TaxTMI 
TaxTMI 
2015 (1) TMI 559
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....ppropriate Arms' Length Price (ALP) of the international transactions undertaken by the petitioner being the subject matter of appeal and to render substantial justice. It is stated that the adoption of turnover filter as an adequate filter has been upheld by this bench of the Tribunal in the case of Genisys Integrating Systems (India) P. Ltd. Vs. Dy. CIT (152 TTJ 215) and therefore the same should be applied in the assessee's case also to reject companies having turnover in excess of INR 200 crores as comparable to the assessee. It is also submitted that the Tribunal has held in various cases that software product companies cannot be compared to software development companies owing to functional dissimilarity and therefore R Systems international Ltd and Persistent Systems Ltd., should also be rejected as comparable cases as these companies are product oriented companies and are functionally dissimilar to the assessee. Thus, the assessee sought to raise two additional grounds of appeal. However, at the time of hearing, learned counsel for the assessee submitted that the assessee does not wish to press the additional ground No.2 relating to exclusion of R Systems international Ltd ....
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....o examine their comparability to the assessee. Therefore, according to him, the issue should be set aside to the file of the TPO for FAR analysis. 2.4 Having regard to the rival contentions and the material on record, we find that this Tribunal, in the case of Genisys Integrating Systems (India) P. Ltd (cited supra) has held that turnover is an important filter which has to be adopted for determination of the ALP. The Tribunal has been consistently following the said decision. The FAR analysis would not alter the turnover of the company. In view of the same, we do not find it necessary to remand the issue of comparability of these companies to the AO/TPO for re-determination of the ALP. In view of the turnover being higher than Rs. 200 crores in the case of the above companies, we direct the AO to exclude these companies from the list of comparables. 3. The assessee has also sought exclusion of the following companies on the ground of functional dissimilarity: Sl. No. Name of the company Functional dissimilarity 1. KALS Information Systems Ltd. Product oriented company 2. Tata Elxsi Ltd. -do- 3. Accel Transmatic Ltd. Product company The learned coun....
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....product company in both Trilogy e-business(supra) as well as EMC Data (supra). In these decisions, a host of companies, inter alia, including KALS Information Systems Ltd. were deliberated upon and held as under:- "12. The following were the relevant observations of the Tribunal on the aforesaid comparable companies in the case of Triology E-Business Software India Pvt.Ltd.(supra): "(d) KALS Information Systems Ltd. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual report, the salary cost debited under the software development expenditure was Q 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal's decision of the ITAT in the case of Bindview India Private Limited Vs. DCI, ITA No. ITA No 1386/PN/1O wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different f....
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....d the company profile and its annual report for financial year 2005-06 from which the DRP noted that the business activities of the company were as under. (i) Transmatic system - design, development and manufacture of multi function kiosks Queue management system, ticket vending system (ii) Ushus Technologies - offshore development centre for embedded software, net work system, imaging technologies, outsourced product development (iii) Accel IT Academy (the net stop for engineers) - training services in hardware and networking, enterprise system management, embedded system, VLSI designs, CAD/CAM/BPO (iv) Accel Animation Studies software services for 2D/3D animation, special effect, erection, game asset development. 4.3 On careful perusal of the business activities of Accel Transmatic Ltd. DRP agreed with the assessee that the company was functionally different 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. DRP therefore directed the Assessing Officer to exclude ACCEL Transmatic Ltd. from th....
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....ar contentions for exclusion of this company as was made in the case of KALS Information Systems Ltd. (supra). Ld. DR also raised similar objections. We find that Accel Transmatics Ltd. has also been considered as a software product company by this Tribunal in the decisions cited at para 8.7.2 above. Relevant part of the decision has been reproduced by us therein. Accordingly, we direct that Accel Transmatics Ltd. be excluded from the comparables. 8.9 Tata Elxsi Ltd.: Ld. AR submitted that this company was engaged in research & development which resulted in creation of Intellectual Property Rights and therefore was a software product company. Reliance was placed on the decision of coordinate Bench of the Tribunal in the case of EMC Data (supra). 8.9.1 Per contra, the ld. DR submitted that Tata Elxsi Ltd. was not a software product company, but was engaged only in development of software. 8.9.2 We have heard the rival contentions. Whether Tata Elxsi Ltd. could be considered as a software development company was one of the issues which came up for consideration before the this Tribunal in the case of EMC Data (supra), wherein it was held as under:- "17. As far as comparab....
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....sider 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 assessee, hence, should be excluded from the list of comparable parties." 15. In view of the above, the ld. counsel for the assessee fairly admitted that comparable company at Sl.No.6 viz., Flextronics Software Systems Pvt. Ltd. should be taken as a comparable, while comparable at Sl.No.24 viz., Tata Elxsi Ltd. should be rejected as a comparable." 18. In view of the aforesaid decision, we hold that Tata Elxsi has to be excluded from the list of comparable chosen by the TPO." 8.9.3 The assessee before us is not developing any niche product. As held by the coordinate Bench of the Tribunal (supra), Tata Elxsi Ltd. could not be considered as a software development company simplicitor. That Tata Elxsi Ltd. was functionally different, has been held by the coordinate Bench of the Tribunal in the case of Yodlee Infotech Pvt. Ltd. (ITA No.1397/Bang/2010 dated 15.2.2013) as well. We therefore direct that Tata Elxsi Ltd. be excluded from the comparables. 8.10 L....
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....ty analysis, it is essential that the characteristics and the functions are by and large similar as that of the assessee company and T.P. analysis/study can be made with fewest and most reliable adjustment. If a company has employed heavy capital in development of a product then profitability in the sale of product would be entirely different from the company, who is involved in service sector. Therefore, this company cannot be treated as having same function and profitability ratio. In our view, due to non-availability of full information about the segmental details as to how much is the sale of product and how much is from the services, therefore, this entity cannot be taken into account for comparability analysis for determining arms length price in the case of the assessee." 15. The facts and circumstances under which the aforesaid companies were considered as comparable is identical in the case of the Assessee as well as in the case of Logica Private Ltd., (supra). Respectfully following the decision of the Tribunal referred to above in the case of Logica Pvt.Ltd..(supra), we direct that the company listed as Sl.No.10 of the list of comparable companies chosen by the TPO an....