TaxTMI 
TaxTMI 
2016 (8) TMI 1160
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....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) was computed at 11.88% as against the PLI of 13.41% of its own. For the transactions relating to reimbursement ....
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....nder: 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 companies should not be included in view of their brand value and high turnover as well as relying on the decision of the ITAT to exclude these companies. 3.2 Considering the above findings of DRP, the AO has reduced the adjustment u/s 92CA to Rs. 88,62,356/-. 4. Aggrieved with the above order, assessee is in appeal before us. 5. The a....
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....he 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, how much profit earned was on the software development or ITES cannot be examined. In the absence of clarity on operational details and comparable company having diversified activities, we are of the opinion that this company cannot be chosen as a comparable company in Assessee's case in this assessment year. We are also aware of the decision of the Co-ordinate Bench giv....
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....t 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 authorities and submitted as under: I) As per Pg. 22 of annual report, the company is engaged in the business of computer software. Hence, it is not functionally different. ii) As per segmental information, Page 23 of annual report, revenue is earned from application software and training. iii) As per age 21 of annual report, the inventories are in the nature of computer spares and....
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.... 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 and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in ou....
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....ind 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 because of its complex nature. Similar view was taken by many of the Co-ordinate Benches in earlier years that Tata Elxsi Ltd., cannot be selected as comparable company. Consistent with the above view, we are of the opinion that a company like Tata Elxsi Ltd., which has complex activities and segmental information of which is not available cannot be selected as comparable company to Assessee. Moreover, as seen from the turn....
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....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 directing TPO to adopt LIBOR + 250 bps instead of 12%. 6. Aggrieved with the above, assessee preferred appeal before us and AR of the assessee submitted that assessee has been fully funded by the AE since its inception, for all its working capital requirements. The assessee being captive developer, completely dependent on the AE in functionally as well as financially. Moreover, he submitted a working of average Debtors ratio of 18 c....