TaxTMI 
TaxTMI 
2016 (8) TMI 1160
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....rovides on ongoing maintenance and support services. 2.1 During the relevant PY, as per the 3CEB report/TP document, the international transactions of the assessee reflected as under: A.E. Nature of transaction Amount (Rs.) Oakton Services Pty Ltd. Provision of software development services 14,49,13,409 Oakton Ltd. Reimbursement of expenses paid 45,70,800 14,94,84,209 2.2 The taxpayer has carried out the economic analysis and has summarized it as under: Nature of international transaction Amount MAM PLI Margin of taxpayer Margin of comparables Provision of software development services 14,49,13,409 TNMM OP/OC 13.41 11.88 Reimbursement of expenses paid 45,70,800 NA NA NA NA 2.3 The taxpayer has carried out the economic analysis in search for comparables at pages 27 to 39 of the TP documentation. The taxpayer has used Prowess and Capitaline Plus data base in search for comparable companies. For the software development services, after applying certain filters, the taxpayer using TNMM as MAM has short-listed 14 comparables with arithmetic mean PLI (OP/OC....
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.... rejected the TP study of assessee and has made fresh TP study with data for the FY 2010-11. TPO had selected the above 19 comparables. 2.9 After comparing the average margins of the comparables to the financials of the assessee, the TPO computed the adjusted arm's length margin as under: Description Amount Arm's Length Margin 22.69% Less: WCA 0.92% Adjusted Arm's Length Margin 21.77 Operation Cost (OC) 12,83,29,116 Adjusted Arm's Length Margin (%) (AALM) 21.77% Arm's Length Price = (100+AALM)*OC 15,62,66,365 Price Received (OR) 14,49,13,410 Adjustment u/s 92CA 1,13,52,955 2.10 Accordingly, the TPO who passed an order u/s 92CA(3) of the Act on 24/09/2013, recommended adjustment of Rs. 1,13,52,955/-. The same was incorporated by the AO in the draft assessment order. Assessee preferred a petition before the Dispute Resolution Panel (DR) raising various objections. 3. DRP has given partial relief to the assessee as under: 3.1 The DRP has eliminated the companies M/s Infosys Technologies Ltd. and L&T Infotech Ltd. as comparables, after considering the submissions of the assessee that these two compani....
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....ned as revenue from software development. iv) Hence this company cannot be rejected as comparable. 1.3. Considered the submissions of both the parties and perused the material facts on record. We find that the coordinate bench in the case of Pegasystems Worldwide India Pvt. Ltd. (supra) held as under: "8.3. After considering the rival contentions and perusing the annual reports placed on record, we are of the opinion that this company cannot be selected as comparable company for TP analysis. First of all, this company is engaged in both software development as well as ITES. Assessee being only captive service provider, the above company cannot be considered as comparable on functional basis. Not only that, as pointed out, segmental I.T.A. Nos. 1758 & 1936/Hyd/14 Pegasystems Worldwide India Pvt. Ltd., :- 7 -: information pertaining to the above company is not available. As seen from the TP orders, documents placed on record, TPO relied on later year's annual report in extracting the information. Variation in profitability over the years alone cannot be a reason to exclude the company from comparability analysis but as rightly pointed, the absence of segmental information, h....
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.... 1.5 In view of the above, in line with the decisions of the various benches of this Tribunal, we hold that this company is to be omitted from the list of comparable companies. With regard to DR submissions, he strongly submitted that in the case of M/s Virtusa India (supra), the matter was remitted back to the AO, in this case also, it should be remitted. We observe that the observations of the coordinate bench also that when the segmental data is not available, we cannot keep the company as comparable. In the present case also, there is no segmental data available on record. Hence, we do not find merits in the submissions of the DR. 2. Kals Information Systems Ltd., 2.1 Objecting to the aforesaid company as comparable, the AR of the assessee submitted that the said company is functionally different and dealing with software products. He submitted that the ITAT has rejected this company in the following cases: 1. Pegasystems Worldwide India Pvt. Ltd., ITA No. 1758/Hyd/2014, AY 2010-11. 2. CNO IT Services (India) Pvt. Ltd., ITA No. 336/Hyd/2015, AY 2010-11. 3. Planet Online Pvt. Ltd., ITA No. 464/hyd/2014, AY 2009-10. 2.2 Ld. DR relied on the orders of revenue ....
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.... 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 repot, the salary cost debited under the software development expenditure was Rs. 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 Vs. 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. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products ....
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....g software development services, which forms 89.52% of total revenues. ii) In response to notice u/s 133(6) the company has merely stated that it is engaged in SDS. iii) This company was considered as comparable in the AY 2008-09, which the DRP has upheld. iv) Hence, this company cannot be rejected as a comparable. 3.3 Considered the submissions of both the parties and perused the material facts on record. We find that the coordinate bench in the case of Pegasystems Worldwide India Pvt. Ltd. (supra) held as under: "12.1. It was the objection of Assessee that above company is predominantly into product design services, Innovation Design Engineering and visual computing labs division which are specialized services. He referred to the order of ITAT in AY. 2009-10 in the case of Planet Online Pvt. Ltd., in ITA No. 464/Hyd/2014 (supra), wherein this company was rejected on the reason that it is engaged in multiple segments. There is no break-up in the annual report and data on which margin from software services activity only can be computed is also not available. Moreover, the company itself has indicated that it cannot be compared with any other software service company....
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....xsi Ltd., is to be excluded from the list of comparables." 3.5 In view of the above, in line with the decision of the various benches of this Tribunal, we direct the AO to exclude this company as comparable. 4. We therefore direct the Assessing Officer /TPO to determine the ALP keeping in view of our directions given hereinabove and if on such determination the price charged by the assessee for its international transaction is found to be within the arms length then no adjustment is required to be made. 5. With regard to ground No. 9 raised by the assessee, the TPO has observed that the assessee has received the amounts after the credit period, which is not specified. He proposed to charge interest @ 12% p.a. after allowing a credit period of 30 days to which assessee did not file any objections. He observed that in any arm's length situation any independent party would like to receive its funds within the credit period allowed, and if not, would normally charge interest. Accordingly, TPO added a sum of Rs. 3,50,132/- as ALP adjustments. Aggrieved, assessee preferred appeal before the DRP. The DRP has considered the submissions of the assessee and given partial relief by d....