TMI Blog2018 (8) TMI 201X X X X Extracts X X X X X X X X Extracts X X X X ..... cts and in the circumstances of the case, the Tribunal was justified in law in holding that the size and turnover of the company are deciding factors for treating a company as a comparable and accordingly directing the assessing authority/TPO not to include cases of M/s Flextronics Software Systems Ltd. , M/s iGate Global Solutions Ltd. , M/s. Mindtree Ltd. , M/s. Persistent System Ltd. , M/s. Sasken Communication Technologies Ltd. , M/s Tata Elxsi Ltd. , M/s Persistent Systems Ltd. , M/s. Sasken Communication Technologies Ltd. , M/s Tata Elxsi Ltd. , M/s. Wipro Ltd. , and M/s. Infosys Ltd. , as comparables for determining ALP in the case of the assessee? (2) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in super imposing the decision of other benches of the Tribunal in the case of the assessee to reject the six cases of comparables namely M/s. Megasoft Ltd. , M/s. Avani Cimcon technology Ltd. , M/s Kals Information Systems Ltd. , M/s. Accel Transmatics Ltd. ,M/s. Celestial Labs Ltd and M/s Lucid Software Ltd. when selection of comparables in a case for determining ALP depends on assessee specific FAR analysis? (3) Whether on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment of the Hon ble Supreme Court in the case of HCL Technologies Ltd. (supra), is quoted below for ready reference:- 17. The similar nature of controversy, akin this case, arose before the Karnataka High Court in CIT v. Tata Elxsi Ltd. [2012] 204 Taxman 321/17/taxman. com 100/349 ITR 98. The issue before the Karnataka High Court was whether the Tribunal was correct in holding that while computing relief under Section 10A of the IT Act, the amount of communication expenses should be excluded from the total turnover if the same are reduced from the export turnover? While giving the answer to the issue, the High Court, inter-alia, held that when a particular word is not defined by the legislature and an ordinary meaning is to be attributed to it, the said ordinary meaning is to be in conformity with the context in which it is used. Hence, what is excluded from export turnover must also be excluded from total turnover , since one of the components of total turnover is export turnover. Any other interpretation would run counter to the legislative intent and would be impermissible. 18. XXXXXX 19. In the instant case, if the deductions on freight, telecommunicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 66/Bang/2011 referred to in this regard laying down identical proposition. We are not referring to those decisions as the decision of the Special Bench on this aspect would hold the field. Reference was also made to the OECD TP Guidelines, 2010 wherein it has been observed as follows:- xxxx xxxx xxxx 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)]: xxxx xxxx xxxx 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 of ₹ 13,149 crores as compared to ₹ 47. 47 crores of Assessee). It was submitted that an appropriate turnover range should be applied in selecting comparable uncontrolled companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnational 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 regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely :-- (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board. (2) The most appropriate method referred to in sub- section (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed: Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices: Provided further that if the variation b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aving 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 enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction. (2) For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:-- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective partie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 TPO viz. , Turnover Rs. (1) Flextronics Software Systems Ltd 848. 66 crores (2) iGate Global Solutions Ltd. 747. 27 crores (3) Mindtree Ltd. 590. 39 crores (4) Persistent Systems Ltd. 293. 74 crores (5) Sasken Communication Technologies Ltd. 343. 57 crores (6) Tata Elxsi Ltd. 262. 58 crores (7) Wipro Ltd. 961. 09 crores. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat this company has made unusually high profit during the financial year 06-07. The operating revenues increased 63. 03% which indicates that it was an extraordinary year for this company. Even the growth of software industry for the previous year as per NASSCOM was 32%. The growth rate of this company was double the industry average. In view of the above, it was argued that this company ought to have been rejected as a comparable. 41. We have given a careful consideration to the submissions made on behalf of the Assessee and are of the view that the same deserves to be accepted. The reasons given by the Assessee for excluding this company as comparable are found to be acceptable. The decision of ITAT (Mumbai) in the case of Telcordia Technologies Pvt. Ltd. v. ACIT (supra) also supports the plea of the assessee. We therefore accept the plea of the Assessee to reject this company as a comparable. (c) Celestial Labs Ltd. 42. As far as this company is concerned, the stand of the assessee is that it is absolutely a research development company. In this regard, the following submissions were made:- In the Director's Report (page 20 of PB-Il), it is stated th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act in which it has said that it is in the business of providing software development services. The Assessee in reply to the proposal of the AO to treat this as a comparable has pointed out that this company provides software products/services as well as bioinformatics services and that the segmental data for each activity is not available and therefore this company should not be treated as comparable. Besides the above, the Assessee has point out to several references in the annual report for 31. 3. 2007 highlighting the fact that this company was develops biotechnology products and provides related software development services. The TPO called for segmental data at the entity level from this company. The TPO also called for description of software development process. In response to the request of the TPO this company in its reply dated 29. 3. 2010 has given details of employees working in software development but it is not clear as to whether any segmental data was given or not. Besides the above there is no other detail in the TPO's order as to the nature of software development services performed by the Assessee. Celestial labs had come out with a IT(TP)A No. 1366/Ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ehalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s. 133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21. 6. 2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable. (e) Accel Transmatic Ltd. 48. With regard to this company, the complaint of the assessee is that this company is not a pure software development service company. It is further submitted that in a Mumbai Tribunal Decision of Capgemini India (F) Ltd v Ad. CIT 12 Taxman. com 51, the DRP accepted the contention of the assessee that Accel Transmatic should be rejected as comparable. The relevant observations of DRP as extracted by the ITAT in its order are as follows: xxxxxxxxxx 49. B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant facts, such substantial questions of law could be raised before the High Court under Section 260-A of the Act, the Courts could have embarked upon such exercise of framing and answering such substantial question of law. On the other hand, the appeals of the present tenor as to whether the comparables have been rightly picked up or not, Filters for arriving at the correct list of comparables have been rightly applied or not, do not in our considered opinion, give rise to any substantial question of law. 56. We are therefore of the considered opinion that the present appeals filed by the Revenue do not give rise to any substantial question of law and the suggested substantial questions of law do not meet the requirements of Section 260-A of the Act and thus the appeals filed by the Revenue are found to be devoid of merit and the same are liable to be dismissed. 57. We make it clear that the same yardsticks and parameters will have to be applied, even if such appeals are filed by the Assessees, because, there may be cases where the Tribunal giving its own reasons and findings has found certain comparables to be good comparables to arrive at an Arm s Length Price in t ..... 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