TaxTMI 
TaxTMI 
2015 (10) TMI 2419
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.... year 2007-08. 3. Assessee raised fourteen grounds in this appeal, out of which grounds No.1 to 9 relate to Transfer Pricing Adjustment. In the course of arguments, the learned counsel has not pressed the grounds No.1 to 6, 9 10 and 11, which relate to rejection of transfer pricing documentation maintained by Assessee; rejection of use of contemporaneous data and undertaking fresh search of comparables; rejection of use of multiple year data; information obtained under S.133(6); incentive to shift profits; use of additional filters; and selection of companies earning abnormal high margins; and applicability of proviso to S.92C(2). These grounds are hence rejected as not pressed. As for the issue relating to adjustment towards risk, raised in Ground No.10, it becomes academic, if suitable directions are given in relation to the grounds contested in this appeal. Being academic, ground No.10 is also treated as not pressed and rejected accordingly, with liberty to the assessee to agitate this issue in further proceedings that ensue in pursuance of this order, if warranted. So also, ground No.13 relating to levy of interest under S.234B and 234C; and ground No.14 relating to initiati....
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....er was TNMM, this transaction is aggregated with the provision of software development services for the transfer pricing study. 8. The TPO and Assessee accepted the TNMM as the most appropriate method on the facts and circumstances of the case. Assessee has selected 28 comparables with weighted profit margin of 14.53% on operating cost in its T.P. study, out of which the TPO, in the course of his TP study has rejected and thereby excluded the eight comparable companies selected by Assessee from the scope of his TP study, and selected on the other hand, certain other companies as comparables for the purpose of his TP study. The TPO ultimately based on the data worked out in respect of 26 companies, determined the Arm's Length margin at 24.23% on cost, and transfer price adjustment to be made at Rs. 2,28,50,421, vide his order under S.92CA dated 31.8.2010. 9. On the objections raised by Assessee against the action of the Transfer Pricing Officer in rejecting comparables selected by Assessee, and in selecting other companies as comparable, the Dispute Resolution Panel has upheld the order of the Transfer Pricing Officer with regard to all the comparable companies ultimately take....
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....33.65 13. Out of the above twenty five companies ultimately selected as comparable, the assessee has no objection with regard to Datamatics Ltd., E-Zest Solutions Ltd., Geometric Ltd.(Seg). Igate Global Solutions Ltd., Lanco Global Systems Ltd., Media Soft Solutions Ltd. Mind Tree Consulting Ltd. (Seg.), Persistent Systems Ltd., Integra Solutions Ltd., R.S. Software (India) Ltd. , R. Systems International Ltd. (Seg)., S I P Technologies and Exports Ltd., Sasken Communication Tech Ltd.(Seg.), Thirdware Solutions Ltd. (Seg.). We may hereinafter deal with the objections raised by the assessee in grounds No.7 of this appeal, with regard to the other comparable companies selected by the TPO. 14. As noted above, the first effective grievance of Assessee that survives for consideration, raised in ground no.7, in this appeal relates to the inclusion of the following seven comparable companies selected by the TPO notwithstanding the objections raised by Assessee. 1. Avani Cimcon Technologies Ltd. 2. Infosys Technologies Ltd. 3. Ishir Infotech Ltd. 4. Lucid Software Ltd. 5. Mega Soft Ltd. 6. Tata Elexsi Ltd. (Seg.) 7. Wipro Ltd. (Seg.) 15. The learned ....
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....f 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 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 product development. As segmental details of operating income of software development services and sale of software products are not available, it could not be ascertained whether the profit ratio of this company can be taken into consideration for comparing with Assessee. As the aforesaid decision of the Coordinate Bench pertained to the same assessment year i.e. A.Y. 2007-08....
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....ted Infosys on the basis of three years data, whereas TPO has considered only current year data. The learned AR further submitted that if 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 Incometax Appellate Tribunal Special Bench decision in case of Quark Systems, 4 ITR (Trib) 606. 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 Assessee due to various factors such as its size, turnover, brand value, scale of operation, diversified activities and owning of intangibles. As can be seen from the TP order, the turnovers of Infosys Technologies Limited during the year under consideration are Rs. 13,149 crores as against Rs. 42 crores of Assessee. Though it is a fact that Assessee in the TP documentation, has selected Infosys Technologies Ltd. as comparable but that cannot prevent Assessee from objecting to the aforesaid company being selected as comparable, if there are valid reasons for ....
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....ons of the coordinate 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 coordinate bench in the case M/s Virtusa (India) Pvt. Ltd. (supra). On perusal of the order passed in case of M/s Virtusa (India) Pvt. Ltd. (supra), it is seen that the co-ordinate bench has excluded the aforesaid company accepting assessee's contention that segmental data in respect of sale of products and software services are not available. Further following cases also considered the above company and excluded the same on same reason. a) M/s. Foursoft Limited (ITA.No.1903/H/2011) b) Intoto Software India P. Ltd. ITA.2102/H/2010 c) Telcordia Technologies India P. Ltd. ITA.No.7821/Mum/2011 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.1....
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....s 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. ITA.No.7821/Mum/2011 b) Triology E Business Solutions, ITA No. 1054/Bang/2011. c) M/s. Foursoft Limited (ITA.No.1903/H/2011) d) M/s. Virtusa (I) P. Ltd. ITA.No.1962/Hyd/2011 e) M/s. Conexant System India P. Ltd. ITA.No.1978/Hyd/2011. 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 record. In case of Telcordia Technologies India Pvt. Ltd., ITA No. 7821/Mum/2011, the ITAT Mumbai Bench while considering the comparability of the aforesaid company with software services provider held as under: "7.7 From the facts and material on record and submissions made by the learned AR, it is seen that the Tata Elxsi is engaged in development of niche product and development services, which is entirely different from Assessee company. We....
