TaxTMI 
TaxTMI 
TaxTMI 
2015 (11) TMI 538
X X X X Extracts X X X X
X X X X Extracts X X X X
....hat the direction given by the CIT (A) is in consonance with the judgment of Hon'ble jurisdictional High Court in the case of CIT v. Tata Elxsi Ltd (349 ITR 98). Their Lordships held that parity has to be there between export turnover and total turnover while excluding items from the export turnover. Filing SLP before the Hon'ble Apex Court, would not be a sufficient reason not to follow the jurisdictional High Court judgment. Accordingly ground 2 of the Revenue is dismissed. 05. In its ground 3, grievance raised by Revenue is that the CIT (A) directed exclusion of all comparables that were having any related party transactions (RPT) from the list of comparables considered for bench marking the pricing of international transactions of the assessee. 06. Ld. DR submitted that 0% of the RPT directed by the CIT (A) went against various decisions of the Tribunal. Specific reliance was placed on the decision of Bangalore Bench of the Tribunal in the case of 24/7 customer.com Pvt Ltd vs DCIT (2013) 140 ITD 344. 07. Per contra, Ld. AR submitted that though he was not having any objection for adopting the 15% RPT filter, as held in the case of 24/7 Customer.Com P. Ltd (supra), the RPT wo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Ltd (supra), the Assessing Officer / TPO are directed to exclude after due verification those comparables from the list with related party transactions or controlled transactions in excess of 15 percent of total revenues for the financial year 2003- 04." 09. Accordingly we are of the opinion that CIT (A) fell in error in directing exclusion of comparables which were having any RPTs. RPT ratio has to be considered at 15% in accordance with the above decision. Vis-a-vis argument of the Ld. AR that a few of the companies which come back to the list of comparables, still had to be excluded, for other reasons, we are of the opinion that the submission warrants consideration. These companies will be considered by us when we take up the appeal of the assessee, while adjudicating on the grounds taken by the assessee seeking exclusion of certain comparable companies. Ground 3 of the Revenue is treated as partly allowed. 10. Vide its ground 4, grievance raised by Revenue is that companies having abnormal profits were directed to be excluded. 11. Ld. DR submitted that CIT (A) had not given any reason as to how the functions discharged, assets deployed and risks assumed by such companies w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssed. 15. Now we take up the appeal of assessee. Ld. Counsel for the Assessee at the outset submitted that he was confining his arguments to exclusion of certain companies from the list of comparables, as it remained after giving effect to the CIT (A) decision and after applying the 15% RPT filter. According to him, other grounds relating to TP issue could be dealt with at an appropriate time, if required. 16. As per the Ld. AR assessee was a subsidiary of Synopsis Inc, USA, providing captive service in the nature of software development to its AE abroad. According to him, assessee had adopted TNMM as the most appropriate one for analysing the pricing of its international transactions with AE. Assessee had considered itself to be a software development service provider and selected 15 comparable companies from the prowess and capitaline data base. As per the Ld. AR, arithmetic mean of the operating margin over cost of the said 15 companies came to 9.78% against assessee's own PLI of 10.35%. As per the Ld. AR, TPO had worked out the PLI of the assessee at 10.47% and pursuant to the CIT (A)'s direction such PLI had gone further down to 10.10%. Nevertheless, according to him, these ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ware Systems Ltd, Geometric Software Ltd, iGate Global Solutions Ltd, Infosys Technologies Ltd, L & T Infotech Ltd, R S Software (India) Ltd, Sasken Communications Ltd, Sasken Networks Ltd, Satyam Computers Ltd, Tata Elxsi Ltd, and Thirdware Solutions Ltd, would come back to the list of comparables. According to him, assessee had no objections in iGate Global Solutions Ltd, L & T Infotech Ltd, R S Software (India) Ltd, Sasken Communications Ltd and Sasken Networks Ltd, coming back to the list of comparables. However according to him, in the case of Infosys Technologies Ltd, CIT (A) himself had rejected it on the basis of functionality and Department had not appealed against such finding of the CIT (A). Vis-a-vis Satyam Computers Ltd, CIT (A), had rejected such comparable for a reason that its financial results were not reliable. As per the Ld. DR Department had not raised any grievance in this regard. 19. Coming to the issue of comparability of M/s. Exensys Software Solutions Ltd, Ld. AR submitted that it was not due to extra-ordinary profits, but due to extra-ordinary events that happened during the relevant previous year that exclusion was sought. Reliance was placed on the coor....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... for selecting comparables for the purpose of ALP study. That assessee was engaged in software development service, is clear from the profile of the assessee reproduced by the TPO at para 2.2 of its order : "2.5 Synopsys India entered into an agreement with Synopsys USA and Synopsys Ireland to provide R&D services in respect of development of EDA tools and software. 2.6 EDA software comprises sof tware programs that are used by engineers as tools in designing ICs. IC's are distinguished by the speed at which they run, their area, the amount of power they consume and the cost of production Synopsys products in the form of EDA software/tools offers its customers the opportunity to design ICs that are optimized or speed. area, power consumption and production cost while reducing overall design time." As per the details provided in the TP report, the tax payer company is engaged in provision of software research and development services to Synopsys UK and Synopsys Ireland. The tax payer's nature of international transactions and functions has been described as under at Page 5 as under:- 23. List of the comparables selected by the TPO for analysing the pricing of inter....