ITAT BANGALORE BENCH ‘A’
Genisys Integrating System (India) (P.) Ltd.
versus
Deputy Commissioner of Income-tax
IT Appeal No. 908 (Bang.) of 2011
[ASSESSMENT YEAR 2007-08]
JANUARY 29, 2013
ORDER
George George K, Judicial Member
This appeal, at the instance of the assessee, is directed against the assessment order passed under section 143(3) rws 144C of the Act, in pursuance to the direction of the Dispute Resolution Panel (DRP) dated 23.8.2011. The relevant assessment year is 2007-08.
2. Briefly stated, the facts of the case are as follows:-
The assessee is a company. It is engaged in the business of providing software development and IT enable services (Call Centres). The assessee exports the services to the Associated Enterprises (AE) and other clients. During the relevant assessment year, the assessee had entered into international transaction with its AE (as reported in Form No. 3CEB) for software development services and Call Centre amounting to Rs. 15,37,95,126/-. Based on this information in Form No. 3CEB, the Assessing Officer referred the matter under section 92CA of the Act to the Transfer Pricing Officer (TPO) to determine the arm’s length price in relation to the international transaction made by the assessee with its AE. On receiving the reference from the AO, the TPO passed an order under section 92CA on 10/10/2010 determining the adjustment to the arm’s length price of Rs. 1,79,47,930/- in respect of software development services segment. However, no adjustment was suggested in respect of providing of IT enable services (Call Centre). A copy of the TPO’s order as well as Draft Assessment Order was provided to the assessee. The assessee raised various objections before the DRP. The DRP, after going through the TPO’s order, the draft assessment order and after considering the assessee’s submission, upheld the TPO’s adjustments. The Assessing Officer, has, accordingly, incorporated the TPO’s adjustments while determining the total income.
2.1 Aggrieved by the assessment order, the assessee is in appeal before us.
2.2 The assessee has raised 19 grounds in its memorandum of appeal. Ground nos.1 to 16 are regarding the transfer pricing issue. Ground nos.17 to 19 are regarding non-transfer pricing issue.
(I) Transfer Pricing Issue
3. Though the assessee has raised several grounds of appeal regarding the transfer pricing issue, in the course of hearing, the learned AR confined his argument only to ground no.8. Since no argument was advanced on the same, ground nos. 1 to 7 and 9 to 16 are not adjudicated, Ground no. 8 raised in the memorandum of appeal reads as follows:-
The lower authorities (the learned Assessing Officer, learned Transfer Pricing Officer and Hon’ble Dispute Resolution Panel) have erred in rejecting internal comparables selected by the appellant and rejecting transfer pricing analysis of the appellant.
3.1 The factual matrix in regard to the above issue is recapitulated below:-
The assessee had rendered software development services to its AE. The total value of the software development services was Rs. 12,38,48,331/-. The assessee had also rendered software development services to overseas third parties, apart from domestic clients. The assessee adopted transaction net margin method (TNMM) to justify the price charged in the international transaction with its AE. According to the assessee, since adequate data was available with it, the net margin earned from services rendered to its AE was compared with the net margin earned on the services rendered to the non-AE (hereinafter referred to as “Internal TNMM”). The comparables chosen for this exercise where the companies situated outside India to whom the assessee exported software much like the AE to whom also the software had been exported. Based on the comparison of the net margin earned from AE and non-AE (Internal TNMM), the assessee concluded that its transaction with the AE was at arm’s length price.
3.2 The TPO issued show-cause notice dated 21/6/2010 (page 62 to 79 of the paper book filed by the assessee). The notice had proposed re-determining the arm’s length price for the software development services. The notice contained remark on the assessee’s study, new search methodology comparables proposed (28) and the copies of the reply received under section 133(6) from other companies. In reply to the show-cause notice, a detailed reply was filed by the assessee on 6/9/2010 raising various objections to the proposed action of the TPO (the assessee’s reply at page 80 to 646 of the paper book-1 filed by the assessee).
3.2.1 The TPO however rejected the assessee’s objections and selected 26 external companies as comparables. The arithmetical mean was determined at 25.14%. After factoring working capital adjustment of 02.38%, the adjusted arithmetical mean was determined at 22.76%. The TPO determined the transfer pricing adjustment at Rs. 1,79,47,930/-. While computing the arm’s length price, the TPO had aggregated the AE and non-AE transactions. The computation of arm’s length price in the TPO’s order is detailed below:-
“13.6 Computation of Arms Length Price:
The arithmetic mean of the Profit Level indicators is taken as the arms length margin. (Please see Annexure B for details of computation of PLI of the comparables). Based on this, the arms length price of the software development services rendered by the taxpayer to its AE(s) is computed as under:
