TMI Blog2019 (4) TMI 1310X X X X Extracts X X X X X X X X Extracts X X X X ..... lection of comparables, the %age should be 25% not 15%. The more we restrict, chances of loosing reasonable comparability. Therefore, we reject the contention of the assessee and exclusion of the said comparable by the assessee from the list of comparables, is hereby rejected. Exemption u/s 10B - scope of TP adjustment when assessee is eligible for exemption - shifting of profit - HELD THAT:- The decision making and shareholder appetite of expansion will not remain same for all the time or countries. Irrespective of profit making ability and exemption available in the country of operation, the actual profit making ability cannot be determined. Irrespective of situation, the transfer price of the global market and the corporates must be within the band of pricing. It cannot fluctuate. It can be determined or evaluated only by means of comparing pricing pattern of Indian market and global market. When it is found that it is within the band of prices adopted globally, no need of making any adjustment. It cannot be restricted based on the prevailing tax rate in other countries. As we said earlier, the tax saving alone cannot be a decision making process to restrict any TP adjus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that the total income of the tax payer should be enhanced by ₹ 2,86,24,167/-, by observing as under in his order 2.2 Assessee has entered into following international transactions, as per 3CEB report/TP document: AE Nature of transaction Amount (Rs. Wissen Infotech Inc Provision of software development services 15,99,99,548 2.3 The TPO noted that assessee has used Prowess and Capitaline data base in search for comparable companies in the TP documentation. After applying certain filters, the assessee has short-listed 3 companies to bench mark the software development services transaction with arithmetic mean PLI (OP/OC was computed at 11.03% as against its own PLI at 6.27%. Accordingly, the assessee stated that the international transactions are at arm s length. 2.4 As per the audited statement of accounts the financials of the assessee are as under: Description Amount (in Rs.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15.30 15 Sasken Communications (Seg.) 13.44 16 Softsol India Ltd. 42.15 17 Tata Elxsi Ltd. (seg.) 18.97 18 Thirdware Solutions 18.01 19 Wipro Ltd. (Seg.) 28.38 arithmetic mean 26.20 Out of the said comparables, the assessee accepted 7 comparables and objected to 12 comparables selected by the TPO. The TPO computed the ALP as under: Description Amount Arm s length margin 26.20% Less: WCA 1.35% Adjustment Arm s length margin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... panies inter alia on the grounds of High Turnover, Functional Dis-similarity, ownership of intangible assets and non-availability of segmental information relating to software development in case of companies engaged in both software development and product development. 1. Avani Cimcon Technologies Ltd 2. Bodh tree Ltd 3 Celestial Biolabs Ltd 4. Infosys Technologies Ltd 5 GS Global Ltd 6 Persistent Systems Ltd 7 Quintegra Solutions Ltd 8 Softsol India Limited 6. The DRP/AO erred in confirming an adjustment when the appellant company was claiming exemption u/s 10B and hence there is no intention to shift profits outside India and more so when the tax rates in USA where the AE is located, were higher than those prevailing in India. 7. Any other ground that may be urged at the time of hearing with the prior approval of the Hon ble ITAT. 4.1 The assessee has filed a petition for Admission of following Additional grounds: 1. The Ld. TPO / DRP erred in computing/confirming the margin of ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvensys Development Centre P Ltd. directed the AO/TPO to exclude the said company from the list of comparables while computing arm s length price. Following the said decision, we direct the AO to exclude the said company as comparable. 8. As regards Bodhtree Consulting Ltd., ld. AR submitted that this company cannot be a comparable to the assessee company as it is engaged in the business of software products and it also provides open end to end web solutions, software consultancy, design and development of software. It is functionally different from the assessee company and thus needs to be eliminated from the list of comparables. He relied on the following cases: 1. Cash Edge India (P) Ltd. Vs. ITO [2014] 151 ITD 717. 8.1 Ld. DR, on the other hand, submitted that there is significant employee cost and software development expenses and there are no intangibles indicating products. 