TaxTMI 
TaxTMI 
2016 (4) TMI 1221
X X X X Extracts X X X X
X X X X Extracts X X X X
....companies. The main areas of specialization of the assessee-company are real-time technology for network systems, wireless applications, mobile computing and bar code scanning. Later, during financial year 2009-10, the Hon'ble High Court of Karnataka and Delhi approved the merger of assessee-company with Kene India w.e.f. 1/4/2008. However, Keane India Ltd., has now been renamed as NTT DATA Global Delivery Services Pvt. Ltd., 3. Return of income for the assessment year 2005-06 was filed declaring total income of Rs. 71,53,080/-. The assesseecompany also reported the following international transactions with its Associated Enterprises (AE): • Software development services Rs.179,11,84,691/- • Recovery of airfare, travel advance etc. Rs. 17,46,86,875/- • Reimbursement travel expenses paid Rs.5,83,17,868/- The assessee-company sought to justify the consideration received for the international transaction entered with its AE to be at arm's length price [ALP]. The assessee-company had also submitted transfer pricing study report adopting the operating profit to total cost (OP/TC) as a profit le....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ied the following filters: • Use of current year data (i.e. FY 2004-05) only; • Turnover filter i.e. excluding companies having income from software development services less than INR 1 crore. • Software development services income less than 75% of total operating revenues; • Related party transactions greater than 25% of sales; • Export sales less than 25% of operating revenues; • Diminishing revenue/persistent operating loss; • Different financial year ending or financial data not pertaining to 12 month period i.e. 01/04/2004 to 31/03/2005; • Employee cost less than 25% of sales; and • Onsite income greater than 75% of their operating revenue. The TPO rejected 15 of the comparables selected by the assessee-company in the TP study and introduced 14 new companies and finally selected the following comparables: SI No. Comparable TP Study Margin (Unadjusted) 1. Bodhtree Consulting Limited 24.85 2. Lanco Giobal Systems Limited 13.65 3. Exensys Software Solutions Limited 70.68 4. Sankhya Infote....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e made by the AO to TPO is invalid in law. The ld.CIT(A), after upholding the validity of reference to the TPO, held that the TPO was justified in rejecting the transfer pricing study analysis conducted by the assesseecompany. On the issue of selection of comparables, the ld.CIT(A) had excluded the following companies by applying the turnover filter of 1 crore to 500 crores: a) Infosys Technologies Ltd.(42.83%) b) Satyam Computer Services Ltd.(29.44%) c) L&T Infotech Ltd.(10.33%). The ld.CIT(A) had restored the issue to the file of the TPO on the issue of functional dissimilarity. The ld.CIT(A) had upheld the inclusion of Thirdware Solutions Ltd., by holding that no company can be excluded on the ground of abnormal profits or losses unless the assessee demonstrates and establishes that abnormal profits were earned wholly on account of some extraordinary event taking place. In this connection, he placed reliance on the decision of Bangalore bench of Tribunal in the case of TrilogyEBusiness Services Pvt. Ltd. reported in 29 taxmann.com 310. The ld.CIT(A) however, upheld the action of the TPO in using multiple year data. The ld.CIT(A) further held that it....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pholding the action of the learned TPO in ignoring the consistency in sharing methodology and similarity of transaction and their acceptance in the earlier and subsequent years and has erred in holding that the determination of the arm's length price by the Assessee accepted by the Revenue authorities in any earlier year cannot operate as res-judicata for any other assessment year; 5. the learned CIT(A) has erred in upholding the action of the learned AO/TPO in conducting a fresh economic analysis considering only FY 2004- 05 financial data at the time of assessment proceedings, the data pertaining to which was not available to the Appellant at the time of complying with the transfer pricing documentation requirements; 6. the learned CIT(A) has erred in upholding the action of the learned AO/TPO in accepting/rejecting companies by applying different quantitative and qualitative filters, without considering the arguments put forth by the Appellant regarding inappropriateness of the following filters and without providing any cogent reasons: a) the learned CIT(A) has erred in upholding the action of the learned AO/TPO in applying export revenues greater....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hat where an adjustment to the differences in working capital is provided, no further adjustments on account of differences in the risk profile of the Appellant vis-à-vis the comparables is warranted; 13.the learned CIT(A) has erred in upholding the action of the learned AO/TPO in computing the arm's length price without giving benefit of +/- 5 percent under the proviso to section 92C of the Act; 14.The learned CIT(A) has erred in law and on facts in not expunging the remarks of the Assessing Officer holding that deduction under section 10A of the Act should not be eligible for recruitment fees as such remarks were made without verifying the nature of services undertaken by the Appellant in this regard; 15.The learned CIT(A) has erred in law and on facts in not appreciating that the recruitment fees is eligible for deduction under section 10A of the Act since it is covered within the notified information technology enabled services constituting computer software; 16.The learned CIT(A) has erred in law and on facts in ignoring and not following the Honourable Tribunal's decisions in the Appellant's own case for the assessment ye....