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TMI Blog2015 (8) TMI 1448X X X X Extracts X X X X X X X X Extracts X X X X ..... made by the Assessing Officer to the Transfer Pricing Officer ('TPO') in respect of the international transactions reportedly entered into by the assessee in the year under consideration for determining their Arm's Length Price ('ALP'). The TPO passed an order under Section 92CA of the Act dt.29.1.2013 proposing a T.P. Adjustment of Rs. 5,09,95,875 to the ALP of the international transactions of the software development segment of the assessee. 2.2 After receipt of the TPO's order under Section 92CA of the Act, the Assessing Officer passed the draft order of assessment for Assessment Year 2009-10 under Section 143(3) rws 144C of the Act vide order dt.25.2.2013 wherein the income of the assessee was determined at Rs. 8,72,84,476. The Assessing Officer subsequently passed the order of assessment for Assessment Year 2009-10 vide order dt.26.4.2013 determining the assessee's income at Rs. 8,72,84,476 I view of the following additions/disallowances :- (i) Disallowance u/R 14A rw Rule 8D : Rs. 4,163. (ii) T.P. Adjustment: Rs. 5,09,95,875. 2.3 Aggrieved by the order of assessment for Assessment Year 2009-10, the assessee filed an appeal before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enues as a comparability criterion in respect of the software development services transaction, is not appropriate. (d) The learned CIT (Appeals) has erred, in law and in facts, by upholding the action of A.O./TPO in accepting/rejecting certaincomparable companies based on unreasonable comparability criteria. (e) The learned CIT (Appeals) has erred, in law and in facts, by considering incorrect receivables and payables in computing the working capital adjustment and further erred, by restricting the benefit on account of working capital adjustment to 1.71 percent. (f) The learned CIT (Appeals) has erred, in law and in facts, by not considering foreign exchange gain/loss as operating in nature while computing the operating margin 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-à-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 givi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 1,39,17,00,00,000 45.61 Average Mean 24.32 4.6 The TPO computed the ALP of the software development services of the assessee as under:- Arm's length mean margin on cost 24.32% Less : Working Capital Adjustment (Annex.C) 1.40% Adjusted Margin 22.92% Operating Cost 411,532,645 Arm's Length Price 122.92% of operating cost 505,855,927 Price Received 454,860,052 Shortfall being adjustment u/s. 92CA : 50,995,875 Based on the above computation, the TPO proposed an adjustment of Rs. 5,09,95,875 to the software development services segment which was incorporated by the Assessing Officer in the assessment ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee 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-ordinate benches of this Tribunal in the case of Mindteck (India) Ltd. [IT Appeal No. 70 (Bang.) of 2014, dated 21-8-2014] for Assessment Year 2009-10 and in the case of Cisco Systems (India) (P.) Ltd. v. Dy. CIT [S.P. No.130/Bang/2014 AND IT(TP)A No.271/Bang/2014, date :14-08-2014] have discussed and decided on the issue in question and therefore places reliance on the decision in the above mentioned cases. We shall now deals with the comparables which the assessee seeks exclusion/inclusion of. 6. Bodhtree Consulting Ltd. 6.1 This company was selected as a comparable by the TPO inspite of the objection of the assessee to its inclusion on the grounds that its margins are high. The TPO included this company in the list of comparables on the ground that this company has been consistently chosen as a comparable by the TPO for the earlier four years 2005 to 2008. 6.2 Before us, the learned Authorised Representative for the assessee submitted that this company had made extraordinary profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 view that Bodhtree Consulting Ltd. is in the business of software products and was engaged in providing open & end to end web solutions software consultancy and design & development of software using latest technology. The decision rendered by the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. (supra) is in relation to A.Y. 2008-09. It was affirmed by the learned counsel for the Assessee that the facts and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY 08-09 as far as this comparable company is concerned. Following the aforesaid decision of the Mumbai Bench of the Tribunal, we hold that Bodhtree Consulting Ltd. cannot be regarded as a comparable. In this regards, the fact that the assessee had itself proposed this company as comparable, in our opinion, should not be the basis on which the said company should be retained as a comparable, when factually it is shown that the said company is a software product comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 for the assessee is the application of turnover filter. The assessee's turnover is admittedly less than Rs. 50 crores. The companies listed at sl.nos.5 to 11 of the final list of comparables chosen by the TPO have turnover above Rs. 200 crores. This Tribunal in ITA No.1054/Bang/2011 for AY 07-08 in M/S.Triology E-Business Software India Pvt. Ltd. v. DCIT, Circle 12(4), Bangalore had held on the application of the turnover filter as follows: "(1) Turnover Filter 11. The ld. counsel for the assessee submitted that the TPO has applied a lower turnover filter of Rs. 1 crore, but has not chosen to apply any upper turnover limit. In this regard, it was submitted by him that under rule 10B(3) to the Income-tax Rules, it was necessary for comparing an uncontrolled transaction with an international transaction that there should not be any difference between the transactions compared or the enterprises entering into such transaction, which are likely to materially affect the price or cost charged or paid or profit arising from such t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o infinity) has resulted in selection of companies like Infosys which is 277 times bigger than the Assessee (turnover of Rs. 13,149 crores as compared to Rs. 47.47 crores of Assessee). It was submitted that an appropriate turnover range should be applied in selecting comparable uncontrolled companies. 14. Reference was made to the decision of the ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010, wherein relying on Dun and Bradstreet's analysis, the turnover of Rs. 1 crore to Rs. 200 crores was held to be proper. The following relevant observations were brought to our notice:- "9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which .ire (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. Sec.92-A defines what is an Associated Enterprise. In the present case there is no dispute that the transaction between the Assessee and its AE was an international transaction attracting the provisions of Sec.92 of the Act. Sec.92C provides the manner of computation of Arm's length price in an international transaction and it provides:- (1) that the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (a) to (d)** ** ** (e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise 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 realised 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 into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d transaction has to be compared with international transaction having regard to the factors set out therein. Before us there is no dispute that the TNMM is the most appropriate method for determining the ALP of the international transaction. The disputes are with regard to the comparability of the comparable relied upon by the TPO. 20. In this regard we find that the provisions of law pointed out by the ld. counsel for the assessee as well as the decisions referred to by the ld. counsel for the assessee clearly lay down the principle that the turnover filter is an important criteria in choosing the comparables. The assessee's turnover is Rs. 47,46,66,638. It would therefore fall within the category of companies in the range of turnover between 1 crore and 200 crores (as laid down in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010) . Thus, companies having turnover of more than 200 crores have to be eliminated from the list of comparables as laid down in several decisions referred to by the ld. counsel for the assessee. Applying those tests, the following companies will have to be excluded from the list of 26 comparables drawn by the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;s contrary claim to the effect that this company i.e. SIP Technologies & Exports Ltd. has reported NIL RPT during this year, has not been examined by the authorities below. In this view of the matter, we deem it fit to remand the matter back to the file of the TPO for a proper factual examination and verification of the issue of RPT filter and then decide the comparability of this company in the light of, inter alia, the decision of the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com (P.) Ltd. v. Dy. CIT [2013] 140 ITD 344 (Bang.) wherein it was held that a company is to be excluded from the list of comparables in the event of its RPT being in excess of 15%. It is ordered accordingly. 9. Ground No.1(f) - foreign Exchange Gain/Loss. 9.1 In this ground, the assessee has raised the issue of the authorities below not considering foreign exchange gain/loss as operating in nature while computing the operating margin of the assessee and comparable companies. In the course of proceedings before us, the learned Authorised Representative of the assessee submitted that this issue has been decided by the co-ordinate bench of this Tribunal in the case of Mindteck (Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erments of the assessee, we deem it fit to remand the matter back to the file of the TPO to examine and verify the assessee's claim that the amount of receivables and payables have been taken incorrectly in computing the working capital adjustment and to recompute the working capital adjustment accordingly, if so required, after affording the assessee adequate opportunity of being heard and to file details/submissions required in this regard. 11. Ground No.1(g) - Risk Adjustment. 11.1 In this ground, 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. 12. Ground No.2 - Benefit of 5% Deduction. 12.1 In this ground, the assessee seeks the grant of benefit of deduction of 5% in computing the ALP of the Transactions. 12.2.1 We have considered the submissions put forth by the assessee in this regard. Prior to the amendment made by the Finance (No.2) Act, 2009 and the F ..... X X X X Extracts X X X X X X X X Extracts X X X X
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