TaxTMI 
TaxTMI 
2014 (5) TMI 889
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....r 2008-09 on 26.9.2008 declaring taxable income of Rs. 32,480 after claiming deduction under section 10B of the Act amounting to Rs. 2,66,31,061. The assessee declared taxable income of Rs. 33,01,431 under section 115JB of the Act. In the period under consideration, since the assessee entered into international transactions of three types, the Assessing Officer made a reference under section 92CA of the Act to the Transfer Pricing Officer ('TPO') for determining the Arms' Length Price ('ALP') of these international transactions after obtaining necessary approval from the CIT, Bangalore-I. The international transactions entered into by the assessee in the relevant period are as under :- S. No. Type of transaction Amount paid (Rs.) Amount received (Rs.) 1. Software Services 25,07,61,728 2. Reimbursement of expenses. 74,58,039 3. Reimbursement of expenses. 21,02,620 The TPO vide order under section 92CA of the Act dt.31.10.2011, proposed a T.P. adjustment of Rs.2,34,27,201 to the ALP of international transactions. The Assessing Officer then issued a draft assessment order under section 143(3) r.w.s. 144C of the Act on....
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....nt's data are not reliable or correct, particularly when he has himself accepted the search process of the Appellant, 6 filters out of 7 filters chosen by the Appellant and 4 companies out of 12 companies selected by the Appellant. 6. The Honourable DRP has failed to appreciate that the Learned TPO having accepted four companies out of the twelve companies selected by the Appellant, ought to have directed the Learned TPO to determine the arm's length price on the basis of those accepted comparable companies. 7. The Honourable DRP is not justified in upholding the action of the Learned TPO in carrying out a fresh TP study and wholly substituting the comparable companies selected by the Appellant with a new set of comparable companies, without successfully disregarding the manner of application of TNM method by the Appellant. 8. Without prejudice to the above, the Learned DRP has failed to appreciate that the Learned TPO unjustly left out 5 out of 6 companies selected by the Appellant which are to be taken as comparable companies according to his own reasoning in the final list of 20 companies. 9. The Honourable DRP has failed to appreciate that the Learned TPO while reje....
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....r section 10B of the IT Act, based on frivolous/extraneous reasons of the Learned ITO. Further, the Honourable DRP is not justified in upholding the exclusion of sum of Rs. 2,17,32,445/- from export turnover for the purpose of computation of deduction under section 10B of the IT Act, for the reason that same was incurred in foreign currency by rejecting the contention of the Appellant that it is not engaged in providing technical services but is engaged in development and export of computer software. 18. The Honourable DRP is not justified in upholding the action of the Learned ITO in reducing the telecommunication charges of Rs. 24,50,957/- from the export turnover when such expenditure is incurred in respect of a standard facility and the same cannot be wholly attributable to delivery of computer software outside India. 19. Without prejudice to the above, the Honourable DRP is not justified in failing to appreciate that the question of deduction of telecommunication charges of Rs. 24,50,957/- would arise only if the same has been incurred in foreign-exchange and if the same has been incurred in Indian rupee, the question of deduction thereof does not arise. 20. The Hon'ble....
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....htree Consulting Ltd. 21.00 5 E-Infochips Ltd. 35.33 6 ICRA Techno Analytics Ltd. 7.92 7 PSI Data Systems Ltd. 5.94 8 Quinnox Consultancy Services Ltd. 9.68 9 Quintegra Solutions Ltd. 19.00 10 R S Software (India) Ltd. 6.30 11 Sonata Software Ltd. 14.39 12 VGL Software Ltd. 20.80 Arithmetic Mean 12.50 The margin earned by the assessee, as per its TP Study, was 13.09% and since this was in excess of the average profit margin of the 12 comparable companies at 12.50% on cost, the assessee treated the international transactions entered into by it as being at arms length. 5.2 The TPO observed that the assessee has characterized itself as a provider of software development services to its Associated Enterprises (AE) and that the assessee used TNMM as the MAM. While accepting the TNMM as the MAM, the TPO rejected the assessee's TP Study for various reasons set out in the show cause notice issued and embarked on a fresh search using the data bases 'Prowess' and 'Capital'. After considering the objections of the assessee, the TPO selected a final set of 20 comparables which are as under : Sl.No. Name of the company OP/TC % 1 Ava....
