009-10 and 2010-11, therefore, we do not find any infirmity in the order of the CIT(A) directing the TPO to grant working capital adjustment on the basis of certain calculation - Decided against revenue - ITA No.812/PN/2013 - Dated:- 27-4-2016 - SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM For the Petitioner : Shri Rajendra Agiwal For the Respondent : Smt. Mini Verma ORDER PER R.K.PANDA, AM : This appeal filed by the Revenue is directed against the order dated 03-01-2013 of the C .....

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criteria, erred in law in not affording an opportunity of being heard to the appellant, when the facts as reported in TPO order locate the contrary. 4. The CIT(A) erred on facts and in law in not appreciating that out of the set of 42 comparables identified by the assessee, only those comparables are to be rejected by applying criteria whose turnover was less than ₹ 1 Cr. 4. Facts of the case, in brief, are that the assessee company is a subsidiary of Starent Networks Corporation (SNC), US .....

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the assessee, during the impugned assessment year, has entered into with its AE the following international transactions : Associated enterprise International transaction Amount (in rupees) Starent Networks Corporation, USA Software Development Services 7,70,17,274/- Starent Networks Corporation, USA Import of equipments 7,20,918/- 6. From the various details furnished by the assessee the TPO noted that the assessee, for benchmarking its international transactions pertaining to software develop .....

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. Average net margin of these companies was arrived at 9.66%. Accordingly, the assessee concluded that its international transactions pertaining to software development services is at ALP. 7. After considering the various details furnished by the assessee the TPO was not satisfied with the TP study report as not satisfactory. He therefore issued a show cause notice under proviso to section 92C(3) of the Act asking the assessee to substantiate the ALP determined by the assessee. The TPO noted tha .....

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0 crores and proposed the following companies for the purpose of comparison : 1. VJIL Consulting Ltd. 2. Indus Networks Ltd. 3. Network Programs (India) Ltd. 4. Tutis Technologies Ltd. 5. Kedia Infotech Ltd. 6. E Star Infotech Ltd., 7. Sterling International Enterprises Ltd. 9. The TPO again scrutinized the above mentioned companies by applying the elimination filter in the show cause notice and applied the following filters : 1. Sales < 1 crores and sales > 20 crores 2. Reasonable sizeabl .....

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td., 22.54% 2 E Star Infotech Ltd. 22.87% 3 Sterling International Enterprises Ltd. 33.84% 11. After considering the various objections by the assessee the TPO incorporated certain new comparables suggested by the assessee and took the final set of comparables as under : Sr. No. Name of the company PBIT/Operating Cost 1 Chakkilam Infotech Ltd. 12.69% 2 E Star Infotech Limited 22.87% 3 Exensys Software Solutions Ltd. 32.25% 4 Kedia Infotech Ltd. 22.54% 5 Lanco Global Systems Limited 10.69% 6 Netw .....

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s for which the assessee had applied turnover filter of ₹ 1 crore to ₹ 100 cr. to select the comparable companies. However, the TPO without any basis and without providing any reason has changed the filter to ₹ 1 crore to ₹ 20 crores which is incorrect. The TPO had not provided any rationale and opportunity to the assessee. It was further argued that in subsequent assessment year, i.e. 2006-07 the assessee had applied turnover filter of ₹ 1 crore to ₹ 100 cror .....

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wed the claim of the assessee by observing as under: 2.2.3 I have gone through the order passed by the learned TPO. I did not find any discussion in the order as to why turnover filter was changed and the basis of the lower turnover filter adopted by the learned TPO. In absence of any discussion, according to me, the judgement of the Honourable Tribunal in the case of Genisys Integrating Systems (India) limited would be applicable here. The honourable Tribunal approved the turnover filter of  .....

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ted, the adjustment made by the learned TPO would stand deleted as average of arithmetical mean of the comparable companies would fall within the safe harbour limit of +/-5%. 2.2.5 As this Ground is decided in favour of the Appellant giving findings on Ground 2 and 3 would be academic, hence, I do not consider it necessary to give my findings on Ground 2 and 3 raised by the Appellant. 15. Aggrieved with such order of the CIT(A) the Revenue is in appeal before us. 16. The Ld. Departmental Represe .....

