AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2013 (11) TMI 1615
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....activities and computer based quantitative management. The assessee provides software development services to its AE. Therefore, the assessee is purely a captive service provider. The assessee has been recognised as 100% EOU registered under the Software Technology Park of India (STPI) Scheme. As per the terms of the contract with its AE, the assessee is remunerated at cost plus 12% for the services rendered by it to its AE. For the impugned assessment year, the assessee earned revenue of Rs. 63,07,80,968 from international transaction with its AE. The assessee for the impugned assessment year filed its return of income on 29-10-2007 declaring total income of Rs. 54,30,688/-. Along with return of income, the assessee also submitted a TP study report wherein transaction Net Margin Method (TNMM) was adopted as most appropriate method and operating profit/operating cost as the profit level indicator (PLI). The assessee in the TP study, after conducting a search in the data bases on the basis of functions, assets and risk (FAR) analysis, selected 17 companies as comparables with an average margin of 10.86% as against assessee's margin shown at 12.07%. Hence, the price charged to th....
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....was reduced to Rs. 5,55,78,968/-. Being aggrieved of the aforesaid order passed by the Assessing Officer, the assessee has preferred this appeal raising various grounds both on transfer pricing issues as well as corporate tax issues. 5. At the outset, the learned AR submitted that he does not want to press ground Nos. 2.4.1, 2.4.2, 2.4.4, 2.5.1, 2.6.1, 2.7.1, 2.8.1, 4.1, 5 and 6. Hence, these grounds are dismissed as not pressed. 6. Ground Nos.1.1, 2.1.1, 2.1.2 and 2.1.3 being general grounds are not required to be adjudicated upon. 7. In ground No. 2.2.1 to 2.2.3 the assessee has raised the issue of rejection of its claim for risk adjustment. 8. In ground 2.3.1, the assessee has challenged the rejection of two comparable companies selected by it namely Akshay Software Technology Limited and MAARS Software International Limited. 9. In ground 2.3.2 to 2.3.4, the assessee has challenged selection of certain companies as comparables by the TPO. 10. Ground Nos.3.1 to 3.2 are relating to the corporate tax issues of claim of deduction u/s 10A of the Act. 11. We will first deal with ground Nos. 2.3.2 to 2.3.4. relating to selection of certain comparables by the TPO, w....
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....service provider. He further submitted that considering the fact that this company is not a purely software development service provider, different benches of the Tribunal have held that M/s Accel Transmatics Limited cannot be compared with a purely software development service provider. It was submitted that taking into consideration the view of different benches of the Tribunal, the ITAT in case of Intoto Software India (P) Ltd. (supra) has held that Accel Transmatics Limited cannot be a comparable as it is not a purely a software development service company. 15. With regard to AVANI CIMCON TECHNOLOGY LIMITED also, the learned AR advanced similar argument and contended that the website of Avani Cimcon Technology Limited clearly reveals that the said company is engaged in product development, hence is functionally different from the assessee. That besides it was further submitted that the high margin of profit shown by Avani Cimcon also makes it non-comparable to the assessee. The learned AR further submitted that in case of Intoto Software India (P) Ltd. (supra) the Tribunal has directed exclusion of Avani Cimcon from the list of comparable companies. 16. Objecting to the c....
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....ess than 25%. The learned AR submitted that co-ordinate bench of this Tribunal in case of Intoto Software India (P) Ltd. (supra) after following the decision of the Bangalore Bench of the Tribunal in case of Trilogy E-Business Software India (P.) Ltd v. Dy. CIT [2013] 140 ITD 540 and HCL EAI Services Ltd. v. Dy. CIT [2013] 35 taxmann.com 146 (Bang.) (Trib.) has held that Kals Information Systems Limited (seg) cannot be treated as comparable with a purely software development service provider. 20. For the same reason, the assessee also requested for excluding M/S LUCID SOFTWARE LIMITED from the list of comparables. 21. The learned AR objecting to MEGASOFT LIMITED being treated as comparable submitted that apart from the fact that Megasoft Limited is predominantly a product development company, on 1-10-2006 another company i.e. Visual Soft has merged with Megasoft and after merger of Visual Soft the operating margin of Megasoft has gone up to 33% from 23%. It was further submitted that the segmental margin of Megasoft from software development services during the relevant financial year was only 23.11%. However, the Assessing Officer without taking the segmental margin of softw....
