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TMI Blog2017 (8) TMI 1683X X X X Extracts X X X X X X X X Extracts X X X X ..... following international transactions: Ø Rendering of consultancy services ... Rs.83,21,05,022/- Ø Reimbursement of expenses (paid) ... Rs. 82,91,029/- 3. The assessee-company had also submitted transfer pricing study report adopting the operating profit to total cost (OP/TC) as a profit level indicator for the transfer pricing study. The assessee-company applied Transactional Net Margin Method [TNMM] which was considered to be the most appropriate method for purposes of bench marking the international transactions. The assessee-company's profit margin was computed at 14.19% and the assessee-company claimed that the same was comparable with other companies rendering software development services. For the purpose of transfer pricing study, the assessee-company had chosen 8 comparable entities and arithmetic average of operating profit margins of said comparables was computed at 8%. According to the assessee-company, its PLI was much higher than the arithmetic mean of the comparable entities. Hence, it was claimed that the transactions with its AE are at arm's length. The assessee-company has selected the following 8 entities as comparables whose average pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and also directed exclusion of Bodhtree Consulting Ltd. as this company was held to be engaged in ITeS and absence of segmental information. The CIT(A) also directed exclusion of Geometric Software Solutions Ltd., on the ground that it is functionally different from that of assessee-company and no segmental information was available. The CIT(A) upheld the action of the TPO in inclusion or exclusion of the other comparable entities. As regards deduction u/s. 10A, the CIT(A) held following the decision of the Hon'ble jurisdictional High Court in the case of CIT vs. Tata Elxsi 349 ITR 98) that expenditure incurred in foreign currency in the form of insurance, freight and telecommunication charges attributable to delivery of computer software, the same should be reduced from export turnover as well as total turnover. 9. Being aggrieved, the revenue is in appeal before us raising the following grounds of appeal: 1. The order of the learned CIT(A) is opposed to law and facts of the case. 2. On the facts and in the circumstances of the case the learned CIT(A) erred in law in directing the AC) to exclude the reimbursement of expenses incurred in foreign currency both from the exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned TPO") in rejecting the Transfer Pricing ("TP") documentation maintained by the Respondent on invoking provisions of sub-section 3 of 92C of the Act contending that the information or data used in the computation of the arm's length price is not reliable or correct and in doing so grossly erred in: 2.1. Upholding the learned TPO's approach using data as at the time of assessment proceedings, instead of that available as on the date of preparing the TP documentation for comparable companies while determining arm's length price, ignoring the fact that this data was not available to the Respondent at the time of complying with the TP documentation requirements. 2.2. Upholding the rejection of comparability analysis in the Transfer Pricing documentation undertaken by the Respondent in accordance with the provisions of the Act read with the Income Tax Rules, 1962, ("the Rules") and in conducting a fresh comparability analysis and application of certain arbitrary filters in determining the arm's length price in connection with the international transactions of the Respondent. 2.3. Upholding the approach of the learned TPO in not applying multiple year/prior ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d CIT (A) erred upholding the rejection of comparability analysis in the Transfer Pricing documentation undertaken by the Respondent in accordance with the provisions of the Act read with the Income Tax Rules, 1962, ("the Rules") and in conducting a fresh comparability analysis and application of certain arbitrary filters (i.e., related party transactions to sales > 25%) in determining the arm's length price in connection with the international transactions of the Respondent [corresponding to cross objection 2.2] 5. That the learned CIT (A) erred in upholding the approach of the learned TPO in not applying multiple year/prior year data for comparable companies while determining arm's length price [corresponding to cross objection 2.3] 6. That the learned CIT(A) erred in upholding the approach of the learned TPO in collecting selective information of the companies by exercising power granted to him under section 133(6) of the Act that was not available to the Respondent in the public domain and relying on the same for comparability purposes; [corresponding to cross objection 2.4] 7. That the learned CIT(A) has erred in upholding the exclusion of Spanco Telesystems & So ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the company should also have been excluded on the grounds that this company is functionally dissimilar as it is engaged in diversified operations, owns significant intangible assets and brand value [corresponding to cross objection 5] 14. That the learned CIT(A) has erred in upholding the approach of the learned TPO in ignoring the limited risk nature of the services provided by the Respondent and in not providing an appropriate adjustment towards the risk differential, even when full-fledged entrepreneurial companies are selected as comparable companies, [corresponding to cross objection 6] That the Respondent craves leave to add to and/or alter, amend, rescind or modify the objections taken hereinabove before or at the time of hearing of this appeal. 11. Now, we shall take up the revenue's appeal. Ground Nos. 1, 7 and 8 are general in nature and do not require any adjudication. 12. Ground No. 2 challenges the direction of the CIT(A) to reduce expenditure incurred in foreign currency in the form of insurance, freight and telecommunication to be reduced from total turnover as well as export turnover. The direction of the CIT(A) is in consonance with the law laid do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , growth in revenues is not supported by growth in expenses. In some cases, expense growth is higher than the revenue growth. Also salary cost ratio is widely fluctuating. These circumstances are peculiar in nature and require further analysis, without which this company should be rejected as a comparable. 35. We are of the view that the basis on which the assessee seeks to exclude Bodhtree Consulting Ltd. in this year is acceptable and accordingly Bodhtree Consulting Ltd. is directed to be excluded from the list of comparable companies. We hold accordingly." 