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....is comparable company has categorized itself as a pure software developer, just like the assessee, and hence selected this company as a comparable. For this purpose, the TPO had relied on information submitted by this company in response to enquiries carried out under section 133(6) of the Act for collecting information about the company directly. 7.2 Before us, the learned Authorised Representative reiterated the assessee's objections for the inclusion of this company from the list of comparable companies on the ground that this company is not functionally comparable to the assessee as it is into software products whereas the assessee is into providing software development services. It is also submitted that the segmental details of this company are not available and the Annual Report available in the public domain is not complete. It was further contended that the information obtained by the TPO under section 133(6) of the Act, on the basis of which the TPO included this company in the final list of comparable companies, has not been shared with the assessee. In support of this contention, the learned Authorised Representative placed reliance on the following judicial decisi....
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....s a comparable. 7.5.2 As regards the submission of the learned Authorised Representative, we are unable to agree that this company has to be deleted from the list of comparables only because it has been deleted from the set of comparables in the case of Triology E-Business Software India (P.) Ltd. (supra). No doubt this company has been deleted as a comparable in the case of Triology E-Business Software India (P.) Ltd. (supra) and this can be a good guidance to decide on the comparability in the case on hand also. This alone, however, will not suffice for the following reasons :- (i) The assessee needs to demonstrate that the FAR analysis and other relevant facts of the Triology case are equally applicable to the facts of the assessee's case also. Unless the facts and the FAR analysis of Triology case is comparable to that of the assessee in the case on hand, comparison between the two is not tenable. (ii) After demonstrating the similarity and the comparability between the assessee and the Triology case, the assessee also needs to demonstrate that the facts applicable to the Assessment Year 2007-08, the year for which the decision in case of Triology E-Business Software Ind....
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....ed the objections by observing that the employee cost filter is only a trigger to know the functionality of the company. 8.2.1 Before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee as it is into bio-informatics, software product/services and the segmental break up is not provided. The assessee has extensively quoted from various parts of the Annual Report of the company, which states as under : (i) "Mission Statement" on page 2 of the Annual Report states that the company is also into bio-informatics products, ITES, Etc., "Celestial is committed to be a technology company respected globally for its software development, products, services in the area of Bio-informatics, Enterprise Resources Planning, Information Technology and Information Technology Enables Services" (Emphasis Supplied). (ii) The "Future Outlook" in the Directors Report of the Annual Report indicates that the company is into large scale development of bio tech products. ".... Your company is setting up a manufacturing facility to manufacture Industrial Enzymes, Active P....
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....2 (Bang.) of 2011, dated 22-2-2013] (iii) Curam Software International (P.) Ltd. (supra). 8.3 Per contra, the learned Departmental Representative contended that the ruling in the case of Triology E-Business Software India (P.) Ltd. (supra) was rendered with respect to F.Y. 2006-07 and there cannot be an assumption or presumption that it would continue to be applicable to F.Y. 2007-08 as well. 8.4 To this, the learned Authorised Representative countered that the functional profile of this company continues to remain the same for F.Y. 2007-08 as it was in F.Y. 2006-07 and the same is evident from the Annual Report quoted extensively above at para 8.2.1 (supra). 8.5.1 We have heard both parties and carefully perused and considered the material on record including the judicial decisions cited. As discussed earlier, there is merit in the contention of the learned Departmental Representative that the ruling of the co-ordinate bench of this Tribunal in the case of Triology E-Business Software India Pvt. Ltd. (supra), was with respect to the facts relevant to an earlier financial year and there cannot be an assumption that it would continue to be applicable to all other assessees for t....
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....wth. In 2008, this company generated over 102 invention disclosures and filed an aggregate 10 patents in India and the USA. Till date this company has filed an aggregate of 119 patent applications (pending) in India and USA out of which 2 have been granted in the US. (ii) This company has substantial revenues from software products and the break-up of the software product revenues is not available. (iii) This company has incurred huge research and development expenditure to the tune of approximately Rs. 200 Crores. (iv) This company has a revenue sharing agreement towards acquisition of IPR in AUTOLAY, a commercial software product used in designing high performance structural systems. (v) The assessee also placed reliance on the following judicial decisions :- (a) ITAT, Delhi Bench decision in the case of CIT v. Agnity India Technologies India (P.) Ltd. [IT Appeal No.3856 (Delhi) of 2010, dated 10-7-2013] and (b) Trilogy E-Business Software India (P.) Ltd. (supra) ....
