TMI Blog2016 (5) TMI 1498X X X X Extracts X X X X X X X X Extracts X X X X ..... of the comparables mentioned above would clearly show that these were much beyond that of the assessee taking them out of the reasonable realm of comparability. Just because the matter was not adjudicated by the CIT (A) may not be a reason for sending it back to him when the facts are clearly on record. There can be no dispute on the position of facts as mentioned above. In such a situation it would be fruitless exercise to remit the issue of application of turnover filter back to the CIT (A). We therefore direct exclusion of Tata Elxsi Ltd, Sasken Communication Technologies Ltd (seg), Persistent Systems Ltd, Zylog Systems Ltd, Mindtree Ltd (seg), L T Infotech Ltd, and Infosys Ltd, from the list of comparables. 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 company and not a software development services company CG-VAK can be considered as a good comparable as if all the employee costs are prope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee respectively, directed against an order dt.27.10.2014 of CIT (A) IV, Bengaluru. 02. Facts apropos are that assessee engaged in providing software development services, design and support, had filed a return declaring income of ₹ 9,18,153/-. Since assessee had international transactions with its Associated Enterprise (AE) exceeding the limits laid down, pricing of such international transactions was referred to the TPO by the AO. Profile of the assessee mentioned by the TPO in para 2 of his order, is as a contract software development service provider. Assessee was a wholly owned subsidiary of one M/s. Sunquest, US, and was primarily developing software and providing support to its principal. Sunquest, US, was providing solutions in healthcare services which helped physicians, hospitals and medical practitioners to effectively manage the complexities in healthcare services. For the support services rendered by the assessee, Sunquest, US, was remunerating on cost plus basis. Assessee s financial results for relevant previous year read as under : Operating Revenues* 19,88,17,946 Forex gain ** 2,83,48 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Quinteora Solutions Limited 18.95% 16. R S Software (India) Limited 9.80% 17 Sasken Communication Technologies Limited 19.55% 18 SIP Technologies and Exports Limited -10.97% 19 Softsol India Limited 14.95% 20 V M F Softech Limited 2.08% 21 Zylog Systems Limited 16.63% Arithmetic mean 14.13% 05. As per the assessee, arithmetic mean of 14.13% on the above 21 comparables fell within + / - 5% of its own profit rate of 11.63% and therefore there was no requirement of any adjustments for the pricing of the international transactions with the AE. Assessee had selected TNMM as the most appropriate one for the TP study. TPO while accepting TNMM, was of the opinion that except for Akshay Software Technologies Ltd, Infosys Technolog ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Average mean 24.32% 06. Thereafter the AO made a work out of the working capital adjustment as per the formula prescribed in OECD guidelines, 2009. Average working capital adjustment worked out by the TPO came to (-) 5.12 %. However, as per the TPO, average cost of capital for the uncontrolled comparables came to only 1.71%. He therefore restricted the working capital adjustment to 1.71%. Though the assessee requested the TPO to give an adjustment for risk this was not accepted by the TPO for a reason that an accurate adjustment for risk could not be quantified and therefore by virtue of Section 10 B of the Act, no such adjustment could be made. He thereafter worked out the adjustment required u/s.92 CA as under : Arm's Length Mean Margin on cost 24.32% Less: Working Capital Adjustment (Annex.C) -5.12% Adjusted margin 29.44% Operating Cost 20,34,92,094 Arms Length Price (ALP) 129.44% of Operating cost 26,34,00,166 Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntioned companies were to be excluded. 10. Continuing his arguments, Ld. AR submitted that M/s. Bodhtree Consulting Ltd, was also one among the comparables which were disputed in the case of Lam Research India (P) Ltd (supra). According to him, at para 10 of the said order, it was held by this Tribunal that Bodhtree Consulting Ltd, was not a proper comparable in the software development services segment. 