TaxTMI 
TaxTMI 
2014 (8) TMI 870
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing 28 comparables with a weighted average profit margin of 14.53% on operating cost. The entire operating revenue was received from the said AE. Assessee incurred cost of Rs. 38.65 crores and earned operating profit of Rs. 3.85 crores. The operating profit ratio was at 9.95%. The TPO, however, rejected the assessee's transfer pricing study and also rejected the comparables and undertaken fresh search of comparables by adopting some filters like employee cost, related party transactions and also analyzing the functional test of various companies. The average operating profit of the 26 comparables was determined at 22.73%. A.O. arrived at the arms length price of operating cost at Rs. 47,44,11,800/- whereas, assessee charged Rs. 42,50,01,369/- from the A.E. The shortfall at Rs. 4,94,10,431/- was added as T.P. adjustment under section 92CA. 3. Assessee preferred objections before the DRP, Hyderabad who by its order dated 09.08.2011 rejected most of the objections, while excluding one comparable - Celestial Labs Ltd. In the result, adjustment of Rs. 4,45,78,567/- was made on the basis of PLI worked out on 25 comparables. 4. Assessee has raised 14 grounds out of which, except....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ee wants the following comparables to be included in the list of comparables which are rejected by TPO : 26. Aztecsoft Ltd. 18.35% 27. Birla Technologies Ltd. -1.08% 28. Indium Software India Ltd. 1.25% 29. Larsen & Toubro Infotech Ltd. 15.15% 30. PSI Data Systems Ltd. (Seg) 5.34% 31. V M F Softech Ltd. 1.40% 7. Each of these comparables in dispute, challenged in ground no 7 was considered as under: Avani Cimcon Technologies Limited : 7.1 Assessee has basically sought exclusion of above company on two grounds, firstly, this company has revenue from both product and software services and segment-wise data is not available and secondly, it is contended that the company has shown super normal profit of 52.59% against average margin of other comparables. It is very much evident from the TP order that the assessee has been categorised as a software development service provider. Coordinate Bench of this Tribunal in the case of Virtusa (India) Pvt. Ltd. (ITA No. 1962/Hyd/2011 dated 30/08/2013) after following some other decisions of the Tribunal has held this company cannot be treated as comparable as this company is also into....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ons of the assessee submitted that so far as Infosys Technologies is concerned, the assessee itself has selected the said company in the TP documentation. Therefore, the assessee cannot again object to the TPO selecting the said company as comparable. He further submitted that only because the company has brand value and is big in size, it cannot be treated as uncomparable to the assessee. 7.2.2 In rejoinder, the ld. AR submitted that the assessee selected Infosys on the basis of three years data, whereas TPO has considered only current year data. The learned AR further submitted that if the assessee has mistakenly selected a comparable, it cannot be estopped from objecting to the selection of that comparable in proceedings before higher forum. In this context, the learned AR relied upon the Income-tax Appellate Tribunal Special Bench decision in case of Dy. CIT v. Quark Systems (P.) Ltd. [2010] 38 SOT 307 (Chd.) 7.2.3 We have considered the submissions of the parties and perused the materials on record. On considering the same, we are of the view that this company cannot be considered as comparable to the assessee due to various factors such as its size, turnover, brand valu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is Tribunal as stated below : (a) M/s. Foursoft Limited (ITA.No.1903/H/2011) (b) Intoto Software India P. Ltd. ITA.2102/H/2010 (c) LG Soft India P. Ltd. ITA.1121/Bang/2011 (d) Transwitch India P. Ltd. ITA.948/Bang/2011 (f) Mercedes Benz Research & Development ITA.No.1222/Bang/2011 (g) CSR India P. Ltd. ITA.No.1119/Bang/2011 (h) First Advantage ITA.No.1086/Bang/2012 (i) HCL EAI Services Ltd. ITA.No.1348/Bang/2011. Respectfully following the aforesaid decisions of the co-ordinate bench, we direct the Assessing Officer/TPO to exclude this company from the list of comparables. Lucid Software Limited : 7.4 The main objection of assessee with regard to the aforesaid company is that it earns revenue both from product development as well as software services for which segmental data is not available. In support of such contention, the learned AR has relied upon the decision of co-ordinate bench in the case Virtusa (India) (P.) Ltd. (supra). On perusal of the order passed in case of Virtusa (India) (P.) Ltd. (supra), it is seen that the co-ordinate bench has excluded the aforesaid company accepting assessee's contention that segme....
