TPO may use date which may not have been available to the assessee at the time of preparation of statutory transfer pricing study/documentation

ITAT BANGALORE BENCH ‘B’

Yodlee Infotech (P.) Ltd.

versus

Income-tax Officer, Ward 12(2), Bangalore

IT Appeal No. 1397 (Bang.) of 2010
[ASSESSMENT YEAR 2006-07]

Date of pronouncement – 15.02.2013

ORDER

Jason P. Boaz, Accountant Member

This appeal by the assessee is directed against the order of under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (herein after referred to as ‘the Act’) passed by the Assessing Officer (viz., ITO, Ward 12(2), Bangalore) on 8.10.2010 in accordance with the directions of the Dispute Resolution Panel, (DRP), Bangalore under section 144C(5) r.w.s 144C (8) of the Act dt.22.9.2010. The Assessment Year involved is 2006-07.

2. The facts of the case, in brief, are as under :

2.1 The assessee, an Indian Company engaged in the business of providing software development support services to its holding company and associated enterprise (AE) Yodlee Inc., USA, filed its return of income for Assessment Year 2006-07 on 18.12.2006 declaring income of Rs. 1,00,072 after claiming deduction of Rs. 1,92,58,728 under section 10B of the Act. The return was processed under section 143(1) of the Act and the case was subsequently selected for scrutiny by issue of notice under section 143(2) of the Act. As the international transactions of the assessee reported in Form 3CEB exceeded Rs. 10 Crores, a reference under section 92CA(1) of the Act was made by the Assessing Officer to the Transfer Pricing Officer (TPO) on 30.12.2008 in respect of the following international transactions entered into by the assessee with its AEs :

1. Provision of Software Development Support Services :	Rs. 17,40,08,906
2. Procurement of assets on loan basis :	Rs. 28,42,363.

The TPO passed an order under section 92C r.w.s. 92CA(1) of the Act dt.26.10.2009 making an upward adjustment of Rs. 1,62,97,697 to the international transactions of the assessee in respect of provision of software development services. The arms length price (ALP) of the international transactions were determined at Rs.19,03,06,603 as against Rs.17,40,08,906 charged by the assessee.

2.2 After receipt of the order of the TPO under section92CA(1) r.w.s. 92C of the Act dt.26.10.2009, the Assessing Officer issued a draft assessment order under section 144C of the Act on 14.12.2009 determining the income of the assessee at Rs.1,67,37,940 which comprised of –

(i) Transfer Pricing adjustment	Rs.1,62,97,697
(ii) Recomputation of deduction under section 10B by
(a) Exclusion of telecommunication expenses incurred in foreign exchange from export turnover but not from total turnover.	Rs.14,34,270
(b) Exclusion of expenditure incurred in foreign currency by technical staff for rendering services outside India.	Rs. 16,39,254.

2.3 Aggrieved by the draft assessment order dt.14.12.2009, the assessee preferred to file objections before the DRP, Bangalore. The DRP disposed off the assessee’s objections vide order dt.22.9.2010 under section 144C(5) r.w.s. 144C(8) of the Act wherein it summarized its directions on page 29 as under :

“To sum up, both restriction proposed by the Assessing Officer of deduction claimed by the assessee under section 10A and the TP order of the TPO stand endorsed by this Panel. The assessment order maybe finalized accordingly. The only area where the proposed draft order is required modified is on account of taking the PLI of M/s. Megasoft Ltd at 51.73% as against 52.74% taken by the TPO and giving consequential working capital adjustment if required. The Assessing Officer can seek the assistance of the TPO for carrying this adjustment in the ALP while finalizing the order. Further, the Assessing Officer may examine the applicability of provisions of section271(1)(c) at the time of finalization of the assessment order.”

2.4 Pursuant to the order of the DRP, Bangalore under section 144C(5) r.w.s. 144C(8) of the Act dt.22.4.2010 and in accordance with the directions therein, the Assessing Officer passed the order of assessment under section 143(3) r.w.s. 144C(13) of the Act on 8.10.2010 determining the assessee’s income at Rs. 1,66,58,768.

3. Aggrieved by the order under section 143(3) r.w.s. 144C(13) of the Act, dt.8.10.2010 giving effect to the direction of the DRP, Bangalore under section 144C(5) r.w.s. 144(8) of the Act for Assessment Year 2006-07, the assessee is now in appeal before us. The grounds raised in this appeal are as under :

“1. Deduction under section 10B of the Act.

(a) On the facts and in the circumstances of the case, the learned A.O. has erred in proposing and the Hon’ble DRP has further erred in confirming the reduction of telecommunication expenses amounting to Rs. 14,34,270 from export turnover while computing the deduction under section 10B of the Act.

(b) On the facts and in the circumstances of the case, the learned A.O. has erred in proposing and the Hon’ble DRP has further erred in confirming the reduction of foreign currency expenditure Rs. 16,39,254 from export turnover while computing the deduction under section 10B of the Act irrespective of the fact that the same are incurred for software development outside India and not for rendering of technical services outside India.

(c) Without prejudice to the above, on the facts and in the circumstances of the case, the learned A.O. has erred in proposing and the Hon’ble DRP has further erred in confirming the reduction of telecommunication expenses amounting to Rs. 14,34,270 and foreign currency expenditure of Rs. 16,39,254 only from export turnover without correspondingly reducing the aforesaid expenses from the total turnover.

2. Assessment and reference to Transfer Pricing Officer are bad in law.

(a) The final order issued by the ITO, Ward 12(2) (‘ITO’ or ‘AO’), is bad on facts and in law, and is in violation of the principles of natural justice.

Without prejudice to the above, the order issued by the Assessing Officer is bad in law insofar as the fact that the Assessing Officer did not issue to Yodlee Infotech Private Limited (‘the appellant’ or ‘the company’), a show cause notice, as per proviso to section 92C(3) of the Income Tax Act, 1961 (‘the Act’)

(b) The Assessing Officer has erred in law in making a reference to the Transfer Pricing Officer (TPO) inter alia, since he has not recorded an opinion that any of the conditions in section 92C(3) of the Act, were satisfied in the instant case. The Assessing Officer also erred in not following the provision contained insection92CA(1) of the Act.

3. The fresh comparable search undertaken by the TPO is bad in law.

(a) The TPO erred on facts and in law in conducting a fresh benchmarking analysis using non-contemporaneous data and substituting the appellant’s analysis with fresh benchmarking analysis on his own conjectures and surmises. Thus the appellant prays that the fresh benchmarking analysis conducted by the learned TPO is liable to be quashed.

(b) On the facts and in the circumstances of the case, the learned TPO erred in not demonstrating that the motive of the appellant was to shift profits outside of India by manipulating the prices charged in its international transactions which is a is prejudicial to the interests of Revenue-requisite condition to make any adjustment under the provision of Chapter X of the Act.

4. Comparability analysis adopted by the TPO for determination of arm’s length price.

(a) The AO/TPO grossly erred on facts in benchmarking the transactions of the captive software services of the appellant with companies operating as full fledged entrepreneurs without considering the differences in the functions performed, assets employed and risk undertaken by the appellant vis-à-vis comparable companies.

(b) The AO/TPO erred on facts in rejecting the comparable companies arrived at in the Transfer Pricing Study.

(c) The Assessing Officer/TPO also erred on facts in arbitrarily filters to arrive at a fresh set of companies as comparables to the appellant, without establishing functional comparability.

(d) The AO/TPO also erred on facts in arbitrarily accepting companies without considering the turnover and size of the appellant and comparables.

(e) The AO/TPO grossly erred in law in deviating from the uncontrolled party transaction definition as per the Income Tax Rules and arbitrarily applying a 25% related party criteria in accepting/rejecting comparables.

(f) The AO/TPO also erred on facts and in law in arbitrarily rejecting companies with different year ending (i.e. Other than 31 March 2006) and inconsistently applying such filter.

