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Income Tax Appellate Tribunal, ‘B’ BENCH, BENGALURU
Before: SHRI SUNIL KUMAR YADAV & SHRI INTURI RAMA RAO
Per INTURI RAMA RAO, AM : These are cross appeals filed by the assessee-company as well as the revenue directed against the assessment order passed u/s 143(3) r.w.s 144C(5) of the Income-tax Act, 1961
IT(TP)A Nos.428 & 577/Bang/2015 Page 2 of 9 [hereinafter referred to as 'the Act' for short] for the assessment year 2010-11.
Briefly, the facts of the case are that the assessee is a company duly incorporated under the provisions of the Companies Act, 1956. The company was formed with the object of providing software development related services to its Associated Enterprises (AE) and group of companies. The name of the company was changed from AIG Systems Solutions Pvt. Ltd., to Mphasis FinSolutions Pvt. Ltd. The return of income for the assessment year 2010-11 was filed on 30/09/2010 declaring loss of Rs.9,70,58,797/-. This return of income was revised on 29/11/2011 declaring total income of Rs.39,69,930/-. The assessee-company also reported the following international transactions with its Associated Enterprise(AE) in 93 CE report.
The assessee-company sought to justify the consideration received for the international transaction entered with its AE to be at arm’s length price [ALP]. The assessee-company had also submitted transfer pricing study report adopting TNMM as most appropriate method and operating profit to operating cost (OP/OC) as a profit level indicator for the transferring 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 10.05% in respect of software services segment. The assessee-company claimed that the same was comparable with other companies rendering software development services. For the purpose of transfer pricing study,
IT(TP)A Nos.428 & 577/Bang/2015 Page 3 of 9 the assessee-company had chosen 21 comparables in respect of software development services and the arithmetical average of operating profit margin of the said comparables was computed at 8.68%. According to the assessee-company, its PLI was much higher than the arithmetical mean of the comparable entities. Hence, it was claimed that international transaction with its AE in respect of software development segment was at arm’s length. As regards reimbursement of payroll cost incurred, the same was claimed to be at arm’s length.
The Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO) for the purpose of bench marking the international transactions. The TPO passed the order u/s 92CA(3) of the Act on 30/01/2014 computing transfer pricing adjustment at Rs.9,84,28,717/- in respect of software development services. The TPO rejected the Transfer pricing study report submitted by the assessee company as the same was not used current year financial data but the average of earlier data pertaining to financial years 2007-8 and 2008-09. However, the TPO proceeded to identify different set of comparables by using TNMM as the most appropriate method while doing so, the TPO adopted the following filters
i. High turnover which helps in making higher profit margin. ii. Revenue from software products and IPs. iii. Brand value of the company which results in higher margin iv. Engaged in higher level of functions when compared to that of the taxpayer. The TPO finally selected the following 17 comparables.
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The TPO computed the average profit of the above comparables at 20.41% after giving working capital adjustment of 1.32% adjusted margin of 19.09%. On the above basis the TPO completed transfer pricing in respect of software development as follows:
The TPO also rejected the risk adjustment. The AO passed draft assessment order dated 25/03/2014 u/s 143(3) r.w.c. 144C of the Act incorporating the above adjustments. After receipt of the draft assessment order, objections were filed before the Hon’ble DRP. The Hon’ble DRP vide directions dated 26/12/2014, while upholding the validity of reference to the TPO held that when the IT(TP)A Nos.428 & 577/Bang/2015 Page 5 of 9 TPO applied the lower turnover limit, should also apply upper turnover limit of Rs.200 crores as the assessee falls within the band of Rs.1 to Rs.200 crores.
Being aggrieved by the above directions of the Hon’ble DRP, the revenue is an appeal in ITA No.577/Bang/2015.
Now, we shall take up the revenue’s appeal. The revenue raised the following grounds of appeal:
The revenue challenges the finding of the Hon’ble DRP that turnover was relevant criteria for the purpose of selecting comparables. We have been consistently holding that unless it is demonstrated that turnover impacts the profit, turnover is not relevant criteria, applying the law laid down by the Honorable Delhi High Court in the case of Chryscapital Investment Advisors (India) (P) Ltd. Vs. DCIT (2015). Even the learned AR of the assessee fairly conceded this position. Hence, the grounds of appeal filed by the revenue are allowed.
IT(TP)A Nos.428 & 577/Bang/2015 Page 6 of 9 9. The assessee company raised the following grounds of appeal:
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IT(TP)A Nos.428 & 577/Bang/2015 Page 9 of 9 10. The assessee company is seeking exclusion of the following companies on the ground of functional difference: i. Zylog Systems ii. Infosys Ltd. iii. Kals Information Systems Ltd. (seg.) iv. Persistent Systems Ltd. v. Sasken Communication Technologies vi. Tata Elxsi (seg) vii. Larsen & Toubro Infotech Ltd. viii. Persistent Systems & Solutions Ltd. The assessee is seeking inclusion certain companies on the ground that it passes all the filters applied by the TPO. We find from record that though pleadings were made on behalf of the assessee company to adjudicate the issue of comparability on the functional difference, The Hon’ble DRP as well as the TPO had failed to render a finding. Hence, in the fitness of things, we remit this issue back to the file of the TPO to consider exclusion of the companies as well as inclusion of the companies cited above on the ground urged on behalf of the assessee-company.
In the result, the appeal filed by the assessee-company is partly allowed for statistical purposes.