TMI Blog2016 (5) TMI 1377X X X X Extracts X X X X X X X X Extracts X X X X ..... any Net Devices Inc., USA on an exclusive basis. For this purpose, the assessee entered into a service agreement with Net Devices Inc., USA. Thus the assessee has been categorized as a software design and development service provider for its parent company thus companies functionally dissimilar with that of assessee need to be rejected from final comparability. Since we have directed the exclusion of various companies form the set of comparables and also remanded some of the comparable companies for verification of facts, therefore the TPO/A.O is directed to recompute the ALP after exclusion of the certain companies as directed by us as well as after considering the comparability of the companies remanded for verification. Needless to say that the benefit of the proviso to section 92C(2) of the Act regarding the tolerance range of + or – 5% also shall be considered. - I.T.(T.P) A. No. 1099/Bang/2011, C.O. No. 19/Bang/201 - - - Dated:- 25-5-2016 - A. K. Garodia (Accountant Member) And Vijay Pal Rao (Judicial Member) For the Appellant : Dr. P. K. Srihari, Addl. CIT (D.R.) For the Respondent/C.O. : Pravin Kishore Prasad, Advocate ORDER Vijay Pal Rao (Judicial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al turnover for the purpose of computation of deduction under Section 10A of the Income Tax Act, 1961 (in short 'the Act'). 5.1 We have heard the rival submission and perused the material on record. The Hon ble Karnataka High Court in the case of CIT v M/s Tata Elxsi Ltd. Others 349 ITR 98 (Kar) had held that while computing the exemption u/s 10A, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded from the total turnover in the denominator. The relevant finding of the Hon ble jurisdictional High Court reads as follows:- ..Section 10A is enacted as an incentive to exporters to enable their products to be competitive in the global market and consequently earn precious foreign exchange for the country. This aspect has to be borne in mind. While computing the consideration received from such export turnover, the expenses incurred towards freight, telecommunication charges, or insurance attributable to the delivery of the articles or things or computer software outside India, or expenses if any incurred in foreign exchange, in providing the technical services outside India should not be incl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es export turnover, the very same meaning given to the export turnover by the legislature is to be adopted while understanding the meaning of the total turnover, when the total turnover includes export turnover. If what is excluded in computing the export turnover is included while arriving at the total turnover, when the export turnover is a component of total turnover, such an interpretation would run counter to the legislative intent and impermissible. Thus, there is no error committed by the Tribunal in following the judgements rendered in the context of section 80HHC in interpreting section 10A when the principle underlying both these provisions is one and the same . 5.2 The Hon ble Mumbai High Court in the case of CIT Vs. Gem Plus Jewellery India Ltd. 330 ITR 175, in identical circumstances, held that since the export turnover forms part of the total turnover, if an item is excluded from the export turnover, the same should also be reduced from the total turnover to maintain parity between numerator and denominator while calculating deduction u/s 10A of the Act. The relevant finding of the Hon ble Mumbai High Court reads as follows:- The total turnover of the busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cifically excluded from export turnover for the purposes of the numerator would be brought in as part of the export turnover when it forms an element of the total turnover as a denominator in the formula. A construction of a statutory provision which would lead to an absurdity must be avoided. Moreover, a receipt such as freight and insurance which does not have any element of profit cannot be included in the total turnover. Freight and insurance charges do not have any element of turnover. For this reason in addition, these two items would have to be excluded from the total turnover particularly in the absence of a legislative prescription to the contrary CIT v Sudarshan Chemicals Industries Ltd. (2000) 163 CTR (Bom) 596: (2000) 245 ITR 769 (Bom) applied; CIT Versus Lakshmi Machine Works (2007) 210 CTR (SC) 1: (2007) 290 ITR 667 (SC) and CIT v Catapharma (India) (P) Ltd. (2007) 211 CTR (SC) 83: (2007) 292 ITR 641 (SC) relied on 5.3 In the light of the above binding precedent, we are of the view that the order of the CIT(A) is correct and in accordance with law and he is justified in directing the AO to exclude the above mentioned expenses both from the export turnover a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0.93 4. Softcell Technology Ltd. 1.92 5. VJIL Consulting Ltd. 10.09 6. Visualsoft Tech Ltd. 31.75 7. R S Software Ltd. 4.88 The TPO carried out a fresh search and selected 17 comparable companies as under : Sl.No. Company Name OP to Total Cost % 1. Bodhtree Consulting Ltd. 24.85 2. Lanco Global Systems Ltd. 13.65 3. Exensys Software Solutions Ltd. 70.68 4. Sankya Infotech Ltd. 27.39 5. Sasken Network Systems Ltd. 16.64 6. Four Soft Ltd. 22.98 7. Thirdware Solution Ltd. 66.09 8. R S Softwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re Solutions Co. Ltd. 7. Tata Elxsi Ltd. (Seg.) 8. Sasken Communication Technologies Ltd. (Seg.) 9. Igate Solutions Ltd. (Seg.) 10. Flextronics Software Ltd. (Seg.) 11. L T Infotech Ltd. 12. Satyam Computer Services Ltd. 13. Infosys Technologies Ltd. On exclusion of the above companies form the list of the comparables, the remaining 4 companies are having a turnover between ₹ 1 Crore to ₹ 200 Crores and after giving effect to the finding given above, the arithmetic mean of the margins of the remaining comparables works out as under : Sl.No. Name of the company OP/OV % OP/OC after working capital adjustment. 