(g) The AO/TPO grossly erred on facts in arbitrarily rejecting companies having software development revenue less than 75% of total operating revenue and inconsistently applying such filter, without considering the specific segmental results.

(h) The AO/TPO also erred on facts in arbitrarily rejecting companies based on their financial results without considering the comparability.

(i) The AO/TPO erred on facts and in law in considering a set of ‘secret data’, i.e. Data which was not available in public domain, in arriving at a fresh set of companies using his power under section 133(6), which is grossly unjustified.

(j) The AO/TPO also erred on facts and in law in excluding the foreign exchange gain or loss while calculating the net margins of the comparable companies.

(k) The AO/TPO also erred on facts incorrectly computing the margins of certain comparable companies.

5. Erroneous data used by the AO/TPO

(a) The Assessing Officer/TPO has erred in law in using data, which was not contemporaneous and which was not available in the public domain at the time of conducting the transfer pricing study by the appellant.

(b) The Assessing Officer/TPO erred in law in not applying the multiple year data while computing the margin of alleged comparable companies.

6. Non-allowance of appropriate adjustments to the comparable companies, by the Assessing Officer/TPO.

The Assessing Officer/TPO erred in law and on facts in not allowing appropriate adjustments under Rule 10B to account for, inter alia, differences in (a) accounting practices, (b) marketing expenditure, (c) research and development expenditure, and (d) risk profile between the appellant and the comparable companies.

7. Variation of 5% from the arithmetic mean

The Assessing Officer/TPO erred in law in not granting the benefits of proviso to section 92C (2) of the Act available to the appellant.

8. Interest under section 234B of the Act

The learned Assessing Officer has erred in levying interest under section 234B of the Act amounting to Rs. 30,65,040.

9. Penalty under section 271(1)(c)

The learned Assessing Officer has erred in initiating penalty proceedings under section 271(1)( c ) of the Act.

10. Directions issued by the Hon’ble DRP

(a) The Hon’ble DRP has erred in law and facts in not taking cognizance of the objections filed by the appellant in relation to the draft assessment order issued by the Assessing Officer/TP order.

(b) The Hon’ble DRP erred in facts and law in confirming the draft order of the Assessing Officer/TPO.”

4. Deduction under section 10B of the Act.

4.1 In the grounds of appeal raised at S.No.1, the assessee at Grounds 1(a) and (b) contends that the authorities below viz. the Assessing Officer and the DRP, Bangalore erred in holding that telecommunication expenses (i.e. leased line charges) amounting to Rs. 14,34,270 and expenditure incurred in foreign currency amounting to Rs. 16,39,254 for software development outside India are to be reduced from export turnover while computing the deduction under section 10B of the Act. Alternatively at Ground No.1(c), the assessee contends that if the said telecommunication expenses and the expenditure incurred in foreign exchange are to be reduced from export turnover then they should correspondingly be reduced from total turnover also on grounds of parity. In support of the assessee’s contention, the learned counsel for the assessee placed reliance on the decision of the Hon’ble High Court of Karntaka in the case of CIT v. Tata Elxsi Ltd reported in (2011) 247 CTR 334 (Kar) which the learned counsel for the assessee submitted squarely covers this issue in favour of the assessee.

4.2 Per contra, the learned Departmental Representative supported the orders of the authorities below.

4.3 We have heard both parties and carefully perused and considered the material on record. We find that the issue in dispute viz., exclusion of telecommunication expenses and expenditure incurred in foreign exchange from ‘export turnover’ is squarely covered in favour of the assessee by the decision of the jurisdictional High Court of Karnataka in the case of Tata Elxsi Ltd reported in 247 CTR 334 (Kar). With respect to the alternate ground raised by it at S. No. 1(c). The Hon’ble High Court in the case of Tata Elxsi Ltd (supra) held as under :

“….if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover. The components of the export turnover in the numerator and the denominator cannot be different. Therefore, though there is no definition of the term ‘total turnover’ in section 10-A, there is nothing in the said section to mandate that, what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. Though when a particular word is not defined by the legislature and an ordinary meaning is to be attributed to the same, the said ordinary meaning to be attributed to such word is to be in conformity with the context in which it is used. When the statute prescribes a formula and in the said formula, ‘export turnover’ is defined, and when the ‘total turnover’ includes export turnover, the very same meaning given to the export turnover by the legislature is to be adopted while understanding the meaning of the total turnover, when the total turnover includes export turnover. If what is excluded in computing the export turnover is included while arriving at the total turnover, when the export turnover is a component of total turnover, such an interpretation would run counter to the legislative intent and impermissible. If that were the intention of the legislature, they would have expressly stated so. If they have not chosen to expressly define what the total turnover means, then, when the total turnover includes export turnover, the meaning assigned by the legislature to the export turnover is to be respected and given effect to, while interpreting the total turnover which is inclusive of the export turnover. Therefore, the formula for computation of the deduction under section 10-A, would be as under :

Profits of the business of the undertaking x Export turnover / (Export turn over + domestic turnover) Total Turnover.”

Respectfully following the decision of the Hon’ble High Court of Karnataka in the case of Tata Elxsi Ltd. (supra), we direct the Assessing Officer not to exclude telecommunication expenses amounting to Rs. 14,34,270 and expenses incurred in foreign exchange amounting to Rs. 16,39,254 from ‘export turnover’ while computing the deduction. 10B of the Act. In this view of the matter the alternate view of the matter the alternate ground raised by the assessee at 1 (c) is allowed. The assessee’s grievance being addressed the grounds raised by the assessee at 1(a) and 1(b) are not being addressed. Ground No.1 raised by the assessee is therefore partly allowed.

5. Before proceeding to deal with the above grounds of appeal, the approach of the TPO vis-à-vis the assessee in its Transfer Pricing Study submitted before the TPO is briefly summarized as under :

5.1 The assessee’s approach

The assessee was set up in India on 25.7.2010 as a wholly owned subsidiary of Yodlee Inc, USA. In the relevant period, the assessee as a part of its agreement, provided software development support services to its parent Yodlee Inc., USA (its AE) to enable consumers to access their personal online accounts and thereby support its parent AE in its –

(i) Product development division for developing next generation aggregation platforms; development of Software Development Kits (SDK), development of Data Intelligence tools for generating various reports, and

(ii) Professional Services division.

The assessee in its T.P. Study applied the Transactional Net Margin Method (TNMM) as the most appropriate method for its Transfer Pricing Study. The assessee adopted ‘Operating Profit (PBIT) to Operating Cost’ as the Profit Level Indicator (PIL) and has used two widely available public data bases, i.e. Prowess and Capitaline. The assessee used earlier periods/years data i.e. pertaining to the earlier financial years i.e. F.Y. 2003-04 and 2004-05. The assessee adopted the following filters in its search for comparables for its T.P. Study.

(i) Companies for which sufficient financial data is not available to undertake the analysis were excluded.

(ii) Companies that have ceased business operations or are currently inactive were excluded.

(iii) Companies undertaking different functions compared to the tax payer were excluded.

(iv) Companies that do not have significant (less than 25%) foreign exchange earnings were excluded.

(v) Companies which have been making persistent operating losses were excluded.

(vi) Companies that have substantial transactions with related parties (> 25%) were excluded.

(vii) Companies that had exceptional year(s) of operations were excluded.

(viii) Companies engaged in software development were treated as comparables in respect of their verticals of software.

(ix) Companies that are duplicated in the data base with different names or engaged to form another company were excluded.

5.2 The above search yielded a set of 36 comparables which are listed as under :

Margin Analysis.

Unadjusted margins of comparable companies.