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ate bench in the case of Kodiak Networks India Pvt. Ltd (supra) it is clear that the Tribunal has followed its earlier decision in Mindtech India Ltd. vs. DCIT in ITA No.70/B/2014 dated 21/8/2014 wherein it was held that on account of change in method of accounting of the revenue recognition, there were fluctuations in the profit margins of the company. The decision in Mindtech India Ltd. is in relation to assessment year 2009-10 and the decision was based on the reasoning that there were fluctuations in the margins of the company whereas in the present case we are concerned with the assessment year 2005-06. It is clear from the chart produced in para.33 of order in IT(TP)A No.532/Bang/2013 in the case of Kodiak Networks India Pvt. Ltd., that the financial data from the financial year 2004-05 was furnished. When compared to financial year 2004-05, there were no wide fluctuations in the financial results of the company in the financial year 2005-06. Therefore, in our considered opinion, this company cannot be excluded from the list of comparables on the ground of wide fluctuations in the margins of the company, without going into the issue whether wide fluctuation would have any imp....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... development services. Therefore, the submission of the assessee-company that it is engaged in the software products is not supported by the material on record. However, in the Director's report (page 1106 of paper book), it is stated that the company Holool India Ltd., is amalgamated with assessee-company w.e.f. 1/4/2004 and it was further stated that the combined financial results were stated in the annual report. But it is not the case of the assessee-company that the amalgamating company is functionally dissimilar. In fact, the notes to accounts states that this amalgamated company i.e. Holool India Ltd. is also engaged in the same business as that of the assessee-company. Therefore, the event of merger itself cannot a factor for exclusion of this company from the list of comparables, as held by the Mumbai bench of the Tribunal in the case of Wills Processing Services (India) (P) Ltd. vs. DCIT (32 taxmann.com 18) (Mum). Hence, this company cannot be excluded from the list of comparables. 11. As regards Flextronics Software Systems Ltd., this comparable was introduced by the TPO and the assesseecompany objected for inclusion of this company in the list of comparables as it ha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is decision is misplaced. Therefore, we do not find any reason to exclude this company from the list of comparables. Sankhya Infotech: 13. This comparable was selected by the TPO. The assesseecompany objected to the inclusion of this company as a comparable on the ground that personnel cost (salary) is less than 15% of the sales, which is less than the industry average of 47%. This objection was overruled by the TPO by citing that salary includes consultancy charges and overseas manpower cost and the two items are included in the personnel cost it comes to 26%. 13.1 Learned AR of the assessee-company again relied on the decision of the co-ordinate bench of the Tribunal in the case of Sunquest Information Systems (India) Pvt. Ltd. (cited supra). 13.2 We heard the rival submissions and perused material on record. Perusal of the decision of the co-ordinate bench of Tribunal in the case of Sunquest Information Systems (India) Pvt. Ltd. (cited supra) on this comparable reveals that the co-ordinate bench had followed the decision of Delhi Tribunal in the case of ITO vs. Colt Technology Services India Pvt.Ltd. (in ITA No.609/Del/2011 dt.23/10/2012 and no reasons were given by ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... "15.7. TATA ELXSI LIMITED : The objection of the assessee is that TATA Elxsi operating two segments -system communication services and software development services. The TPO accepted the software development services segment in his T.P. analysis and assessee's objection is that the software development services segment itself comprises of three subservices namely (a) product design services (b)design engineering services and (c) visual computing labs. It was submitted that these services are not akin to assessee software services and segmental information of only product design services could have been accepted by the TPO as a comparable but not the entire software development service. Since company's operations are functionally different as such, the same is not comparable. Further, assessee is also objecting on the basis of intangible scale of operations. The coordinate bench in the case of Intoto (supra) considered the issue as under in para 22: "22 Tata Elxsi Limited : As regards this company, the learned Counsel appearing on behalf of the assessee, filed before us the reply of Tata Elxsi Limited to the Addl. CIT (Transfer Pricing), Hyderabad, wherein the concerned....