X X X X Extracts X X X X
X X X X Extracts X X X X
....aid company u/s 133(6) wherein the said company has admitted that it cannot be treated as comparable with any other software service provider due to complex nature of its business. However, while the TPO selected the aforesaid company by holding that the services provided are akin to software development services, the DRP, did not comment on the comparability of this company. The learned AR submitted that comparability of the aforesaid company was considered and analysed by different benches of the ITAT and the aforesaid company was rejected as comparable to the software services provider. For such contention, the learned AR relied upon the following decisions: (a) Telcordia Technologies India (P.) Ltd.'s case (supra) (b) Triology E Business Solutions case (supra) (c) Foursoft Ltd.'s case (supra) (d) Virtusa (India) P. Ltd.'s case (supra) (e) Conexant System India (P.) Ltd.'s case (supra) 7.6.1 The learned DR, on the other hand, supported the orders of the AO/TPO and DRP in this regard and referred to the observations made by the TPO in his order. 7.6.2 We have heard the submissions of both the parties and perused the material on ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ndia (P.) Ltd.'s case (supra) (b) Triniti Advanced Software Labs (P.) Ltd.'s case (supra) (c) Foursoft Ltd.'s case (supra) (d) Virtusa (India) (P.) Ltd.'s case (supra) (e) Conexant System India (P.) Ltd.'s case (supra) (f) Adaptec (India) (P.) Ltd.'s case (supra) 7.7.1 The learned DR on the other hand supported the orders of the DRP as well as TPO so far as the selection of the aforesaid company as comparable while determining ALP. 7.7.2 We have heard the submissions of the parties and perused the material on record. The ITAT Mumbai Bench in case of Telcordia Technologies India (P.) Ltd. (supra), while considering the objection of the assessee for treating the aforesaid company as comparable held as follows: "7.5 This company is also a global IT Company having varieties of service and products and looking to the magnitude of its operations, sales and expenses, the same cannot be taken into consideration for comparability analysis. Moreover, 67% of its sales relates to its product which are sold on premium resulting into higher profitability, therefore, cannot be compared with the assessee compan....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ferent from the assessee company as it was engaged in the services in the form of ACCEL IT and ACCEL animation services for 2D and 3D animation and therefore assessee's claim that this company was functionally different was accepted. It directed the Assessing Officer to exclude ACCEL Transmatic Ltd. from the final list of comparables for the purpose of determining TNMM margin. A similar view was taken in the following cases : (a) Conexant System India (P.) Ltd.'s case (supra) (b) Intoto Software India (P.) Ltd.'s case (supra) (c) Bearing Point Business Consulting (P.) Ltd.'s case (supra) (d) LG Soft India (P.) Ltd.'s case (supra) (e) Transwitch India (P.) Ltd.'s case (supra) (f) Mercedes Benz Research & Development's case (supra) (g) CSR India (P.) Ltd.'s case (supra) (h) HCL EAI Services Ltd.'s case (supra) Respectfully following the decisions of the Coordinate Benches of the Tribunal, we direct that this company should be excluded from the list of comparables. Kals Information System Limited : 7.9 As far as Kals Information System Limited is concerned, learned Counsel for the assessee sub....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds." Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. "47. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable". 7.9.1 We find that both HCL EAI Services Ltd.'s case (supra) as well as Triology E-Business Solutions....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he submission that above companies are to be selected as comparables. 8.2 After considering the submissions, we are of the opinion that proper case was not made out for inclusion of the above comparables. Once TPO and DRP forms that these comparables are not functionally similar to the assessee on the basis of various filters adopted by the TPO, it would be better if the matter is left like that rather than ordering fresh enquiry. We also noticed that these companies have related party transactions and therefore, may not justify on various filters adopted. As far as Indium Software India Ltd. there is a finding that this company is functionally different. L & T Infotech also found to be functionally different. Moreover, it has more than Rs. 600 crores turnover and may fail on turnover filter, even though turnover filter was not applied in this case. When specific 133(6) notice was issued, that assessee has not to responded and therefore, TPO was not in a position to include the above case in the absence of segmental data. PSI Data Systems also in our view need not be considered as it has related party transactions. It requires analysis of segmental data to notice whether it has ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssee admits that it is having a single customer risk, whereas, other comparable companies has market risk. The TPO in fact, discussed this issue elaborately vide para 16.2 of his order and analysed the risk and concluded that there is no risk adjustment given as the single customer risk/political risk of tax payer combined with arithmetic mean price considered in the case of comparable companies qualifies the risk differential if any between the tax payer and comparable Indian enterprise. Since DRP has not given any opinion on this, we are of the opinion that this issue requires detailed examination afresh by the TPO and DRP. In case of any adjustment to be required to be done, after excluding the comparables as stated above, risk adjustments may be considered by the TPO, if such situation arises. In case the PLI determined after exclusion of the comparables is within the parameters and no adjustment is to be made for the international transaction, then, adjustment for risk may become academic in nature. With these observations, the issue of risk adjustment is restored to the file of the TPO for necessary consideration. Ground is accordingly considered as allowed for statistical pu....