8.2 Considered the rival submissions and perused the material on record. We find that the coordinate bench of this Tribunal in the case of United Online Software Development (India) (P) Ltd. directed to exclude the said company by observing as un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions, we are of the view that the submissions on profile of the company, it is mentioned as we also provide product engineering and enterprise services to fortune 500 firms . This also will be categorized as software services and cannot be categorized as software product. The auditor of this company submitted the letter before TPO, which was part of assessment proceedings. These submissions are made by ld. AR as additional evidence and we direct AO/TPO to analyse this comparable with the submissions of the assessee after giving them an opportunity of being heard. In case, this comparable is found to be into software products, it may be eliminated from the list of comparables. Respectfully following the said decision, we direct AO/TPO to analyse this comparable with the submissions of the assessee after giving them an opportunity of being heard. In case, this comparable is found to be into software products, it may be eliminated from the list of comparables. 9. As regards Celestial Biolabs Ltd., ld. AR submitted that this company cannot be a comparable to the assessee company as it is engaged in R D activities and renders services to specific sectors. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ased on TNMM, we consider the average margin of all the several activities carried on by the assessee. On a compartmentalizing two profit making companies with several activities, we can compare the end result, unless they are into product or highly diversified or some activities which will modify the profit making ability of the organization. In this case, we do not see any reason to interfere with the selection process. Therefore, the objection of the assessee to exclude the said company is hereby rejected. 10. As regards Infosys Technologies Ltd, ld. AR submitted that this company cannot be a comparable case to the assessee company as it is to be rejected based on its size, huge turnover, brand value, scale of operation, owning of intangibles and diversified operations. He relied on the following cases: 1. Invensys Development Centre (P) Ltd. (supra) 2. Adaptec (India) P. Ltd. Vs. ACIT [2014] 44 Taxmann.com 236 (Hyd. Trib) 3. 3DPLM Software Solutions Ltd. Vs. DCIT (supra) 4. United Online Software Development (India) P. Ltd. (supra) 10.1 The ld. DR, on the other hand, in his written submiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the parties and perused the materials on record. On considering the same, we are of the view that this company cannot be considered as comparable to Assessee due to various factors such as its size, turnover, brand value, scale of operation, diversified activities and owning of intangibles. As can be seen from the TP order, the turnovers of Infosys Technologies Limited during the year under consideration are ₹ 13,149 crores as against ₹ 42 crores of Assessee. Though it is a fact that Assessee in the TP documentation, has selected Infosys Technologies Ltd. as comparable but that cannot prevent Assessee from objecting to the aforesaid company being selected as comparable, if there are valid reasons for doing so. In this context, the contention of the learned AR that Assessee has selected Infosys Limited on the basis of three years financial data, whereas the TPO considered only the current year data also needs to be appreciated. Therefore, considering the enormity of turnover of the company as well as other relevant factors, the aforesaid company cannot be treated as comparable to Assessee in any manner. This view of ours is also in tune with the view expressed by diff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w of different benches of the Tribunal in respect of the aforesaid, we direct the AO/TPO to exclude the aforesaid company from the list of comparables. After considering the submissions of both the parties and keeping in tune with the consistent view of different benches of the Tribunal in respect of the aforesaid, we direct the AO/TPO to exclude the aforesaid company from the list of comparables. Following the said decision, we direct the AO/TPO to exclude the said company as comparable from the list of comparables. 11. As regard LGS Global Ltd., the ld. AR submitted that this company cannot be a comparable company to the assessee company, as this company is engaged in rendering consultancy services, BPO, testing services and application maintenance outsourcing. The segmental data is not available for comparability analysis therefore the company is to be rejected from the final list of comparables. He relied on the following cases: 1. Cash Edge India (P) Ltd. (supra) 2. United Online Software Development (India) Ltd. (supra) 11.1 The ld. DR on the other hand, on the objections on LGS Gl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cumstances of the present case and in view of the discussions made above and in view of various judicial pronouncements, we direct the Assessing Officer to re-adjudicate the issue of arms length pricing and determine the same by excluding the comparables having turnover of more than ₹ 200 crores. The Assessing Officer will also take into account the bank and finance charges as part of operating expenses of com parables for arriving at the margin. Similarly, Assessing Officer will only take segmental results relating to services only for comparing the companies Ws. Kals Information Systems, Avani Cincon, LGS GLobal Ltd. and Bodhtree Consulting Systems as the consolidated results of these companies cannot be compared with the assessee, as assessee is admittedly into service providing activities. It is further directed that if segmental results of the above companies relating to similar services as being provided by assessee are not available, then these companies will have to be excluded as comparables as held in various judicial pronouncements relied upon by Ld. A.R . 