1 Bodhtree Consulting Ltd. 24.01 21.19 2 Lanco Glob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al submissions as well as the relevant material on record. At the outset we note that in strict sense, the ALP has to be determined by considering uncontrolled comparable prices which means unrelated comparable prices has to be taken into account to bench mark the international transactions which are the control and RPTs. However, 0% RPTs of the comparable price is an impossible situation and therefore a reasonable tolerance range of the revenue from RPT can be considered for selecting the uncontrolled comparables. There cannot be a single criteria/parameter which can be applied as a general rule in all cases. Therefore, this tolerance range varies from case to case and depending upon the availability of the comparables. If the comparables of international transactions are easily available, then, this tolerance of RPT should be restricted to minimum. There is no specified tolerance range in the Act or Rules under the Transfer Pricing provisions, however, in due course of discussion and adjudication of this issue in a series of decisions of this Tribunal, commonly accepted tolerance range of 5% to 25% of the total revenue from RPT has been considered as reasonable depending upon the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an 15%, then such comparable companies have to be excluded from the final list of comparables. In support of this contention also, the learned counsel for the assessee has placed reliance upon the decision of the co-ordinate bench of the Tribunal in the case of M/s.Ariba Technologies India Pvt. Ltd. In view of the facts and circumstances of the case when there is good number of comparables available then, we concur with the view of the co-ordinate bench that the RPT filter of 15% is proper in the case of the assessee. Accordingly we direct the Assessing Officer/TPO to exclude the comparable companies having the revenue of more than 15% from related parties. The learned Authorised Representative of the assessee has referred Annexure A to TPO order which mentions the percentage of RPTs. Thus as per the Annexure A of the TPO s order, the following companies having more than 15% of RPT are directed to be excluded. Sl. No. Comparable Company Name % of RPT Over sales 1. Aztec Software Limited 17.78 2. Geometric Software Limited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l as relevant material on record. We note that though the CIT (Appeals) has finally concluded that this company has abnormal profit and accordingly directed the TPO/A.O to exclude the same form the set of comparables, however, as it is manifest from the Annual Report of the company that during the year under consideration this company entered into a scheme of amalgamation with M/s. Holool India Ltd. The scheme of amalgamation has been sanctioned by the Hon'ble High Court of Andhra Pradesh w.e.f. 1.4.2004 vide order dt.5.9.2005. Therefore, undisputedly there was an extra-ordinary event during the year under consideration in respect of this company. Further we find that the co-ordinate bench of this Tribunal in case of M/s. Textron Global Technology Centre Pvt. Ltd. in IT(TP)A No.29/Bang/2012 has considered the comparability of this company in paras 19 20 as under : Sankhya Infotech Limited ( Sankhya ) 19. It was submitted by the learned counsel for the Assessee that Sankhya is engaged in the business of development of software products services and training. The company focuses on the development of niche products for the transport and aviation industry. However ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice provider. Hence we concur with the view of the CIT (Appeals) though on a different reason and direct the A.O./TPO to exclude Accentia Software Solutions Ltd. from the list of comparables. Thirdware Solutions Pvt. Ltd. 9.1 There is no dispute that the high profit margin or loss cannot be a ground for exclusion or inclusion of a particular company in the list of comparables. The learned Authorised Representative of the assessee has submitted that this company is in the diversified activities and derive its income from sale of software license, software products apart from software development services. This company is engaged in the diversified activities of rendering application development, customer relationship management and ERP, software products. He has referred to the Annual Report of this company and submitted that this company is also engaged in the distribution of software products and providing trunky project which include a bundle of activities such as providing software product combined with implementation and customer services. In support of his contention, he has relied upon the following decisions : i) M/s. McAfee Software (India) Pvt. Ltd. in IT(TP)A N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act. 10.1 The learned Departmental Representative has submitted that the CIT (Appeals) has erred in directing the Assessing Officer to allow the standard deduction of 5% whereas this is only a benefit in the nature of tolerance range up to + or 5%. 10.2 On the other hand, the learned Authorised Representative has not disputed that the benefit of proviso to Section 92C(2) is only in the nature of a tolerance range up to + or 5% and not a standard deduction. 