TaxTMI 
TaxTMI 
2016 (1) TMI 1260
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....ts Information Technology enabled services ('ITES') and Contract Software Development ('CSD') services do not satisfy the arm's length principle envisaged under the Income-tax Act, 1961 ('the Act') and in doing so, the Ld. DRP and the Ld. AO has grossly erred in agreeing with and upholding the Ld. TPO's action of : 2.1. not appreciating that none of the conditions set out in section 92C (3) of the Act are satisfied in the present case, 2.2.ignoring the fact that the appellant is entitled to tax holiday under section 20A of the Act on its profits and therefore would not have any untoward motive of deriving a tax advantage by manipulating transfer prices of its international transactions; 2.3.disregarding the arm's length price ('ALP'), as determined by the appellant in the Transfer Pricing ('TP') documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('Rules') as well as fresh search; and in particular modifying/rejecting the filters applied by the appellant; 2.4. disregarding multiple year/ prior years 'data as used by the appellant in the TP documentation and holding that current ye....
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....this ground, therefore same is dismissed. 03. Ground no two of the appeal is against the selection of comparables by TPO and upheld by DRP. At the time of hearing, Ld. AR of the assessee submitted that he does not press any other grounds except the grounds relating selection and rejection of comparables by TPO and DRP and working capital adjustment sought. In ground no two assessee has raised several sub grounds. These sub grounds are against issues that (a) provisions of section 92C (3) of the act are not satisfied, (b) assessee is enjoying tax holiday u/s 10A of the income tax act therefor it does not need to transfer its profits to AE and there is no motive in showing lesser income, (c) applicability of multiple year data instead of single year data, (d) application of inconsistent filters etc. In the synopsis filed by the assessee, it is also reiterated. Therefore, we restrict this appeal to those sub grounds of ground no. 2, which are relevant for individual comparables only and reject all other grounds. 04. During the course of hearing Ld AR of the appellant has assailed some of the comparables for reasons that they were func....
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.... 30.45 % 08. Based on above, TPO proposed an adjustment of 21,647,857/- for software development services and Rs. 21,40,56,075/- for ITes services. On objection before DRP, vide its direction dated16.12.2014 where in DRP directed to exclude one comparable M/s Infosys limited to be excluded for software development services and arithmetical correction in case of comparables taken for ITes services. Ld. TPO passed order pursuant to that direction by making an adjustment of Rs. 23,21,00,865/- to the income of the assessee. Against this assessee is in appeal before us. 09. Now we first consider software development services (CSD/ IT) segment. Assessee had selected TNMM for its TP study and had selected 16 comparables through a search done under prowess and capitaline database. Average PLI of these 16 comparables came to 12.21% and as per assessee and profit margin of 15.02% was above the mean margin of comparables. After the fresh search, assessee came out with 21 comparables out of which TPO rejected 14 comparables and included six more comparables rejected by assessee by applying accept/ reject matrix and therefore ultimately TPO chose 13 comparables out of which one ....
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....he company is engaged in software developing services. The ld DRP rejected the claim of the assessee for its exclusion. Before us, the ld AR submitted that this company is functionally different because it renders outsourced product development services and developed product as paxpro, ChemLMS etc. He further contended that segmental information of sale of software services and sale of product are not available and therefore it should be excluded. He relied on the decision of 3DPLM Software solutions Limited V 42 tamann.com 333 ( bang.) and Yadlee Infotech Pvt limited TS-465-ITAT 2014 ( bang.) b. Ld. DR Relied on the order of AO and submitted that AO has given sufficient reason for selection of this comparable. c. We have perused the arguments on the same. Firstly on perusal of the balance sheet of this comparable it is noted that that this company has not provided segmental information for sale of services and sale of products of software's. Further It is seen from the details on record that this company i.e. Persistent Systems Ltd., is engaged in product development and product design services while the assessee is engaged in contract software development servic....
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....f the RPT is in excess of 25 % which is the filter set by TPO himself then this comparable fails that filter and therefore to be excluded. It is established principle that higher the RPT more vulnerable the Comparable is for exclusion. However, this contention was not raised before the TPO, as we did not find the same in order of TPO while discussing this comparable. Therefore, in the interest of Justice we set aside the issue of this comparable to the file of TPO to verify the contention of assessee that RPT in the case of this comparable is wrongly calculated. We order accordingly. 15. Wipro technology Services Limited. a. TPO has included Wipro Technology Services Ltd having a margin of 73.35% and it has been upheld by DRP. Before us, the ld AR submitted that this company has huge related party transaction as company's total revenue is governed by master service agreement with CITI technology services Limited where the 100 % of the equity is owned by Wipro. Therefore, the entire revenue of this is much related party. It was further submitted that it has turnover of more than 24 times of the assessee and has huge brand value of Wipro and therefore it should be exclude....
