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2016 (3) TMI 1114

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..... of the Act, ALP has to be examined adopting the most appropriate method. In view of absence of reliable data either to adopt Cost Plus Method or to analyse the data on the basis of CUP method, either internal CUP or external CUP, we are of the opinion that under given facts and circumstances of the case, TNMM is the only option available to the TPO to analyse the assessee’s transactions in order to arrive at the ALP. Therefore, we reject the assessee’s contentions on CUP/CPM as most appropriate method and approve the approach taken by the TPO for analyzing transactions under TNMM. As the assessee contended that the reimbursement costs are included in the working , the actual working of TPO is not verifiable we restore the issue to the file of TPO to examine the computation again by excluding the reimbursement cost since it do not have any profit margin and also to consider whether the companies fail the RPT filter or not. Assessee should be given due opportunity and its working should be considered after due examination. The grounds relating to this issue are allowed for statistical purposes. Exclusion of foreign exchange fluctuation from the working of operating margins .....

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..... AD/CAE), electrical, electronics and IT services. Assessee operates on Cost + 5% (CPM) and has reported net profit of 3.20% on operating cost of ₹ 49.81 crores with revenues of ₹ 51.41 crores. Assessee in its TP study adopted Cost Plus Method as appropriate method and gave alternate working under CUP method (external) on man-hourly rate basis of five comparable companies to support that assessee s receipts are at arm s length. Assessing Officer reported the same to the TPO for ALP analysis and TPO vide his order u/s. 92CA of the Act, rejected the methods relied on by the assessee, mostly on the basis of his analysis in AY 2007-08, adopted TNMM as Most Appropriate Method (MAM), selected comparables by using various filters, adopted single year data and arrived at average profit margin of comparable companies at 23.65% and proposed an adjustment of ₹ 8,98,28,017. AO has issued a draft order accordingly and assessee s objections were rejected by the DRP in its order dated 18.04.2012. Assessee is aggrieved. 4. Even though assessee raised many grounds, Ld Counsel restricted the arguments to the issue of selection of MAM and in TNMM, issues like comparability of cert .....

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..... rables. Assessee preferred a Misc. Application and ITAT while acknowledging the same, however, restored the MAM also to the TPO. It was the contention that assessee cannot be compared to other companies as they are only supplementing or testing in the software development services and so the method being adopted since inception should be accepted. Ld. counsel referred to the rules and data furnished by the assessee to submit that the CPM/CUP method is appropriate. 5.2 On a specific query by the Bench, why two methods are taken as MAM and which one is the preferred method, the ld. counsel fairly admitted that CUP is preferable (i.e. external CUP). 5.3 The ld. CIT(DR), however, referred to the orders of TPO and DRP and the position of the Department to submit that the data pertaining to CPM or CUP is not furnished by the assessee and so comparability on TNMM is most appropriate, as it does not effect functional differences, if any, as stated in OECD guidelines and relied on by DRP. Ld. CIT(DR) also referred to Rule 10C to submit that TNMM is the most appropriate method. 5.4 We have considered the rival contentions and perused the details placed on record. As stated by the ld .....

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..... ncontrolled comparable prices are generally not available in the Cost Plus Method. Even the assessee s analysis of 32% Gross Profit and 5% Net Profit cannot be accepted as there cannot be any Gross Profit in the case of assessee, who is operating on Cost Plus Method. More over, even though the assessee is stated to have been operating on Cost Plus 5% Method, OP/Cost as computed by the assessee itself is at 3.2% and if foreign exchange gain was added to the operating margin, then only it comes to 5%. Generally in a Cost Plus situation, the entire cost spent by the assessee with a mark-up of 5% would be billed to the AE on a periodical basis. The conversion generally done at the prevailing rate of USD or foreign currency involved. Therefore, the basic concept is the margin would be about 5%. In case of any foreign exchange gain, this could increase the margin to that extent. In case of foreign exchange loss on the USD / foreign currency quoted by the assessee, then the margin would come down to that extent. However, as seen in this case, the margin without foreign exchange gain itself is less than 5%. Therefore, in the absence of correct cost structure and billing procedure, it is ve .....

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..... profit by so many assumptions/ numbers. This analysis of the assessee cannot be relied on as an external CUP. As can be seen from the above, there is no internal CUP which can be relied on in order to accept the CUP method. Therefore, in our view, the analysis undertaken by the assessee is not only faulty, but devoid of any data or proper analysis. In view of this, we have no option than to accept the TPO s contention of TNMM as the most appropriate method. 5.8 Under section 92C of the Act, ALP has to be examined adopting the most appropriate method. Section 92C prescribes five methods CUP, RPM, CPM, PSM and TNMM. Rule 10C provides the relevant guidelines for analyzing the most appropriate method to be selected. Under the Indian TP regulations, there is no priority or preference to any of the methods. There are also no regulations which prescribe any circumstances under which method is to be adopted, except for PSM. The above 5 methods are categorised generally as 1.Traditional methods i.e., CUP, RPM and CPM, and 2. Transactional profit methods of PSM and TNMM. In the absence of reliable data to undertake the exercise under the traditional methods, the only option is go for the .....