X X X X Extracts X X X X
X X X X Extracts X X X X
....son to differ with the decision of the co-ordinate bench in the above cases. Accordingly, we hold that this company cannot be held to be comparable with that of the assessee-company on functional dissimilarities. In our opinion, these activities of the company cannot be equated with the software development service. Thirdware Solutions: 15. This company was selected by the TPO and the assesseecompany objected to the inclusion of this company in the list of comparables on the ground that the financial data was not available in the public domain at the time of transfer pricing audit. The TPO held that the data was available in capital line as well as prowess data base. The TPO further held that more than 50% of the revenue is from software development services; this can be considered as a comparable. 15.1 Before us, learned AR of the assessee-company submitted that this company cannot be considered as comparable in the light of the decisions of the co-ordinate bench in the case (i) the Sunquest Information Systems (India) Pvt. Ltd.(cited supra); (ii) Textron Global Technology Centre Pvt. Ltd(cited supra) and (iii) Colt Technology Services India Pvt.Ltd. (cited supra). 15.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....(India) Pvt. Ltd.(cited supra) "25. As far as Thirdware Software Solution Limited is concerned, we find from the information furnished by the said company that though the said company is also into product development, there are no software products that the company invoiced during the relevant financial year and the financial results are in respect of services only. Thus, it is clear that there is no sale of software products during the year but the said company might have incurred expenditure towards the development of the software products. 26. As far as Flextronics Software Limited is concerned, we find that at page 90 of his Order, the TPO has also observed that the said company has incurred expenditure for selling of products and has incurred R & D expenditure for development of the products. The above facts clearly demonstrate that there is functional dissimilarity between the assessee and these companies and without making adjustment for the dissimilarities brought out by the TPO himself, these companies cannot be taken as comparable companies. The method adopted by the TPO to allocate expenditure proportionately to the software development services and sof....
X X X X Extracts X X X X
X X X X Extracts X X X X
....missed. 19. In the result, the appeal filed by the assessee-company is partly allowed. ITA No.1487/Bang/2013: 20. In this appeal by the revenue, the following grounds are raised: 1) The Order of the learned CIT (A) is opposed to law and facts and circumstances of the case. 2) The Ld. CIT(A) erred in following the decision of another ITAT in a different case in directing the TPO to exclude functionally dissimilar companies subject to the guidelines laid down by of the Mumbai Bench of the Hon'ble Tribunal without appreciating the fact that in transfer pricing selection of comparables in a case depends on assessee specific FAR analysis. 3) The Ld. CIT(A) erred in relying on the decisions of the ITAT including those of other benches of ITAT, without appreciating the specific facts brought on record by the TPO in the case of the assessee and the similar issue has been agitated before the Karnataka High Court in other cases. 4) The Learned CIT(A) erred in directing the TPO to exclude functionally dissimilar companies subject to the guidelines laid down by of the Mumbai Bench of the Hon'ble Tribunal without appreciating the fact that wh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng in respect of each comparables finally selected by the TPO. 22.2 Now, it is well settled that the companies which are not functionally similar cannot be considered as comparable. Therefore, we do not find any infirmity in the direction of the ld.CIT(A). 23. The revenue is challenging direction of the CIT(A) to exclude the following companies from the list of comparables on the ground that the turnover of the above companies is more than Rs. 200 crores relying on the decision in the case of Genesis Integrating Systems (India) Pvt. Ltd. vs. DCIT (20 taxmann.com 715(Bang.): i. Infosys ii. L&T Infotech iii. Satyam Computer Systems These companies were selected by the TPO as comparables and the assessee-company objected to their inclusion in the list of comparables on the ground of turnover of the above companies is more than Rs. 200 crores and the companies had related party transactions. The TPO rejected the submission by holding that the turnover had no co-relation with the profit margin earned by the company and also rebutted that the companies had related party transactions by drawing the attention of the assesseecompany to the annual reports ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... service industry and the company is alleged to have indulged in malpractices only in the subsequent periods and therefore, we do not see any other reason to exclude this company from the list of comparables. Hence, we uphold the action of the TPO in including this company in the list of comparables. 25. As regards the contention of the revenue that once the criteria filter applied by the assessee-company or TPO is rejected or relaxed, the matter should go back to the TPO for fresh analysis is not tenable. The Special Bench of Tribunal, in eh case of Quartz systems has held that at any stage of proceedings, either before TPO or appellate proceedings, a new comparable can always be considered. 26. Ground No.5 challenges the direction of the ld.CIT(A) allowing the benefit of deduction u/s 10A of the Act to the assessee-company. The issue in appeal is squarely covered in favour of the assessee-company by the decision of the Hon'ble High Court of Karnataka in the assessee's own case in ITA No.403 of 2008 dated 20/6/008 wherein it has been held as under: "To be eligible for exemption under Section 10A, the conditions stipulated in Sub-Section(2) (i) of Section 10A has to ....