Sl. No.	Name of the Company	Weighted Average Margins (%)
1.	3 I Infotech Limited	6.42
2.	Akshay Software Technologies Limited	8.24
3.	Aztech Software & Technology Services Limited	13.74
4.	Bangalore Softsell Limited	4.37
5.	Bristlecone India Limited	– 2.92
6.	Compucom Software Limited	15.97
7.	Datamatics Limited	– 5.87
8.	Encore Software Limited	– 33.94
9.	Flextronics Software Systems Limited	32.69
10.	Four Soft Limited	22.27
11.	Future Software Limited	2.88
12.	Gebbs Infotech Limited	23.69
13.	Goldstone Technologies Limited	7.48
14.	Infosys Technologies Limited	41.17
15.	Intertec Communications Limited	46.07
16.	KPIT Cummins Infosystems Limited	13.60
17.	Lanco Global Systems Limited	12.26
18.	Larsen &Tourbo Infotech Limited	8.09
19.	Maars Software International Limtied	4.27
20.	Melstar Information Technologies Limited	– 0.15
21.	Mphasis BFL Limited	52.87
22.	Orient InformationTechnology Limited	14.76
23.	Quintegra Solutions Limited	8.59
24.	R S Software (India) Limited	7.62
25.	S I P Technologies and Exports Limited	58.70
26.	Sasken Communciation Technologies Limited	14.35
27.	Sasken Network Systems Limited	16.19
28.	Satyam Computers Services Limited	29.13
29.	Software Technology Group International Limited	15.39
30.	Sonata Software Limited	15.31
31.	Subex Systems Limited	6.39
32.	Transworld Infotech Limited	26.34
33.	Tyche Industries Limited	10.62
34.	VJIL Consulting Limited	6.47
35.	V M F Softech Limited	18.70
36.	Visualsoft Technologies Limited	29.02
	Arithmetic mean	12.04

The operating margin of the assessee as per its T.P. Study is computed at 9.90% whereas the arithmetical mean for the set of 36 comparable companies considered by the assessee works out to 12.04% on cost. As the margin of the assessee at 9.90% was within the + / – 5% margin of the allowed variation of the arithmetical mean, margin of the comparables, the assessee held that its international transactions were at arms length.

5.3 The TPO’s Approach

The TPO analysed the T.P. Study of the assessee and applied the following additional filters ;-

(i) Companies whose data for F.Y. 2005-06 I was not available were excluded.

(ii) Companies whose software development services revenue is less than 25% were excluded.

(iii) Companies whose software development services revenue (turnover) is less than Rs. 1 Crore were excluded.

(iv) Companies who have less than 25% of the revenues as export sales were excluded.

(v) Companies having more than 25% related party transactions (RPT) of the operating revenue were excluded.

(vi) Companies whose employee cost to revenue is less than 25% of revenue were excluded.

(vii) Companies having different financial year ending (i.e. not 31.3.2005) or date of the company does not fall within the 12 month period 1.4.2005 to 31.3.2006 were rejected.

(viii) Companies who have diminishing revenues/persistent losses for the last 3 years up to F.Y. 2005-06 were excluded.

(ix) Companies whose on-site revenues is more than 75% of the export revenues were excluded.

(x) Companies that are functionally different from the assessee were excluded.

On this basis, the TPO issued a show cause notice on 20.4.2009, proposing to reject 30 out of 36 comparables selected by the assessee and to select 14 new comparables. A second show cause notice was issued on 20.7.2009 proposing to make a T.P. adjustment of Rs. 1,87,67,772.

5.4 After considering the submissions of the assessee, the TPO finally selected, the following 20 comparables were identified by the TPO as the final list of comparable companies :

Sl. No.	Company Name	Sales (Rs. Cr.)	OP to Total Cost (%)	Provisions written back	Adjusted OP/TC (%)
1.	Aztec Software Limited	128.61	18.09	0	18.09
2.	Geometric Software Limtied (Seg)	98.59	6.70	0	6.70
3.	Infosys Limtied	9028.00	40.38	0	40.38
4.	KALS Info Systems Limited	1.97	39.75	0	39.75
5.	Mindtree Consulting Limited	448.79	14.67	0	14.67
6.	Persistent Systems Limited	209.18	24.67	0.05	24.71
7.	R Systems International Ltd (Seg)	79.42	22.20	0	22.20
8.	Sasken Communication Ltd (Seg)	240.03	13.90	0	13.90
9.	Tata Elxsi Ltd (Seg)	188.81	27.65	0	27.65
10.	Lucid Software Limited	1.02	8.92	0	8.92
11.	Mediasoft Solutions P. Ltd.	1.76	6.29	0	6.29
12.	R S Software (India) Ltd.	91.57	15.69	0	15.69
13.	SIP Technologies & Exports Ltd.	6.53	3.06	0	3.06
14.	Bodhtree Consulting Ltd.	5.32	15.99	0	15.99
15.	Accel Transmatics Ltd (Seg)	8.02	44.07	0	44.07
16.	Synfosys Business Solutions Ltd	4.49	10.61	0	10.61
17.	Flextronics Software Systems Ltd	595.12	27.24	2.17	27.83
18.	Lanco Global Solutions Ltd.	35.63	5.27	0	5.27
19.	Megasoft Ltd	56.15	52.74	0	52.74
20.	iGate Global Solutions Ltd (Seg)	527.91	15.61	0	15.61
	Average		20.68		20.71

5.5 As per the calculation above, the TPO arrived at the arithmetical mean margin of 20.68% on cost. After considering the objections of the assessee, the TPO used the above 20 companies as the final comparables with the arithmetical mean PLI of 20.19%, after allowing 0.49% deduction towards working capital adjustment. Based on the above arithmetical mean margin, the arms length of the services rendered for software development support by the assessee was arrived at Rs. 19,03,06,603 as against the price shown at Rs. 17,40,08,966 thereby resulting in a transfer pricing adjustment of Rs. 1,62,97,697 by the TPO vide his order under section 92A(1) r.w.s. 92C of the Act dt.26.10.2009.

6. We have heard both parties, carefully perused and considered the order of the TPO under section 92CA of the Act, the orders of assessment, the directions of the DRP, the submissions of the assessee / learned counsel for the assessee, judicial decisions relied on by the assessee. We now proceed to examine the various issues raised by the assessee.

7. Adjustments to Arms Length Margin

7.1 In the ground raised at 2(a), it is contended that the final order of the Assessing Officer is bad on facts and in law and is in violation of the principles of natural justice. Alternately, it is also contended that the Assessing Officer’s order is bad in law since he did not issue any show cause notice under section 92C(3) of the Act.

7.2 We have heard both the learned counsel for the assessee and the learned Departmental Representative and carefully perused the record. After due consideration, we find no merit in the claim of the assessee that adequate opportunity of being heard was not afforded to it thereby violating the principles of natural justice. Except for making this claim, no evidence has been brought on record before us by the assessee to establish this claim. We find from the record that show cause notices were issued to the assessee by the TPO at least on two occasions; viz., on 20.4.2009 and 20.7.2009 in the course of T.P. Audit. As far as issue of notice to the assessee before passing of the final order by the Assessing Officer under section 143(3) r.w.s. 144(13) of the Act. Section 144C(13) mandates that upon receipt of the DRP’s directions under section 144C(5) of the Act, the Assessing Officer’s mandate is to complete the assessment in conformity with the directions of the DRP without providing any further opportunity of being heard to the assessee. In this view of the matter, the grounds raised by the assessee being vexatious and devoid of any merit whatsoever, are rejected as infructuous.

REFERENCE TO TPO

7.3 In the ground raised at S.No.2(b), the assessee contends that the Assessing Officer erred in making a reference to the TPO since he had not recorded an opinion that any of the conditions in section 92C(3) of the Act were satisfied and therefore the order passed is bad in law. The learned counsel for the assessee was heard in support of the grounds raised.