11. Vis-a-vis, Tata Elxsi Ltd, Sasken Communication Technologies Ltd, Persistent Systems P. Ltd, Mindtree Ltd (seg) and Infosys Technologies Ltd, Ld. AR submitted that in the same decision, these were directed to be excluded since the turnover of the said companies exceeded ₹ 200 crores. As per the Ld. AR, assessee s turnover was negligible and came to only ₹ 22.71 crores. As per the Ld. AR, turnover of the above companies was more than ten times of that of the assessee and hence could not be considered as good comparable. 12. Vis-a-vis, Zylog Systems Ltd, Ld. AR submitted that this company also had a turnover of ₹ 734.93 crores. According to him, this was evident from para 6 of the order of the Tribunal in of Lam Research (India) P. Ltd, (supra). Similar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an evolving area. As per the Ld. DR if the turnover filter is to be applied, matter has to be sent to the CIT (A) for consideration since he had not adjudicated the issue. Assessee is seeking application of turnover filter in the case of Tata Elxsi Ltd, Sasken Communication Technologies Ltd, Persistent Systems Ltd, Zylog Systems Ltd, Mindtree Consulting Ltd (seg), L T Infotech Ltd, and Infosys Ltd. Reliance has been placed by the assessee on the decision of coordinate bench in the case of Lam Research (India) P. Ltd, (supra). Profile of the assessee, as we have already captured in para 02 of this order is one of providing software development services to its principal abroad. Lam Research (India) P. Ltd, (supra) had two segments, namely, software development services and ITES. With regard to software development services, it was providing software development services to its principal called Novelleus Systems International Inc. USA. Thus vis-a-vis software development services, adjudication done by the Tribunal in the case of Lam Research (India) P. Ltd, (supra) can be applied here also, since the said case was also for the very same assessment year. Turnover of various companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 76,626 24.72% 11 Infosys Ltd 2,02,64,00,00,000 1,39,17,00,00,000 45.61% Average 24.32% 17. It is clear from the above, that turnover of Tata Elxsi Ltd was ₹ 378.43 crores, that of Sasken Communication Technologies Ltd, came to ₹ 405.31 crores, that of Persistent Systems Ltd, was ₹ 519.69 crores, that of Zylog Systems Ltd was ₹ 734.9 crores, that of Mindtree Ltd (seg) was ₹ 793.22 crores, that of L T Infotech Ltd, was ₹ 1,950.83 crores and that of Infosys Ltd, was ₹ 20,264 crores. Turnover of the assessee was only ₹ 22.72 crores. Obviously the volume of activity of the above mentioned companies were much higher to that of the assessee. It was more than ten times that of the assessee. In the case of Lam Research (India) P. Ltd, (supra) with regard to application of turnover filter, it was held as under at para 13 of the order dt.30.04.2015 : 13. We have heard the rival contentions and perused the material on record. In the case of Yodlee Infotech Pvt. Ltd., (supra), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 1 crore to infinite is a reasonable classification as turnover base. 2. E-Gain Communication (P) Ltd. vs. ITO (2008) 118 TTJ (Pune) 354 : (2008) 13 DTR (Pune)(Trib) 65; 3. Sony India (P) Ltd. vs. Dy. CIT (2008) 118 TTJ (Del) 865 : (2008) 14 DTR (Del)(Trib) 228 : (2008) 114 ITD 448 (Del); 4. Dy. CIT vs. Indo American Jewellery Ltd., ITA No. 6194/Mum/2008 [reported at (2010) 131 TTJ (Mumbai) 163 : (2010) 40 DTR (Mumbai)(Trib) 386-Ed.]; 5. Philips Software Centre (P) Ltd. vs. Asstt. CIT (2008) 119 TTJ (Bang) 721 : (2008) 15 DTR (Bang)(Trib) 505 : (2008) 26 SOT 226 (Bang); 6. Asstt. CIT vs. NIT (2011) 57 DTR (Del)(Trib) 334 8.1 He further submitted that size as a criteria for selection of comparables is also recommended by OCED in its TP guidelines. The observation of OCED in para 3.43 of the chapter on guidelines reads as follows : Size criteria in terms of sales, assets or number of employees : The size of the transaction in absolute value or in proportion to the activities of the parties might affect the relative competitive positions of the buyer and seller and therefore comparability. 8.2 The learned couns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various Benches of the Tribunal, when companies which are loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of ₹ 1 crore to ₹ 200 crores have to be taken as a particular range and the assessee being in that range having turnover of ₹ 8.15 crores, the companies which also have turnover of ₹ 1 to ₹ 200 crores only should be taken into consideration for the purpose of making TP study. The above view was followed by the Co-ordinate Bench of this Tribunal in the case of M/s Bearing Point Business Consu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld come down reducing profit margin. Thus, a held by the various benches of the Tribunal, when companies which are loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun and Bradstreet is more suitable ad reasonable. In view of the same we hold that the turnover filter is very important and the companies having a turnover of ₹ 1 Crore to200 Crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 Crores, the companies which also have turnover of 1.00 to 200 Crores only should be taken into consideration for the purpose of making TP study . 