TaxTMI 
TaxTMI 
2016 (3) TMI 1114
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.... 133(6) for obtaining data which is not in public domain; and (iii) various filters adopted; these are held against by DRP on the basis of various decisions of Coordinate Benches of ITAT. Assessee has not made any submissions on them, hence these issues are considered academic now. 3. Briefly stated, assessee company is engaged in providing software research and development services to Daimler AG, its AE. The parent company (AE) is involved in research in automobile and aircraft fields along with manufacturing and assessee supplements the research work as a captive service provider. The uniqueness of assessee service function, it was contended that, was not comparable to other software development services being provided by other companies. As per TPO, the business profile (para 2.2 of TP order), is that it contributes to research in the areas of computer simulation and Computer Aided Design/Engineering (CAD/CAE), electrical, electronics and IT services. Assessee operates on Cost + 5% (CPM) and has reported net profit of 3.20% on operating cost of Rs. 49.81 crores with revenues of Rs. 51.41 crores. Assessee in its TP study adopted Cost Plus Method as appropriate method and gave ....
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....od The taxpayer claims to have applied Cost Plus Method as the most appropriate method in its documentation u/s. 92D. Detail reasons for which CPM is not applicable in the facts and circumstances of the case of the taxpayer have been discussed in the show-cause letter and the order of the TPO for AY 2007-08. As the arguments of the taxpayer on this issue, including reference to CUP method, remain the same, to avoid repetition reference is made to those documents. In view of the above the international transactions of the taxpayer are analyzed under TNMM method. Discussions regard search and filters used by the TPO have also been made in the show-cause notice." 5.1 Thus, TPO based his observations on the order of TPO in AY 2007- 08. At the outset, the ld. counsel submitted that assessee preferred an appeal on the issue in AY 2006-07 and without adjudicating the issue, the ITAT has set aside the matter relating to TNMM comparables. Assessee preferred a Misc. Application and ITAT while acknowledging the same, however, restored the MAM also to the TPO. It was the contention that assessee cannot be compared to other companies as they are only supplementing or testing in the ....
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.... and arrived at the gross profit and operating profit margin of around 32% is quite reasonable. The net margin of 5% of overall cost is also very significant and reasonable, especially because the company does not resume any significant business risks. Thereafter, the assessee has taken 15% of the profits of companies who have R&D activities as per decision of ITAT in Rolls Royce case and analysed the Cost Plus Method. 5.6 However, as the ld. TPO has stated in the report, there is no data furnished by the assessee with reference to Cost Plus method. Even when we enquired, the ld. counsel fairly admitted that assessee would prefer CUP method over Cost Plus Method. In view of this, in the absence of any data, we are not in a position to appreciate the Cost Plus Method. More over, most of captive service provides work on Cost Plus Method ranging from 5% mark-up to 25% mark-up. All the transactions are related party transactions. Therefore, uncontrolled comparable prices are generally not available in the Cost Plus Method. Even the assessee's analysis of 32% Gross Profit and 5% Net Profit cannot be accepted as there cannot be any Gross Profit in the case of assessee, who is operatin....
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....in arriving at the rate per hour either in USD terms or INR terms. It was submitted that by taking general accounts and annual repot of the respective companies, assessee has derived offshore consultancy amount and thereafter assumed the persons who have worked offshore and then the rate per day at 20 days per month working and rate per hour at 8 hours per day, thus on various assumptions and presumptions, the rate per hour was arrived from the total profits as reported in the public domain. It was fairly admitted that rate per hour is not available for strict comparison. It was also submitted that the assessee has not taken NASCOM rates as the basis in comparing the rate per hour. This indicates that assessee's comparability under the CUP method is based on various assumptions of (a) estimating the offshore profits, (b) estimating number of employees, (c) estimating the working hours per employee per day per month, and then dividing the profit by so many assumptions/ numbers. This analysis of the assessee cannot be relied on as an external CUP. As can be seen from the above, there is no internal CUP which can be relied on in order to accept the CUP method. Therefore, in our view, ....
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....d. 18.72% 9 Thirdware Solution Ltd. 19.35% 10 Softsol India Ltd. 17.89% 11 e-Zest Solutions Ltd. 29.81% 12 Flextronics (Aricent) 7.86% 13 iGate Global Solutions Ltd. 13.99% 14 LGS Global Ltd. 27.52% 15 Mindtree Ltd. 16.41% 16 Persistent Systems Ltd. 20.31% 17 Quintegra Solutions Ltd. 21.74% 18 R S Software (India) Ltd. 7.41% 19 R Systems International (Seg) 15.30% 20 Sasken Communication Technologies Ltd. (Seg) 7.58% Arithmetic Mean 23.65% 6.2 Assessee is objecting to the companies listed at Sl.Nos. 1 to 11. These companies are elaborately considered by the Coordinate Bench in the case of NXP Semiconductors, IT(TP)A No.1560/Bang/2012 dated 5.3.2015 as under:- "9. Avani Cincom Technologies Ltd. 9.4.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial decisions cited by the assessee. We find that a co-ordinate bench of this Tribunal in the case of M/s. Curam Software International Pvt. Ltd. in ITA No.1280/Bang/2012 dt.31.7.2013 for Assessment Year 2008-09, h....
