TaxTMI 
TaxTMI 
2015 (5) TMI 367
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.... the international transaction of rendering software development services to its Associated Enterprise (AE), the assessee, after making the search on the prowess and capitaline data bases, has selected 49 comparables for the software development services and had adopted the TNMM (Transactional Net Margin Method) as the most appropriate method for arriving at the Arms Length Price (ALP). 5. The TPO rejected many of the comparables adopted by the assessee and made his own search of the database. He arrived at a set of 20 comparable companies, the list of which is annexed to this order as ANNEXURE-I. The profit margin of comparables so chosen by the TPO was 20.68. After giving risk adjustments, the TPO determined the arm's length price (ALP) as follows:- "18.6 Computation of Arms Length Price: The arithmetic mean of the Profit Level indicators is taken as the arms length margin. (Please see Annexure B for details of computation of PLI of the comparables). Based on this, the arms length price of the software development services rendered by the taxpayer to its AE(s) is computed as under: Arithmetic mean PLI 20.68% Less: Working capital Adjustment (Annexure-C) 1....
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....effect to the directions of the Tribunal, the AO has incorrectly computed the ALP and if the inaccuracy is rectified, then the profit margin of the assessee would be within the +/- 5% range of the arithmetic mean of the comparables chosen by the TPO. According to the ld. counsel for the assessee, the provisions of second proviso to section 92C of the Act have not been properly applied by the TPO. 9. In the set aside proceedings, the TPO had chosen 14 comparables. The arithmetic mean of the profit margin of 14 comparables chosen after working the capital adjustment was 18.63%. Based on the above, the TPO computed the adjustment on account of ALP as follows:- Particulars Amount (Rs.) Operating Cost post capacity adjustment 21,67,21,274 Arm's Length Margin 18.63% Arm's Length Margin Price @ 122.28% of Operating Cost 1.55% Price shown in International Transaction 25,37,37,268 Difference being shortfall 24,06,82,087 Difference being shortfall 1,30,55,180 10. As far as IT segment is concerned, the TPO in the set aside proceedings gave effect to the directions of the Tribunal insofar as it relates to applying the turnover filter and also the....
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....3(6) as not reliable on the basis of data available in electronic media such as PROWESS and CAPITALINE databases. It is relevant to submit that the data-base do not claim absolute authenticity. Therefore, how can assessee challenge the authenticity of information collected u/s. 133(6) of IT Act received under verification on the basis of database which is not fully reliable? Therefore, the direction given by the ITAT cannot be compiled with. This has been brought to the notice of the Hon'ble tribunal by way of Miscellaneous petition filed vide dated:10.08.2012. Order of the Tribunal has not been received by the TPO as on date. Further, the assessee had filed with the TPO a list of questions for which the replies had to be sought from the third parties. The questions were forwarded to Kals Information Systems, Megasoft Pvt Ltd, Accel Transmatic Pvt Ltd. The reply sought for has not been provided by Megasoft Pvt Ltd till date. The other two parties Accel Transmatic Pvt Ltd and Kals Information Systems Pvt Ltd had replied which is enclosed as annexure-A to the order for the taxpayer's reference. I propose to pass the order subject to amendment to the Hon'ble ITAT's order on the ....
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....filed by the assessee in this regard has already been extracted at para 13 hereinabove. 14. In the above circumstances, the ld. counsel for the assessee has given up the assessee's right to agitate the issue with regard to the TPO not having afforded the opportunity to the assessee of cross-examining all the persons from whom TPO obtained information u/s. 133(6) of the Act. 15. The ld. DR, placing reliance on the order of the TPO, submitted that the comparability of 4 companies out of 5 companies pointed out by the ld. counsel for the assessee, has already been adjudicated by this Tribunal. The 5th company viz., Megasoft Ltd. was considered as a comparable to software development service provider, but only segmental data was directed to be considered. 16. We have considered the rival submissions. In the light of the submissions made by the ld. counsel for the assessee, we are of the view that it is no longer necessary for us to go into question regarding affording the assessee opportunity to cross-examine all the persons who have information in response to TPO's notice u/s. 133(6) of the Act. We are also of the view that 4 out of the 5 comparable companies pointed ....
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....t the said company is into development of software products, etc. All these aspects have not been factually 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. (e) Accel Transmatic Ltd. 4....
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....ware developer. The Tribunal, in the said decision referred to by the ld. counsel for the assessee, has accepted that this company was not comparable in the case of the assessees engaged in software development services business. Accepting the argument of the ld. counsel for the assessee, we hold that the aforesaid company should be excluded as comparables." 12. In view of the aforesaid decision of the Tribunal, comparables at Sl.Nos.4 & 13 of the list of comparables chosen by the TPO have to be excluded for the purpose of comparison while determining the ALP of the impugned transaction in this appeal. 13. As far as comparable at Sl.No.9 viz., Lucid Software Ltd. from the list of comparables chosen by the TPO is concerned, we find that the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India Pvt. Ltd. (supra) while dealing with the case of software services provider like the assessee, considered the comparability of Lucid Software Ltd. with similar software services provider and the Tribunal held as follows:- "7.2 Lucid Software Limited It has been submitted before us that this company, besides doing software development services, is also involved in....
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....38/Bang/2010 by its order dated 30.8.2013 held that this company is not functionally comparable with a software development service provider. The following were the relevant observations of the Tribunal in this regard. "15. Tata Elxsi Limited. 15.1.1 This company was selected by the TPO for inclusion in the set of comparables. Before the TPO, the assessee had objected to the inclusion of this company in the set of comparables for various reasons such as functional dis-similarity significant R & D activity, brand value, size, etc. The TPO, however, rejected the assessee's objections and included the company in the set of comparables. Before us, in this appeal the learned Authorised Representative reiterated that this company is not functionally comparable to the assessee as it performs a variety of activities and functions under the software development and services segment and has drawn our attention to and quoted from the Annual Report of the company. 15.1.2 The learned Authorised Representative submitted that as per the Annual Report, this company operates in two segments, namely, 1. Systems and Integration Support Services - which caters to the domestic market an....
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.... that the nature of product developed and services provided by this company are different from the assessee 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 assessee, hence, should be excluded from the list of comparable parties." As can be seen from the extracts of the Annual Report of this company, placed before us, this factual position pertaining to Tata Elxsi Ltd., has not changed from Assessment Years 2007-08 to 2008-09. In this view of the matter, we are of the view that this company is not to be considered for inclusion in the set of comparable in the case on hand for the period under consideration and therefore direct the TPO to exclude this company from the final set of comparables for the period under consideration." 18. In view of the above, the aforesaid comparable at Sl.No.8 of the list of comparable chosen by the TPO should also be excluded for the purpose of ....
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....proceeded to hold that the comparable company was mainly into customization of software products developed (which was akin to software development) internally and that the portion of the revenue from development of software sold and used for customization was less than 25% of the overall revenues. The TPO therefore held that less than 25% of the revenues of the comparable are from software products and therefore the comparable satisfied TPO's filter of more than 75% of revenues from software development services. Having drawn the above conclusion, the TPO did not bother to quantify the revenues which can be attributed to software product development and software development service but adopted the margin of this company at the entity level. In terms of Rule 10B(3)(b) of the Rules, an uncontrolled transaction shall be comparable to an international transaction if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can b....