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.... also undergone into the business of restructuring where it is clear Dugout fair flex matrix. Therefore, it is apparent that the company, which have undergone the business restructuring process during the year, cannot be held to be a comparable in view of the extraordinary circumstances. The company is also owning significant intangibles and carrying on research and development activities ownership significant intangibles cannot be held to be a comparable with the assessee and therefore on this ground too this comparable is ordered accordingly to be excluded. 17. Now we come to ITes segment of the assessee. S. No Name Of The Company Margin (OP/TC) 1. Accentia Technologies Ltd. 42.52% 2. Cosmic Global Ltd. 18.28% 3. E4e Healthcare 31.03% 4. Fortune Infotech Limited 22.80% 5. Jindal Intellicom Limited 13.62% 6. Infosys BPO Limited 31.44% 7. TCSE-Serve International Ltd. 54.03% 8. TCSE-Serve Ltd. 63.42% 9. Microland Limited (IT Enabled segment) -3.11% Mean OP/TC 30.45% 18. Before us on this issue, AR of the appellant addressed limited argument for exclusion of foll....
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....by TPO while selecting the comparables. c. We have considered the rival contention. During the year this comparable has been gone into substantial business restructuring resulting into extraordinary circumstances during the FY 2009-10 subsidiary of Ascentia got amalgamated with this company and the figures of the business results for the year ending 31st March 2010. In this case also excluded the figures of amalgamated company and due to which the comparable has high OP by TC margin. The relevant observations of the Tribunal as recorded in para 19.2 of the order passed in the case of Excellence Data Research Pvt. Ltd., Hyderabad v. ITO Ward 2(1), Hyderabad (ITA No. 159/Hyd/2014 dated 31.7.2014); being relevant in this case, are reproduced below- "19.2 We have considered the rival contentions and noticed that this company operates in a different business strategy of acquiring companies for inorganic growth as its strategy. In earlier years on the reason of acquisition of various companies, being an extraordinary event which had an impact on the profit, this company was excluded. As submitted by the learned counsel, this year also, the acquisition of some companies ....
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....gly. 21. Fortune InfoTech Limited, a. This comparable has a margin of 22.80% and before the TPO, it was submitted that the company has provided ITE services and therefore it is not compared with software development segment of the assessee. The DRP rejected the contention of the assessee holding that it was profile of the comparable is similar to the assessee and therefore before us the assessee has objected the inclusion of this comparable. According to the assessee, this company is engaged in web application, mobile application, web designing and SEO provider. Therefore, it is functionally different and should be excluded. b. Ld. DR relied on the orders of lower authorities c. We have carefully considered the rival contentions. We have heard both parties and carefully perused and considered the material on record. There is no dispute that the assessee is operating purely in the ITES sector providing services to its AEs, whereas comparable selected, by TPO has developed and owns its unique web based software by which it provides niche services to its customers. The issue of whether Fortune Infotech Limited is to be taken as a comparable with ITES enti....
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.... of lower authorities and stated that all the reasons have been considered by the TPO and DRP for inclusion of this comparable. c. We have considered the rival contention regarding exclusion of Infosys BPO Ltd. It is engaged in high and integrated services and therefore it is functionally dissimilar. The Infosys brand is indisputably is a huge brand and definitely, result of that brand goes to this comparable. Therefore, the brand of Infosys definitely results in opening higher profits to this company. In view of the following decisions, the same is required to be excluded and hence it is ordered accordingly. 23. TCS E Serve International Ltd, a. This comparable was taken by TPO where the margin is 54.02%. The TPO has taken this comparable considered this a company in IPS industry and considered it as a singled segment. The TPO was also of the view that there are no exceptional circumstances, which is related in the increase in the profit. Before DRP the argument of the assessee were rejected and it was held that far profile of the company is similar to that of the appellant. Before us it was submitted that in addition to BPO services this company is engaged in....
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....s bene considered by the TPO. c. We have also considered the rival contention for exclusion of TCS e-service Ltd. It is mainly involved in transaction processing and technology services. It carries on business of providing technology service such as software testing, verification and validation. It is also developed a software such as transport management software therefore functionally this company is dissimilar to the assessee company. It also owns huge intangible and use of 'Tata' Brand, which has definitely benefited this comparable, it is directed to be excluded. 25. The assessee has submitted that if appellant's contention regarding certain company would be considered, it does not press any other ground of the appeal therefore we have considered the various comparable of TPO has already direct to exclude some of them and one of the comparable has been set aside to the file of TPO. We do not adjudicate all other these grounds of the appeal of the assessee and hence all other grounds of appeal and contention therein regarding the comparable are dismissed. 26. Accordingly we direct the AO/TPO to rework the average PLI of the comparables after considering our direc....