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....the principle applicable to one particular year cannot be extrapolated automatically and made applicable to subsequent years. To do that, it is necessary to first establish that the facts and attendant factors have remained the same so that the factors of comparability are the same. Viewed in that context, the assessee has not discharged the onus upon it to establish that the decision rendered in the case of Triology E-Business Software India Pvt. Ltd. (supra) can be applied to the facts of the case and that too of an earlier year i.e. Assessment Year 2007-08. The assessee, in our view, has not demonstrated that the facts of Triology EBusiness Software India Pvt. Ltd. (supra) are identical to the facts of the case on hand and that the profile of the assessee for the year under consideration is similar to that of the earlier Assessment Year 2007-08. In view of facts as discussed above, we deem it fit to remand the matter back to the file of the Assessing Officer / TPO to examine the comparability of this company afresh by considering the above observations. The TPO is directed to make available to the assessee information obtained under section 133(6) of the Act and to afford the as....
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....ly dis-similar and different from the assessee in the case on hand and is therefore not comparable and also that the findings rendered in the cited decisions for the earlier years i.e. Assessment Year 2007-08 is applicable for this year also. We agree with the submissions of the assessee that this company is functionally different from the assessee. It has also been so held by co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) as well as in the case of Triology E-Business Software India Pvt. Ltd. (supra). In view of the fact that the functional profile of and other parameters of this company have not changed in this year under consideration, which fact has also been demonstrated by the assessee, following the decision of the co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 in ITA No.845/Bang/2011 and Triology E-Business Software India Pvt. Ltd. in ITA No.1054/Bang/2011, we hold that this company ought to be omitted from the list of comparables. The A.O./TPO are accordingly directed." 10.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of ....
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....te bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), we direct the Assessing Officer / TPO to omit this company from the final set of comparables as it is functionally different from the assessee in the case on hand, who is purely a software service provider." "18. Lucid Software Ltd. 18.3.1 We have heard the rival submissions and perused and carefully considered the material on record; including the judicial decision cited and placed reliance upon. We find that the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company has to be excluded from the list of comparables for software development service providers as it is engaged in software product development and the relevant observations of the order at para 16.3 thereof is extracted hereunder :- " 16.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that the company i.e. Lucid Software Ltd., is engaged in the development of software products whereas the assessee, in the case on hand, is in the business....
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....n record, we find that this company is predominantly engaged in product designing services and not purely software development services. The details in the Annual Report show that the segment "software development services" relates to design services and are not similar to software development services performed by the assessee. 13.4.2 The Hon'ble Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. V ACIT (ITA No.7821/Mum/2011) has held that Tata Elxsi Ltd. is not a software development service provider and therefore it is not functionally comparable. In this context the relevant portion of this order is extracted and reproduced below :- " .... Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of the learned Authorised Representative 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 f....
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....iew of the matter, we hold that this company ought to be omitted from the set of comparable companies. It is ordered accordingly." 12.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), we direct the Assessing Officer / TPO to omit this company from the final set of comparables as it is functionally different from the assessee in the case on hand, who is purely a software service provider." "13. Wipro Ltd. 13.4.1 We have heard both parties and perused and carefully considered the material on record; including the judicial decisions cited. We find that a co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company ought to be excluded from the list of comparables holding as under at paras 12.4.1 and 12.4.2 of its order, which is extracted hereunder :- " 12.4.1 We have heard both parties and carefully perused and considered the material on record. We find merit in the contentions of the assessee for exclusion of this company from the set of comparables. It is seen that this company is en....
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.... " 16. We have considered the rival submissions. The Special Bench of the ITAT in the case of Maersk Global Centres (supra) had an occasion to deal with the question as to whether high profit margin making companies should be excluded as a comparable. The Special Bench after considering several aspects held in para 88 of its order that the potential comparable companies cannot be excluded merely on the ground that their profit is abnormally high. The Special bench held that in such cases it would require further investigation to ascertain the reasons for unusually high profit and in order to establish whether the entities with such high profits can be taken as comparable or not. In the light of the aforesaid decision of the Special Bench and in view of the admitted position that the assessee follows Fixed Price Project model where revenues from software development is recognized based on software developed and billed to clients, there is a possibility of the expenditure in relation to the revenue being booked in the earlier year. The results of Bodhtree from FY 2003 to 2008 excluding FY 2007 as given by the learned counsel for the assessee were also perused. Perusal of the same s....
