TMI Blog2015 (6) TMI 1164X X X X Extracts X X X X X X X X Extracts X X X X ..... at:- RPT filter should be considered at 15% of total revenues and companies having RPT in excess of 15% of total revenues are to be excluded from the list of comparables. In this view of the matter, the order of the learned CIT(A) holding that companies are not to be considered as comparables even if they have a single RPT i.e. that the RPT is in excess of 0% is hereby reversed. Power of CIT(A) for enhancement of income - Held that:- Though the CIT (Appeals) has co-terminus power with that of Assessing Officer and can enhance the assessment, however, since he has not issued any show cause notice for enhancement under Section 251(2) of the Act, he cannot reject these two companies from the set of comparables. Therefore to the extent of the rejection of these two companies from the set of comparables, the order of CIT (Appeals) is set aside and the TPO is directed to recompute the ALP after giving effect to the order of the Tribunal in respect of the comparables which are directed to be excluded from the set of comparables. Decided partly in favor of assessee. - I.T. (T.P) A. No.1472/Bang/2012 - - - Dated:- 5-6-2015 - SHRI VIJAYPAL RAO, JUDICIAL MEMBER AND SHRI JASON P. BOAZ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s) IV, Bangalore. The learned CIT(A) disposed off the assessee's appeal vide order dt.7.9.2012 allowing the assessee partial relief. 3.0 Aggrieved by the order of the CIT (Appeals) IV, Bangalore dt.7.9.2012 for Assessment Year 2008-09, the assessee has preferred this appeal raising the following grounds :- 1. The Order of the learned Commissioner of Income Tax (Appeals) IV to the extent prejudicial to the appellant is bad in law. 2. The learned Assessing Officer has erred in making a reference to Transfer Pricing Officer for determining arm s length price without demonstrating as to why it was necessary and expedient to do so. The learned Commissioner of Income Tax (Appeals) - IV has erred in confirming the action of the Assessing officer. 3. The learned Assessing Officer, learned Transfer Pricing Officer and Commissioner of Income Tax (Appeals) - IV have erred in a. passing the order without demonstrating that appellant had motive of tax evasion. b. not appreciating that the charging or computation provision relating to income under the head Profits Gains of Business or Profession do not refer to or include the amounts computed under Chapter X and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring the submissions of the appellant. PRAYER 7. On an overall consideration of the facts of the case, and the law applicable, the ALP as determined by the Transfer Pricing Officer, as adopted by the Assessing Officer and as modified by the CIT(A) being not correct is to be quashed and the figures as determined and returned by the appellant being correct are to be accepted. 8. The learned Assessing Officer has erred in levying interest under section 234B. In the course of appellate proceedings, the assessee filed submissions in paper book in support of the grounds and a compendium of case laws on which the assessee placed reliance. 4. The Grounds raised at S.Nos.1, 2 3 are general in nature and not being specifically urged before us, are dismissed as infructuous. Transfer Pricing Issue (Ground Nos.4 to 7) 5.1 In the course of proceedings before us, the learned Authorised Representative submitted a chart explaining the assessee's position regarding the acceptability or otherwise of each of the companies selected by the TPO / CIT (Appeals) as comparable to the assessee. The learned Authorised Representative also submitted that he would only press those ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 16.57% on cost as comparables, which are as under :- S.No. Name of the Company Average Unadjusted Margins (%) 1. Akshay Software Technologies Ltd. 6.36 2. Goldstone Technologies Ltd. 22.42 3. Helios Matheson InformationTechnology Ltd. 39.86 4. Indium Software (India) Ltd. 1.91 5. Lanco Global Systems Ltd. 20.01 6. MAARS Software International Ltd. 0.14 7. Quintegra Solutions Ltd. 19.07 8. R S Software (India) Ltd. 13.41 9. Sonata Software Ltd. 21.87 10. Visu International Ltd. 20.66 Arithmetic Mean 16.57 Since the profit marg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Software Ltd. 16.50 Average 23.65 The average mean margin of the 20 comparable companies selected by the TPO was 23.65% whereas the average mean margin of the software development services segment of the assessee was computed by the TPO at 14.07% on total cost. After granting working capital adjustment at 0.11%, the TPO computed the T.P. Adjustment of ₹ 1,23,18,582 to the ALP of international transactions entered into by the assessee in the period relevant to Assessment Year 2008-09. 6.3.1 On appeal, before the learned CIT(A), the assessee filed submissions raising various objections regarding the application of filters by the TPO. A summary of the CIT (Appeals) findings while disposing off the assessee's appeal, are as under :- (i) The learned CIT(A) applied the turnover filter of ₹ 1 Crore to ₹ 200 Crores and rejected 8 companies from the final set of TPO s comparables; (ii) The learned CIT(A) applied the related party transactions (RPT) filter at 0% and thereby rejected 11 companies as comparables; (iii) the learned CIT(A) rejected Celestial Bio Labs Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d CIT(A) deserve to be rejected. Exclusion of comparables sought for by the assessee 7. The learned Authorised Representative submitted that the following three companies are liable to be rejected as comparables as they are functionally different from the assessee; based on the judicial pronouncements in the decisions of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 :- (i) e-Zest Solutions Ltd. (ii) Lucid Software Ltd. and (iii) KALS Information Systems Ltd. (seg.) We shall now proceed to examine and consider each of the comparable companies so highlighted by the assessee in its chart. 8. e-Zest Solutions Ltd. 8.1 This company was selected by the TPO as a comparable. Overruling the assessee's objections that it was functionally different, the TPO included this company as a comparable on the ground that as per the information received under Section 133(6) of the Act, this company is engaged in software development services and satisfies all filters. 