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....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 Pvt. Ltd., ITA No. 7821/Mum/2011, while considering the objection of 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 comparabil ity analysis. Moreover, 67% of its sales relates to its product which are sold on premium resulting into higher prof itabil ity, therefore, cannot be compared with Assessee company at all. There are several judgments of ITAT which have been referred in para 6.5 above, that Wipro cannot be taken as comparable case for comparable case with the company like assessee. In view of these facts and the reasoning given in the case of Infosys, we hold that Wipro also cannot be considered as a comparabil ity analysis, hence, would not be included in the list of the comparable entities as identif ied by the TPO." 7.7.3. As can be seen from the ....
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....8/Hyd/2011. b) Intoto Software India P. Ltd. ITA.2102/H/2010 c) Bearing Point Business ITA.No.1124/Bang/2011 d) LG Soft India P. Ltd. ITA.1121/Bang/2011 e) 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) HCL EAI Services Ltd. ITA.No.1348/Bang/2011. 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 Assessee submitted that it is functionally different from Assessee. In support of his contention, the learned Counsel for Assessee relied upon the decision of the Bangalore Tribunal in the case M/s. Trilogy E-Business Software India Private Limited (supra) wherein at paras 46 and 47 of its order, the Tribunal has discussed the functional dissimilarity with Assessee therein and has directed that the company should be excluded from the list of comparables. Similarly, the Tribunal at Bangalore in the case of M/s.....
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....y 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 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 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 Assessee that this company is not comparable". 7.9.1. We find that both M/s. HCL EAI Services Ltd. ITA.No.1348/Bang/2011 as well as M/s. Trilogy E-Business Solutions ITA.No.1054/Bang/2011 are into software development services to its parent companies. Assessee is also into similar type of activity. Therefore, the decision taken in M/s. Trilogy E-Business Software India Private Limited as well as M/s. HCL EAI Services Ltd. to exclude Kals Information Systems Ltd. applies to the facts of the case before us also. Similar view has been expressed by the Coordinate Bench of the Tribunal in the following cases : a) M/s. Conexant System India P. Ltd. ITA.No.1....
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....e employee cost filter. Therefore, not comparable. Assessee relied on the judgment of Mentor Graphics P. Ltd. vs. DCIT 109 ITD 101 (Del.) with reference to this comparable. 15. After considering the contentions, we are of the opinion that these 14 comparables are required to be excluded by the TPO. Respectfully following the decisions of the Coordinate Benches of the Tribunal, we direct that these companies should be excluded from the list of comparables as assessee turnover is only 2.18 crores and employee cost is more. Many of the companies are also found to be not functionally similar. The various filters and reasons accepted in other cases do apply to Assessee as TPO selected same 26 comparables in all the cases relied on and decided earlier in various cases. " 19. Further, as per the chart furnished before us, similar view has been taken by the coordinate benches of the Tribunal in similar matters, wherein comparable nature of above eleven companies has come up for consideration, such as- (a) M/s. Axsys Healthcare Ltd. (ITA No.2076/hyd/2011) (b) M/s.Virtusa (I) P. Ltd. (ITA No.1962/Hyd/2011) (c) M/s. Contexant System India Pvt. Ltd.(ITA Nos.1978/Hyd/2011) (d)....
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....- "8. In Ground No. 8, Assessee has challenged the action of the TPO in rejecting certain comparables selected by Assessee, which are as under: 1. Aztec Soft Ltd. 2. Birla Technologies Ltd. 3. Indium software India Ltd. 4. Larsen & Toubro Infotech. 5. PSI Data systems Ltd. (SEG) 6. VMF Softech Ltd. 8.1. With reference to inclusion of these comparables, assessee's contentions are that related party transactions in the case of Aztek and Birla Technologies are within the filters applied by the TPO and with reference to Indium Software P. Ltd. and L & T Infotech, they are functionally similar. It was the submission by the Ld. Counsel that they are not functionally different and TPO should have considered segmentals from the details furnished by Assessee. In the case of L & T Infotech., even though information was not received under section 133(6), it was the submission that this company also should be considered as the comparable. As far as PSI Data Systems Ltd. are concerned, the TPO is rejected the comparison on the related party transactions filter. It was the submission that RPT was worked out by including reimbursement tr....
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....e facts exists we are also of the opinion that the aforesaid company has been rightly rejected, as comparable, even though on a different filter applied by the TPO. In view of the above, we are of the opinion that there is no need to consider any of the comparables, already rejected by the TPO/DRO for the reasons stated above. " 23.1 Respectfully following the above, we are of the opinion that assessee has not made out a proper case for inclusion of above comparables. Accordingly we reject ground no 8 raised by assessee. 24. The other ground that survives for consideration is ground No.12. It relates to computation of deduction under S.10A by reducing the communication charges of Rs. 9,79,218 from the export turnover considering it as attributable to the delivery of computer software outside India, but not reducing the same from the total turnover. 25. We have considered the rival submissions and perused the material available on record. It is settled position of law that the communication charges have to be excluded from the export turnover, and the issue that remains to be considered is whether it has to be reduced from the total turnover as well, in the computation of d....