TaxTMI 
TaxTMI 
2016 (2) TMI 1050
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....d counsel for the assessee at the outset submitted if the grounds rejecting exclusion of certain companies from the list of comparables considered by the learned TPO was considered, other grounds could be taken as not pressed. Accordingly, we are confining ourselves to the exclusion sought by the assessee from the list of comparables considered by the TPO, while testing the ALP of the international transactions undertaken by the assessee with its Associated Enterprises. 3. Facts apropos are that the assessee engaged in the business of providing software research and services development to its Associated Enterprise (AE) called M/s Citrix US and Citrix Online LLC had a revenue of Rs. 96,36,03,696/- from such activities. In the TP study filed alongwith the return, assessee had selected 21 comparable companies and applied TNM method for justifying the pricing of its international transactions. Assessee used Prowess and capital line plus databases for such research. Learned TPO, when the matter regarding the ALP was referred to him by the AO noted that the assessee had selected comparable companies engaged in the software development services without looking into the verticals/horiz....
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.... 22.61% Operating cost 825,841,926 Arm's length Price (ALP)122.61% of operating cost 1,012,564,785 Price received 963,603,696 Shortfall being adjustment u/s 92CA 48,961,089 The assessment was completed thereafter by making an addition of the above amount. 4. Aggrieved, assessee moved in appeal before the learned CIT(A). Apart from assailing the comparables considered by the TPO, assessee also argued before the CIT(A) that the working capital adjustment though it was computed by the TPO at 3.26% was unjustly restricted to 1.71%. Learned CIT(A) did not accept any of these contentions, but confirmed the addition made by the AO. 5. Now before us learned AR submitted that apart from working capital adjustment which was required to be given he was assailing inclusion of three comparable companies namely M/s Bodhtree Consulting Ltd., M/s Tata Elxsi Ltd (Segmental) and M/s Infosys Ltd. According to the learned AR, even though, Infosys Ltd. was one among the comparables in the list considered by the assessee in its TP study, it had specifically sought exclusion of the said company before the TPO itself, relying on the judgment of the Hon'ble Delhi High Cour....
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....s per the learned DR the objections now being raised were already considered by the TPO and rejected. In sofaras the working capital was concerned learned DR submitted that excessive working capital adjustment if given would negate the purpose of a TP study. 9. We have perused the orders and heard the rival contentions. Profile of the assessee as mentioned by the TPO himself at page no.2 states as under; "Citrix R & D India is engaged in the business of providing software research and development services to Citrix US and Citrix Online LL.C.". Assessee had considered itself to be software development services provider and the TPO had also accepted this. The most appropriate method selected both by assessee and TPO were TNM method. This method obviates necessity for complete product identity or services identity between the tested party and the comparables. Broad functional similarities would suffice. However, where the functional profile show that the dissimilarity, even within the very same segment was so significant so as to erode the comparability, then there is a good case for exclusion. Assessee has mainly relied on the decision of the Co-ordinate Bench in the c....
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....Bodhtree Consulting Ltd. cannot be regarded as a comparable. In this regards, the fact that the assessee had itself proposed this company as comparable, in our opinion, should not be the basis on which the 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". 11. Observations of the Co-ordinate Bench with regard to M/s Tata Elxsi Ltd. as it appears at para-26.4 of the very same order is re-produced hereunder; "26.4 Tata Elxsi Ltd.:- As far as this company is concerned, it is not in dispute before us that in assessee's own case for the A.Y. 2007-08, this company was not regarded as a comparable in its software development services segment in ITA No.1076/Bang/2011, order dated 29.3.2013. Following were the relevant observations of the Tribunal:- II. UNREASONABLE COMPARABILITY CRITERIA : 19. The learned Chartered Accountant pleaded that out of the six comparables shortlisted above as comparables based on the turnover filter, the following two companies, namely (i) Tata Elxsi Ltd; and (ii) M/s. Flextronics Software Systems Ltd., deser....
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.... why the taxpayer is objecting to it. How the company is functionally similar in the earlier FY 2005-06 but the same is not functionally similar for the subsequent FY 2006-07 even when no facts have been changed from the preceding year. Thus the taxpayer is arguing against this comparable as the company was not considered as a comparable by the taxpayer for the present FY 2006-07." 21. We have heard the rival submissions and considered the facts and materials on record. After considering the submissions, we find that Tata Elxsi and Flextronics are functionally different from that of the assessee and hence they deserve to be deleted from the list of six comparables and hence there remains only four companies as comparables, as listed below:" 26.5. Following the aforesaid decision of the Tribunal, we hold that M/S.Tata Elxsi Ltd. should not be regarded as a comparable". 12. Observation of the Co-ordinate Bench in the very same order with regard to the comparability of M/s Infosys Ltd appears at para-26.2 of the order which is re-produced here under; "26.2 Infosys Ltd.:- As far as this company is concerned, it is not in dispute before us that this company....
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....oviders assuming limited risk ; (iii) the company has generated several inventions and filed for many patents in India and USA ; (iv) the company has substantial revenues from software products and the break up of such revenues is not available ; (v) the company has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in 'AUTOLAY', a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded form the list of comparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 11.4 We have heard the rival submission....