8.2 Before us, the learned Authorised Representative submitted that this company be excluded from the list of comparables as it is f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh end technical services which come under the category of KPO services. It has been held by the co-ordinate bench of this Tribunal in the case of Capital I-Q Information Systems (India) (P) Ltd. Supra) that KPO services are not comparable to software development services and are therefore not comparable. Following the aforesaid decision of the co-ordinate bench of the Hyderabad Tribunal in the aforesaid case, we hold that this company, i.e. e-Zest Solutions Ltd. be omitted from the set of comparables for the period under consideration in the case on hand. The A.O. / TPO is accordingly directed. 8.4.2 Following the aforesaid decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), we direct the A.O./TPO to exclude this company from the list of comparables as it is functionally different form the assessee in the case on hand who is rendering purely software development services. It is ordered accordingly. 9. Kals Information Systems Ltd. (Seg) 9.1 This company has been selected by the TPO as a comparable. The assessee had objected to the inclusion of this company on the ground that it is functionally different from the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eloping software products and was not purely or mainly a software service provider. Apart from relying of the above cited decisions of co-ordinate benches of the Tribunal (supra), the assessee has also brought on record evidence from various portions of the company s Annual Report to establish that this company is functionally dis- similar and different form the assessee and that since the findings rendered in the decisions of the co-ordinate benches of the Tribunal for Assessment Year 2007-08 (cited supra) are applicable for this year i.e. Assessment Year 2008-09 also, this company ought to be excluded from the list of comparables. In this view of the matter, we hold that this company i.e. KALS Information Systems Ltd., is to be omitted from the list of comparable companies. It is ordered accordingly. 9.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), we direct the Assessing Officer to exclude this company from the final set of comparables as it is functionally different from the assessee in the case on hand, who is only a software service provider to its AEs. 10. Bothtree Consulting Ltd. and Lu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... final list of comparables is upheld. INCLUSION OF COMPANIES AS COMPARABLES SOUGHT FOR BY THE ASSESSEE. 11.1 In the course of appellate proceedings, the learned Authorised Representative of the assessee submitted that R System International Ltd. should be included in the list of comparables. The ld. A. R. challenged the order of the learned CIT(A) in directing the Assessing Officer / TPO to exclude the following companies from the list of comparables by applying the Related Party Transaction ( RPT ) filter of more than 0%, as he was of the view that even a single instance of RPT should lead to their rejection from the list of comparables :- (i) Avani Cincom Technologies Ltd. (ii) LGS Global Ltd. (iii) Flextronics Software Systems Ltd. (iv) i-Gate Global Solutions Ltd. (v) Infosys Technologies Ltd. (vi) Mindtree Ltd. (vii) Persistent Systems Ltd. (viii) R. Systems International Ltd. (Seg) (ix) Softsol India Ltd. (x) Tata Elxsi Ltd. (xi) Thirdware Solutions Ltd. (xii) Wipro Ltd. 11.2.1 The learned Authorised Representative submitted that RPT filter should be applied at 15% of the total revenue and only those companies having RPT in excess o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding acceptance of comparable companies having related party transactions as proposed by the TPO, the learned counsel for the assessee argued that the transfer pricing regulations do not stipulate any minimum limit of related party transactions which form the threshold for exclusion as a comparable. In this regard, the learned counsel for the assessee objected to the TPO s setting a limit of 25% on related party transactions. He objected to the inclusion of comparables being related party transactions in excess of 15% of sales / revenue. In support of this proposition, the learned counsel for the assessee placed reliance on the decision of the Hon'ble Bench of the ITAT, Delhi in the case of Sony India (P) Ltd. reported in 2008- TIOL-439-ITAT-Delhi dt.23.12.2008. The learned counsel for the assessee drew our attention to para 115.3 of the order wherein the Tribunal has held that - We are further of the view that an entity can be taken as uncontrolled if its related party transactions do not exceed 10 to 15% of total revenue. Within the above limit, transactions cannot be held to be significant to influence the profitability of the comparables. For the purpose of comparison w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of 2 comparables namely (i) LGS Global Limited and (ii) Mindtree Limited. The assessee has not raised any objections against the inclusion of these two companies namely (i) LGS Global Limited and (ii) Mindtree Limited before the TPO/CIT(A). Though the CIT (Appeals) has co-terminus power with that of Assessing Officer and can enhance the assessment, however, since he has not issued any show cause notice for enhancement under Section 251(2) of the Act, he cannot reject these two companies from the set of comparables. Therefore to the extent of the rejection of these two companies from the set of comparables, the order of CIT (Appeals) is set aside and the TPO is directed to recompute the ALP after giving effect to the order of the Tribunal in respect of the comparables which are directed to be excluded from the set of comparables. 12. In Ground No.8, the assessee denies itself liable to be charged interest under Section 234B of the Act. The charging of interest is consequential and mandatory and the Assessing Officer has no discretion in the matter. This proposition has been upheld by the Hon'ble Apex Court in the case of Anjum H Ghaswala (252 ITR 1) and we, therefore, upho ..... 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