8.2 In view of the above and also ld. AR submitted that the revenue in FY 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cord. It is seen from the details on record that this company i.e. Persistent Systems Ltd., is engaged in product development and product design services while the assessee is a software development services provider. We find that, as submitted by the assessee, the segmental details are not given separately. Therefore, following the principle enunciated in the decision of the Mumbai Tribunal in the case of Telecordia 41 IT(T.P)A No.1303/Bang/2012 Technologies India Pvt. Ltd. (supra) that in the absence of segmental details / information a company cannot be taken into account for comparability analysis, we hold that this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. It is ordered accordingly. 9.2 Ld. AR also relied on the decision in the case of Cash Edge India Pvt. Ltd., ITA No. 5848/D/12 AY 2008-09. 9.3 Ld. DR relied on the orders of revenue authorities. 9.4 Respectfully following the said decision, we direct the AO/TPO to exclude the said company as comparable from the list of comparables. Following the said decision, we direct the AO/TPO to ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company to one that does not own intangibles and requires to be omitted form the list of comparables, as in the case on hand. 18.3.2 We also find from the Annual Report of Quintegra Solutions Ltd. that there have been acquisitions made by it in the period under consideration. It is settled principle that where extraordinary events have taken place, which has an effect on the performance of the company, then that company shall be removed from the list of comparables. 18.3.3 Respectfully following the decision of the co-ordinate bench of the Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (supra), we direct that this company i.e. Quintegra Solutions Ltd. be excluded from the list of comparables in the case on hand since it is engaged in proprietary software products and owns its own intangibles unlike the assessee in the case on hand who is a software service provider. 10.2 Respectfully following the said decision, we direct the AO/TPO to exclude the said company as comparable from the list of comparables. Following the said decision, we direct the AO/TPO to exclude the said company from the list of comparables. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filter for RPT. Generally, the %age of RPT is determined based on the availability of comparables. When the comparables are more, the RPT filter is adopted at minimum level whereas when the comparables are less, the RPT % are fixed liberally. Generally, it is selected between 15% or 25% depending upon the availability of comparables. In the given case, TPO has selected 19 comparables. Therefore, it shows that comparables are reasonably more, hence, TPO could have applied 15%. In the given case, out of 19 comparables, assessee accepted only 7 and balance it objected. Therefore, in our considered view, in the restricted atmosphere of selection of comparables, the %age should be 25% not 15%. The more we restrict, chances of loosing reasonable comparability. Therefore, we reject the contention of the assessee and exclusion of the said comparable by the assessee from the list of comparables, is herby rejected. 15. We therefore direct the Assessing Officer /TPO to determine the ALP keeping in view our directions given hereinabove and if on such determination the price charged by the assessee for its international transaction is found to be within the arms length then no a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee with the AEs giving rise to exempt income in the hands of the assessee is to be benchmarked with the ALP determined in accordance with the provisions of Transfer Pricing to ensure that no excess exempt income is disclosed by the assessee and assessee is entitled for exemption of income u/s lOA of the total income determined as per the Transfer Pricing Provisions only and where the assessee has claimed more exempt income, then exemption u/s lOA shall be allowed in accordance with the profit compared as per ALP only. 38. Keeping in view the above in mind in the instant case we find that as per the decisions of the lower authorities the assessee has not reported any excess exempt income from its international transactions with AE. On the other hand as per the opinion of the lower tiuthorities in the instant case exempt income declared by the assessee when benchmarked with the ALP