TMI Blog2015 (8) TMI 1448X X X X Extracts X X X X X X X X Extracts X X X X ..... tunity of being heard and to file details/submissions required in this regard. Risk Adjustment - Held that:- the assessee has raised the issue of grant of market risk adjustment. However, during the proceedings before us, it was admitted that the assessee apart from putting forth this claim has not quantified the adjustment to be granted in this regard. In view of this, this plea of the assessee is hypothetical in nature and not maintainable and is accordingly dismissed. Grant of benefit of deduction of 5% in computing the ALP of the Transactions - Held that:- The new section 92C(2A) of the Act mandates that if the AM price falls beyond +/- 5% from the price charged in the international transactions, then the assessee does not have any option as referred to in Section 92C(2) of the Act. Thus, as per the above amendment, it is clear that +/- 5% variation is allowed to justify the price charged in the international transactions and not for adjustment purposes. The aforesaid amendment has settled the issue and accordingly the 5% benefit is not available to the assessee. Consequently, Ground No.2 raised by the assessee is dismissed. Charging of Interest u/s.234B - Held that:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e order dt.26.4.2013 determining the assessee's income at ₹ 8,72,84,476 I view of the following additions/disallowances :- ( i ) Disallowance u/R 14A rw Rule 8D : ₹ 4,163. ( ii ) T.P. Adjustment: ₹ 5,09,95,875. 2.3 Aggrieved by the order of assessment for Assessment Year 2009-10, the assessee filed an appeal before the CIT (Appeals) - IV, Bangalore. The learned CIT (Appeals) dismissed the assessee's appeal by order dt.18.8.2014. 3. Aggrieved by the order of the CIT (Appeals) - IV, Bangalore dt.18.8.2014, for Assessment Year 2009-10, the assessee has preferred this appeal raising the following grounds:- 1. The learned CIT (Appeals) has erred in law and facts, by upholding the addition of ₹ 5,09,95,875 made by the ld. Assessing Officer /Transfer Pricing Officer on account of adjustment to the Arm's Length Price of the payments made by the appellant to its Associated Enterprise towards software development services: (a) The learned CIT (Appeals) has erred in law and facts by not accepting the appellant's plea in entirely and confirming with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgin of the appellant and comparable companies. (g) The learned CIT (Appeals) has erred, in law and in facts, by not making suitable adjustments to account for differences in the risk profile of the appellant vis- -vis the comparables and conducting that once the working capital adjustment is granted, there is no necessity of providing any further adjustments. 2. The learned CIT (Appeals) has erred, in law and facts, in computing the ALP without giving benefit of +/- 5% under the proviso to section 92C(2) of the Act. 3. The learned CIT (Appeals) has erred, in law and in facts, in confirming the imposition of interest under Section 234D of the Act by the ld. A.O. 4. The learned CIT (Appeals) has erred, in law and facts, in upholding initiation of penalty proceedings under Section 271(1)(c) of the Act by the learned A.O. . . . TRANSFER PRICING ISSUES. 4.1 Before proceeding to deal with the grounds of appeal, the brief facts relating to the T.P. issues are summarized hereunder. 4.2 The assessee, a resident private limited company is engaged in the business of providing software development services to its AEs. For the year under consideration, the assessee had re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16,05,75,212 9,89,56,821 62.27 4. R S Software (India) Ltd. 1,49,57,12,634 1,36,01,02,589 9.97 5. Tata Elxsi Ltd. (Seg.) 3,78,43,03,000 3,14,63,15,000 20.28 6. Sasken Communication Technologies Ltd. (Seg) 4,05,31,20,000 3,18,69,97,000 27.91 7. Persistent Systems Ltd. 5,19,69,10,000 3,67,52,70,000 41.40 8. Zylog Systems Ltd. 7,34,93,51,475 7,81,69,98,160 7.81 9. Mindtree Ltd. (Seg) 7,93,22,79,326 5,74,06,73,058 5.52 10. Larsen and Toubro Infotech 19,50,83,81,374 15,64,12,76,626 24.72 11. Infosys Ltd. 2,02,64,00,00,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operating in nature while computing the margin of the assessee. Ground No.1(g) relates to the action of the Assessing Officer in not allowing risk adjustment. Ground No.2 relates to the grant of benefit of + / - 5% in computing the ALP. Ground No.3 relates to the action of the Assessing Officer in charging interest under Section 234B of the Act. Ground No.4 is raised in respect of the action of the Assessing Officer in initiating penalty proceedings under Section 271(1)(c) of the Act. 5.2 In the course of appellate proceedings before us, the learned counsel for the assessee submitted that he is not pressing grounds at S.No.1(a) to (c) and would make submissions only on the grounds related to exclusion and inclusion of comparable companies and the adjustments to be granted. Consequently, the grounds at S. Nos. 1(a) to (c) being not pressed by the assessee, are rendered infructuous and are accordingly dismissed. 