ITAT DELHI BENCH ‘I’
Global Logic India (P.) Ltd.
versus
Deputy Commissioner of Income-tax, Circle 12(1), New Delhi
IT Appeal No. 5110 ( Delhi) of 2010
[ASSESSMENT YEAR 2006-07]
DECEMBER 21, 2012
ORDER
Shamim Yahya, Accountant Member
This appeal by the assessee is directed against the order of the Assessing Officer u/s. 143(3) read with section 144C of the I.T. Act for the assessment year 2006-07.
2. The grounds raised read as under:-
1. That the assessing officer erred on facts and in law in completing assessment under Section 143(3) read with Section 144C of the Income-tax Act, 1961 (“the Act”) at an income of Rs. 8,20,86,272 as against the returned income of Rs. 14,78,675.
2. That the assessing officer erred on facts and in law in making an addition of Rs. 7,87,94,571 on account of the alleged difference in the arm’s length price of the ‘international transactions’ of provision of software design and development services on the basis of the order passed under section 92CA(3) of the Act by the Transfer Pricing Officer (“the TPO”).
3. That the assessing officer/the TPO erred on facts and in law in considering the current year data only of the comparable companies disregarding the multiple year data used by the appellant.
3.1 That the assessing officer/the TPO erred on facts and in law in not appreciating that use of single year data of the comparable companies may not adequately capture the market and business cycle reflected in the industry.
4. That the assessing officer/the TPO erred on facts and in law in applying additional filters of percentage of wages to sale, declining sales, NFA/Sales ratio, without appreciating that the selection’ or rejection’ should be based on FAR analysis and not merely on financial results.
4.1 That the assessing officer/the TPO erred on facts and in law in considering (i) Saksoft Limited, (ii) Datamatics Technologies Ltd. and (iii) 3D PLM Software Ltd. having abnormally high profit margin as comparable companies for undertaking bench marking analysis applying TNMM.
4.2 That the assessing officer/TPO erred on facts and in law in not appreciating that M/s. Saksoft Ltd. cannot be considered as comparable company in as much as (i) the said company was not engaged in business activities comparable to that of the appellant, (ii) the said company has significant related party transaction in excess of 25% of total revenue and (iii) the wages/sales ratio of the company is 40.85% and the NFA/sales ratio is 6.96% which are not comparable to those of the appellant at 60.25% and 19.42%.
4.3 That the assessing officer/TPO erred on facts and in law in not appreciating that Datamatics Technologies Ltd. was engaged in rendering BPO services and cannot be considered as comparable company of the appellant which is engaged in rendering software development services.
4.4 That the assessing officer/TPO erred on facts and in law in considering 3D PLM Software Solutions Ltd. as comparable company not appreciating that the said company has significant related party transactions and also wages/sales ratio of the said company is 41.70% which is not comparable to that of the appellant at 60.25%.
5. That the assessing officer/the TPO erred in rejecting Gold stone Technologies Ltd. and Blue Star Infotech Limited as comparables allegedly on the ground that there has been decline in the sales of such companies.
5.1 That the assessing officer/the TPO erred on facts and in law in rejecting PSI Data Systems Ltd. as comparable company allegedly on the ground of being functionally different without appreciating that the company provides information technology services similar to that of the appellant.
6. Without prejudice the learned assessing officer/the TPO erred on facts and in law in not appreciating that the appellant is a low-risk-bearing contract service provider and a risk adjustment to the extent of 5% over the cost ought to be provided, as risk and reward to this extent vest with the overseas associated enterprises to which the appellant renders off-shore software services.
7. That the assessing officer/the TPO erred on facts and in law in not appreciating that the income of the appellant is exempt under section 10A of the Income Tax Act and hence, there could not be any motive for the transfer of profits outside India.
8. Without prejudice that the assessing officer/the TPO erred on facts and in law in not allowing the working capital adjustment in respect of the companies proposed to be selected as comparable by the TPO.
9. Without prejudice the assessing officer/the TPO erred on facts in considering the total operating cost of the appellant at Rs. 49,40,57,000 as against the actual operating cost of Rs.48,26,77,000.
10. Without prejudice, that the assessing officer/the TPO erred in law in not allowing variation to the extent of (+/-) 5%, while determining the arm’s length price of the ‘international transactions’, in terms of proviso to section 92CA(2) of the Act.
11. That the assessing officer erred on facts and in law in reducing the communication expenses to the extent of Rs. 1,79,10,869 from the export turnover for computation in terms of clause (iv) of Explanation 2 of section 10A of the Act while computing deduction under that section.
11.1 That the assessing officer erred on facts and in law in not appreciating that only 5% internet charges of the communication expenses is attributable to the export of software outside India.
11.2 Without prejudice that the assessing officer erred on facts and in law in making the adjustment of communication expenses, viz., link charges of Rs. 1,79,10,869 attributable to delivery of computer software outside India from “the export turnover” in terms of clause (iv) of Explanation 2 of Section 10A of the Act without making the similar adjustment from” the total turnover” resulting into absurd and unintended results.
The appellant craves leave to add, alter, amend or vary from the aforesaid grounds of appeal before or at the time of hearing.
3. Transfer Pricing Issue
The assessee is a private limited company, is affiliated to Global Logic USA and is engaged in the business of provision of software development services. The assessee in the relevant previous year entered into the international transaction of rendering the software development services to its associated enterprise.
3.1 For the purpose of bench marking the international transactions, the assessee has considered TNMM as the most appropriate method and considered itself to be the tested party with operating profit/operating cost (OP/OC%) as the Profit Level Indicator (PLI). In the search process, the assessee has considered following 8 comparable companies in the transfer pricing documentation with OP/OC of 11.70% as under:
