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INCOME TAX APPELLATE TRIBUNAL, PUNE
Pramod Kumar, Vimal Gandhi, JJ.
E-Gain Communication (P.) Ltd. -Appellant
Versus
Income-tax Officer, Ward 1(4), Pune -Respondent
IT Appeal No. 1685 (Pune) of 2007
Decided On : 10-06-2008
T.P. Ostwal,Pradeep Sharma, Ajit Srivastava
Vimal Gandhi, President. - This appeal by the Taxpayer E-Gain Communication Pvt. Ltd., a non-resident company, is directed against the order of the ld. Commissioner of Income-tax (Appeals) [‘CIT(A)’ in short], confirming addition of Rs. 1,08,62,537 on account of adjustment in the arm’s length price under the provisions of section 92CA(3) of the Act for services rendered by the taxpayer to its parent company in USA.
2. The assessee company is engaged in the business of software product development and is 100 per cent EOU unit approved by Software Technology Park of India under STPI Scheme. It is also taken as leading provider of customer service and contact centre software based on integrated communication platform. The taxpayer has further claimed exemption under section 10A of the Income-tax Act. As per the audited accounts filed by the taxpayer, it has shown the total export turnover of Rs. 10,25,68,917 from which it derived profit of Rs. 46,95,254.
3. The Assessing Officer, after noticing the details of transactions of the taxpayer with its associated concerns, referred the case to the Transfer Pricing Officer (TPO) for computation of arm’s length price as per his letter dated 5-6-2006. The TPO, on examination of Form 3CEB i.e., the audit report filed by the taxpayer, found that the taxpayer had claimed that the transactions with its associated concern were carried at arm’s length and had relied on TNMM in support of its claim as under :
| S.No. | Nature of Transaction | Asstt. Year and Amount | Method Used | A.Y. 2004 05 Amount | Method used |
| 1. | Receipt for Software Development | 118626462 | TNMM | 102568917 | TNMM |
| 2. | Purchase of computers | 193562 | -do- | - | -do- |
| 3. | Total | | | 102568917 | |
4. The Transfer Pricing Officer further found that the taxpayer had claimed net profit margin on cost at 5.16 per cent against average profit of 16.12 per cent on similar uncontrolled transactions carried by independent concerns being, similarly computed.
5. The comparable enterprises taken into account for applying Transactional Net Margin Method (TNMM) and Profit Before Income Tax (PBIT) with reference to Total Turnover (TO) and total expenses was taken at 13.29 per cent and 16.12 per cent as per chart below :—
| Sl.No. | Company Long Name | Turnover(2003-04) | PBIT | PBIT/TO | Total Expd. | PBIT/Total Expd. |
| 1. | 3i Infotech Ltd. | 192.6 | 0.04 | 0.02% | 195.29 | 0.02% |
| 2. | Amex Information Technologies Ltd. | 11.92 | 1.59 | 13.34% | 9.98 | 15.93% |
| 3. | Aviation Software Development Consultancy Ltd. | 18.52 | 3.46 | 18.68% | 15.45 | 22.39% |
| 4. | FCS Software Solutions Ltd. | 67.03 | 7.15 | 10.67% | 59.91 | 11.93% |
| 5. | Gebb Infotech Ltd. | 14.05 | 2.73 | 19.43% | 10.62 | 25.71% |
| 6. | Genesys Inter-national Corpo-ration Ltd. | 21.47 | 1.78 | 8.29% | 18.34 | 9.71% |
| 7. | Geometric Software Solutions Company Ltd. | 63.67 | 18.73 | 29.42% | 54.71 | 34.24% |
| 8. | Goldstone Technologies Ltd. | 57.27 | 2.74 | 4.78% | 52.54 | 5.22% |
| 9. | Larsen & Tourbo Infotech Ltd. | 364.61 | 9.51 | 2.61% | 350.88 | 2.71% |
| 10. | Lifetree conver-gence Ltd. | 12.87 | 0.32 | 2.49% | 12.47 | 2.57% |
| Sl.No. | Company Long Name | Turnover(2003-04) | PBIT | PBIT/TO | Total Expd. | PBIT/Total Expd. |
| 11. | Pentasalt Techno-logies Ltd. | 100.9 | 5.25 | 5.20% | 96.45 | -5.44% |
| 12. | Prithy Information Solutions Ltd. | 246.77 | 18.03 | 7.31% | 228.38 | 7.89% |
| 13. | Sasken Communication Technology | 166.13 | 15.42 | 9.28 | 148.73 | 10.37% |
| 14. | Sonata Software Ltd. | 69.68 | 12.48 | 17.91% | 73.4 | 17.00% |
| 15. | Tata Elxsi Ltd. | 153.48 | 19.71 | 12.84% | 134.18 | 14.69% |
| 16. | Thirdware Solution Ltd. | | ||||
