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2017 (4) TMI 866 - ITAT PUNE

2017 (4) TMI 866 - ITAT PUNE - TMI - Transfer pricing adjustment - comparable selection - application of turnover filter - Held that:- The assessee is aggrieved by the order of Assessing Officer / TPO in considering the turnover range on cost basis instead of turnover basis and hence, the inclusion of Helios and Matheson Information Technology Ltd., which was identified as comparable even though its total turnover was ₹ 213.37 crores. The grievance of assessee in considering the turnover r .....

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; 213.39 crores, then the same merits to be excluded from the final list of comparables. Accordingly, we hold so. The ground of appeal raised by the assessee is thus, partly allowed. - Assessee which is providing software development services thus selection of comparable as companies functionality dissimilar with that of assessee need to dis-selected as final list of comparable. - Non-allowance of risk adjustment - Held that:- We direct the Assessing Officer to allow the risk adjustment .....

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or meeting expenses, travel cost, stay cost, etc. - Held that:- uthorized Representative for the assessee pointed out that the said expenditure was part of operating cost and was recovered @ 7%. The factual aspects of this issue are not clear and the Assessing Officer/Transfer Pricing Officer is directed to redecide the same after allowing reasonable opportunity of hearing to the assessee. We hold so. - ITA No.46/PUN/2013 - Dated:- 22-3-2017 - MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM F .....

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y the learned Assessing Officer have: 1. General ground challenging the transfer pricing adjustment of ₹ 2,70,62,939 Erred in making transfer pricing adjustment to the international transactions of the Appellant in the nature of provision of software development services and payment for reimbursement of certain expenses and not accepting the comparability analysis documented in the Transfer Pricing study report for benchmarking analysis. I Grounds of appeal in respect of transfer pricing a .....

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fied range on cost base instead of turnover base. Erred in applying turnover filter of INR 1 crore to INR 200 crores as a comparable selection criteria (i.e. using a turnover filter of INR 1 to 200 crores) as against the turnover filter of upto INR 100 crores applied by the Appellant for identifying the comparable companies (Appellant's turnover being INR 14.37 crores). Further, erred in inappropriately considering the above range on cost basis instead of turnover basis (i.e. companies havin .....

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ng certain filters on selective basis for rejecting/accepting certain companies such as: - Use of single year data for comparability analysis (as opposed to three years data used in the Transfer Pricing study report); - Rejection of companies with less than 75% earnings from exports; - Rejection of loss making companies; - Rejection of companies with peculiar circumstances and - Use of diminishing revenue filter 5. Rejection of certain comparable companies identified by the Appellant in the tran .....

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super normal profits Erred in selecting companies having supernormal profits as comparable to the Appellant. 8. Following inconsistent approach for rejecting / selecting companies as comparable Erred in adopting an inconsistent approach while applying the functional comparability criteria for rejecting / accepting companies as comparable. 9. Adjustment for differences on account of functional and risk profile of comparable companies vis-a-vis the Appellant Erred in comparing full-fledged risk be .....

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o section 92C(2) of the Act of adopting as arm's length price, a price which varies by not more than 5 per cent from the arm's length price. II. Grounds of appeal in respect of international transactions relating to payment for meeting expenses, travel cost, stay cost, etc 11. Adjustment on account of payment for reimbursement of certain expenses Erred in making transfer pricing adjustment by disallowing genuine operating expenses of the Appellant to the amount of INR 14,88,134 pertainin .....

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eria adopted for identifying the comparable companies, interpretation of provisions of law, etc and not due to concealment of or furnishing of inaccurate particulars of income. 13. Erroneous levy of interest under section 234B of the Act Erred in levying interest under section 234B of the Act to the extent addition is made to the total income of the Appellant on account of transfer pricing adjustments related matters without considering the fact that shortfall in advance tax resulted due to the .....

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CA(1) of the Act for determination of arm's length price of international transactions with associate enterprises. The assessee had applied TNNM method for benchmarking the international transactions of provision of software development services at ₹ 14,37,01,094/-. The Transfer Pricing Officer (in short the TPO ) agreed that the TNNM method was most appropriate method. The assessee had selected 12 companies as comparables for benchmarking the international transactions by adopting wei .....

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panies. The TPO was of the view that the assessee had applied subjective approach while selecting the comparables. On going through accept / reject matrix adopted by the assessee, the TPO detected certain defects in the approach followed by the assessee. The TPO also noted that in certain cases the assessee had selected companies which were actually not suitable as comparable and in some cases, the assessee had omitted to select certain cases which were more suitable after appropriate FAR analys .....

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ed party transactions were selected. Certain companies with peculiar circumstances were also rejected. The TPO noted that the assessee had applied turnover filter of ₹ 25 crores to ₹ 100 crores, whereas the turnover of assessee in SW segment was ₹ 178 crores. After considering the explanation of assessee, the TPO was of the view that the turnover range of ₹ 1 to ₹ 200 crores was acceptable in assessee s case. The PLI was to be determined with respect to operating co .....

