TaxTMI 
TaxTMI 
2016 (4) TMI 1250
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....company was changed from Juno India Pvt. Ltd. to United Online Software Development (India) Pvt. Ltd., with effect from 19/06/07. 2.1 During the relevant PY, the assessee company entered into international transaction with its AE, M/s United Online Inc., USA, for the provision of software development services and purchases as below: 1. Provision of software development services Rs. 21,69,90,553/- 2. Purchase of computer and equipment Rs. 13,26,687/- 2.2 Financial results for the FY 2007-08 are as under: Description Amount Operating Revenue 21,69,90,553/- Operating Cost 19,96,47,265/- Operating Profit (PBIT) 1,73,43,288/- Operating profit to cost ratio 8.69% 2.3 The final comparables selected by Transfer Pricing Officer (TPO) with OP to OC are as under: Sl.No. Name of the company OP to Total cost 1. Avani Cincom Technologies 21.65 2. Bodhtree Consulting Ltd. 19.14 3. Celestial Biolabs 87.94 4. e-zest Solutions Ltd. 28.95 5. Flextronics (Aricent) 8.07 6. iGate Global Solution Ltd. 13.90 7. Infosys 40.41 8. Kals Information Systems ....
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....RS - Relating to determination of Arm's Length Price ("ALP") in respect of provision of software services to Associated Enterprises (" AEs") under Transactional Net Margin Method ("TNMM") Based on the facts and circumstances of the case and in law, the learned Assessing Officer (" AO") j learned Transfer Pricing Officer ("TPO") and the Hon'ble Dispute Resolution Panel ('DRP') erred in the following: Rejection of transfer pricing documentation maintained 1. Rejecting the transfer pricing documentation maintained by the Appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962 (,Rules') and making adjustment of Rs. 2,61,59,851; Rejection of use of contemporaneous data and undertaking fresh search of comparables 2. Rejecting the contemporaneous data (i.e., data existing before the due date of filing of return of income) and in undertaking a fresh comparable search during the course of assessment proceedings using information data which was not available to the Appellant at the time of satisfying the mandatory documentation requirements under the Act; Eligibility under section 10A 3. Not appreciating that the Ap....
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....n law, the learned Assessing Officer ("AO") and the Hon'ble Dispute Resolution Panel ('DRP') erred in: 13. Reducing the communication charges of Rs. 251,725 from the export turnover considering it as attributable to the delivery of computer software outside India and further not reducing the same from the total turnover in computing the deduction u/s 10A of the Act; 14. Initiating the penalty proceedings u/s 271(1)(c) of the Act. The Appellant craves, to consider each of the above grounds of appeal without prejudice to each other and craves leave to add, alter, delete or modify all or any of the above grounds of appeal." 5.1 During the hearing proceedings, assessee filed a petition for admission of additional ground of appeal as below: "The assessee wish to object the following companies for the first time before the Hon'ble Tribunal: 1. Avani Cincom Technologies 2. Bodhtree Consulting Ltd. (Seg.) 3. E-Zest Solutions Ltd. 4. LGS Global Ltd. 5. Persistent Systems Ltd. 6. Qunitegra Solutions Ltd. 7. Softsol India Ltd. 6. Ld. AR relying on the following judgments, submitted that the additional grounds may be admitted/accepted: 1. Q....
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....ciated. 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. 1.3 The ITAT in AY 2005-06 in assessee's own case for AY 2005-06 vide ITA No. 1480/H/10 and others held as follows: "15. We have heard submissions of the parties and perused the materials on record. So far as Infosys Technologies Ltd. is concerned the issue of comparability of the aforesa....
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....gth 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 functional ly different from software companies. The relevant extract are as follows: "16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. Assessee has objected to its i....
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....re 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, respectful ly following the decision of the Coordinate Benches (supra), we direct the Assessing Officer/TPO to exclude the company from the list of comparables." 2.2 Ld. AR also relied on the decision of Invensys Development Centre India Pvt. Ltd., 1692/H/12 AY 2008-09, wherein the Tribunal held as follows: "4.4.4 We have heard both parties and carefully considered the material on record. We find from the record that the TPO has drawn conclusions as to the comparabi lity of this company to assessee based on information obtained u/s.133(6) of the Act. We also find that the co-ordinate benches of this Tribunal have held that this company was developing software products and was not purely or mainly a software service provider. Apart from relying of the above cited decisions of co-ordinate benches of the Tribunal (supra), assessee has also brought on record evidence from various portions ....
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....ted 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." 3.2 Ld. AR also relied on the decision of the Tribunal in case of Invensys Development Centre India Pvt. Ltd., (supra) wherein the it has held as follows: "4.5.4 We have heard both parties and carefully perused and considered the material on record. From the details on record, we find that this company is predominantly engaged in product designing services and not purely software development services. The detai ls in the Annual Report show that the segment "software development services" relates to design services and are not similar to software development services performed by assessee. 4.5.5 The Hon'ble Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. V ACIT (ITA No.7821/Mum/2011) has held that Tata Elxsi Ltd. is not a software development service provider and therefore it is not functionally comparable. In this context the relevant portion of this order is extracted and reproduced below :- " .... Tata Elxsi is engaged in development of niche product and development services wh....