determined in accordance with the provisions of Transfer Pricing, the assessee has declared lesser exempt income and thereby no taxable base in India was eroded. Therefore, in our considered opinion no adjustment with the exempt income of the assessee was required to be made as p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nes, the Id. DR does not get much help. The Id. DR ought to have appreciated that what is relevant in the Indian context are the specific provisions of the Circular No. 14/2001. As submitted above, at para 55.5 of the said Circular, the CBDT has clearly mentioned that the intention of the transfer pricing provisions is to curtail avoidance of taxes by shifting profits outside India. In the case of Cotton Naturals (J) (P.) Ltd. v. DCIT [2013] 32 taxmann.com 219 (Delhi - Trib.) the Hon'ble Delhi Tribunal held as under: 18. We further note that assessee's profits are exempt u/s. 10B. Hence, there is no case that assessee would benefit by shifting profits outside India. This view is supported by Bangalore Tribunal decision in this case Philips Software Centre (P.) Ltd. v. Asstt. CIT [2008J 26 SOT 226 and Mumbai Tribunal in the case of ITO v. Zydus Altana HealthCare (P.) Ltd. [2011J 44 SOT 132. I In the case of CIT v. Lumax Industries Ltd [2013]36 taxman.com 380 (Delhi Trib) The TPO has nowhere made out a case that profit was shifted from a higher tax jurisdiction to a lower tax jurisdictio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee's support to the impugned order on both counts is found to be correct. The AO erred in not himself examining the issue of TP and with the approval of the Id. CIT, made a reference to the TPO u/s 92CA(1) of the Act; that the AO as well as the Id. CIT(A) failed to apply their mind to the TP Report filed by the assessee, or to any other material or information or document furnished. The TPO made an adjustment which was incorporated by the AO in the assessment order. Thereby. the AD as well as the Id. CIT(A) did not discharge necessary respective judicial functions conferred on them under sections 92C and 92CA of the Act. Further, the assessee is also correct in contending that no TP adjustment can be made in a case like the present one, where the assessee enjoys u/s 10A or 80HHE of the Act, or where the tax rate in the country of the Associated Enterprises is higher than the rate of tax in India and where the establishment of tax avoidance or manipulation of prices or establishment of shifting of profits is not possible. 22.0 In view of what has been stated above we pray the Hon'ble Bench to grant relief as per the grounds of appeal and submissions ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under: 3. On the ground of treating FBT is treating as expenditure, it is humbly submitted that it is essential to know about the objective of levy of FBT which is available in Circular no: 8/2015. The relevant portions of the circular are quoted as under. The objective is as follows: 2. Objective: 2.1 The taxation of perquisites or fringe benefits is justified both on grounds of equity and economic efficiency. When fringe benefits are under-taxed, it violates both horizontal and vertical equity. A taxpayer receiving his entire income in cash bears a higher tax burden in comparison to another taxpayer who receives his income partly in cash and partly in kind, thereby violating horizontal equity. Further, fringe benefits are generally provided to senior executives in the organization. Therefore, under-taxation of fringe benefits also violates vertical equity. It also discriminates between companies which can provide fringe benefits and those which cannot thereby adversely affecting market structure. However, the taxation of fringe benefits raises some problems primarily because- (a) all benefits cannot be individ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount of FBT paid, for the purposes of computing the income under the head 'profits and gains of business or profession'. This prohibition does not apply to the computation of 'book profit' for the purposes of section 11SJ8. Accordingly, the FBT is an allowable deduction in the computation of 'book profit' under section 11SlB of the Income-tax Act . From the above, it may kindly be seen that FBT is an expenditure in commercial parlance and needs to be considered as part of operating expenses. 16.3 Considered the rival submissions and perused the material on record. The assessee made the plea before us that TPO has considered the FBT as operating expenses at the same time, he eliminated the FBT expenditure in the case of comparables. AR has not submitted any papers in support of such submission. However, as a principle, the profit margin should be compared with comparables by following similar set of rules and accounting principles. In case of following different methods/rules, we end up reaching different conclusions. Therefore, we remit this issue also to the file of AO/TPO to treat the FBT as business operating expenses fo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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