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..... Mindtree Ltd. 16.41% 16 Persistent Systems Ltd. 20.31% 17 Quintegra Solutions Ltd. 21.74% 18 R S Software (India) Ltd. 7.41% 19 R Systems International (Seg) 15.30% 20 Sasken Communication Technologies Ltd. (Seg) 7.58% Arithmetic Mean 23.65% 6.2 Assessee is objecting to the companies listed at Sl.Nos. 1 to 11. These companies are elaborately considered by the Coordinate Bench in the case of NXP Semiconductors, IT(TP)A No.1560/Bang/2012 dated 5.3.2015 as under:- 9. Avani Cincom Technologies Ltd . 9.4.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial decisions cited by the assessee. We find that a co-ordinate bench of this Tribunal in the case of M/s. Curam Software International Pvt. Ltd. in ITA No.1280/Bang/2012 dt.31.7.2013 for Assessment Year 20 .....

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..... le to one particular year cannot be extrapolated automatically and made applicable to subsequent years. To do that, it is necessary to first establish that the facts and attendant factors have remained the same so that the factors of comparability are the same. Viewed in that context, the assessee has not discharged the onus upon it to establish that the decision rendered in the case of Triology E-Business Software India Pvt. Ltd. (supra) can be applied to the facts of the case and that too of an earlier year i.e. Assessment Year 2007-08. The assessee, in our view, has not demonstrated that the facts of Triology EBusiness Software India Pvt. Ltd. (supra) are identical to the facts of the case on hand and that the profile of the assessee for the year under consideration is similar to that of the earlier Assessment Year 2007-08. In view of facts as discussed above, we deem it fit to remand the matter back to the file of the Assessing Officer / TPO to examine the comparability of this company afresh by considering the above observations. The TPO is directed to make available to the assessee information obtained under section 133(6) of the Act and to afford the assessee adequate opport .....

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..... the case on hand and is therefore not comparable and also that the findings rendered in the cited decisions for the earlier years i.e. Assessment Year 2007-08 is applicable for this year also. We agree with the submissions of the assessee that this company is functionally different from the assessee. It has also been so held by co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) as well as in the case of Triology E-Business Software India Pvt. Ltd. (supra). In view of the fact that the functional profile of and other parameters of this company have not changed in this year under consideration, which fact has also been demonstrated by the assessee, following the decision of the co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 in ITA No.845/Bang/2011 and Triology E-Business Software India Pvt. Ltd. in ITA No.1054/Bang/2011, we hold that this company ought to be omitted from the list of comparables. The A.O./TPO are accordingly directed. 10.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), we direct the Ass .....

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..... , we direct the Assessing Officer / TPO to omit this company from the final set of comparables as it is functionally different from the assessee in the case on hand, who is purely a software service provider. 18. Lucid Software Ltd. 18.3.1 We have heard the rival submissions and perused and carefully considered the material on record; including the judicial decision cited and placed reliance upon. We find that the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company has to be excluded from the list of comparables for software development service providers as it is engaged in software product development and the relevant observations of the order at para 16.3 thereof is extracted hereunder :- 16.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that the company i.e. Lucid Software Ltd., is engaged in the development of software products whereas the assessee, in the case on hand, is in the business of providing software development services. We also find that, co-ordinate benches of the Tri .....

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..... evelopment services. The details in the Annual Report show that the segment software development services relates to design services and are not similar to software development services performed by the assessee. 13.4.2 The Hon'ble Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. V ACIT (ITA No.7821/Mum/2011) has held that Tata Elxsi Ltd. is not a software development service provider and therefore it is not functionally comparable. In this context the relevant portion of this order is extracted and reproduced below :- . Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of the learned Authorised Representative that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company as fit for comparability analysis for determi .....

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..... above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), we direct the Assessing Officer / TPO to omit this company from the final set of comparables as it is functionally different from the assessee in the case on hand, who is purely a software service provider. 13. Wipro Ltd. 13.4.1 We have heard both parties and perused and carefully considered the material on record; including the judicial decisions cited. We find that a co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company ought to be excluded from the list of comparables holding as under at paras 12.4.1 and 12.4.2 of its order, which is extracted hereunder :- 12.4.1 We have heard both parties and carefully perused and considered the material on record. We find merit in the contentions of the assessee for exclusion of this company from the set of comparables. It is seen that this company is engaged both in software development and product development services. There is no information on the segmental bifurcation of revenue from sale of product and software services. .....

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..... ng companies should be excluded as a comparable. The Special Bench after considering several aspects held in para 88 of its order that the potential comparable companies cannot be excluded merely on the ground that their profit is abnormally high. The Special bench held that in such cases it would require further investigation to ascertain the reasons for unusually high profit and in order to establish whether the entities with such high profits can be taken as comparable or not. In the light of the aforesaid decision of the Special Bench and in view of the admitted position that the assessee follows Fixed Price Project model where revenues from software development is recognized based on software developed and billed to clients, there is a possibility of the expenditure in relation to the revenue being booked in the earlier year. The results of Bodhtree from FY 2003 to 2008 excluding FY 2007 as given by the learned counsel for the assessee were also perused. Perusal of the same shows, that there has been a consistent change in the operating margins. The chart filed by the assessee in this regard is given as an annexure to this order. It appears to us that the revenue recognition m .....