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....has been granted 40 registered patents and has 62 pending applications and its Annual Report confirms that it owns patents and intangibles. (ii) the ITAT, Delhi observation in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856(Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and a market leader assuming all risks leading to higher profits, cannot be considered as comparable to captive service providers assuming l imited risk; 18 ITA.No.1692/Hyd/2012 M/s. Invensys Development Centre India (P) Ltd., Hyderabad. (iii) The Coordinate Bench of the ITAT, Mumbai in the case of Telecordia Technologies India Pvt. Ltd. (ITA No.7821/Mum/2011) has held that Wipro Ltd. is not functional ly comparable to a software service provider. (iv) Wipro Ltd. is engaged in both software development and product development services. No information is available on the segmental bifurcation of revenue from sale of products and software services. (v) the TPO has adopted consolidated financial statements for comparability purposes and for computing the margins, which is in contradiction to the TPO's own filter of rejecting compani....
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....(Bang)- TP) AY 2008-09. 2.. Cash Edge India Pvt. Ltd., ITA No. 5848/D/12 - AY 2008-09. 4.3 Ld. DR relied on the orders of revenue authorities. 4.4 In view of the above, we hold that this company cannot be considered as a comparable to the assessee. We, therefore, direct the Assessing Officer/TPO to omit this company from the set of comparable companies. 5. AVANI CINCOM TECHNOLOGIES LIMITED : 5.1 Objecting to the aforesaid company as comparable, the ld. AR of the assessee submitted that this company is into software products and company's website gives details that company develops and sells customized software solutions like DX change, CARMA, etc. and relied on the decision of the Tribunal in assessee's own case for AY 2007-08 wherein the Tribunal held as follows: 7.1. Assessee has basically sought exclusion of above company on two grounds, firstly, this company has revenue from both product and software services and segment-wise data is not available and secondly, it is contended that the company has shown super normal profit of 52.59% against average margin of other comparables. It is very much evident from the TP order that Assessee has been categorised as a so....
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.... own case for Assessment Year 2007-08, assessee has brought on record evidence that this company is functionally dissimilar and different from assessee and hence is not comparable. Therefore the finding excluding it from the list of comparables rendered in the immediately preceding year is applicable in this year also. Since the functional profile and other parameters by this company have not undergone any change during the year under consideration which fact has been demonstrated by assessee, following the decisions of the co-ordinate benches of this Tribunal in assessee's own case for Assessment Year 2007- 08 in ITA No.1780/hyd/2011, and the findings in the above cited cases wherein this company was excluded, we direct the A.O./TPO to exclude this company from the l ist of comparables." 5.3 The ld. AR also relied on the following cases: 1. 3DPLM Software Solutions Ltd, (TS-359-ITAT-2013(Bang)- TP) AY 2008-09. 2.. Cash Edge India Pvt. Ltd., ITA No. 5848/D/12 - AY 2008-09. 5.4 Following the above decisions, as the company is functionally dissimilar and different from the assessee, we direct the AO/TPO to exclude the said company from the list of comparables. 6. B....
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....se services to fortune 500 firms". This also will be categorized as software services and cannot be categorized as software product. The auditor of this company submitted the letter before TPO, which was part of assessment proceedings. These submissions are made by ld. AR as additional evidence and we direct AO/TPO to analyse this comparable with the submissions of the assessee after giving them an opportunity of being heard. In case, this comparable is found to be into software products, it may be eliminated from the list of comparables. 7. E-Zest Solutions Ltd. 7.1 Objecting to the said company as comparable as this company is engaged in e-business consultancy services and also in BPO services, the ld. AR relied on the decision of the coordinate bench of Hyderabad in case of Invensys Development Centre P. Ltd. (supra) wherein the bench held as follows: "4.2.4 We have heard the rival submissions and perused carefully the material on record. It is seen from the record that the TPO has included this company in the list of comparables only on the basis of the statement made by the company in its reply to the notice under section 133(6) of the Act. It appears that the TPO has....
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....product also in addition to the business of providing services. 16. Ld. D.R. had argued that the TPO had taken segmental figures only to make the comparison. Therefore, we hold that this issue can be examined by the Assessing Officer afresh to ascertain as to whether segmental data relating to the provision of services were used or consolidated results were used for making comparison. 17. As regards the last argument of the Ld. A.R. regarding inclusion of finance and bank charges in operating expenses while computing the margin and comparables, we are in agreement with the argument of the Ld. A.R. that finance and bank charges form part of operating expenses and need to be included while calculating margin of comparables. 18. Therefore, in view of the facts and circumstances of the present case and in view of the discussions made above and in view of various judicial pronouncements, we direct the Assessing Officer to re-adjudicate the issue of arms length pricing and determine the same by excluding the comparables having turnover of more than Rs. 200 crores. The Assessing Officer will also take into account the bank and finance charges as part of operating expenses of com ....
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....cordingly. 9.2 Ld. AR also relied on the decision in the case of Cash Edge India Pvt. Ltd., ITA No. 5848/D/12 AY 2008-09. 9.3 Ld. DR relied on the orders of revenue authorities. 9.4 Respectfully following the said decision, we direct the AO/TPO to exclude the said company as comparable from the list of comparables. 10. Qunitegra Solutions Ltd. 10.1 Objecting to the aforesaid company as comparable, the ld. AR relied on the decision of the coordinate bench of ITAT Banlgaore in case of IDPLM Software Solutions Ltd. (supra) wherein the bench held as follows: "18.3.1 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details brought on record that this company i.e. Quintegra Solutions Ltd. is engaged in product engineering services and is not purely a software development service provider as is the assessee in the case on hand. It is also seen that this company is also engaged in proprietary software products and has substantial R&D activity which has resulted in creation of its IPRs. Having applied for trade mark registration of its products, it evidences the fact that this company owns intangible asset....