AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2016 (4) TMI 1221
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.... 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 level indicator for the transfer pricing study. The assessee-company applied Transactional Net M....
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....ent 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 Infotech Limited 27.39 5. Sasken Network Systems Limited 16.64 6. Four Soft Limited 22.98 7. Thirdware Solution Limited 66.09 8. R S Software (India) Limited TP Study 8.07 9. Geometric Software Solutions Co, Limited TP Study 20.34 10. Tata Elxsi Limited (seg) 24.35 11. Visualsoft Technologies Limi....
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.... 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 was not necessary to establish the intention of the assessee not to shift profits out of India since availing tax holiday benefits u/s 10A for invoking the transfer pricing provisions. 6.1 The ld.CIT(A), vide para.2.1 of his order held that the assessee-company is entitled for deduction u/s 10A. He also held that income earned from supply of man power, and interest on miscellaneous income did not have nexus with the activity of export of software and therefore held that they cannot be treated as part of business profits for the purpose of computin....
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....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 than 25% of total revenues filter as a comparability criterion in the search strategy to identify comparable companies; b) the learned CIT(A) has erred in upholding the action of the learned AO/TPO in applying diminishing revenue filter as a comparability criterion in the search strategy to identify comparable companies, i.e. rejecting companies as having economic performance contrary to industry behavior; c) the learned CIT(A) has erred in upholding the action of the learned AO/TPO in applying a filter to reject companies having different accounting year (i.e. companies having accounting year other than ....
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....ces 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 year 2007- 08, being binding on the lower authorities, without appreciating the fact that the issues and facts covered under the present appeal are identical and similar with that of the Appellant's own case for the AY 2007-08; 17.The learned CIT(A) has erred in law and on facts in not granting deduction under section 10A of the Act in respect of interest income and miscellaneous income which form part of the business income of the Appellant. 8. Ground Nos.1 to 7 are not pressed during the course of hearing and the same are dismissed. 9. Ground No.8 challenges the direction of the ld.CIT(A) remitting the ground relating to functional dissimilarities of comparables to the TPO without rendering ....
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....a 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 impact on the comparability. 9.3 However, the assessee-company's contention before the TPO as well as before us is that this company is engaged in the sale of IT products as well as software development services and no segment details were available. It was further submitted that this company had related party transaction. 9.4 We find that the above submissions are not supported by the annual financial results of the company enclosed in the paper book placed at pages 895 to 920. From the Director's report at page 906 of the paper book, it is clearly stated that the company has only one segment i.e. software development. In the notes to the accounts, at page 920 of the paper book, it is clearly mentioned that except managerial ....
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....lusion 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 has related party transactions, and derives revenue both from the product sales as well as service. The TPO rebutted the contention of the assessee-company by drawing attention to the financial results of the company wherein it is clearly stated that the related party transactions are less than 25% and the segmental details are made available. It is further noticed that the revenue from the services constitutes more than 85%. Therefore, it can be treated as a software development services company as it passes through revenue filters adopted by TPO. During the course of hearing before us, the ld.AR of the assessee-company had relied on the order of the co-ordinate bench of Tribunal in the case of ITO vs. Sunquest Information Systems (India) P....
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....). 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 the Tribunal as to why this company cannot be considered as a comparable. Therefore, we are unable to discern any ratio in the decision cited supra. Thus, the learned AR of the assesseecompany could not adduce any other evidence in support of exclusion of this company from the list of comparables. In the circumstances, we uphold the action of the TPO in including this company in the list of comparable. Tata Elxsi Ltd.: 14. This company was selected by the TPO as comparable. The assessee-company objected to the inclusion of this company in the list of comparables on the ground that major portion of the services are rendered only to Tata Consultancy Ltd., and Tata Sons Ltd. In other words, the assessee-company's contention is that it has related party ....
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....rable. 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 Officer has been informed that Tata Elxsi Limited is specialised Embedded Software Development Service Provider and that it cannot be compared with any other software development company. It was submitted that because of the specialisation and also because of diverse nature of its business, it is very difficult to scale-up the operations of Tata Elxsi Limited. In view of this, Tata Elxsi Limited has informed that it is not fair to use its financial numbers to compare it with any other company. The communication dated 25th August, 2009 to the TPO is placed before us. As this communication was not before the TPO at the time of transfer pricing adjustment we deem it fit and proper to remand this issue also to the file of the TPO to reconsider adopting this company as the comparabl....
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....omparable. 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). 15.2 We heard the rival submissions and perused the material on record. The co-ordinate bench (Delhi) of Tribunal in the case Colt Technology Services India Pvt.Ltd. (cited supra) recorded the finding on the above company as follows: "Thirdware Solutions Ltd, it was submitted that the said company has a diversified functional professional profile and is also engaged in sale of software licenses. They invest in R&D and also provides/sells software licenses and there are no segmental results available in its audited financials to segregate profitability from provision of software development services and from sale of software licences. These information were supported by the annual report for Financial year 2004- 05 of the said company. In its annual report a generic disclosure was made that the compa....
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....learly 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 software product activity cannot be said to be correct and reasonable. Wherever, the Assessing Officer/TPO cannot make suitable adjustment to the financial results of the comparable companies with the assessee company to bring them on par with the assessee, these companies are to be excluded from the list of comparables. Therefore, we direct the Assessing Officer/TPO to exclude these three companies from the list of comparables." 15.3 The decision in the case of Sunquest Information Systems (India) Pvt. Ltd.(cited supra) is based on the non-availability of information to make suitable adjustments to bring the company on par with the assessee-company. However, in the present case, the TPO made available full details of the revenue and expenditure in respect of each of the segments and segmental details are very much available. However....
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....e 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 when any filter or criteria applied by the assessee is accepted or if any filter or criteria applied by the TPO is relaxed, the entire accept / reject matrix changes resulting in a new set of comparables including those comparables which are neither taken by the assessee or the TPO and which do not find a place in the order under section 92 CA. 5) The learned CIT (Appeals) erred in striking down the opinion of the AO that deduction u/s 10A is not available in respect of units 1,2,3 and 4 as the production commenced in these units much before obtaining the license for the bonded warehouse by placing reliance on the orders of the ITAT for the A.Y 2001-021 2003- 041 2004-05, 2006-07 and 2007-08 in the assessees own case without appreciating the fact that the decision of the ITAT has not been accepted by the department and appeals u/s 260A have been filed before the Hon'ble H....
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....ed 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 of those companies. 24. We now deal with each of these companies. Before adverting to the comparables, it is worth mentioning here that there are divergent decisions of the Tribunal whether high turnover is a relevant for accepting/rejecting a comparable in the case of a service company. For example, the Mumbai bench of the Tribunal in the case of Capgemini India Pvt Ltd. Vs. ACIT (TS 45 ITAT 2013(Mum)(TP) held that the turnover was relevant only to the manufacturing concerns not to the service oriented companies. On the other hand, the coordinate (Bangalore) bench of the Tribunal in the case of Genesis Integrating Systems (India) Pvt. Ltd. (cited supra) held that turnover is a relevant factor for accepting/rejecting the comparable. However, without going into the turnover factor, we hold that Infosys Ltd., cannot be considered as comparable with that of the assessee-company since Infoysis Ltd. is a giant in the area of software develop....