TaxTMI 
TaxTMI 
TaxTMI 
2016 (4) TMI 1250
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....d. 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 Ltd. (seg.) 41.94 9. LGS Global Ltd. 26.64 10. Mindtree Ltd. (seg.) 17.51 11. Persistent Systems Ltd. 27.23 12. Qunitegra Sol....
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....d 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 Appellant is eligible for tax holiday benefit under section 10A of the Act, and there is no incentive for shifting of profits; Rejection of use of multiple year data 4. Rejecting the use of multiple year data and using data for the FY 2007-08 only; ....
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....urther 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. Quark Systems India (P.) Ltd., Chandigarh Special Bench decision. 2. National Thermal Power Co. Ltd., Vs. CIT, 229 ITR 383 3. Jute Corporation Of India Ltd. 187 ITR 688 (SC) 4. Ahmedabad Electricity Co. Ltd. 199 ITR 351 (Born) FB) 5. Mahalaxmi Textile Mills Ltd. 66 ITR 710 (SC) 6. Gilbert and B....
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....e 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 aforesaid company has been considered by different Benches of the Tribunal including the Hyderabad Benches. It is to be noted that the consistent view of different Benches of the Tribunal is to the effect that Infosys Technologies Ltd. being a big company in all respects including the range of turnover is not a comparable to small compan....
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.... 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 inclusion on the basis that functional ly the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by Assessee. The appellant has submitted an extract on pages 185-1....
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....sessing 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 of the company's Annual Report to establish that this company is functionally dissimilar and different form assessee and that since the findings rendered in the decisions of the co- 14 ITA.No.1692/Hyd/2012 M/s. Invensys Development Centre India (P) Ltd., Hyderabad. ordinate benches of the Tribunal for Assessment Year 2007-08 (cited supra) are applicable for this year i .e. Assessment ....
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....terial 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 which is entirely different from the assessee company. We agree with the contention of the learned Authorised Representative 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 detai ls for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the....
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.... 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 companies with consolidated financial statements. (vi) The learned A.R. further relied on the following decisions : i) Agnity India Technologies P. Ltd., vs. DCIT, Circle 1(1), New Delhi ITA.No.6485/Del/2012 dated 20th September, 2013. ii) 3DPLM Software Solution Ltd., (Successor to Delmia Solutions P. Ltd.,) Bangalore vs. DCIT, Circle 11(1), Bangalore I.T.(T.P.)A.No.1303/ Bang / 2012 dated 28.11.2013. iii) Adaptec (India) P. Ltd., Hyderabad vs....
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....tted 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 software development service provider. Coordinate Bench of this Tribunal in the case of Virtusa (India) Pvt. Ltd. (ITA No. 1962/Hyd/2011 dated 30/08/2013) after following some other decisions of the Tribunal has held this company cannot be treated as comparable as this company is also into product development. As segmental details of operating income of software development services and sale of software products are not available, it could not be ascertained whether the profit ratio of this comp....
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....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. Bodhtree Consulting Ltd. (Seg.) 6.1 The ld. AR objecting to the said company as comparable, relied upon the decision of the ITAT, Hyderabad in assessee's own case for AY 2005-06 wherein the Bench held as follows: "20. The Learned AR submitted that since the aforesaid company fails the RPT filter it cannot be treated as a comparable. The learned DR supported the order of the TPO. 21. We have considered the submissions of the parties and perused the materials on record. The ground on which the learned AR seeks for ....
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....parables. 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 not examined the services rendered by the company to give a finding whether the services performed by this company are similar to the software development services performed by assessee. From the details on record, we find that while assessee is into software development services, this company i.e. e-Zest Solutions Ltd., is rendering product development services and high end technical services which come under the category of KPO services. It has been held by the co-ordinate bench of this Tribunal in the cases of Capital I-Q Informat....
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....les, 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 parables for arriving at the margin. Similarly, Assessing Officer will only take segmental results relating to services only for comparing the companies Ws. Kals Information Systems, Avani Cincon, LGS GLobal Ltd. and Bodhtree Consulting Systems as the consolidated results of these companies cannot be compared with the assessee, as assessee is admittedly into service providing activities. It is further directed that if segmental results of the above companies relating to similar services as being provided by assessee are not available, then these c....
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....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 assets. The co-ordinate bench of this Tribunal in thecase of 24/7 Customer.Com Pvt. Ltd. (ITA No.227/Bang/2010 dt.9.11.2012) has held that if a company possesses or owns intangibles or IPRs, then it cannot be considered as a comparable company to one that does not own intangibles and requires to be omitted form the list of comparables, as in the case on hand. 18.3.2 We also find from the Annual Report of Quintegra Solutions Ltd. that there have been acquisitions made by it in the period under consideration. It is settled principle that where extraordinary events have ....