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Ness Technologies (India) Pvt. Ltd. Versus Dy. Commissioner of Income Tax Central Circle–6 (1) , Mumbai

2015 (9) TMI 1476 - ITAT MUMBAI

Transfer pricing adjustment - selection of comparable CG–Vak Software and Exports Ltd. - Held that:- No reason to sustain the order of the DRP in rejecting CG–Vak Software and Exports Ltd. as a comparable. Accordingly, we direct the Transfer Pricing Officer to include this company as comparable and determine the arm's length price. In the course of hearing, learned Counsel for the assessee submitted a working indicating the margin of comparables finally selected after including CG–Vak Software a .....

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learned Counsel, we find the aforesaid submissions of learned Counsel for the assessee to be correct. In view of the aforesaid, as we have directed the Transfer Pricing Officer to include CG–Vak Software and Exports Ltd. as a comparable, by virtue of which assessee’s margin comes within the range of 5% of average arithmetic mean of comparables requiring no further adjustment, there is no need to adjudicate the other grounds relating to selection / rejection of comparables as well as risk and wor .....

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the Assessing Officer raising the aforesaid issues which is still pending, we direct the Assessing Officer to consider assessee’s petition under section 154 of the Act on merits and in accordance with law. - IT(TP)A no.943/Mum/2015 - Dated:- 30-9-2015 - SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER. Assessee by : Shri M.P. Lohia a/w Shri Nikhil Tiwari Revenue by : Shri N.K. Chand ORDER PER SAKTIJIT DEY, J.M. The instant appeal of the assessee is directed again .....

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assessee, on its part, is engaged in providing software development services to its A.Es including information technology enabled services (ITES). For the assessment year under consideration, the assessee filed its return of income on 29th September 2010, declaring total income of ₹ 34,99,90,400. During the assessment proceedings, the Assessing Officer noticing that the assessee has entered into international transactions with its A.E., made a reference to the Transfer Pricing Officer for .....

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rgin of the international transaction with the A.E. He further found that assessee conducting a search in the data bases has identified 19 companies as comparable with average arithmetic mean of 8.94% considering financial results of the current year and preceding two years and profit margin of 10.52% in case of 11 companies by using data for the financial year 2009-10 alone. Since in both the cases, the profit margin of the comparable companies were less than the profit margin declared by the a .....

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as comparable which, according to him, were functionally similar to the assessee. Though the assessee objected to such action of the Transfer Pricing Officer but the Transfer Pricing Officer rejecting the objections of the assessee, undertook a search process himself and selected fresh set of comparables by using contemporaneous data, which also included certain comparables selected by the assessee. In the process, the Transfer Pricing Officer rejected some of the comparables selected by the as .....

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. In terms with the order passed under section 92CA(3) of the Act by the Transfer Pricing Officer, the Assessing Officer passed a draft assessment order incorporating the transfer pricing adjustment. 3. Being aggrieved of the Draft Assessment Order, the assessee filed objections before the DRP challenging the arm's length price determined by the Transfer Pricing Officer raising various grounds including grounds relating to selection and rejection of comparables. The DRP, after considering th .....

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clude the following companies from the list of comparables:- i) Bodh Tree Consulting Ltd. ii) KALS Information System Ltd. iii) Igate Global Solution Ltd. iv) Tata Elxsi Ltd. v) Wipro Ltd. vi) Infosys Ltd. 4. The DRP, however, rejected the assessee s contentions for including CG-Vak Software and Exports Ltd. as comparable and for excluding Third Ware Solutions Ltd. and Persistent Systems Ltd., from the list of comparable. That besides, the DRP on its own, found some companies to be functionally .....

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7. Zylog Systems Limited 19.08% 8. LGS Global Limited 10.21% Average 21.04% 5. Of-course, the DRP also passed some directions on other corporate issues with which we are not concerned at present. In terms with the direction of the DRP, the impugned assessment order was passed. Being aggrieved, the assessee is in appeal before us raising as many as 23 grounds:- 6. Grounds no.1 and 2, being general in nature, do not require any specific adjudication. 7. The learned Counsel for the assessee submitt .....

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n being consequential is not required to be adjudicated at this stage. 9. In ground no.24, the assessee has challenged initiation of penalty proceedings under section 271(1)(c) of the Act. This ground being pre- mature at this stage of the proceedings, is not required to adjudicate upon, hence, dismissed. 10. This leaves us with grounds no.6, 7, 8, 9, 10, 12, 13, 14, 15, 16 and 17 as far as transfer pricing issues are concerned. Apart from the transfer pricing issues, there are couple of other i .....