5.12 The above view has been followed in the recent order of the Tribunal n the case of Trilogy E - Business(supra). The relevant findings of the Tribunal are extracted as under; 20. In this regard we find that the provisions of law pointed out by the learned counsel for the assessee as well as the directions referred to by the learned counsel for the assessee clearly lay down the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lying turnover limit of ₹ 200 crores may not be a wise and prudent one, the turnover of the comparables mentioned above would clearly show that these were much beyond that of the assessee taking them out of the reasonable realm of comparability. Just because the matter was not adjudicated by the CIT (A) may not be a reason for sending it back to him when the facts are clearly on record. There can be no dispute on the position of facts as mentioned above. In such a situation it would be fruitless exercise to remit the issue of application of turnover filter back to the CIT (A). We therefore direct exclusion of Tata Elxsi Ltd, Sasken Communication Technologies Ltd (seg), Persistent Systems Ltd, Zylog Systems Ltd, Mindtree Ltd (seg), L T Infotech Ltd, and Infosys Ltd, from the list of comparables. 19. No doubt we are alive to the fact that Sasken Communication Technologies Ltd, Persistent Systems Ltd, Zylog Systems Ltd, Mindtree Ltd (seg), L T Infotech Ltd, Infosys Ltd, were a part of assessee s own comparables. However as mentioned by us, assessee had taken a ground before the CIT (A) seeking exclusion based on turnover, though it has not pressed it. At least in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is on which the said company should be retained as a comparable, when factually it is shown that the said company is a software product company and not a software development services company Accordingly we have no hesitation in directing the exclusion of Bodhtree Consulting Ltd also. 21. Now taking the pleading of the assessee that CG-VAK was unjustly rejected from the list of comparables, we find that the said company was also one of the comparables , which had come up before this Tribunal in the case of Lam Research (India) P. Ltd, (supra). This Tribunal had held as under at para 21 of the order, as under : CG-VAK Software Exports Ltd . (D) (i) As far as this company is concerned, the TPO rejected the same by applying the 25% employee cost filter. According to the TPO, usually software development services are high-end services performed by skilled and professional employees and hence the cost of rendering such high-end services is also high as they comprise of high salaries and better welfare facilities, compared to low-end services. Therefore, the filter of employee cost of more than 25% of turnover was considered by the TPO while choosing the comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sasken Communication Technologies Ltd (seg), Persistent Systems Ltd, Zylog Systems Ltd, Mindtree Ltd (seg), L T Infotech Ltd, and Infosys Ltd from the list of comparables and direct inclusion of M/s. CG-VAK as a good comparable. Ordered accordingly. 23. Coming to the pleading of the assessee that foreign exchange adjustment once allowed as operational in nature should also be considered while working out the operating margin of the comparables, we are inclined to agree. This is because comparability should be done based on equal footing and if foreign exchange gains / losses are considered as part of operational income / loss of the assessee, then such items of expenditure , are also to be considered as operational in nature in the case of comparables also. TPO is therefore directed to work out the margin of the comparables that are left in the list after considering foreign exchange gains / losses as operational in nature. Ordered accordingly. 24. Since the Ld. AR had submitted that he was not pressing any grounds other than the grounds relating to application of turnover filter in grounds 5, 6 and 9, other grounds are not considered for adjudication by us. 25. In the r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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