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....ed all the filters. With regard to Accel Transmatics Limited and Avani Cimcon Technology Limited, the learned Departmental Representative submitted that since the TPO has only considered the revenue earned from software segment, there is no reason to exclude these two companies. The same argument was also advanced in case of Flextronics Software Systems Limited (seg). So far as Ishir Infotech Limited is concerned, the learned Departmental Representative submitted that though the payments have been termed as professional fee, but it is actually salary. Hence, this company qualifies the employee cost filter. In case of Kals Information Systems Limited (seg), it is contention of the learned Departmental Representative that this company has been rightly retained as a comparable as it qualifies all the filters applied by the TPO. So far as Lucid Software Limited and Megasoft Limited are concerned, the learned Departmental Representative submitted that both these companies have been selected as comparables by the TPO as they are engaged in software development service. With regard to Tata Elxsi Limited, the learned Departmental Representative submitted that since the segmental details ar....
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....he facts of the present case in so far as selection of comparables are concerned. Having held so, we will now consider each of the companies objected to by the assessee. 26. Avani Cimcon Technology Limited and Accel Transmatics Limited:- It is the contention of the assessee that both these companies are not comparable as they are into product development. So far as Accel Transmatics is concerned, it is the further contention of the assessee that the said company has also sold one of its divisions during the relevant financial year and if this slump sale is excluded, this company will be a loss making company. On perusal of the material on record, we find that both the aforesaid companies were considered by the ITAT, Bangalore Bench in case of Triology E. Business Software India (P.) Ltd. (supra), the ITAT Bangalore Bench held that since these two companies are into product development they cannot be compared with a purely software development service company. Following the aforesaid decision of the ITAT, Bangalore Bench, the co-ordinate Bench in case of Intoto Software India (P.) Ltd. (supra) also directed for exclusion of the aforesaid two companies from the list of comparab....
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....arning is from software exports, however, the details of percentage of export of products or23services have not been given. We, therefore, reject this company also from taking into consideration for comparability analysis." It was also highlighted that the margin of this company at 52.59% which represents abnormal circumstances and profits. The following figures were placed before us:- Particulars FYs 05-06 06-07 07-08 08-09 Operating Revenue 21761611 35477523 29342809 28039851 Operating Expns. 16417661 23249646 23359186 31108949 Operating Profit 5343950 12227877 5983623 (3069098) Operating Margin 32.55% 52.59% 25.62% - 9.87% (e) Accel Transmatic Ltd. 48. With regard to this company, the complaint of the assessee is that this company is not a pure software development service company. It is further submitted that in a Mumbai Tribunal Decision of Capgemini India (P.) Ltd. v. Addl. CIT [2011] 12 Taxmann.com 51, the DRP accepted the contention of the assessee that Accel Transmatic should be rejected as comparable. The relevant observations of DRP as ext....
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....Intoto Software India (P.) Ltd. (supra) we also direct the Assessing Officer/ TPO to exclude both these companies. 28. Infosys Limited and Wipro Limited:- Having considered the submissions of the parties, we are of the view that these two companies cannot be compared to the assessee as comparables due to various factors such as their size, turnover, brand value, diversified activities owning of intangibles etc. The co-ordinate bench of this Tribunal in case of Intoto Software India (P.) Ltd. (supra) has directed exclusion of the aforesaid two companies due to the aforesaid reasons. This is also the consistent view taken by different benches of the Tribunal including the Hyderabad Benches in many other cases. Therefore, respectfully following the view expressed by the co-ordinate benches of this Tribunal, we direct exclusion of the aforesaid two companies from the list of comparables. 29. Ishir Infotech Limited:- So far as this company is concerned, the assessee has sought exclusion of the aforesaid company on the ground that this company fails both employee cost filter and RPT filter. In this context, the learned AR has relied upon the decision of co-ordinate Bench of this Tr....
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....in the case of M/s. HCL EAI Services Ltd. v. DCIT IT(TP)A.No.1348/Bang/2011 at para 17 at pages 24 to 26 of its order has discussed at length the reasons for not considering the said company as comparable to software development services company. The relevant portion of the respective order is reproduced hereunder : (d) KALS Information Systems Ltd. 46. 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 v. 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 from software companies. The relevant extract are as follows: "16....
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....e in the case of Telcordia Technologies Pvt. Ltd. v. ACIT (supra). The submissions and the finding of the Hon'ble Mumbai Tribunal is reproduced below:- "7.2 Lucid Software Limited: It has been submitted before us that this company, besides doing software development services, is also involved in development of software product. The learned AR has tried to distinguish by pointing out that product development expenditure in this case is around 39% of the capital employed by the said company, and, therefore, such a company cannot be considered as tested party. Even as per the information received in response to notice under section 133(6), the 20company has described its business as software development company or pure software development service provider. This information itself is very vague as the segmental details of operating revenue has not been made available to examine how much is the ratio of sale from software product and sale of software service and development. Looking to the fact that it has developed a software product named as "Muulam" which is used for civil engineering structures and the product development expenditure itself is substantial vis-à-vis....