5.3 Before us, the learned Authorised Representative for the assessee put forth submissions for the exclusion of various comparable companies from the list of final comparables chosen by the TPO. The learned Authorised Representative submitted that the co-or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and engaged in providing open and end to end web solutions, software consultancy and design and development of software using latest technology, it cannot be considered as comparable to a captive software service provider; as is the assessee in the case on hand. At para 26.1 of its order the co-ordinate bench has held as under:- 26.1 Bodhtree Consulting Ltd.:- As far as this company is concerned, it is not in dispute that in the list of comparables chosen by the assessee, this company was also included by the assessee. The assessee, however, submits before us that later on it came to the assessee's notice that this company is not being considered as a comparable company in the case of companies rendering software development services. In this regard, the ld. counsel for the assessee has brought to our notice the decision of the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. v. ITO, ITA No.7633/Mum/2012, order dated 6.11.2013. In this case, the Tribunal followed the decision rendered by the Mumbai Bench of the Tribunal in the case of Wills Processing Services (I) P. Ltd., ITA No.4547/Mum/2012. In the aforesaid decisions, the Tribunal has taken the v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of comparables by applying the turnover filter of ₹ 200 Crores whereas the assessee in the case on hand has a turnover of only ₹ 45.48 Crores. Our attention was drawn to the fact that the co-ordinate bench of this Tribunal in the case of Mindteck (India) Ltd. (supra) for Assessment Year 2009-10 has excluded these companies from the final set of comparables on the ground of having turnover in excess of ₹ 200 Crores. 7.2 Per contra, the learned Departmental Representative supported the orders of the authorities below. 7.3.1 We have heard both parties and perused and carefully considered the material on record. We find that a co-ordinate bench of this Tribunal in the case of Mindtech (India) Ltd. (supra) for Assessment Year 2009-10 has excluded these six companies at S.Nos.5 to 11 of the TPO's list (supra) from the set of comparables on the ground of having turnover in excess of ₹ 200 Crores in the year under consideration i.e. period relevant to Assessment Year 2009-10. The relevant portion of the order of the co-ordinate bench at paras 17 18 thereof is extracted hereunder:- '17. The next aspect which was highlighted by the learned counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and therefore comparability. 12. The ICAI TP Guidelines note on this aspect lay down in para 15.4 that a transaction entered into by a ₹ 1,000 crore company cannot be compared with the transaction entered into by a ₹ 10 crore company. The two most obvious reasons are the size of the two companies and the relative economies of scale under which they operate. The fact that they operate in the same market may not make them comparable enterprises. The relevant extract is as follows [on Rule 10B(3)]: Clause (i) lays down that if the differences are not material, the transactions would be comparable. These differences could either be with reference to the transaction or with reference to the enterprise. For instance, a transaction entered into by a ₹ 1,000 crore company cannot be compared with the transaction entered into by a ₹ 10 crore company. The two most obvious reasons are the size of the two companies and the relative economies of scale under which they operate. 13. It was further submitted that the TPO's range (Rs. 1 crore to infinity) has resulted in selection of companies like Infosys which is 277 times bigger than the Assessee (turnover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the above proposition has also been followed by the Honourable Bangalore IT AT in the following cases: 1. M/s Kodiak Networks (India) Private Limited v. ACIT (ITA No.1413/Bang/2010) 2. M/s Genesis Microchip (I) Private Limited v. DCIT (ITA No.1254/Bang/20l0). 3. Electronic for Imaging India Private Limited (ITA No. 1171/Bang/2010). It was finally submitted that companies having turnover more than ₹ 200 crores ought to be rejected as not comparable with the Assessee. 16. The ld. DR, on the other hand pointed out that even the assessee in its own TP study has taken companies having turnover of more than ₹ 200 crores as comparables. In these circumstances, it was submitted by him that the assessee cannot have any grievance in this regard. 