TaxTMI 
TaxTMI 
2016 (1) TMI 1300
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to provide software development services in the areas of ERP, sales design implementation, maintenance and providing internet technology sales to its customers. It is required to customise software based on software design specifications, determined by Intelli group or other related associated enterprises. Assessee provides software development services to the group and is stated to have been compensated at cost plus 15% mark up on such cost. It also provides software developments services to third parties. On a reference made by the DCIT, Circle 21, Hyderabad under S.92CA, the TPO undertook the exercise of transfer pricing analysis, and has determined the transfer pricing adjustments in an order under S.92CA(3) dated 29.10.2010. The TPO analysed the financial results vide para 2.3 and determined the Operating Profit to Cost ratio at 10.21%(excluding interest, loss on investment, foreign exchange loss as part of cost). The TPO determined international transactions on software development services at Rs. 103.35 crores. The assessee has reported total operating revenue at Rs. 149.89 crores. In the transfer pricing study by the assessee, it has selected seventeen comparables with ave....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 19.37 22. Mega Soft Ltd. 60.23 23. Tata Elxsi Ltd. (Seg.) 26.51 24. Wipro Ltd. (Seg.) 33.66 4. Objecting to the above action of the Assessing Officer/Transfer Pricing Officer, consequent to the orders of the Dispute Resolution Panel, assessee has raised various grounds, including sub grounds before us. Assessee has not pressed grounds No.1, 2, part of ground No.3 from (a) to (f), part of 3(g) and (h) to (k) and (m). Therefore, these grounds are treated as withdrawn and consequently, rejected. The surviving grounds, including an additional ground- being 3(n), are as under- "1. ...... 2. .... 3. On the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in upholding/confirming the fresh bench marking analysis undertaken by the learned TPO, which is defective in nature due to following reasons and is liable to be quashed: (g) i. The ld TPO/DRP erred in not undertaking an objective comparative analysis and inter-alia selecting the following companies as comparables to the Appellant for determination of ALP under TNMM i. Accel Transmatic Ltd. (Seg) ii. Avani Cimcon ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ges. 6. At the outset, it has been fairly admitted that the comparables objected to in the list from Sl. Nos. 14 to 24 were already considered by the coordinate bench of this Tribunal in the case of United Online Software Development India Pvt. Ltd. in ITA No.1658/Hyd/2011 vide its order dated 24.9.,2015 for assessment year 2007-08. Learned counsel submitted that the assessee has raised the same objections with reference to the above comparables and requested for exclusion of the said companies taken as comparables Relevant portion of the order of this Tribunal dated 24.9.2015 in the case of United Online Software Development India Pvt. Ltd., is as under- "16. We have heard the arguments of both the sides and also perused the relevant material on record, including the paper-books and detailed filed by Assessee. It has been brought to our notice by the learned counsel for Assessee, and not disputed by the Learned Departmental Representative, that in assessee's own case for the assessment year 2006-07, the issue relating to comparable nature of three of the companies named in the original ground, viz. Megasoft Ltd., Infosys Technologies Ltd. and Tata Elxsi Ltd.(Seg)., and....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt System India P. Ltd. ITA.1978/H/2011 c) Intoto Software India P. Ltd. ITA.2102/H/2010 d) Telcordia Technologies India P. Ltd. ITA.7821/Mum/2011 e) Triology E-Business Solutions ITA.No.1054/Bang/2011 f) Bearing Point Business ITA.No.1124/Bang/2011 g) LG Soft India Pvt. Ltd. ITA.No.1121/Bang/2011 h) Transwitch India P. Ltd. ITA.No.948/Bang/2011 i) Mercedes Benz Research & Development ITA.No.1222/Bang/2011 j) CSR India P. Ltd. ITA.No.1119/Bang/2011 k) First Advantage ITA.No.1086/Bang/2012 l) HCL EAI Services Ltd. ITA.No.1348/Bang/2011 We herefore direct the Assessing Officer/TPO to exclude this while computing ALP. INFOSYS TECHNOLOGIES LTD., : 7.2 Objecting to the aforesaid company being treated as comparable, learned AR submitted that the company cannot be considered to be comparable to a captive service provider like Assessee, not only because of the quantum of revenue earned by them but also on account of various other factors. It was submitted that the company command a premium in the pricing of their products and services due to the goodwill, reputation and bran....