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PR. COMMISSIONER OF INCOME TAX-VADODARA-1 Versus ALLSCRIPTS (INDIA) PRIVATE LTD

2016 (8) TMI 1187 - GUJARAT HIGH COURT

Transfer pricing adjustment - selection of comparable - Held that:- The assessee was involved only in software development. - Considering widely fluctuating and erratic results of the company the Tribunal found that it would be unsafe to assess armís length price based on TNMM taking into account the results of Bodhtree Consulting Ltd. company. We do not find the decision of the Tribunal gives rise to any substantial question of law. - E-Infochip Bangalore Ltd - Tribunal merely considere .....

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ng the finding of the TPO, without giving any specific finding of its own much less recording the reasons, proceeded to hold that in absence of segmental information E-Infochip Bangalore Ltd. must be excluded from consideration, directed exclusion of E-Infochip Bangalore Ltd. We find that the Tribunal has committed a serious error. Tribunalís directions to exclude E-Infochip Bangalore Ltd. from working out the transfer pricing, the judgment is reversed. - TAX APPEAL NO. 258 of 2016 - Dated:- 2-8 .....

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ack to the file of AO/TPO and directed AO to rework addition after excluding the aforesaid 2 companies without going to merits and facts of the case? 2. On 5.7.2016, after recording the submissions of the counsel for the revenue that the Tribunal, while remanding the issue of transfer pricing to the Assessing Officer, directed that the Assessing Officer should exclude two of the companies while working out comparability analysis, we had issued notice indicating that we may dispose of the Tax App .....

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Tribunal provided that the results of two companies, viz., Bodhtree Consulting Ltd. And E-Infochip Bangalore Ltd. would be kept out of consideration. The Tribunal thereupon directed the Assessing Officer to re-work the additions in case of the assessee on the basis of transfer pricing mechanism after excluding the aforesaid two companies. 4. Section 92C of the Act as is well known pertains to computation of arm s length price in relation to international transaction or specified domestic transac .....

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rprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take in .....

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in thus established is then taken into account to arrive at an arm s length price in relation to the international transaction (or the specified domestic transaction]; 5. In the context of agreed application of TNMM method, the Revenue adopted the results of various companies including above two companies, despite strong opposition from the assessee. The final working out by the Assessing Officer was done in tune with the report of the TPO. The Tribunal with respect to Bodhtree Consulting Ltd. r .....

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contention that since the financial information with respect to these two segments was not separately available, the profit margin of this company also must be kept out of consideration. 6. With respect to Bodhtree Consulting Ltd., we notice that the Tribunal in case of another assessee had noted the company s financial results for financial year 2005-06 to financial year 2012-13 as under : Partic ulars FY 05-06 FY 06-07 FY 07-08 FY 08-09 FY 09-10 FY 10-11 FY 11-12 FY 12-13 OP/TC 13.87% 80.15% .....

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sed on TNMM taking into account the results of this company. We do not find the decision of the Tribunal gives rise to any substantial question of law. The Revenue s objection in this regard therefore, must be turned down. 8. With respect to exclusion of E-Infochip Bangalore Ltd., however, the issue requires a closer scrutiny. As noted, the grievance of the assessee was that this company was engaged in software development as well as IT enabled services. Since the assessee was engaged only in so .....

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n. The TPO rejected the contention on the ground that the said company was engaged only in software development. TPO had observed as under : B.11.2 As far as the contention regarding entity being engaged in software development and IT enabled services is concerned, the observation of the assessee is itself negated by the details submitted by the company, which was incidentally reproduced by the assessee in the reply to show cause notice also. The same is being reproduced again for convenience: e .....

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in system development phase. III. Application software development for various projects using the languages like C, C++, Java, Net and Android. The major customers in this segment are spread across all sorts of industries who need software for their support functions or integrations of their various systems. From perusal of the above, there can be no doubt that the comparable is engaged in providing software development services only. The only difference can be in respect of the verticals in whi .....

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d 2010-11 ANNEXURE-B : Brief Description of Software Development process : (Please Refer Para No.2 of the Notice) Sir, please note that our Company is a pure Software Development Company according to the categories mentioned under Para.2 of your notice. Our company does not generate any intellectual property for its own. B.11.3 The assessee has also brought to differentiate the work being carried out by the comparable and the work being carried out by it by submitting that the comparable is enga .....

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are reproduced below : xxx xxx xxx Thus, it can be seen that the comparable as well as the tested party are engaged in providing similar software development services and consequently there is no reason why this entity should not be considered as comparable. 9. The Tribunal in the impugned judgment observed as under : 10. Before us, Revenue has not brought any contrary binding decision in its support. With respect to E-Infochip Bangalore Ltd., we find that in the annual accounts of the company, .....

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facts and it was held that it cannot be included on the basis of diminishing of Revenues so long it was a not a consistent loss making company. Considering the aforesaid facts, we are of the view that the aforesaid two companies needs to be excluded while working out the comparability analysis and therefore uphold the plea of the assessee in excluding the margins of the aforesaid 2 companies. We therefore deem it fit to restore the issue back to the file of A.O./TPO, who after excluding the afor .....

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