7.4 The learned Departmental Representative submitted that as per CBDT’s Circular No.3 of 2003 makes it mandatory to refer all cases where the aggregate value of international transactions exceed Rs. 5 Crores. As the international transactions in the instant case were in excess of Rs. 5 Crores, the learned Departmental Representative submitted that the Assessing Officer had correctly made a reference to the TPO to determine the ALP. Similarly, the Commissioner of Income Tax (CIT) in order to approve the making of a reference to the TPO had to only satisfy himself on three things based on Form 3CEB submitted by the assessee, namely, (i) Whether there are Associated Enterprises (AEs), (ii) that there are international transactions and (iii) whether the aggregate value of the international transactions exceeds Rs. 5 Crores during the relevant period.

7.5 In this regard, we would like to point out that the decision of a co-ordinate bench of this Tribunal in the case of Tally solutions Pvt Ltd. v. DCIT (ITA No.1235/Bang/2010 dt.26.9.2011), it was observed that :

“There is nothing in section 92CA to suggest that the Assessing Officer should hear the assessee or record reasons before making a reference to the TPO nor is there anything to suggest that the Assessing Officer should ask the assessee whether he should himself proceed to determine the arm’s length price or should involve the TPO for this purpose. The reference is a step in the collection of material which might be useful for making assessments. No violation of any civil rights of the assessee is involved here. Mere reference does not tantamount to any adverse assessment or use of adverse material. Moreover, by virtue of Board Instruction No.3 of 2003 dt.20.5.2003 the CBDT decided that whenever the aggregate value of international transactions exceeds Rs. 5 Crores, the case should be picked up for scrutiny and reference under section 92CA be made to the TPO.

Thus, it is mandatory for the Assessing Officer to refer all the cases whenever the aggregate value of international transactions is more than Rs. 5 Crores. These instructions are binding on all Assessing Officers. In these cases, there is no need for the Assessing Officer to make a prima facie opinion, except that he/she needs to examine the 3CEB Report to see the aggregate value of international transactions. In the instant case, as the aggregate value of international transactions based on 3CEB Report filed by the taxpayer before the Assessing Officer, exceeded Rs. 5 Crores, he referred the case to the TPO. Therefore, we see no infirmity in referring the matter to the TPO without forming “a considered opinion”. In the light of the above reasoning, the first legal point raised by the assessee, namely, the reference to the TPO by the Assessing Officer without forming “a considered opinion” does not stand the test of law and cannot be sustained, therefore this plea of the assessee is rejected. It is ordered accordingly.”

Respectfully following the decision of the co-ordinate bench of this Tribunal in the case of Tally Solutions Pvt Ltd (supra), we hold that there is nothing in section 92CA to suggest that the Assessing Officer should hear the assessee or record reasons before making a reference to the TPO and therefore in the instant case there is no infirmity in the action of the Assessing Officer in referring this case to the TPO. Accordingly this ground of the assessee is dismissed.

THE FRESH COMPARABLES SEARCH, undertaken by TPO is bad in law.

8.1 In this ground of appeal at S.Nos.3(a) and (b), the assessee has objected to the TPO conducting a fresh bench marking analysis and substituting the assessee’s analysis with his own analysis. The assessee also contends that the TPO failed to demonstrate that the motive of the assessee was to shift profits outside of India which is a pre-requisite condition for making any T.P. adjustment. The learned counsel for the assessee argued that the TPO ought not to have made any T.P. adjustment without establishing that the assessee shifted profits outside India.

8.2.1 We have heard both parties on this issue. The ground at S. No. 3(a) challenging the fresh benchmarking analysis by the TPO was not agitated before us and nothing more was brought on record by the assessee in addition to the ground raised. In this view of the matter, no adjudication is called for therein and this ground is dismissed as infructuous.

8.2.2 As regards the ground raised at S.No.3 (b), we have perused the decision of the ITAT, Pune Bench in the case of ACIT v. MSS India Pvt Ltd (2009-TIOL-416-ITAT-PUNE) wherein the Tribunal discussed both the decisions of the co-ordinate benches of the Bangalore Bench in the cases of – (i) Aztech Software Technology Services Ltd reported in 107 ITD 141 (Bang) (SB) and (ii) Phillips Software Centre Pvt Ltd reported in (2008-TIOL-471-ITAT-BANG). The Tribunal was of the view that the decision of the Special Bench of the Tribunal in the case of Aztech Software Technology Services Ltd (supra) would prevail and held that it is not necessary for the TPO to demonstrate tax avoidance and diversion of income for invoking the provisions of section 92C and 92CA of the Act. In the case of Coca Cola India Inc v. ACIT reported in 309 ITR 194 (P & H), the Hon’ble Punjab & Haryana High Court dealt with the matter of anti-avoidance and T.P. in detail and held that it is not necessary for the Assessing Officer/TPO to demonstrate that profits are shifted out of India in order to determine the arm’s length nature of any international transaction.

In para 52 of the judgment their Lordships have held that –

“…… The income arising from international transactions is to be computed having regard to arm’s length price as per the guidelines laid down in section 92C of the Act by adopting one of the laid down methods, at the discretion of the competent authority….”

In para 53 of the said judgment their Lordships have held that :

“53. We do not find any ambiguity or absurd consequence of application of Chapter X to persons who are subject to the jurisdiction of taxing authorities in India nor do we find any statutory requirement of establishing that there is a transfer of profits outside India or that there is evasion of tax. Only condition precedent for invoking provisions of Chapter X is that there should be income arising from international transaction and such income has to be computed having regard to arm’s length price.”

In para 54 of the said judgment, their Lordships have held that –

“54. We, thus, do not find any merit whatsoever in the contention that provisions of Chapter X cannot be made applicable to parties which are subject to the jurisdiction of the tax authorities in India, without there being any material to show transfer of profits outside India or evasion of tax between the two parties……”

Respectfully following the decisions of the Hon’ble Punjab & Haryana High Court in the case of Coca Cola India Inc (supra) and of the ITAT, Pune Bench in the case of MSS India Pvt Ltd (supra) and of the Bangalore ITAT, Special Bench in the case of Aztec Software Technology Services Ltd (supra), we do not find any merit in the ground raised that no T.P. adjustment could be made in the assessee’s case without there being any material or finding by the TPO to show that there was transfer of profits outside India or evasion of tax in India and therefore dismiss this ground raised by the assessee.

Comparability Analysis adopted by the TPO for determining ALP.

9.1 In the grounds raised at S.Nos.4(a) to (k), the assessee has inter alia challenged the rejection of its T.P. Study and the comparables selected by it by the TPO by applying various arbitrary filters to arrive at a fresh set of comparables.

9.2 This ground of appeal has been perused and we find it to be general in nature as far as 4(a), (b), (h) and (k) are concerned. The other sub-grounds of ground No.4 are addressed at various parts of this order when dealing with the acceptability or otherwise of comparable companies at paras 9.3 to 12.3 of this order. The TPO’s examination of the TP documentation has been done in detail giving elaborate reasons for rejection of the assessee’s T.P. Study, rejection of filters applied by the assessee, data utilized by assessee, reasons and requirement for adoption of additional filters, etc from page 11 onwards of his order dt.26.10.2009 warranting a fresh search for comparables and culminating in the T.P. adjustment for ALP of international transactions for the relevant period. The assessee / learned counsel for the assessee have failed to put forward any specific arguments to establish that the TPO’s action were baseless as alleged. In this view of the matter, we are of the opinion that the TPO was right in rejecting the T.P. Study submitted by the assessee.

Comparables in Distpute

9.3 The assessee as per its T.P. Study / Documentation selected 36 comparables. Out of these, the TPO in this T.P. Audit rejected 29 of these comparables and accepted only the remaining six of them as acceptable comparables. The TPO as per his T.P. Study/Audit selected 14 new companies. Therefore, the TPO finally selected a list of 20 comparables in the T.P. order. Before us, the assessee has raised objections to the following six comparables selected by the T.P.O.