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....is predominantly a product development company and margin from software development services is 23.11%. As can be seen in case of Intoto Software India (P.) Ltd. (supra) the co-ordinate bench of the Tribunal while considering the assessee's objection with regard to the aforesaid company had directed the Assessing Officer/TPO to take only segmental margin of this company for computing ALP. Respectfully following the aforesaid order of co-ordinate bench, we also direct the Assessing Officer /TPO to consider only the segmental margin of this company for the relevant assessment year for computing ALP. 32. Tata Elxsi Limited:- The assessee has sought the exclusion of the aforesaid company by placing reliance upon a letter of the said company to the Additional. CIT (Transfer Pricing), Hyderabad relating to a proceeding in case of another assessee wherein the said company has admitted that it cannot be treated as comparable with any other company since it is a specialized embedded software development provider. In this context, it would be relevant to note the finding of the co-ordinate bench of this Tribunal in case of Intoto Software India (P.) Ltd. (supra) which is as under:- ....
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....y is 100%. In this context, the learned AR referring to the Directors report as contained in page 1 of the annual report of MAARS Software International Limited submitted that the Assessing Officer was not correct in holding that the company operates through its branch. The learned AR further referring to page 22 of annual report submitted that the company is a software development company and hence comparable to the assessee. 34. The learned Departmental Representative, on the other hand, supported the orders of the DRP and TPO. 35. We have considered the rival submissions and perused the materials available on record. On perusal of the order of the DRP, we find the DRP has not specifically dealt with the issue of rejection of the aforesaid two companies as comparables. It is clear from the annual report of MAARS Software International Limited for the financial year 2006-07 that the said company is engaged in software development service. Similarly assessee's contention has not been considered in case of Akshay Software Technologies Ltd., vis-a-vis the material available on record. These facts need to be considered properly. Since neither the DRP nor Assessing Officer ha....
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....assessing them, selection of appropriate tools and methods for measuring them, providing appropriate adjustment to the financials of the companies, etc., fall within the domain of experts from economics and management fields. It may be right to refer this issue to their expert opinion and determination to minimize the subjectivity as much as possible." 37. The learned AR submitted before us that the assessee during the TP proceedings itself has claimed the risk adjustment on the basis of a scientific method (CAPM) adopted by it. The assessee submitted that it neither owns intangible nor assumes any major risk. Whatever risk is assumed by the assessee is very minimal like human risk and foreign exchange risk. It was submitted that the observation made by the TPO that the assessee undertakes single customer risk and political risk is totally misplaced as single customer risk is a future risk and there cannot be any political risk when both the assessee and comparables are in the same country. He further submitted that rule 10B (3) provides benefit of adjustment. So far as the decision relied upon by the DRP are concerned, the learned AR submitted that in case of Dy. CIT v. Deloitt....
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....see is a captive service provider without undertaking any risk has allowed benefit of 1% towards risk adjustment. Relying upon the aforesaid decision of co-ordinate bench, the learned AR submitted that 1% benefit towards risk adjustment may be allowed to the assessee. 39. The learned Departmental Representative, on the other hand, strongly supporting the order of the DRP as well as TPO on this issue submitted that the proposition laid down by the Tribunal in the case of Deloitte Consulting India (P.) Ltd. (supra) applies to the facts of the issue. 40. We have heard the submissions of the parties and perused the material on record as well as orders of the lower authorities on this issue. As can be evident from the order of the TPO, the assessee in course of the TP proceedings had claimed benefit towards risk adjustment and submitted certain basis for quantifying the adjustment towards risk. Of course, it is another matter that the method adopted by the assessee was not acceptable to the TPO. However, as can be seen from the order of the TPO, according to his alternative computation also the assessee is entitled for risk adjustment of 0.73% on cost. Though ultimately, the TPO, ....
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.... and cannot be considered to be laying down a precedent to be applied uniformly to all cases. The assessee's grounds raised on this issue are partly allowed. 42. Since the finding given by us while deciding ground No. 2.3.1. and ground Nos. 2.3.2 to 2.3.4 also covers the issue raised in ground No. 2.4.3, there is no need to adjudicate this ground separately. 43. Ground Nos.3.1 to 3.4 are on the issue of reduction of communication expenses attributable to delivery of software outside India from the export turnover without reducing the same from total turnover while computing deduction u/s 10A of the Act. 44. We have heard the contentions of the parties and perused the orders of the authorities below on this issue. The sole contention of the learned AR before us is that the communication charges attributable to delivery of software outside India should be reduced both from the export turnover as well as total turnover for computing deduction u/s 10A of the Act. In our view, this issue has been set at rest by a number of decisions of different High Courts as well as different benches of the Tribunal including the Chennai Special Bench. In case of CIT v. Gem plus Jewellery....