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considering the relevant factual details was convinced with the fact that this company is not a consistent loss making company and there, in fact, is a foreign exchange gain earned by the company in the immediately preceding year which was not taken into account while computing segmental revenue, however, the DRP rejected this company on a totally different ground by observing that the turnover of the company during the relevant previous year was only ₹ 7.16 crores compared to assessee s .....

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excluded merely on the basis of turnover. Moreso when neither the assessee nor the Transfer Pricing Officer has applied the turnover filter for selecting comparable. For such proposition, the learned Counsel relied upon the following decisions:- i) Techbooks Internationals Pvt. Ltd. v/s DCIT, ITA no.240/Del./2015, order dated 6th July 2015; ii) Nortel Networks India Pvt. Ltd. v/s ACIT, ITA no.4765/Del./2011 and ITA no.472/Del./2013, order dated 25th February 2014; and iii) CIT v/s Nortel Networ .....

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d Exports Ltd.. The learned Departmental Representative submitted, though, there may be co-relation between the turnover and profit but a relatively small company cannot be compared to a big company. As far as the decisions relied upon by the learned Counsel for the assessee, it was submitted by the learned Departmental Representative, the ratio laid down in the decisions are fact based and cannot be applied to all cases. In this context, he relied upon the decision of the Tribunal, Delhi Bench, .....

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d the rival submissions, perused the orders of the Revenue authorities and material available on record. On a perusal of assessee s transfer pricing study as well as the order passed under section 92CA(3) of the Act by the Transfer Pricing Officer, it is very much evident that neither the assessee nor the Transfer Pricing Officer have applied the turnover filter while selecting comparables. In fact, it is pertinent to mention here that the Transfer Pricing Officer, while rejecting the CG-Vak Sof .....

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, it cannot be considered as a comparable to the assessee. In our view, when neither the assessee nor the Transfer Pricing Officer have applied the turnover filter while selecting the comparable, it is not at all relevant to apply the filter for rejecting or selecting any comparable. Moreover, it is a principle well settled in a number of decisions of this Tribunal, low turnover alone may not have an impact on profitability unless there are other factors impacting the profitability. In the prese .....

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mparables merely on the ground that its turnover is less. The reasons given above while considering the comparability of CG-VAK Software and Exports apply to this company as well. We, therefore, order for the inclusion of this company in the list of comparables. However, the Transfer Pricing Officer is directed to verify the correctness of OP/OC of this company before its inclusion in the set of comparables. 14. Similarly, the Tribunal, Delhi Bench, again in Nortel Net Works India Pvt. Ltd. (sup .....

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ppreciated that no turnover filter was applied by either of the parities. The comparable has been excluded because the total turnover of this comparable is ₹ 13.92 crores. The analysis needs to be carried out on the basis of functional profile and not on an arbitrary or adhoc criteria. From the facts on record and argument advanced before us, it emerges that the functional profile of Capital Trust Limited s consultancy segment is similar to that of Nortel India the same needs to be include .....

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tirely fact dependent. In the given facts of this case, the record indicates that the Transfer Pricing Officer chose to apply that filter but used it to exclude the data pertaining to M/s. Capital Trust Ltd. This inconsistency went unnoticed even by the DRP. The ITAT corrected the position and noticed that not having applied the turnover filter at the initial stage, the Revenue cannot take advantage, in the facts of the case, particularly when the turnover filter is not a test even in respect of .....

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are and Exports Ltd. or whether it is functionally dissimilar to the assessee, hence, cannot be considered as comparable. Therefore, keeping in view the principles laid down in the decisions referred to above, we find no reason to sustain the order of the DRP in rejecting CG-Vak Software and Exports Ltd. as a comparable. Accordingly, we direct the Transfer Pricing Officer to include this company as comparable and determine the arm's length price. In the course of hearing, learned Counsel for .....

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itted, there will be no need to adjudicate other grounds on T.P. adjustment. On a perusal of the working submitted before us by the learned Counsel, we find the aforesaid submissions of learned Counsel for the assessee to be correct. In view of the aforesaid, as we have directed the Transfer Pricing Officer to include CG-Vak Software and Exports Ltd. as a comparable, by virtue of which assessee s margin comes within the range of 5% of average arithmetic mean of comparables requiring no further a .....

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