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....said company should be retained as a comparable, when factually it is shown that the said company is a software product company and not a software development services company." 15.3.2 It is also seen that the decision relied on by the co-ordinate bench of this Tribunal in the above mentioned case; CISCO Systems (India) Pvt. Ltd. (supra), has been in relation to Assessment Year 2008-09 and therefore we find merit in the contention of the assessee that the finding rendered in the above cited decision applies to the facts and circumstances of the case on hand, which is for Assessment Year 2008-09. In this view of the matter, following the above decision of the co-ordinate bench of the Tribunal, we direct the TPO to include this company form the set of comparable companies to be applied to the assessee. It is ordered accordingly." "17. Thirdware Solutions Ltd. 17.3.1 We have heard both parties and perused and carefully considered the material on record. We find that a co-ordinate bench of ITAT, Bangalore in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has excluded this company from the set of comparables to a pure software de....
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....ibunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2011. As the facts for this year are similar and material on record also indicates that RPT is 18.3%, following the afore cited decisions of the co-ordinate benches (supra), we hold that this company is to be omitted from the list of comparables to the assessee in the case on hand." 21.4.2 Following the decision of the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, and 24/7 Customer.com Pvt. Ltd. in ITA No.227/Bang/2011, we direct the A.O / TPO to exclude this company from the list of comparables as it has RPT of 18.30% which is in excess of 15%. It is ordered accordingly." "16. E-Zest Solutions Ltd. 16.4.1 We have heard both parties and perused and carefully considered the material on record. We find that a co-ordinate bench of ITAT, Bangalore in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 had excluded this company from the list of comparables holding that this company is into rendering of product development services and high end technical services in the category of KPO Service....
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....6.2015. The objections of assessee are similar to the above and facts being the same, we direct the TPO to exclude them from the list of comparables. The grounds raised by the assessee are allowed accordingly. 7. Assessee requested for inclusion of the following two companies rejected by the TPO:- (1) Aditya Birla Minacs IT Services Ltd. (2) Aditya Birla Minacs Technologies Ltd. 7.1 The reason for rejection of the above companies was that they failed RPT filter. The objection of the assessee was that TPO has included the reimbursement cost in operating cost. It is submitted that the reimbursement cost does not have any effect on profitability and if they are excluded, then they are within the filter range adopted by the TPO. Detailed objections and working as provided in objections to DRP at page 72 to 74 are referred in support of the contentions. 7.2 The above companies were considered by the Coordinate Bench in the case of Yodlee Infotech Pvt. Ltd. in IT(TP)A No.1538/Bang/2012 dated 30.8.2013 wherein vide para 25 and 26, the Bench directed as under:- "25.0 Aditya Birla Minacs IT Services 25.1 This company was selected by the TPO on....
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....the search conducted by him and was proposed as a comparable company in the show cause notice issued to the assesses. The assessee had no objection to the inclusion of this company in the set of comparables. The TPO, however, excluded this company from the final set of comparables for the reason that this company failed the Related Party Transaction filter, having 94.08% RPT. 26.2 In this appeal before us, the learned Authorised Representative contended that the reason for which the TPO has rejected this company as a comparable is incorrect since he had calculated the RPT figure at 94.08% wrongly. It is submitted that the RPT for this company is only 7.43% and that the TPO has computed the some wrongly by considering reimbursements also as RPT. In view of this the learned Authorised Representative prayed that the TPO/AO be directed to include this company in the final set of comparables. 26.3 Per contra the learned Departmental Representative supported the orders of the TPO in excluding this company from the final set of comparables on the ground that it failed the RPT filter applied by the TPO. 26.4 We have heard both parties and perused and carefully co....
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.... cannot be said to be one realized from international transaction though they may form part of the gain/loss of the enterprise and therefore they should be excluded while determining operating cost. On the above issue we find that the Bangalore Bench of ITAT in the case of Sap Labs India (P) Ltd. Vs. ACIT (2011) 44 SOT 156 (Bang.) has taken the view that Foreign Exchange Fluctuation gains are required to be added to operating revenue. Following the same, the AO is directed to accept the claim of the Assessee in this regard.....................". 5.8.1 In conformity with the above finding, we direct the AO/TPO to consider the foreign exchange gain or loss as part of the operating cost or revenue, as the case may be, for both the assessee as well for the comparable companies." 8.1 In conformity with the above finding, we direct the TPO to consider accordingly. Ground is allowed. 9. The last issue for consideration is the issue of risk adjustment. This issue was also considered and held in favour of assessee in AY 2007-08 in assessee's own case as under:- "5.11 It was the case of the assessee that the AO/TPO erred in not making suitable adjustments on account o....