10.3 It is pertinent to note that it is settled proposition of law that the benefit of proviso to section 92C(2) is only in the nature of tolerance range if the price of international transactions is within the range of + or 5% of the average comparable price. Accordingly, we direct the A.O./TPO to consider the benefit under the proviso to Section 92C(2) of the Act if the difference between the Arm s Length Price ( ALP ) and the price of international transactions of the assessee are within the tolerance range of + or 5%. 11.1 Ground No.6 is regarding exclusion of M/s. Infosys Technologies Ltd. on the ground of turnover and brand value of the company. 11.2 We have heard the rival submissions as well ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely from India) Expenditure on Advertising/Sales promotion and brand building Rs.61 Crores Rs. Nil (as the 100 percent services are provide to AEs) Expenditure on Research Development ₹ 102 crores Rs. Nil Other 100 percent offshore (from India) 6. Learned counsel for the Revenue has submitted that the tribunal after recording the aforesaid table has not affirmed or given any finding on the differences. This is partly correct as the tribunal has stated that Infosys Technologies Ltd. should be excluded from the list of comparables for the reason latter was a giant company in the area of development of software and it assumed all risks leading to higher profits, whereas the respondent-assessee was a captive unit of the parent company and assumed only a limited risk. It has also stated that Infosys Technologies Ltd. cannot be compared with the respondent- assessee as seen from the financial data etc. to the two companies mentioned earlier in the order i.e. the chart. In the ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls) erred in : a) Upholding the comparability analysis performed by the ld. TPO in the TP order. b) Arbitarily rejecting the filters applied by the Respondent while undertaking the TP Study. c) Modifying some of the filters applied by the ld. TPO in the TP order, without providing an opportunity of being heard to the appellant. d) Arbitrary arriving at a set of companies as comparable to the Respondent. e) Disregarding application of multiple year/prior year data and holding that current year (i.e. opportunity of being heard to the appellant. f) Upholding the ld. TPO s approach of using data as at the time of assessment proceedings. g) Upholding the approach adopted by the ld. TPO of collecting selective information of the companies by exercising power granted to him under section 133(6) of the Income Tax Act, 1961 that was not available to the Respondent in the public domain. h) Not providing appropriate adjustment towards the risk differential between the Respondent and the entrepreneurial companies selected as compar bles, while determining the arms length price. That the Respondent craves leave to add to and/or alter, amend, rescind, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sibility of the additional grounds raised by the assessee. We find that there are some decisions of this Tribunal wherein the comparability of these two companies have been considered and decided by this Tribunal. Therefore, once the assessee has brought on record some decisions of the Tribunal wherein these two companies were held to be not good comparables then the facts and circumstances and in the interest of justice, we admit the additional grounds raised by the assessee. Accordingly, we will deal with the comparability of these two companies on merits. 16 . Bodhtree Consultancy Ltd. 16.1 The learned Authorised Representative of the assessee has submitted that this company is required to be rejected the RPT of 34.68% of the total sale which is in excess of 15% taken as proper threshold limit. In support of his contention, he has relied upon the decision of the Hyderabad Bench of ITAT in the case of NTT Data Enterprises Pvt. Ltd. Vs. ACIT Dt.23.10.2013 in ITA No.1612/Hyd/2010 and submitted that in the said case the Tribunal has noted that the RPT of this company are 34.68%. The learned Authorised Representative has submitted that by following the said decision, the coord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not press the exclusion of the said company as evident from the finding of the Tribunal in para 9 as under : 9. Even though detailed submissions were made with reference to the above 7 companies, the learned counsel fairly admitted that even one company i.e. Exensys Software Solutions Ltd. is excluded, inclusion of other companies will become academic in nature as the arm s length margin is within Assessee's margin of 16.74%. With reference to this company, the learned counsel referring to replies given to AP/TPO in response to the notices under Section 133(6) and their annual reports, which are available in its paper book, submitted that this company is functionally different and the operations are exceptional as there was a merger in the year with another company which had a material/significant impact on the profit margins and further the computations are also wrong as the differed revenue expenditure, which was claimed regularly on the basis of accounting policy of the company, was excluded by the TPO in arriving at a different higher profit margin, which is not correct. Thus it is manifest from the order of the Tribunal that only the submissions of the learned Au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o.1280/Hyd/2010) 17.2 On the other hand, the learned Departmental Representative has submitted that the TPO has examined the functional comparability of this company and it had qualified all the parameters and filters applied by the TPO. The objections raised by the assessee at