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the current year data also needs to be appreciated. Therefore, considering the enormity of turnover of the company as well as other relevant factors, the aforesaid company cannot be treated as comparable to Assessee in any manner. This view of ours is also in tune with the view expressed by different Benches of this Tribunal as stated below as well as that of the Hon'ble Delhi High Court in the case of CIT Vs. Agnity India Technologies Pvt. Ltd.,[2013] 85 CCH 146. a) M/s. Foursoft Limited (ITA.No.1903/H/2011) b) M/s. Conexant System India P. Ltd. ITA.1978/H2011 c) M/s. Virtusa (I) P. Ltd. ITA.No.1962/Hyd/2011 d) Telcordia Technologies India P. Ltd. ITA.7821/Mum/2011 e) Triology E-Business Solutions ITA.No.1054/Bang/2011 f) Adaptec (India) P. Ltd. vs. DCIT ITA.No.1801/Hyd/2009 g) Trinity Advanced Software Labs P. Ltd. vs. ACIT ITA.No.1129/Hyd/2005 We therefore direct the Assessing Officer/TPO to exclude this while computing ALP. ISHIR INFOTECH LTD 7.3. So far as this company is concerned, Assessee has sought exclusion of the aforesaid company on the ground that this company fails employee cost ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o.1086/Bang/2012 i) HCL EAI Services Ltd. ITA.No.1348/Bang/2011. Following the aforesaid decisions of the Coordinate Benches, we direct exclusion of the aforesaid company from list of comparables. MEGASOFT LIMITED : 7.5. The main objection of Assessee with regard to the aforesaid company is that this is predominantly a product development company and margin from software development services is 23.11%. As can be seen, in case of M/s Virtusa (India) Pvt. Ltd. (supra), the Co-ordinate Bench of the Tribunal while considering Assessee's objection with regard to the aforesaid company had directed the Assessing Officer/TPO to take only segmental margin of this company for computing ALP. Similar view was also expressed in the following cases : a) M/s. Foursoft Limited (ITA.No.1903/H/2011) b) M/s. Conexant System India P. Ltd. ITA.No.1978/Hyd/2011 c) Intoto Software India P. Ltd. ITA.2102/H/2010 d) Triology E-Business Solutions ITA.No.1054/Bang/2011 e) Telcordia Technologies India P. Ltd. ITA.No.7821/Mum/2011 f) Bearing Point Business ITA.No.1124/Bang/2011 g) LG Soft India P. Ltd. ITA.1121/Ba....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion of the learned AR that the nature of product developed and services provided by this company are different from Assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company fit for comparability analysis for determining the arms length price for Assessee, hence, should be excluded from the list of comparable parties." Following the decision of the ITAT Mumbai Bench as aforesaid and also considering the fact that the company itself in the information provided in response to the notice issued u/s 133(6) of the Act has admitted that it cannot be considered as comparable with other assessees, we direct exclusion of the aforesaid company from the list of comparables while determining ALP. WIPRO LIMITED : 7.7. While objecting to the aforesaid company being treated as comparable, the learned AR submitted that the TPO only on considering segmental details submitted by the said company for IT services, in response to notice issued u/s 1....
X X X X Extracts X X X X
X X X X Extracts X X X X
....en from the facts and materials on record during the year under consideration, the segmental turnover of the Wipro Ltd. Is 9616.09 crores. Therefore, considering the turnover, brand value as well as other dynamics of Wipro Ltd., it comes in the same category as Infosys and certainly cannot be compared with Assessee. Therefore, following our reasoning in case of Infosys Technologies Ltd. And other coordinate bench decisions, we hold that Wipro Ltd. cannot be treated as comparable with Assessee. ACCEL TRANSMATIC LTD. : 7.8. With regard to this company, the complaint of Assessee is that this company is not a pure software development service company. It is further submitted that in a Mumbai Tribunal Decision of Capgemini India (F) Ltd v Ad. CIT 12 Taxman.com 51, the DRP accepted the contention of Assessee that Accel Transmatic should be rejected as comparable. The relevant observations of DRP as extracted by the ITAT in its order are as follows: "In regard to Accel Transmatics Ltd. Assessee submitted the company profile and its annual report for financial year 2005-06 from which the DRP noted that the business activities of the company were as under. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....les. Similarly, the Tribunal at Bangalore in the case of M/s. HCL EAI Services Ltd. vs. DCIT IT(TP) A. No. 1348/Bang/2011 at para 17 at pages 24 to 26 of its order has discussed at length the reasons for not considering the said company as comparable to software development services company. The relevant portion of the order is reproduced hereunder : (d) KALS Information Systems Ltd. 46. As far as this company is concerned, the contention of Assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual report, the salary cost debited under the software development expenditure was Rs. 45,93,351. The 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....owing cases : a) M/s. Conexant System India P. ITA.No.1978/Hyd/2011. Ltd. b) Intoto Software India P. Ltd. ITA.2102/H/2010 c) Bearing Point Business ITA.No.1124/Bang/2011 d) LG Soft India P. Ltd. ITA.1121/Bang/2011 e) Transwitch India P. Ltd. ITA.948/Bang/2011 f) CSR India P. Ltd. ITA.No.1119/Bang/2011 g) First Advantage ITA.No.1086/Bang/2012 Therefore, respectfully following the decision of the Coordinate Benches (supra), we direct the Assessing Officer/TPO to exclude the company from the list of comparables." 18. Similarly, as contended by the learned counsel for Assessee comparable nature of Flextronics Software Systems Ltd.