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..... sion relied on by the co-ordinate bench of this Tribunal in the above mentioned case; CISCO Systems (India) Pvt. Ltd. (supra), has been in relation to Assessment Year 2008-09 and therefore we find merit in the contention of the assessee that the finding rendered in the above cited decision applies to the facts and circumstances of the case on hand, which is for Assessment Year 2008-09. In this view of the matter, following the above decision of the co-ordinate bench of the Tribunal, we direct the TPO to include this company form the set of comparable companies to be applied to the assessee. It is ordered accordingly. 17. Thirdware Solutions Ltd. 17.3.1 We have heard both parties and perused and carefully considered the material on record. We find that a co-ordinate bench of ITAT, Bangalore in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has excluded this company from the set of comparables to a pure software development service provider since this company is functionally different as it is engaged in product development and earns revenue from sale of licenses and subscription. The relevant portion of the above order at para 15.3 thereof is .....

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..... company is to be omitted from the list of comparables to the assessee in the case on hand. 21.4.2 Following the decision of the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, and 24/7 Customer.com Pvt. Ltd. in ITA No.227/Bang/2011, we direct the A.O / TPO to exclude this company from the list of comparables as it has RPT of 18.30% which is in excess of 15%. It is ordered accordingly. 16. E-Zest Solutions Ltd . 16.4.1 We have heard both parties and perused and carefully considered the material on record. We find that a co-ordinate bench of ITAT, Bangalore in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 had excluded this company from the list of comparables holding that this company is into rendering of product development services and high end technical services in the category of KPO Services and therefore cannot be considered as comparable to an assessee rendering purely software development services. The relevant portion of the order of the co-ordinate bench at para 14.4 thereof is as under :- 14.4 We have heard the rival submissions and perused and carefu .....

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..... ditya Birla Minacs IT Services Ltd. (2) Aditya Birla Minacs Technologies Ltd. 7.1 The reason for rejection of the above companies was that they failed RPT filter. The objection of the assessee was that TPO has included the reimbursement cost in operating cost. It is submitted that the reimbursement cost does not have any effect on profitability and if they are excluded, then they are within the filter range adopted by the TPO. Detailed objections and working as provided in objections to DRP at page 72 to 74 are referred in support of the contentions. 7.2 The above companies were considered by the Coordinate Bench in the case of Yodlee Infotech Pvt. Ltd. in IT(TP)A No.1538/Bang/2012 dated 30.8.2013 wherein vide para 25 and 26, the Bench directed as under:- 25.0 Aditya Birla Minacs IT Services 25.1 This company was selected by the TPO on the basis of the search conducted by him and was proposed as a comparable company in the show cause notice issued to the assessee. The assessee had no objection to the inclusion of this company in the set of comparables. The TPO, however, excluded this company from the final set of comparables for the reason that this company faile .....

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..... ving 94.08% RPT. 26.2 In this appeal before us, the learned Authorised Representative contended that the reason for which the TPO has rejected this company as a comparable is incorrect since he had calculated the RPT figure at 94.08% wrongly. It is submitted that the RPT for this company is only 7.43% and that the TPO has computed the some wrongly by considering reimbursements also as RPT. In view of this the learned Authorised Representative prayed that the TPO/AO be directed to include this company in the final set of comparables. 26.3 Per contra the learned Departmental Representative supported the orders of the TPO in excluding this company from the final set of comparables on the ground that it failed the RPT filter applied by the TPO. 26.4 We have heard both parties and perused and carefully considered the material on record. It is clear from the record that the TPO had actually proposed this company for inclusion as a comparable based on the search process carried out by him. In the search process, the TPO had applied the RPT filter at 25%. It is seen that after having selected this company as a comparable after using the RPT filter, the TPO rejected the case on the .....

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..... added to operating revenue. Following the same, the AO is directed to accept the claim of the Assessee in this regard..................... . 5.8.1 In conformity with the above finding, we direct the AO/TPO to consider the foreign exchange gain or loss as part of the operating cost or revenue, as the case may be, for both the assessee as well for the comparable companies. 8.1 In conformity with the above finding, we direct the TPO to consider accordingly. Ground is allowed. 9. The last issue for consideration is the issue of risk adjustment. This issue was also considered and held in favour of assessee in AY 2007-08 in assessee s own case as under:- 5.11 It was the case of the assessee that the AO/TPO erred in not making suitable adjustments on account of differences in the risk profile of the assessee vis-a-vis the comparables. At this juncture, we would like to recall that a similar issue raised by the assessee in the immediately preceding assessment year has been remanded back to the files of AO/TPO by the earlier Bench to decide the issue afresh. The above direction was in conformity with the findings recorded in the case of M/s. Insilica Semiconductors India Pvt. .....

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