17. We have considered the rival submissions. The provisions of the Act and the Rules that are relevant for deciding the issue have to be first seen. Sec.92. of the Act provides that any income arising from an international transaction shall be computed having regard to the arm's length price. Sec.92-B provides that international transaction means a transaction between two or more associated enterprises, either o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the opinion that- (a) the price charged or paid in an international transaction has not been determined in accordance with sub-sections (1) and (2); or (b) any information and document relating to an international transaction have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made in this behalf; or (c) the information or data used in computation of the arm's length price is not reliable or correct; or (d) the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D, the Assessing Officer may proceed to determine the arm's length price in relation to the said international transaction in accordance with sub-sections (1) and (2), on the basis of such material or information or document available with him: 18. Rule 10B of the IT Rules, 1962 prescribes rules for Determination of arm's length price under section 92C:- 10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. (4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into: Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared. 19. A reading of the provisions of Rule 10B(2) of the Rules shows that uncontrolled transaction has to be compared with interna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l list of comparables at S.Nos.5 to 11 thereof have to be excluded as comparables for the purpose of determining the ALP of the impugned transactions in this appeal on the ground of having turnover in excess of ₹ 200 Crores. The companies that get excluded on this ground are as under:- S.No. Company Name Turnover (Rs. in Crores) 5. Tata Elxsi Ltd. (Seg) 378.43 6. Sasken Communication Technologies Ltd. 405.31 7. Persistent Systems Ltd. 519.69 8. Zylog Systems Ltd. 734.93 9. Mindtree Ltd. (Seg) 793.22 10. L T Infotech Ltd. 1950.83 11. Infosys Technologies Ltd. 20,264 Inclusion of companies sought for by the assessee. 8. SIP Technologies exports Ltd. 8.1 In the proceedings before us, the learned Authorised Representative of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot disputed by the Revenue that the foreign exchange fluctuation has arisen as a result of the realization of the consideration for rendering software development services. It is therefore incurred in the normal course of business and therefore there is no reason why it should be excluded from determining the operating revenue for the purpose of calculation of operating margin. In our view, the analogy drawn by the DRP regarding exclusion of interest expenses while computing operating margins is not proper. In our view, foreign exchange gain on realization of consideration for rendering software development services should be regarding as part of the operating revenue. Following the decision of the ITAT, Bangalore Bench in the case of SAP Labs (supra), we hold that the operating revenue for the assessee be computed by including the foreign exchange gain. 9.3 In the above order, the co-ordinate bench of the Tribunal has held that foreign exchange gain on realization of consideration for rendering software development services should be regarded as part of the operating revenue. Following the order of the co-ordinate bench in the case of Mindteck (India) Ltd. (supra), we also hol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Section 92C(2A) was inserted, as per Finance Act, 2012 and reads as under :- (2A) Where the first proviso to sub-section (2) as it stood before its amendment by the Finance (No. 2) Act, 2009 (33 of 2009), is applicable in respect of an international transaction for an assessment year and the variation between the arithmetical mean referred to in the said proviso and the price at which such transaction has actually been undertaken exceeds five per cent of the arithmetical mean, then, the assessee shall not be entitled to exercise the option as referred to in the said proviso. 12.2.2 The new section 92C(2A) of the Act mandates that if the AM price falls beyond +/- 5% from the price charged in the international transactions, then the assessee does not have any option as referred to in Section 92C(2) of the Act. Thus, as per the above amendment, it is clear that +/- 5% variation is allowed to justify the price charged in the international transactions and not for adjustment purposes. The aforesaid amendment has settled the issue and accordingly the 5% benefit is not available to the assessee. Consequently, Ground No.2 raised by the assessee is dismissed. 13. Ground No.3 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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