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l Technologies India P. Ltd. This Tribunal had held at para 14 of the order, as under : 14. The Ground raised by the Revenue with regard to the action of the CIT(A) in excluding companies with abnormal profits is misconceived and the issue and does not arise out of the order of the CIT(A). As we have already seen the CIT(A) rejected some of the comparable companies chosen by the TPO by applying related party transaction filter. The filter of companies dealing in software products and abnormal profits owing to amalgamation of the companies during the relevant period thereby showing abnormal profits was applied to exclude Exensys Software solutions Ltd., was excluded for reasons of high turnover and high risk profile. Satyam Computer Services Ltd., has to be excluded from the comparable companies for non-reliability of financial data as it was involved in financial scam. In doing so, the CIT(A) followed the decision of this Hon'ble Tribunal in Agnity India Technologies v. ITO (ITA 3856/DeI/2010) and SAP India Pvt. Ltd v. ITO [ITA No. 398/8/2008]. Therefore the grievance as projected by the Revenue in ground No.5 is misconceived. On the facts of the present case, we are of the view ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d during the relevant financial year and the financial results are in respect of services only. Thus, it is clear that there is no sale of software products during the year but the said company might have incurred expenditure towards the development of the software products. 30. Though this Tribunal had directed exclusion of Thirdware Solutions Ltd, what we find is that Hyderabad bench decision of the Tribunal in the case of Invensys Development Centre I. P. Ltd (supra), was admittedly against exclusion of Thirdware Solutions Ltd. Argument of the assessee before us is that segmental results of Thirdware Solutions Ltd were not available and Thirdware Solutions were into software product development and software development services. No doubt in the submissions made before the CIT (A) by the assessee, it has been stated that annual report of Thirdware Solutions Ltd for F. Y. 2004-05 did not provide segmental information. Annual report of Thirdware Solutions Ltd for the relevant previous year shows its revenue stream as under : 27. Notes to its accounts for the said year mentioned as under : QUANTITAVE DETAILS:- The company is engaged in trading and development of software. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Tata Elxsi Limited to the Addl. CIT (Transfer Pricing), Hyderabad, wherein the concerned Officer has been informed that Tata Elxsi Limited is specialised Embedded Software Development Service Provider and that it cannot be compared with any other software development company. It was submitted that because of the specialisation and also because of diverse nature of its business, it is very difficult to scale-up the operations of Tata Elxsi Limited. In view of this, Tata Elxsi Limited has informed that it is not fair to use its financial numbers to compare it with any other company. The communication dated 25th August, 2009 to the TPO is placed before us. As this communication was not before the TPO at the time of transfer pricing adjustment we deem it fit and proper to remand this issue also to the file of the TPO to reconsider adopting this company as the comparable in the light of observations of this company to the TPO in the case of another assessee. In the result, the Assessing Officer/TPO is directed to reconsider the issue in accordance with law, after affording a reasonable opportunity of being heard to the assessee." Keeping the assessee's objections and the decisions o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ning Content Management System) - IRMAQTM : This is an integrated resource planning, management tracking system exclusively developed for Airline operations. It is an end-to-end solution for all Flight Operations. - Sakai CLE : This is a widely used and popular open source LMS used in many leading educational institutions and corporate. The relevant extract from the Annual report substantiating that the company also engages in different activities is reproduced below: "2. Activities The company as engaged in the business of development of Software Products & Services and training. The production of software is not capable of being expressed in any generic unit and hence 11 is riot possible to give the information as required by certain clauses of paragraphs 3.4C and 4 D of Part II of Schedule VI of the Companies Act, 1956." 19. The Delhi Tribunal in ITO v. Colt Technology Services India Pvt. Ltd. (judgment dated 23.10.2012 in ITA No. 609I/Del/2011 for the assessment year 2005-06) has held that the said company is not a comparable to the assessee therein which was also in the business of software development. 20. The submissions made by the learned counsel for the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....: "For the reasons mentioned in the ensuing paras Flextronics cannot be considered as comparable company, for the purposes of application of TNMM in the subject proceedings. The relevant extracts from the Annual Report of Flextronics Ltd. (Flextronics) for FY 2004-05 are reproduced below and are attached as Annexures (as mentioned for each of the paras below) for your goodselfs ready reference. At the outset the company submits the business review of Flextronics from the Director's Report for FY 2004-05 which states as follows.......... Income from products: Flextronics has income from products and this is evident from the data available in the Annual Report for FY 2004-05. Some of the products introduced by Flextronics during the year 2004-05 are: OSA Application Server, IMS client Framework, IP Phone Toolkit, nexGen SS7 platform, GSNLite Solution. (Source: Page 11 of the Annual Report attached herewith as Annexure 8.1) As per notes to accounts: "revenue _from sale of software user license /products is recognized on delivery of software and when the customer has an unrestricted right to use." (Source: Page 36 of the Annual Report attached herewith as....
X X X X Extracts X X X X
X X X X Extracts X X X X
....04-05 which inter alia mentioned three streams of its business as software services, sale of product and related services and business of project outsourcing services. TPO had noted that 81% of the revenue of the said company were from billings done on man-hours spent on services and its fixed price revenue was only about 15% of the total service income. In our opinion, TPO has been able to demonstrate that Flextronics Software Systems Ltd was predominantly into software development service. Just because an insignificant portion of revenue was generated from sale of products and related services or business process outsourcing, a conclusion cannot be drawn that it was not into software development services. We are therefore of the opinion that Flextronics Software Systems Ltd was properly considered as a good comparable. 34. Coming to Foursoft Ltd, admittedly RPT was in excess of 15%. In accordance with our decision in 24/7 Customer.com P. Ltd (supra), the said company is directed to be excluded. 35. As mentioned by us exclusion of Bodhtree Consulting Ltd, though mentioned in the chart furnished by the assessee, was not pressed by the Ld. AR during the argument. 36. Vis-a-Vis Ge....