(Seg) and Helio & Matheson Information Tech Ltd., has been rejected by coordinate bench of the Tribunal in the case of M/s. Axsys Heathcare Ltd. vide order dated 28.5.2014 in ITA No.2076/Hyd/2011 for the assessment year 2007-08, for the following reasons- "14. After hearing rival contentions, we agree that the following comparables were excluded by the Coordinate Benches considering the similar facts and arguments raised before us: ........................... ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....(b) M/s.Virtusa (I) P. Ltd. (ITA No.1962/Hyd/2011) (c) M/s. Contexant System India Pvt. Ltd.(ITA Nos.1978/Hyd/2011) (d) Intoto Software India Pvt. Ltd. (ITA No.2102/Hyd/2010) (e) Triology E Business Solutions (ITA No.1054/Bang/2011) (f) Telcordia Technologies India Pvt. Ltd. (ITA No.7821/Mum/2011) (g) LG Soft India Pvt. Ltd. (ITA No.1121/Bang/2011) (h) Transwitch India Pvt. Ltd. (ITA No.948/Bang/2011) (i) Mercedes Benz Research & Development (ITA No.1222/Bang- -/2011) (j) CSR India Pvt. Ltd. (ITA No.1119/Bang/2011) (k) First Advantage (ITA No.1086/Bang/2012) (l) HCL EAI Services Ltd. (ITA No.1348/Bang/2011) (m) Adaptee (India) Pvt. Ltd.(ITA No.1801/Hyd/2011) 20. Respectfully following the consistent view taken by the Tribunal with regard to comparable nature of the above seven companies in similar matters and more particularly, the decision of the Tribunal in the case of Sumtotal Systems India Private Ltd. cited supra, including the decision rendered in assessee's own case for assessment year 2006-07, we allow ground No.7 of Assessee along with additional ground and direct th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....with the objections of the assessee in its order, we were informed that DRP has directed the TPO/A.O. not to make any negative working capital adjustment in some of the cases in the next assessment year, in the cases of Market Tools Research P. Ltd., and Mega Systems Worldwide India P. Ltd., assessee placed on record copies of orders of DRP. In that DRP considered the issue and directed the TPO as under : "14. Ground No.11 : Negative Working Capital adjustment - Making a negative working capital adjustment without appreciating the fact that the company does not bear any working capital risks. On this issue, the assessee submitted as under : "The learned TPO determined the ALP for the international transactions with A.Es by making a negative working capital adjustment for the differences in working capital between the assessee and the companies considered as comparables. The assessee does not agree with the learned TPO as : * The company does not bear any working capital risk since it is been fully funded by it's A.E. from its inception and has no working capital contingencies. * The company has never taken any loans till date from the date of inc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssee does not have any risk and is a captive services provider. Therefore, following the decision of Coordinate Bench in the case of Cordys Software India P. Ltd., in ITA.No.1972/H/2011 dated 15.03.2013 for A.Y. 2007-08, assessee requests for positive working capital adjustments. As far as the working capital adjustment is concerned, these are academic in nature and require to be analysed on the basis of assessee's work profile and comparable companies working results. No clear cut directions can be given in this as it requires examination of various documents. In fact, DRP itself has directed the TPO to re-workout the working capital adjustment after excluding certain comparable companies. We also directed the TPO to exclude certain comparables above. Consequently we direct the A.O./TPO to re-workout the working capital adjustment after giving due opportunity to assessee, keeping in mind the principles laid down on this issue. 14.1. With reference to objection of assessee that it is a captive service provider fully funded by A.E. Assessee also undertakes works for third parties. It was one of the objection that internal TNMM is available as assessee undertakes with third ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... only. The panel agrees with the assessee and direct that the reimbursement of Rs. 12,56,96,824/- be not taken for ALP calculation." 16. Ld. Counsel submitted that DRP got its findings mixed-up with reference to analysis of non-A.E. transaction to that of reimbursements. While direction of reimbursement is correct, the direction with reference to adjustment of non-A.E. transactions has not been given. Considering the observations of DRP and also various case law on the issue relied upon by assessee in M/s. Saven Technologies Ltd., vs. ACIT ITA.No.1456/Hyd/2010, we direct the A.O. to exclude the T.P. adjustment on the non-A.E. transactions and restrict the adjustment only to the A.E. transactions, in case ALP determined after comparability analysis require any adjustment under the provisions of the Act. With these directions, ground is considered as allowed." 11. Considering the order of the Transfer Pricing Officer and the objections of the assessee, we are of the opinion that the entire cost was taken by the TPO for making adjustment, thereby invoking the TP proceedings on non-AE transactions as well. Therefore, we direct the Assessing Officer/Transfer Pricing Officer ....