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s provided by the assessee, the arithmetic mean of PLI was worked out at 31.92% and after working capital adjustment at 27.32%. The TPO also verified the working PLI submitted by the assessee and extraordinary expenses on account of rent paid for premature termination of leave and license agreement was excluded while working PLI. Similarly, miscellaneous income was found to be included in the operating income and Fringe Benefit Tax was held to be considered for the said working. The PLI of asses .....

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on organizing such meetings by the group, the TPO was of the view that the same cannot be considered at arm's length and sum of ₹ 14,88,134/- was proposed as an adjustment. The Assessing Officer issued draft assessment order to the assessee in this regard, against which the assessee filed objections to the Dispute Resolution Panel (in short DRP ). The DRP in its directions under section 144C(5) of the Act vide order dated 27.08.2012 issued certain directions, as per which, revised work .....

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determined at 5.25%. Further, following the directions of DRP, revised margins of final set of comparables was worked out which comprised of seven companies as comparable and the arithmetic mean of margins after working capital adjustment worked out to 23.90%. The TPO thus, proposed an adjustment over operating income at ₹ 2,55,74,805/- on account of software development services and ₹ 14,88,134/- on account of cost allocation. The revised total adjustment as per directions of DRP w .....

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rores applied by the assessee for identifying the comparable companies. The first part of the issue raised by way of ground of appeal No.3 is against the application of turnover filter of ₹ 1 to ₹ 200 crores and not ₹ 100 crores as applied by the assessee. The learned Authorized Representative for the assessee pointed out that the first limb of ground of appeal No.3 is not pressed, hence, the same is dismissed as not pressed. 7. Now, coming to the second limb of ground of appea .....

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s have held that the turnover basis is to be adopted range for the selection of companies. The total turnover of the assessee was ₹ 14.37 crores, as against which we hold that the turnover filter of ₹ 1 to ₹ 200 crores merits to be applied. Since the turnover of Helios and Matheson Information Technology Ltd. was more than ₹ 200 crores i.e. ₹ 213.39 crores, then the same merits to be excluded from the final list of comparables. Accordingly, we hold so. The ground of .....

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selected eight companies as comparable and allowed working capital adjustment and computed the arithmetic mean of comparables at 27.32%. Pursuant to the directions of the DRP, revised final list of comparables was as under:- Sr. No. Name of the comparable OP/TC Working capital adjusted in the case of assessee 1 Bodhtree Consulting Ltd. 19.14 15.68 2 E-Infochips Ltd. 30.32 25.37 3 eZest Solutions Ltd. 28.58 26.78 4 Goldstone Technologies 27.03 19.88 5 Helios and Matheson Information Tech 36.05 3 .....

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Software Technologies Ltd. 2 Indium Software (India) Ltd. 3 Maars Software international Ltd. 4 Quintegra Solutions Ltd. 5 S I P Technologies and Exports Ltd. 6 R S Software (India) Ltd. 10. First, we shall take up the objections of assessee and the submissions of the learned Departmental Representative for the Revenue in respect of companies which were finally selected by the Assessing Officer / TPO / DRP in the final set of comparables. The first concern is Bodhree Consulting Ltd. The learned .....

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o ITES segment. Where the assessee was providing mixed set of services i.e. product and engineering services, then the same is comparable to Bodhtree Consulting Ltd. Reliance placed upon by the assessee on the ratio laid down by the Pune Bench of Tribunal in John Deere India Pvt. Ltd. Vs. ACIT in ITA No.2236/PN/2012, relating to assessment year 2008-09, vide order dated 18.11.2015, it was held to be distinguishable since Bodhtree Consulting Ltd. was not providing data cleaning services and hence .....

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same be held to be functionally comparable with the assessee which is providing software development services to its associate enterprises. While benchmarking any international transactions undertaken by the assessee, endeavour should be made to compare the results shown by the assessee with such concerns which are functionally comparable. Where the margins of concerns picked up are from different segments of operation i.e. software development product as well as ITES services and in the absenc .....

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pment services. Following the same we hold that Bodhtree Consulting Ltd. is to be excluded from the final set of comparables. 13. Now, coming to the next concern E-Infochips Ltd. The plea of the assessee in this regard was that the said concern was a product company and also in ITES segment. Our attention was drawn to the financial statements for the year under consideration placed at pages 618, 619, 625 and 630 of the Paper Book and the learned Authorized Representative for the assessee pointed .....

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for the Revenue on the other hand, pointed out that the concern was engaged in embedded software development services. He further pointed out that the quantum of hardware sale had to be seen. Since the assessee and also the Assessing Officer / TPO had selected the companies with export filter of 75% turnover, then the concern EInfochips Ltd. is to be included in the final set of comparables. He referred to the decision of Hon ble High Court of Gujarat in the case of Allscripts (India) (P.) Ltd. .....