this stage were not available before the TPO and therefore the same cannot be accepted in the absence of the examination of the fact by the TPO. 17.3 We have heard the rival submissions as well as considered the relevant material on record. At the outset, we note that the comparability of this company has been examined by this Tribunal in various cases as relied upon by the learned Authorised Representative of the assessee. In the case of McAfee Software (India) Pvt. Ltd. (supra), the co-ordinate bench of this Tribunal has again considered this issue in para 10.10 as under : 10.10 This company was objected to on functional dissimilarity. This was considered in ITO Vs. M/s. Sunquest Information Systems (India) Pvt. Ltd. in IT(TP)A No.1302/Bang/2011 dt.11.6.2015 (supra) as under : 26. As far as Flextronics Software Limited is concerned, we find that at page 90 of his Order, the TPO has also ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s. McAfee Software (India) Pvt. Ltd. in IT(TP)A Nos.4/Bang/2012 1388/Bang/2011. ii) M/s. Sunquest Information Systems (India) Pvt. Ltd. (IT(TP)A No.1302/Bang/2011 92/Bang/2012) iii) Textron Global Technology Centre Pvt. Ltd. in IT(TP)A No.29/Bang/2012. 18.1.2 On the other hand, the learned Departmental Representative has relied upon the orders of the TPO. 18.1.3 We have considered the rival submissions as well as relevant material on record. At the outset, we note that the functional comparability of this company has been examined by the Tribunal in a series of the cases as relied upon by the learned Authorised Representative of the assessee. In the case of ITO Vs. M/s. Sunquest Information Systems (India) Pvt. Ltd. (IT(TP)A No.1302/Bang/2011 92/Bang/2012), the Tribunal has considered and decided an identical issue in paras 19 20 as under : Sankhya Infotech Limited ( Sankhya ) 19. It was submitted by the learned counsel for the Assessee that Sankhya is engaged in the business of development of software products services and training. The company focuses on the development of niche products for the transport and aviation industry. However, segmenta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evelopment of software products and services as well as training, it cannot be considered as a good comparable of software development services provider. Accordingly, we direct the A.O/TPO to exclude this company from the list of comparables. Foursoft Ltd. 18.2. We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. At the outset, we note that the RPT of this company is 19.89%. Therefore in view of our finding on the threshold limit of RPT at 15%, this company cannot be considered as a good comparable having more than 15% RPT. We find that this fact of RPT at 19.89% has not been disputed by the Revenue. Accordingly, we direct the A.O./TPO to exclude this company from the list of comparables. Geometric Software Solutions Ltd. 18.3.1 The learned Authorised Representative of the assessee has submitted that the RPT of this company is 22% whereas the TPO has wrongly considered the RPT at 10.97%. The learned Authorised Representative has referred the computation of RPT at page 561 of the paper book containing Annual Report and submitted that if all the RPTs are taken into considera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is software development and therefore it is considered as functionally comparable. 18.4.3 We have heard the rival submissions as well as considered the relevant material on record. At the outset, we note that the functional comparability has been considered by this Tribunal in assessee's own case for the Assessment Year 2006-07 vide order dt.30.6.2015 in ITA No.1485/Bang/2010 in para 13 to 18 as under : 13. Having regard to the rival contentions and the material on record, we find that being the very same assessment year viz., 2006-07 in the case of M/s.Ariba Technologies India Pvt. Ltd. this Tribunal had occasion to go into the comparability of these companies with the said company and the Tribunal has held it to be functionally dissimilar from the similar activity of software development service. We find that the Tribunal, at para.12 13 of its order, has held as under: 12. The following were the relevant observations of the Tribunal on the aforesaid comparable companies in the case of Triology E-Business Software India Pvt.Ltd.(supra): Xxxxxx Xxxxxx 17. As far as comparable company chosen by the TPO viz., Tata Elxsi Ltd., is concerned, the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal, we are of the view that this company cannot be considered as a good comparable to the assessee. Hence, the Assessing Officer/TPO is directed to exclude this company from the list of comparables. Satyam Computer Services Ltd. 18.5.1 The learned Authorised Representative of the assessee has submitted that the financial results and information of this company is not reliable due to the financial irregularity and fraudulent activities by the Directors of this company. In support of his contention, he has relied upon the following decisions : i) M/s. McAfee Software (India) Pvt. Ltd. in IT(TP)A Nos.4/Bang/2012 1388/Bang/2011. ii) M/s. Agnity India Technologies Pvt. Ltd. (ITA No.3856/Del/2010). iii) M/s. Symbol Technologies India Pvt. Ltd. in IT(TP)A No.391/Bang/2012. iv) M/s. Textron Global Technology Centre Pvt. Ltd. in IT(TP)A No.29/Bang/2012. 18.5.2 On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below. 18.5.3 We have considered the submissions of rival parties and the relevant material on record. At the outset, we note that an identical issue has been considered by the co-ordinate bench of thi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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