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of ₹ 1 crore to ₹ 20 crores. He submitted that in subsequent years the TPO and DRP have accepted the turnover filter of ₹ 1 crore to ₹ 100 crores. Further, the Ld.CIT(A) following the decision of M/s. Genesys Integrating Systems India Pvt. Ltd. (Supra) has directed the AO to apply the turnover filter of ₹ 1 crore to ₹ 100 crores in the case of the assessee. He accordingly submitted that under these circumstances the order of the CIT(A) should by upheld and th .....

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dings. We find the TPO applied the turnover filter of ₹ 1 crore to ₹ 20 crores as reasonable under the fact and circumstances of the case. The relevant observation of the TPO at Para 7.3 in page 20 of the order for adopting such filter is as under : 7.3 The next issue is of admitting the extra comparables. This is because the mistake from the assessee side for rejecting the comparables above ₹ 10 crore. It is seen that earlier the assessee has considered the comparable companie .....

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its own mistake. It has not considered the companies having turnover above ₹ 10 crore, the opportunity should not be denied to it completely. Hence, considering the assessee s submission and considering the turnover of the company which is ₹ 7.8 crore, those companies having a turnover upto ₹ 20 crore are now admitted for fresh analysis. All other companies having turnover more than ₹ 20 crore are hereby rejected. 19. From the above, it is clear that the TPO without assig .....

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s 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 t .....

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have given different ranges. Taking the 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 core 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 .....

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we do not find any merit in the grounds raised by the revenue regarding certain observations of the CIT(A). Under these circumstances, we do not find any infirmity in the order of the CIT(A) on this issue. Accordingly, the grounds raised by the revenue are dismissed. 22. Grounds of appeal No.5 and 6 by the revenue are as under : 5. The CIT(A) erred on facts and in law in allowing working capital adjustment to the profit level indicator of the comparables when it has not been demonstrated or pro .....

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. Facts of the case, in brief, are that the assessee during the course of hearing before the CIT(A) requested him to provide the adjustment on account of working capital and risk adjustment. Although such argument was never raised before the AO/TPO, the Ld.CIT(A) admitted such ground raised by the assessee. It was submitted before him that the TPO should have given working capital adjustment for the difference in levels of accounts receivable and accounts payable in the books of the tested party .....

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t to bring all the companies to an equal footing, an adjustment is required to be made to account for the underlying cost component in the sales price or cost of sales. 24. Based on the arguments advanced by the assessee the Ld.CIT(A) allowed the claim of the assessee regarding working capital adjustment by observing as under : 2.3.5 I have considered the submission of the Appellant and the data available on record. Delhi bench of ITAT in the case of Vedaris Technologies Pvt. Ltd. Vs. ACIT (2010 .....

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th such order of the CIT(A) the revenue is in appeal before us. 26. After hearing both the sides, we do not find any infirmity in the order of the CIT(A). Admittedly, the assessee has not asked for working capital adjustment before the TPO. However, before CIT(A) the assessee made an alternate claim which was allowed by him. This ground by the assessee in our opinion is a legal issue. The Coordinate Benches of the Tribunal are taking consistent view that the assessee is entitled to working capit .....

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nd the comparable companies. Ground No. 10 - Adjustment for risk difference Erred in comparing full-fledged risk bearing entities with the Appellant s captive operations without making any risk adjustment for difference between the functional and risk profile or comparable companies considered as comparable vis-à-vis the risk profile of the Appellant. With respect to the adjustment of working capital and risk the ld. AR submitted that the issue has not been properly appreciated by the DRP .....

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decided on 31-12-2012. ii. Ariston Thermo India Limited Vs. DCIT (ITA No. 1455/PN/2010) (A.Y. 2006-07) decided on 25-06-2013. and in support of risk adjustment the ld. AR placed reliance on following case laws: i. Intellinet Technologies India Pvt. Ltd. (ITA No. 1237/Bang/2010)(A.Y. 2006-07) decided on 30-03-2012. ii. Curam Software International Pvt. Ltd. Vs. ITO (ITA No. 1280/Bang/2012)(A.Y. 2008-09) decided on 31-07-2013. The ld. DR submitted that the DRP has admitted that working capital adj .....

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