(i) Infosys Technology Limited. (‘Infosys’)

(ii) Accel Transmatic Limited (‘Accel’)

(iii) Tata Elxsi Limited (‘Tata Elxsi’)

(iv) KALS Info Systems Limited

(v) Megasoft Limited

(vi) Flextronics Software Systems Limited (‘Flextronics’)

The assessee’s objections with respect to the application of various filters by the TPO such as arbitrary filters at 4(c) of the grounds as turnover filters at 4(d) of the grounds; 25% RPT at 4(c) of the grounds, software development revenue at 75% of total revenue at 4(g) of the grounds; use of 133(6) information at 4(i) of the grounds, will be addressed in the course of dealing with the objections raised by the assessee with respect to the above six comparable companies which will now be discussed in seriatum.

9.4.1 Infosys Technologies Limited

The learned counsel for the assessee submitted that this company cannot be considered as a comparable company to the assessee for the following reasons :

(a) Company not comparable based on Turnover Filter. It is the submission of the assessee that considering a number of economic factors and market dynamics, this comparable company having a turnover of Rs. 9,028 Crores in F.Y. 2005-06 which is over 500 times that of the assessee’s turnover of Rs. 17.40 Crores cannot be considered as a comparable. In support of this proposition, the assessee placed reliance on the following decisions :

(i) Genysys Integrating Systems (India) P. Ltd. [2012] 15 ITR AT 475.

(ii) Kodiak Networks (India) Pvt. Ltd. v. ACIT [2012] 15 ITR AT 610

(iii) Telecordia Technologies India Pvt. Ltd. v. ACIT (2012) 137 ITD 1.

(b) Significant brand related profits :

It was submitted that this comparable company has substantial brand profits, quantified at Rs. 1,866 Crores in the relevant period.

Per contra, the learned Departmental Representative argued that brand or size per se does not affect the margins and though brand names may set higher turnovers, it does not necessarily generate higher margins. The learned Departmental Representative also stated that the assessee had failed to demonstrate that Infosys had charged a premium over the market and earned higher profits due to its brand name.

(c) Owns significant intangibles

It was also submitted that being a market leader, Infosys enjoys significant benefits on account of marketing intangibles and intellectual property rights owned by it, filing over 20 patents and generating over 82 invention disclosures during F.Y. 2005-06.

The learned counsel for the assessee argued that size is an important facet of an enterprise – level difference and submitted that size as one of the selection criteria for comparables has been approved by various Benches of the ITAT, and also recommended by the OECD in its T.P. Guidelines. Hence, the learned counsel for the assessee contended that an appropriate turnover range should be applied in selecting a comparable as has been held by the co-ordinate bench of this Tribunal in the case of M/s. Genysys Integrating Systems India (P) Ltd v. DCIT in ITA No.1231/Bang/2010 dt.5.8.2010 wherein the Bench was of the view that size matters in business and pointed out that at para 9 on page 32 thereof held that :

“9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which hire (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables in such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able 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 & 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 Rs. 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 1.00 to 200.00 Cores only should be taken into consideration for the purpose of making TP Study.”

In these circumstances, the learned counsel for the assessee submitted that Infosys Technologies Ltd having a turnover of Rs. 9,028 Crores be excluded as a comparable as it falls outside the range of Rs. 1 Crore to 200 Crores laid down in the cited case.

9.4.2 Per contra, the learned Departmental Representative supported the orders of the authorities below.

9.4.3 We have heard both parties, perused and carefully considered the submissions made, the material on record and the judicial decisions cited. The co-ordinate Bench of this Tribunal in the case of Genysys Integrating Systems (India) P. Ltd (supra) held that only companies within the range of Rs.1 Crore to Rs.200 Crores should be taken into account as comparables when the turnover of the assessee concerned falls within the range of Rs. 1 Crore to Rs. 200 Crores and we find that this filter is squarely applicable to the case on hand since the assessee’s turnover is Rs. 17.40 Crores only. Therefore, respectfully following the decision of the co-ordinate Bench of this Tribunal in the case of Genysys Integrating Systems (India) P. Ltd (supra), we direct the Assessing Officer/TPO that in the instant case only those companies having turnover of between Rs.1 Crore to Rs.200 Crores be considered for being taken as comparable and consequently to exclude Infosys Technologies Ltd form the set of comparables in the instant case.

9.5.1 Accel Transmatics Ltd (‘Accel’)

The assessee objected to this company being taken as a comparable in the instant case on the following grounds :

(a) Erroneous margin computation by the TPO.

It is the contention of the assessee that the TPO computed the margins of this comparable on the basis of the reply furnished by the said company under section 133 (6) of the Act and did not consider the figures appearing in the Annual Report of the company.

(b) Abnormal profits

The learned counsel for the assessee submitted that the profit of this comparable at 40.75% for the relevant period is almost double the arithematic mean margin of the comparables selected by the TPO and being on the higher side ought to be rejected as a comparable.

(c) Fails filter of software development filter > 75%

It is submitted by the assessee that in spite of Accel having only 27.59% revenue from software services, it has been selected as a comparable even though it did not pass the filter applied by the TPO himself and has been cherry picked as a comparable.

9.5.2 This company was selected by the TPO and proposed for inclusion as a comparable by show cause notice dt.6.8.2009 on the basis of search through prowess and ‘Capital Line Plus’ data bases under the key word “computer software”. Details obtained under section 133(6) of the Act were also incorporated in the show cause notice. After considering the assessee’s objections, for the reasons discussed in his order, the TPO included this company in the final set of comparables, holding that ‘Accel’ is considered as a comparable as its software division is into software development and it qualifies all the filters applied by the TPO. Before the DRP, vide letter dt.15.12.2009, the assessee objected to the inclusion of this company as a comparable, essentially on the grounds of abnormal profits and software development filter which was rejected by the DRP.

9.5.3 Before us, the learned counsel for the assessee brought to our attention that in the case of Capgemini India (P.) Ltd., a software provider, it was held by the Mumbai Tribunal in the decision reported in 12 Taxman.com 51 that ‘Accel’ is not functionally comparable because it was engaged in the services in the form of ACCEL-IT and ACCEL animation services for 2D and 3D animation. It was urged by the learned counsel for the assessee that since ‘Accel’ was held as not comparable to a software service provider like Capgemini, it cannot be held as a comparable to the assessee also, who is categorized as a software service provider.

9.5.4 We have heard both parties and carefully considered the material on record, the decision of the Mumbai Tribunal in the case of Capgemini India (P) Ltd. (supra). At the outset, it may be mentioned that the Mumbai Tribunal has not examined the comparability of ‘Accel’ with Capgemini India (P.) Ltd. (supra) nor has it given any specific finding in this regard. It is the DRP that had given a finding that ‘Accel’ has to be excluded from the set of comparables for Capgemini India (P) Ltd which has been noted by the Tribunal. The Tribunal has not given any specific finding in regard to this comparable, leave alone any general proposition that ‘Accel’ cannot be taken as a comparable for any software service provider. The only conclusion that can be drawn from the decision in the case of Capgemini India (P) Ltd is that ‘Accel’ is not a comparable for Capgemini. No general proposition can be made out that ‘Accel’ cannot be a comparable for any software service provider. After all, the data base relied upon by both the assessee and the TPO has categorized this company as a ‘software service provider’ as this company was thrown up as a comparable in the search process of the TPO with the key words being ‘computer software’. The contention that ‘Accel’ cannot be taken as a comparable for any software service provider will amount to negating the classification done by the data base, for which no evidence has been brought on record. Hence, we are of the view that, it is untenable to argue that ‘Accel’ is not a comparable for the assessee, merely because it has been held to be not comparable to Capgemini India (P) Ltd.

9.5.5 To determine the comparability of ‘Accel’ with the assessee, it would be both useful and necessary to examine the functional profile of the assessee. As per the T.P. Study of the assessee, its principal viz., Yodlee, USA is organized into two divisions.

(i) Product Development Division and

(ii) Professional Services Division.