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t have significant (less than 25%) foreign exchange earning were held to be reason for rejection of companies as comparable. The perusal of financial reporting of the concern E-Infochips Ltd. at page 625 of the Paper Book reflects that the income from software services at ₹ 21.03 crores with consulting services at ₹ 2.16 crores and hardware sales were at ₹ 82.61 lakhs. The consultancy services were linked to the software services provided by the assessee and the hardware sales .....

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ble High Court of Gujarat has set aside the issue of exclusion of E-Infochips Bangalore Ltd. on the ground that it was not clear as to whether the said concern was engaged in any services other than software development services. However in the present case, financial details are available and applying the filters adopted by assessee, we hold that E-Infochips Bangalore Ltd. is to be included in final set of comparables. 16. The next concern against inclusion of which the assessee is aggrieved is .....

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f Tribunal in John Deere India Pvt. Ltd. Vs. ACIT (supra). 17. On the other hand, the learned Departmental Representative for the Revenue pointed out that where the assessee is also providing mixed bag of services, so it cannot be pleaded that it is not comparable being providing mixed services. 18. On perusal of record and the order of Tribunal in John Deere India Pvt. Ltd. Vs. ACIT (supra), we find that the concern E-zest Solutions Ltd. is a product company and is engaged in both the provision .....

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e same is to be excluded from the final set of comparables. 20. The learned Departmental Representative for the Revenue also stated that the same arguments as in the case of E-zest Solutions Ltd. are raised against exclusion of KALS Information Systems Ltd. 21. We find that the concern KALS Information Systems Ltd. is functionally not comparable to the assessee as it is engaged in software services as well as software products and has reported inventory and work in progress in annual report. Ref .....

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l in John Deere India Pvt. Ltd. Vs. ACIT (supra). Further the Hon ble Bombay High Court in the case of CIT Vs. PTC Software (I) Pvt. Ltd. in Income Tax Appeal No.732 of 2014 judgement dated 26-09-2016 has held that Kals Information Systems Ltd. was engaged in Software products not comparable to concern providing software services. Applying the same, we hold that the said concern is to be excluded from the final list of comparables. 22. The learned Authorized Representative for the assessee while .....

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clusion of concerns which were selected by the assessee in its TP analysis. The first concern is Akshay Software Technologies Ltd., which as per the assessee is functionally comparable to the assessee. However, the said concern is engaged in on-site development and hence, the margins of said concern are not comparable to the assessee which is off-site developer. The Pune Bench of Tribunal in TIBCO Software (India) Pvt. Ltd. Vs. DCIT in ITA No.2536/PN/2012 relating to assessment year 2008-09, ord .....

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rom the final list of comparables as done by the TPO. Applying the said principle, we further hold that the concern at serial No.3 i.e. Maars Software International Ltd. being on-site developer is also to be excluded from the final set of comparables. Similarly, the concern at serial No.6 i.e. R S Software (India) Ltd. is on-site developer and the same is to be excluded from the final list of comparables. 24. Now, coming to the concern at serial No.2 i.e. Indium Software (India) Ltd. The said co .....

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uded in the final set of comparables. 25. The learned Departmental Representative for the Revenue on the other hand, strongly objected to its inclusion as the filter applied by the assessee that the concern with export turnover less than 75% should be excluded, has been applied by the TPO also. He pointed out that the said concern was excluded on two accounts i.e. it was loss making company and it failed in export turnover filter. The learned Departmental Representative for the Revenue placed re .....

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t fulfill the export filter which has been applied by the assessee itself, that the concern whose software development services were greater than 75% are to be included as comparable, then Indium Software (India) Ltd. is to be excluded from the final list of comparables. The said filter is to be applied first before applying the next filter as whether it is persistent loss making concern or not. Reliance placed upon by the learned Authorized Representative for the assessee on series of decisions .....

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having intangibles has already been decided by the Pune Bench of Tribunal in Barclays Technology Centre India (P.) Ltd. Vs. ACIT, relating to assessment year 2008-09 reported in (2015) 56 taxmann.com 386 (Pune - Trib.) and the same is to be excluded from the final list of comparables. 29. Now, coming to the last concern S I P Technologies and Exports Ltd., which the assessee wants to be included in the final set of comparables. The said concern was rejected on the ground that it was loss making .....

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t it is to be excluded from the final list of comparables. The Assessing Officer is directed to compute the margins of comparables and make suitable adjustments, if any, to the international transactions undertaken by the assessee. 32. The ground of appeal No.9 raised by the assessee is against nonallowance of risk adjustment. 33. The assessee is captive service provider to its Associated Enterprises and claims to be risk free and hence desires risk adjustment in the margins of its finally selec .....

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international transaction of assessee. The Bangalore Bench of Tribunal in the case of Philips Software Centre Pvt. Ltd. Vs. ACIT reported in 26 SOT 226 has upheld that the adjustment of risk to be computed as difference between the PLR and the risk free rate of turn. The assessee prepared a summary computation considering the aforesaid rule, which reads as under:- 33. Further, the Delhi Bench of Tribunal in the case of Sony India Pv t. Ltd. reported in 114 ITD 448 has allowed 20% risk adjustment .....

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