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....gment' does not have any product revenue. (ii) from the Annual Report of KALS for the year ended 31.3.2008; i.e. the year under consideration, it is observed that the company is into provision of software development services as well as sale of software products. "Inventories" under schedule to the financial statements on page 16 of the Annual Report discloses "Software Development" as inventory and work-in-progress. It is to be noted that a pure software development service provider would not be able to disclose such details as it does not carry any such inventory or work-in-progress. "Background" under the Schedules to the financial statements on page 18 of the Annual Report states :- "The company is engaged in development of software and software products since its inception. This company consisting of STPI unit engaged in Development of Software and Software Products and a Training Centre engaged in training of software professionals on online projects" (Emphasis provided) &nbs....
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.... the Annual Report of the company as has been highlighted by the assessee in its submissions. We also find that the co-ordinate bench of this Tribunal in the case of Trilogy E-Business Software India (P.) Ltd. (supra) has held that this company was developing software products and was not purely or mainly a software development service provider. Further, apart from relying on the decision of Trilogy E-Business Software India (P.) Ltd. (supra), the assessee has brought on record substantial evidence quoting from various portions of the Annual Report of that this company is functionally dis-similar and different from the assessee and hence is not comparable and therefore the finding rendered in respect of this company in the case of Trilogy E-Business Software India (P.) Ltd. (supra) for Assessment Year 2007-08 is applicable for this year i.e. Assessment Year 2008-09 also. In view of the facts and circumstances of the case as discussed above, we hold that this company i.e. KALS Information Systems Ltd., is to be omitted from the set of comparable companies. 11. (5) Tata Elxsi Ltd. 11.1 This company was a comparable selected by the TPO. Before the TPO, the assessee had objected to t....
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....nue 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 as fit for comparability analysis for determining the arm's length price for the assessee, hence, should be excluded from the list of comparable portion." As can be seen from the extracts of the Annual Report of this company produced before us, the facts pertaining to Tata Elxsi have not changed from Assessment Year 2007-08 to Assessment Year 2008-09. We, therefore, hold that this company is not to be considered for inclusion in the set of comparables in the case on hand. It is ordered accordingly. 12. (6) Wipro Limited 12.1 This company was selected as a comparable by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the list of comparables or several grounds like functional dis-similarity, brand value, size, etc. The TPO, however, brushed aside the objections of the assessee and included this company in the set of comparables. 12.2 Before us, the assessee contended that this company is functionally not comparable to the assessee for sev....
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.... captive service provider who does not own any such intangible and hence does not have an additional advantage in the market. As the assessee in the case on hand does not own any intangibles, following the aforesaid decision of the co-ordinate bench of the Tribunal i.e. 24/7 Customer.Com (P.) Ltd. (supra), we hold that this company cannot be considered as a comparable to the assessee. We, therefore, direct the Assessing Officer/TPO to omit this company from the set of comparable companies in the case on hand for the year under consideration. B. Companies chosen as comparable by the assessee rejected by the TPO. 13. (1) P.S.I. Data Systems 13.1 This company was selected as a comparable by the assessee in its TP Study. It is submitted by the learned Authorised Representative that the TPO after examining this company, has accepted it as comparable but has inadvertently omitted to include it in his final list of comparable companies. In this regard, the learned Authorised Representative drew our attention to pages 4 and 5 of the TPO's order under section 92CA of the Act dt.31.10.2011 wherein the TPO had examined the list of 12 comparables chosen by the assessee. It is pointed ou....
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....O in excluding this company from the final list of comparables. 14.3 We have heard the rival submissions and perused and carefully considered the material on record. Admittedly there appear to be contrasting claims; of the TPO that this company cannot be taken as a comparable as current year's data pertaining to it is not available and that of the learned Authorised Representative that current year's data is available. We have had occasion to peruse the show cause notice dt.27.9.2011 issued by the TPO to the assessee listing out the reasons for the rejection 10 companies of the 12 comparable companies chosen by the assessee at pages 5 & 6 thereof. At S.No.8 at page 6 of the show cause letter, the TPO has made the following observations/findings in respect of this company which is extracted hereunder : 8. Quinnox Consultancy Services Ltd. The company does not qualify all the filters applied by the TPO. Thus the company is not considered as a comparable. In this factual matrix, it appears that there was some data pertaining to this company to which the TPO applied filters and found it not suitable as a comparable as is evident from the observations in the show ca....