Yodlee Infotech (i.e. the assessee) operates as a dedicated development centre for Yodlee, US, providing it software development support services that support and supplement Yodlee, US product offerings in the account aggregation industry. As per the Master Services Agreement (MSA) signed between the assessee and Yodlee, US.

(i) Yodlee, USA has engaged the assessee for the provision of software development, implementation and maintenance of computer software programme’s .

(ii) Yodlee, USA would be the exclusive owner of all the Intellectual Property Rights (IPRs)of the software products (including any product developed in connection with the performance of software services under the MSA).

Therefore, from the assessee’s T.P. Study and the MSA, it is clear that the assessee group deals with both product development and professional services and the assessee renders services to both the divisions, including product development. The MSA between Yodlee, USA and the assessee envisages product development by the assessee and this aspect does not appear to have been examined by the TPO.

9.5.6 As has been observed in the Tribunal’s order in the case of Capgemini (India) P. Ltd (supra), the services rendered by “Accel’ are in the form of I.T. and animation services. Similarly, from the business profile of the assessee, it is seen that the services rendered by the assessee include IT services and as such, there appears to be similarities in the functional profiles of “Accel’ and the assessee. This issue too does not appear to have been examined by the TPO.

9.5.7 As regards the issue of ‘abnormal profits’ of ‘Accel’ raised by the assessee in written submissions, the co-ordinate bench of this Tribunal in the case of Triology E-Business Software India Pvt Ltd in ITA No.1054/Bang/2011, a decision heavily relied on by the learned counsel for the assessee, has ruled that there is no bar to considering companies either with abnormal profits or abnormal losses as comparables as long as they are functionally comparable. At para 35 of the said order the Tribunal held that “….. a general rule that companies with abnormal profits should be excluded may be in tune with the principles of enunciated in OECD Guidelines but cannot be said to be in tune with Indian T.P. Regulations. However, if there are specific reasons for abnormal profits or losses or other general reasons as to why they should not be regarded as comparables, then they can be excluded for comparability. It is for the assessee to demonstrate existence of abnormal factors.” A similar view has been upheld by another co-ordinate bench of this Tribunal in the case of 24/7 Customer Care Pvt. Ltd. in ITA No.227/Bang/2012 at para 17.8 thereof. In the instant case, the assessee has not been able to establish or demonstrate with any evidence any reason to support the proposition that the profit of the comparable ‘Accel’ was abnormally high. It must also not be overlooked that high profits also reflect better business sense and practices. In view of this, it is not possible to exclude ‘Accel’ as a comparable on account of abnormal profits.

9.5.8 In respect of the ‘issue of software development filter’, the TPO held that the assessee satisfies this filter by making his computation based on details furnished by ‘Accel’ in response to notice under section 133(6) of the Act, The contention of the assessee is that as per the computation based on the figures in the Annual Report , the assessee does not satisfy the test and the TPO has not given any finding on the correctness or otherwise of the computation adopted by the assessee.

9.5.9 In the facts and circumstances of the case as discussed above, we are of the view that in the fitness of things it would be fair to remand the matter of computation of the margins of ‘Accel’ to the file of the Assessing Officer, who will in turn refer the matter to the TPO for fresh consideration to determine whether ‘Accel’ satisfies the software development filter adopted by the TPO, based on the discussion in the aforesaid paragraphs. Specifically, the question of comparability of ‘Accel’ with the assessee made to be examined afresh, taking into consideration the following aspects :

(i) Whether this company is “functionally comparable”, taking into account the functional profile as decided in the T.P. Study submitted by the assessee ?

(ii) Whether the “revenue filter” adopted by the TPO is satisfied in this case, after reconciling the figures adopted by the TPO and the assessee.

The Assessing Officer/TPO is directed to afford the assessee adequate opportunity of being heard to substantiate its case, with the right to file fresh evidence in the matter, if necessary, before deciding this issue.

9.6.1 Tata Elxsi Ltd. (‘Tata Elxsi’)

The assessee has objected to this company being taken as a comparable for T.P. Audit on the ground that this company is functionally not comparable and also that the computation of the margin by the TPO is erroneous. In this regard to support the contention that the activities of Tata Elxsi cannot be compared to the software development services of the assessee, the assessee relied on the decision of the Mumbai Tribunal in the case of Telecordia Technologies India P. Ltd. v. ACIT [2012] 137 ITD 1 wherein at para 7.7 thereof the Tribunal has observed about Tata Elxsi that :-

“…. it is seen that this company is engaged in the development of niche product and development services, which is entirely different from the appellant. We agree with the contention of the learned counsel for the assessee that the nature of the product developed and the services provided by the company are different from the appellant as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company fit for comparability analysis for determining the arms length price for the appellant, hence, should be excluded from the list of comparable parties.”

9.6.2 We have heard both parties, have perused and carefully considered the material on record and the judicial decision cited. We find force in the contention of the assessee, that as held by the Mumbai Tribunal in the case of Telecordia Technologies India Pvt Ltd (supra), Tata Elxsi are engaged in development of niche products and development services are functionally different from the software development services rendered by the assessee. In this view of the matter, we direct the Assessing Officer/TPO to exclude the Tata Elxsi from the set of comparable companies drawn up in the assessee’s case.

9.6.3 Since we have held this case is to be excluded from the list of comparables on grounds of functional differences and this addresses the grievance raised by the assessee, the contention raised in respect of erroneous computation of margins by the TPO is not required to be adjudicated upon.

9.7.1 KALS Info Systems Ltd. (KALS)

The assessee has objected to the inclusion of this company as a comparable on the ground that it is functionally different and not comparable as it is into software product development as well as provision of software services operating in two segments namely (i) application software and (ii) training services. For the purposes of the T.P. Study, it is contended that the TPO has considered the application software segment which is functionally comparable to the business of the assessee. It was also argued by the learned counsel for the assessee that the inventory holding of the company is 59.32% of the total sales, which leads to the conclusion that KALS is into software product development as well as software development services. It is also contended that since the marketing expenses as a percentage of sales of KALS being substantial, it indicates a functional profile different from that of the assessee. The learned counsel for the assessee for the proposition that KALS should be excluded from the list of comparables in this case, relied on the decision of the Pune Tribunal in the case of Bindview India P. Ltd. v. DCIT (ITA No.1386/PN/2010) wherein it was held that KALS is a product development company.

9.7.2 Per contra, the learned Departmental Representative contended that since ‘KALS’ derived 97.54% of its revenue from software development services, the TPO was justified in including this company as a comparable in his T.P. Audit.

9.7.3 We have considered the rival submissions and have carefully perused and considered the material on record. We find that while the TPO is of the view that ‘KALS’ is a software services provider like the assessee, based on information submitted by ‘KALS’ under section 133(6) of the Act. The learned counsel for the assessee on the other hand contends that ‘KALS’ is a product development company basing his assessment on the details, which he claims were culled out of the Annual Report of ‘KALS’. As per the extract submitted by the assessee, there is mention in the Annual Report of ‘KALS’ that it is into development of software and software products. Since as per these extracts of the Annual Report, ‘KALS’ does software development services, the view of the TPO that it qualifies to be a comparable cannot be dismissed off hand. On a specific reference by the TPO, ‘KALS’ has clarified that it is in the business of software development. Therefore, the contention of the assessee that ‘KALS’ be excluded from the list of comparables cannot be accepted. At the same time, the issue as to whether the business of the ‘KALS’ is predominantly software development or development of software products needs to be examined carefully. In these circumstances, we are of the view, that in the fitness of things, the issue of the suitability of taking ‘KALS’ as a comparable be remanded back to the file of the Assessing Officer/TPO for fresh consideration in accordance with the discussions above and to decide the issue only after affording the assessee adequate opportunity of substantiating its case, including the filing of fresh evidence if necessary. It is ordered accordingly.

9.8.1 Megasoft Limited

The assessee has objected to Megasoft Ltd being selected as a comparable on the following grounds :

(i) That though this company earns its revenue from two business segments, namely (a) I.T. Consulting and Services Division (Blue Ally Division) and (b) Telecom Division (XIUS Division), the TPO considered the entity level results rather than segmental results.

