TaxTMI 
TaxTMI 
2016 (7) TMI 660
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....er Book placed on record along with summary of charts and submissions. 2.1. Briefly stated, assessee is engaged in the business of computer software development and its related services to its Associated Enterprise (AE). Since assessee has international transactions with the AE, the matter was referred to Transfer Pricing Officer (TPO), Hyderabad u/s. 92CA of the Act. The TPO passed order u/s. 92CA(3) on 31-08-2010. After the above order by TPO, AO issued draft assessment order on 15-12-2010. Assessee filed objections before the DRP and the DRP vide its order dt. 09-08-2011, gave directions u/s. 144C(5) of the Act. Consequent to AO passed order on 25-08-2011, which is the subject matter of present appeal. Transfer Pricing matters: 3. Even though assessee was engaged in software development as well as IT enabled services up to AY. 2006-07, during the year, assessee involved only in software development services. The activities of assessee relate to only one segment i.e., software development. It has reported operating revenue of Rs. 167.19 Crores and an operating cost of Rs. 149.35 Crores. The operating profit by assessee is Rs. 70.84 Crores and the operating profits to cos....
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....ies Ltd 50.93% 16. Infosys Technologies Ltd 38.69% 17. Ishir Infotech Ltd 30.11% 18. Lucid Software Ltd 16.71% 19. Mega Soft Ltd 51.07% 20. Tata Elxsi Ltd (Seg) 25.86% 21. Wipro Ltd (Seg) 34.20% 22. Flextronics Software Systems Ltd (Seg) 24.73% 23. Helios & Matheson Information Tech Ltd 34.14% 24. Accel Transmatics Ltd 19.79% 25. KALS Information Systems Ltd Comparables to be included but rejected by TPO 23.10% 26. Aztecsoft Ltd Fails RPT filter 27. Birla Technologies Ltd Fails RPT filter 28. Indium Software India Ltd Functionally different 29. Larsen & Toubro Infotech Ltd Response to notice u/s. 133(6) not received 30. PSI Data Systems Ltd (Seg) Fails RPT filter 31. VMF Softech Ltd Fails Employee cost filter 7. At the outset, Ld. Counsel as well as the DR fairly admitted that most of these companies are already considered and rejected in the Co-ordinate Bench decision in the case of M/s. United Online Software Development (India) Pvt. Ltd., in ITA No. 1658/Hyd/2011 dt. 24-09-2015 and also other decisions of the Co-ordinate ....
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....reads as under- "7. Each of 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 asse....
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.... submitted that Assessee selected 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 Income-tax 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, ....
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....; Respectfully following the aforesaid decisions of the co-ordinate 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 co-ordinate 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....
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....ny was considered and analysed by different benches 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, whi....
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....so far as the selection of the aforesaid company 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 comparability analysis. Moreover, 67% of its sales relates to its product which are sold on premium resulting into higher prof itability, 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 comparability analysis, hence, would not be included in the list of the comparable entities as identif ied b....
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.... M/s. Conexant System India P. Ltd. ITA.No.1978/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 EBusiness 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, ....
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....usions 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 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) ....
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....w employee cost of 1.36%. Thus it fails the 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". 9. Further, as per the chart furnished before us, similar view has been taken by the Co-ordinate 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. Contex....
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.... also taken in the case of M/s. United Online Software Development (India) Pvt. Ltd., in ITA No. 1658/Hyd/2011 dt. 24-09-2015 (supra). Relevant portion of the said order of the Tribunal in the case of Sumtotal Systems India Pvt. Ltd., in ITA No. 1710/Hyd/2011 (supra) is extracted as under: "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 ....
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....ars of salary paid etc. Hence, genuineness of the company and its activities are doubted. This finding has not been controverted by Assessee in that case. Considering the facts, the Coordinate Bench felt that the aforesaid company has been rightly rejected as comparable. Since same 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". Respectfully following the above, we are of the opinion that assessee has not made out a proper case for inclusion of the above comparables. Accordingly, we reject Ground No. 8 raised by assessee. 13. Ground No. 12 pertains to inclusion of reimbursable cost as operating cost by the TPO. It was fairly submitted that this issue was also covered by the Co-ordinate Bench decision in assessee's own case for AY. 2005-06 in ITA No. 471/Hyd/2011 dt. 26-08-2015, wherein the issue was considered and decided as under: "23. The next issue which arises for consideration as raised in Gro....
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....ct of software development services. The learned counsel for the assessee has also filed before us a comparative chart explaining the computation of Net Margin, excluding the bad debts and clearly demonstrated before us that if the bad debts/reimbursements are excluded for the purpose of computing the margins on the transactions relating to the associated enterprises, the net margin comes to 19.07%, which is well comparable with the Arms Length Margin of 19% determined by the Transfer Pricing Officer. In our considered view, for computing the net margin of the assessee for the purposes of transfer pricing, only the cost related to the transaction with the Associated Enterprises has to be considered and accordingly, we approve that segmental financials is to be considered for the purpose of arriving at the net margin on the international transaction with the assessee's enterprise in respect of software development services. In that process, bad debts/reimbursements has to be excluded and segmental profitability has to be adopted. We find support in this behalf from various decisions of the Tribunal relied upon by the learned counsel for the assessee duly filing copies thereof in....
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.... Jewellery [330 ITR 175] and order of Special Bench of the ITAT in the case of ITO Vs. Sak Soft Limited [121 TTJ 865], AO was directed to exclude the communication charges from both export turnover as well as total turnover, the decision of the Co-ordinate Bench is as under: "4. We have heard rival submissions and perused the material on record. We have also applied our mind to the decisions cited before us. After going through the decisions, we find that the issue raised in the grounds is squarely covered in favour of the assessee. The Hon'ble Bombay High Court in the case of M/s. Gem Jewellery Limited (330 ITR 175) and the ITAT Chennai Special Bench in case of ITO Vs. Sak Soft Limited (121 TTJ 865) have held that while computing the deduction u/s. 10A of the Act, telecommunication charges have to be reduced from the export turnover as well as total turnover. In view of the ratio laid down as aforesaid, we direct the AO to re-compute deduction u/s. 10A after reducing communication charges both from the export turnover as well as total turnover. Accordingly, we allow the ground raised by the assessee". 17. In view of the ratio laid down as above, we direct the AO to re-co....
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....ology Pvt. Ltd., Vs. ACIT was appealed before the Hon'ble High Court. The AO, however, has not allowed even the unabsorbed depreciation. Hence, the ground raised by assessee. 21. It was submitted that Co-ordinate Bench in assessee's own case in AY. 2008-09 in ITA No. 1724/Hyd/2012 has considered the issue and directed the AO to allow the benefit of carried forward loss and un-absorbed depreciation, after deciding the issue in the consequential orders to be passed in pursuant to the directions of ITAT in AY. 2005-06. The direction of the ITAT is as under: "12. We have heard rival submissions and perused the material on record. Undisputedly, the ITAT vide its order dated 18- 5-2012 passed in ITA No. 1646/Hyd/10 for assessment year 2005- 06 has held that the loss of non STPI unit cannot be set off against the income of STPI unit availing deduction u/s. 10A. Therefore, the direction of the CIT given in the order passed by him u/s. 263 of the Act for the assessment year 2005-06 to the effect that the deduction u/s. 10A for the STPI unit has to be computed after setting off of the losses of other divisions was reversed by the ITAT. In other words, the ITAT allowed the claim wit....