9.2 From a perusal of the order of the co-ordinate bench in the case of Kodiak Networks India Pvt. Ltd. (supra) it is clear that the Tribunal has followed its earlier decision in Mindtech India Ltd. vs. DCIT in ITA No. 70/B/2014 dated 21/8/2014 wherein it was held that on account of change in method of accounting of the revenue recognition, there were fluctuations in the profit margins of the company. The decision in Mindtech India Ltd. is in relation to assessment year 2009-10 and the decision was based on the reasoning that there were fluctuations in the margins of the company whereas in the present case we are concerned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned AR of the assessee-company on this decision is misplaced. Therefore, we do not find any reason to exclude this company from the list of comparables. Therefore, respectfully following the decision of the co-ordinate bench in the case cited supra, we uphold the action of the TPO/AO to include in the list of comparables the comparables Bodhtree Consulting Ltd. and Geometric Software Solutions: 15. In the result, the appeal filed by the revenue is partly allowed. 16. The assessee filed revised cross objections seeking inclusion of the entities Spanko Telesystems & Solutions Ltd, and exclusion of entities Exensys Software Solutions Ltd., Thirdware Solutions, Flextronics Software Systems Ltd., on the ground that there are functional dissimilarities with that of the assessee-company before us. The assessee also seeks exclusion of Sankhya Infotech and Satyam Computer Services Ltd., on the ground that financial results are not reliable. 17. Before we delve on the merits of the submissions made by the assessee-company, it is crucial to go into the maintainability of the very cross objections itself. The provisions of sub-section (4) of section 253 provide for filing of cross object ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee-company had relied on the order of the coordinate bench of Tribunal in the case of ITO vs. Sunquest Information Systems (India) Pvt. Ltd. in IT(TP)A No. 1302/Bang/2011 dated 11/6/2015 wherein this Tribunal, vide para. 14 of its order, had directed the exclusion of this company from the list of comparables on the ground that the company is dealing in the software products and earned abnormal profits on account of amalgamation etc. 10.2 We perused the annual report of this company paced at pages 1097 to 1129 of the paper book. From perusal of page 1104 of the paper book it is clear that the nature of business of the company is software development services. Therefore, the submission of the assessee-company that it is engaged in the software products is not supported by the material on record. However, in the Director's report (page 1106 of paper book), it is stated that the company Holool India Ltd., is amalgamated with assessee-company w.e.f. 1/4/2004 and it was further stated that the combined financial results were stated in the annual report. But it is not the case of the assessee-company that the amalgamating company is functionally dissimilar. In fact, the notes to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny objected to the inclusion of this company as a comparable on the ground that personnel cost (salary) is less than 15% of the sales, which is less than the industry average of 47%. This objection was overruled by the TPO by citing that salary includes consultancy charges and overseas manpower cost and the two items are included in the personnel cost it comes to 26%. 13.1 Learned AR of the assessee-company again relied on the decision of the co-ordinate bench of the Tribunal in the case of Sunquest Information Systems (India) Pvt. Ltd. (cited supra). 13.2 We heard the rival submissions and perused material on record. Perusal of the decision of the co-ordinate bench of Tribunal in the case of Sunquest Information Systems (India) Pvt. Ltd. (cited supra) on this comparable reveals that the co-ordinate bench had followed the decision of Delhi Tribunal in the case of ITO vs. Colt Technology Services India Pvt. Ltd. (in ITA No. 609/Del/2011 dt. 23/10/2012 and no reasons were given by the Tribunal as to why this company cannot be considered as a comparable. Therefore, we are unable to discern any ratio in the decision cited supra. Thus, the learned AR of the assessee-company could no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is the assessee which claimed to be a cost plus low risk captive which cannot be expected to earn such high profitability. " Similarly co-ordinate bench of Tribunal in the case of Textron Global Technology Centre Pvt. Ltd(cited supra) recorded the finding as under: "26. As far as Thirdware Software Solution Limited is concerned, we find from the information furnished by the said company that though the said company is also into product development, there are no software products that the company invoiced during the relevant financial year and the financial results are in respect of services only. Thus, it is clear that there is no sale of software products during the year but the said company might have incurred expenditure towards the development of the software products." 23. In view of the aforesaid decision rendered on identical facts and circumstances, we are of the view that Foursoft Ltd., and Thirdware Solutions Ltd., should be excluded from the list of comparable companies." Similarly co-ordinate bench of Tribunal in the case of Sunquest Information Systems (India) Pvt. Ltd. (cited supra) "25. As far as Thirdware Software Solution Limited is concerned, we find from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O rejected the submission by holding that the turnover had no co-relation with the profit margin earned by the company and also rebutted that the companies had related party transactions by drawing the attention of the assessee-company to the annual reports of those companies. 24. We now deal with each of these companies. Before adverting to the comparables, it is worth mentioning here that there are divergent decisions of the Tribunal whether high turnover is a relevant for accepting/rejecting a comparable in the case of a service company. For example, the Mumbai bench of the Tribunal in the case of Capgemini India Pvt Ltd. Vs. ACIT (TS 45 ITAT 2013 (Mum) (TP) held that the turnover was relevant only to the manufacturing concerns not to the service oriented companies. On the other hand, the coordinate (Bangalore) bench of the Tribunal in the case of Genesis Integrating Systems (India) Pvt. Ltd. (cited supra) held that turnover is a relevant factor for accepting/rejecting the comparable. However, without going into the turnover factor, we hold that Infosys Ltd., cannot be considered as comparable with that of the assessee-company since Infosys Ltd. is a giant in the area of softwa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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