(ii) This company fails the software development filter of 75% applied by the TPO.

9.8.2 Per contra, the learned Departmental Representative justified the inclusion of this company as a comparable on the grounds that substantial amount of revenue comes from the software development service segment.

9.8.3 We have heard both parties and carefully perused and considered the material on record. The learned counsel for the assessee relied on the decision of the co-ordinate bench of this Tribunal I the case of Triology E-Business Software India Pvt Ltd (ITA No.1054/Bang/2011) wherein it was held that Megasoft was to be taken as a comparable but directed that segmental margins only need be considered. In effect, this endorses that the assessee has accepted Megasoft as a comparable but only wants segmental margins to be adopted. While it is true that in the case of Triology E-Business Software India Pvt Ltd (‘Triology’) the co-ordinate bench of this Tribunal held that only the segmental profit of Megasoft is to be considered for comparability in that case, this was based on the finding that there is bound to be difference between ‘Triology’ and Megasoft due to the profit arising to Megasoft as a result of the existence of the software product segment which was unique and specific to the facts of the case of ‘Triology’.

9.8.4 As per the assessee’s T.P. Study, the assessee’s principal Yodlee, USA is organized into two divisions :

(iii) Product Development Division and

(iv) Professional Services Division.

Yodlee Infotech (i.e. the assessee) operates as a dedicated development centre for Yodlee, US, providing it software development support services that support and supplement Yodlee, US product offerings in the account aggregation industry. As per the Master Services Agreement (MSA) signed between the assessee and Yodlee, US.

(i) Yodlee, USA has engaged the assessee for the provision of software development, implementation and maintenance of computer software programme’s .

(ii) Yodlee, USA would be the exclusive owner of all the Intellectual Property Rights (IPRs)of the software products (including any product developed in connection with the performance of software services under the MSA).

Therefore, from the assessee’s T.P. Study and the MSA, it is clear that the assessee group deals with both product development and professional services and the assessee renders services to both the divisions, including product development. The MSA between Yodlee, USA and the assessee envisages product development by the assessee and this aspect does not appear to have been examined by the TPO.

9.8.5 Regarding the assessee’s objections to the ‘use of data collected under section 133(6)’ of the Act on the ground that it is ‘secret data’, we find from the record that the TPO has forwarded the details received from Megasoft under section 133(6) of the Act to the assessee, duly considered the objections raised by the assessee in detail in the T.P. order.

This is in keeping with the observations of the co-ordinate bench of this Tribunal in the case of Genysys Integrating Systems (India) P. Ltd. v. DCIT (ITA No.1231/Bang/2010) at para 13 thereof that :-

“13. We have already held that if any information is sought to be used against the assessee, and thereafter, taking into consideration the assessee’s objections, if any, only then the TPO proceed to take a decision… .“

In the order of the co-ordinate bench of this Tribunal in the case of Triology (supra) at para 21 thereof, the use of details obtained under section 133(6) of the Act has been upheld.

9.8.6 In respect of the issue of the computation for the ‘onsite filter’, we find that the TPO has held that the assessee satisfies the test by making his computation based on details furnished by Megasoft in response to information called for under section 133(6) of the Act without giving any finding on the correctness or otherwise of the computation adopted by the assessee. It would therefore be in the fitness of things to restore this issue to the file of the Assessing Officer/TPO to examine the computation made by the assessee to determine whether the company Megasoft satisfies the filter adopted by the TPO.

9.8.7 In these circumstances, we are of the considered view that the question of comparability of Megasoft be restored to the file of the Assessing Officer/TPO for fresh consideration based on the discussions in the above paragraphs, in the light of the following :

(i) Whether the assessee and Megasoft are ‘functionally comparable’, taking into account the functional profile of the assessee in its own T.P. Study ?

(ii) Whether the assessee is a pure software development service provider or is also involved in product development activities may be examined by the TPO before deciding whether the margins at entity level or segmental level are to be considered.

(iiii) Whether the ‘onsite filter’ is satisfied in this case, after reconciling the figures adopted by the TPO and the assessee. The Assessing Officer/TPO shall afford the assessee adequate opportunity of being heard to substantiate its case, including the filing of fresh evidence, if necessary, before deciding on the issue on hand.

9.9.1 Flextronics Software Systems Ltd (‘Flextronics’)

The assessee objects to the inclusion of this company as a comparable on the ground that it is not functionally comparable. It is also contended that the company is engaged in both development of software products and software consulting services and the same has been reported in a single segment which has been adopted by the TPO. It is the contention of the assessee that ‘Flexitronics’ develops software products and provide software consulting services for use in the telecommunication industry and also sells telecommunication equipment and provides services on business process outsourcing (BPO) and therefore derives revenue from sale of products (developed software) services (IT and BPO) and commission on sale of telecommunication equipment. It is submitted that ‘Flextronics’ has two reportable segments –

(a) product and services; and

(b) BPO services.

It is contended that the BPO segment is not comparable segment for the assessee, but that the BPO segment has been taken along with the product and services segment for the purpose of comparability by the TPO, which is not correct.

9.9.2 Per contra, the learned Departmental Representative supported the order of the TPO on this issue contending that it is nowhere indicated that the revenue of ‘Flextronics’ includes sale of products and that the reported revenue from software development services constitutes 93.72% of total revenues. In these circumstances, the learned Departmental Representative contended that the TPO was amply justified in considering ‘Flextronics’ as a comparable.

9.9.3 We have heard both parties and have carefully perused and considered the material on record. That ‘Flextronics’ has different segments is not disputed. We find that the TPO has sought to apply only the segmental results, which in his opinion is, applicable to the assessee. The assessee on the other hand contends that the segment applied by the TPO included revenue not only from services but also from products. The stand of the learned Departmental Representative/revenue is that there is no evidence that revenue of the segment includes sale of products. In these circumstances, we are of the opinion that it will be in the fitness of things, if this issue of examining this company for inclusion as a comparable be restored back to the file of the Assessing Officer/TPO to examine the following:

(i) Whether the segment included by the TPO in his T.P. Audit for inclusion of ‘Flextronics’ as a comparable includes revenue from products also or comprises of only revenue from software development ?

(ii) The computation of segmental results, including the allocation of expenses between the different segments.

In this regard, we direct the Assessing Officer to afford adequate opportunity of being heard to the assessee to substantiate its case, with the right to file fresh evidence, if necessary, before the issue is decided by the TPO.

9.10.1 In the grounds at S.No.4(f), the assessee has objected to the action of the TPO in excluding companies with different year ending (i.e. up to 31.3.2006) from the list of comparable companies.

9.10.2 We have heard both parties in the matter. As per the provisions of Rule 10B(4) of the I.T. Rules, 1962, it is clear that the use of data of the current financial year (i.e. of the financial year in which the transaction was actually entered into) is a mandatory requirement of law in the comparability analysis to be undertaken as per Indian T.P. Regulations. It is only the proviso to Rule 10B(4) that makes an exception in allowing the use of data of the two preceding years, if and only if it is established that the data reveals facts which could have an influence on the determination of transfer price. The mandatory requirement of law for the use of data of the current financial year cannot be dispensed with.

ERRONEOUS DATA USED BY A.O/T.P.O

10.1.1 In the ground raised at S.No.5(a), the assessee contends that the TPO has erred in using data that was not contemporaneous and which was not available in the public domain when the assessee did its T.P. Study.

10.1.2 The ground raised has been carefully perused. As regards the data used by the TPO while determining the ALP, we find that it is to be as per the provisions of section 92D of the Act that every person who has entered into international transactions is required to maintain information and documentation thereof. Rule 10B(4) provides that the information and documents as specified under Rule 10B(1) and 10B(2) should as far as possible be contemporaneous and should exist latest by the “specified date” referred to in section 92F(4) which has the same meaning as ‘due date’ in Explanation 2 to section 139(1) of the Act. In the assessee’s case, this would be ’30th day of September’ as it is a company. It is clear, after going through the relevant provisions of law, that the Act has not provided for any cutoff date up to which only the information in the public domain has to be taken into consideration by the TPO while arriving at the ALP or making TP adjustments. Both the assessee and Revenue being bound by the provision of the Act and Rules are required to take into consideration contemporaneous data relevant to the previous year in which the international transaction has taken place. The assessee is obliged to maintain the information and documentation as required relating to international transactions as per the specified date so that it can be made available to the TPO or the Assessing Officer or any other authority in any proceedings under the Act. We are, therefore, of the view that there is no infirmity in the action of the TPO in using contemporaneous data at the time of transfer pricing audit, though the same may not have been available to the assessee at the time of preparation of statutory transfer pricing study/documentation.

10.2.1 In support of the grounds raised at S.No.5(b) and 4(f), the assessee contends that the TPO erred in not applying the multiple year data while computing the margin of comparable companies and in rejecting comparison which had a year ending other than 31.3.2006.

10.2.2 This ground was not argued before us in appellate proceedings and consequently it is dismissed as infructuous. Even otherwise, this ground of the assessee is liable to be dismissed. Rule 10B (4) of the IT Rules, 1962 specifies the requirement regarding data to be used for analyzing the comparability of an uncontrolled transaction with an international transaction which reads as under :

“Rule 10 B(4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into :

Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared.”

10.2.3 The use of the word “shall” in the main provision of the Rule makes it abundantly clear that the use of data of the current financial year (i.e. of the financial year in which the international transaction was actually entered into) is a mandatory requirement of law in the comparability analysis to be undertaken as per Indian T.P. Regulations. It is only the proviso to Rule 10B(4) that makes an exception in allowing the use of data of the two preceding years, if and only, if it is established that the data reveals facts which could have an influence on the determination of transfer price. The mandatory requirement of law for the use of data of the current financial year cannot be dispensed with even if the relevant data was not available to the assessee in the public data base at the time of preparation of the T.P. Report. Non-availability of information in the public data base can at best be relevant to explain the discharge of the assessee’s obligation of maintaining the prescribed documentation under section 92D(i) of the Act r.w. Rule 10D of the IT Rules, 1962. However, such non-availability will not dispense with the mandatory requirement of Rule 10B(4) for using current financial year data in conducting comparability analysis and in determining the ALP in accordance with section 92C (1) and 92C(2) of the Act.

10.2.4 As it is mandatory requirement of law to utilize data of the current financial year to conduct the comparability analysis at the time of transfer pricing proceedings, the TPO is not only empowered but is also duty bound to determine the ALP using such contemporaneous data for this purpose even if such data was not available to the assessee in the public data bases at the time of preparation of its report on the T.P. Study. Further, we are also of the view that the TPO rightly rejected the use of earlier year’s data by the assessee, as the assessee failed to establish before the TPO, CIT (Appeals) or the Tribunal how such earlier year’s data had an influence on the prices of the current financial years.

Non-allowance of appropriate adjustments to the comparable companies.

11.1 In the ground of appeal at S.No.6, the assessee has objected to the action of the TPO in not allowing appropriate adjustments under Rule 10B of the I.T. Rules, 1962 to account for differences in (a) accounting practices, (b) marketing expenditure, (c) research and development expenditure and (d) risk profile between the assessee and the comparable companies.

11.2 We have perused this ground and find that it has been raised in a general manner, without bringing on record evidence to demonstrate how these factors affect the profitability of the assessee, thereby affecting its comparability. As far as risk factors are concerned, we find that the assessee has not demonstrated as to how the risk profiles are different and that it affects comparability. At para 18.2 on page 154 of the TPO’s order it has been pointed out that the assessee did not provide any quantification of risk adjustment but merely mentioned various risks. We find that inspite this the TPO has given a detailed disposition on each of the risk involved in the risk profile and his detailed reasons as to why no adjustment is tenable in the case of the assessee find mention at paras 18.2.1 to 18.4.6 at pages 154 to 184 of the T.P. order. No evidence has been brought on record by the assessee before us, to controvert or to demonstrate that the findings of the TPO were incorrect and that the assessee had a case either for risk adjustment, or for that matter for adjustments for accounting practices, research and development expenditure or marketing expenditure. No case has been made out by the assessee by virtue raising this ground that any of the adjustments sought for are warranted. It cannot be anybody’s case that an adjustment has to be necessarily granted whenever or wherever there is difference between the tested party and the comparables. An adjustment for risks etc is a valid principle for comparability, but whether this case entails such an adjustment would depend on the facts of the case. However, in the instant case mere claim for adjustments for risks, research and development expenditure, market expenditure etc serves no purpose as it is not backed by any cogent or clinching evidence. The onus is on the assessee to establish the need for adjustments on specific issues and how these issues affect comparability. In the instant case, the assessee has not discharged the onus and we are, therefore, constrained to dismiss this ground raised by the assessee.

Variation of 5% from arithmetic mean.

12.1 In this ground raised at S.No.7, the assessee contends that the action of the TPO, in not granting it the benefits of the proviso to section 92C(2) of the Act is erroneous.

12.2 In respect of the assessee’s claim for grant of the benefit of 5% from the arithmetic mean, the proviso to section 92(2), prior to the amendment made by Finance (No.2) Act, 2009 and Finance Act, 2012, provided that the ALP would be taken to be the arithmetic mean (AM) or at the option of the assessee, a price which may vary from the AM by an amount not exceeding 5% of such AM by an amount. Thus the ALP was +/ – 5% of such A.M. This issue is more of an academic nature and case laws cited by the assessee are not applicable to the facts of the case, as the IT Act, 1961 has been amended with retrospective effect from 1.4.2002 by the introduction of a clarificatory amendment in which the section 92C (2A) was inserted, which as per the Finance Act, 2012 reads as follows :

“(2A) Where the first proviso to sub-section (2) as it stood before its amendment by Finance (No.2) Act, 2009 (33 of 2009), is applicable in respect of international transactions from an assessment year and the variation between the arithmetical mean referred to in the said proviso and the price at which such transaction has actually been undertaken exceeds five per cent of the arithmetical mean, then, the assessee shall not be entitled to exercise the option as referred to in the said proviso.”

12.3 The new section 92C(2A) mandates that if the arithmetical mean price falls beyond +/ – 5% from the price charged in the international transactions, then the assessee does not have any option referred to in section 92C(2). Thus, as per the above amendment, it is clear that the +/ – 5% variation is allowed only to justify the price charged in the international transactions and not for adjustment purposes. The aforesaid amendment has settled the issue and accordingly the 5% benefit is not allowable in the assessee’s case. The various judicial decisions cited pertain to the period prior to the retrospective amendment in section 92C(2A) of the Act and are not applicable to the facts of the assessee’s case. In view of the amendment brought about therein by Finance Act, 2012, this ground raised by the assessee is not maintainable and is accordingly dismissed.

Interest under section 234B of the Act.

13. In the ground raised at S.No.8, the assessee denies itself liable to be charged interest under section 234B of the Act. The charging of interest is mandatory and consequential and the Assessing Officer has no discretion in the matter. In view of this, the Assessing Officer’s action in charging the said interest is held to be in order. The Assessing Officer is, however, directed to recompute the interest chargeable under section 234B of the Act while giving effect to this order.

Penalty under section 271(1)(c) of the Act.

14. In the ground raised at S.No.9, the assessee has contended that the Assessing Officer had erred in initiating penalty proceedings under section 271(1)(c) of the Act. Since initiation of penalty proceedings does not give rise to any cause of action as there is no grievance caused to the assessee. We are of the view that this ground is premature and not maintainable and is therefore dismissed as infructuous.

15. In the result, the assessee’s appeal is partly allowed.

NF