TaxTMI 
TaxTMI 
2016 (1) TMI 1321
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....es to its parent company (AE) in USA. It had an operating profit margin of 12.86% on cost. For the purpose of transfer pricing documentation it had considered 36 comparable cases and selected most appropriate method the 'TNMM'. It arrived at operating margin of 12.06% based on 3 years data. The matter was referred to TPO for determining the ALP in respect of IE. TPO conducted fresh analysis and using only current year's data selected 20 comparables wherein arithmetic mean operating profit margin was arrived at 20.67% on cost. Allowing working capital adjustment of 1.55% he determined the ALP at 19.12% and consequent ALP at 119.12% on operating cost. The TPO vide order dated 30.10.2009 determined the value of IE at Rs. 23,80,70,631 as against the price shown by assessee at Rs. 22,56,66,318, thereby, enhancing by an amount of Rs. 1,25,04,313. Assessee prepared objections before DRP which were rejected on the T.P. issues. On the consequential order passed by A.O, the present appeal is preferred. 4. Assessee filed concise grounds with additional ground raised as under : "Concise Grounds 1. The order passed by Dispute Resolution Panel is liable to be set aside as a ....
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.... 1. The learned TPO has erred in selecting certain comparables in the order u/s 92CA, without considering that the scale of operations of the companies vis-a-vis the turnover of the Appellant (viz. INR 22.55 Crores) for FY 2005-06. Accordingly, the following companies cannot be compared to the Appellant on application of turnover filter of INR 200 Crores. Sl. No. Name of the Company Turnover (In Crs.) Margin as per TPO 1. iGate Global Solutions Ltd., 527.91 15.61% 2. Infosys Technologies Ltd., 9028 40.38% 3. Mindree Consulting Ltd., 448.79 14.67% 4. Persistent Systems Ltd., 209.18 24.67% 5. Sasken Communication Ltd., 240.03 13.90% 6. Flextronics Software Systems Ltd., 595.12 27.24%" 5. We have heard Ld. Counsel for the assessee and the Ld. D.R. for Revenue. It was primarily submitted that most of the comparability issues were considered and analysed by the Coordinate Bench in the case of United Online Software Development (India) P. Ltd., Hyderabad vs. ITO, Ward 3(2), Hyderabad in ITA.No.1500/Hyd/2010 dated 20.06.2014 and mostly covered. However, we have examined the issues company-....
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....ctual property belongs to the company. The products are sold generally on license basis wherein the right to use the software is transferred without giving the source code. These types of companies are not similar to the taxpayer, who is a pure service provider. Pure Software Development Service Provider A pure software development service provider does a portion of the described software development life cycle. It does not generate any intellectual property for its own. The intellectual property generated belongs to the customer and not to the service provider. The taxpayer falls in this category. Thus comparables are also to be chosen from companies whose significant activities (> 75% of the operating revenues) are in the nature of or relate to software development services." As can be seen from the above extracted portion, the TPO has himself mentioned that a pure software development service provider does not generate any intellectual property for its own. He has further stated that, the companies which sell their products generally on license basis wherein the right to use the software is transferred without giving source code cannot be comparable to....
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....ngaged in providing of I T enabled services and that the said company is into development of software products, ete. All these aspects have not been factually rebutted and, in our view the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds. " Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. 47. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has dra wn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.06.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITA T has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that ....
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....d not be treated as comparables was considered by the Tribunal in Capgemini India Ltd (supra) where the assessee was software developer. The Tribunal, in the said decision referred to by the Id. counsel for the assessee, has accepted that this company was not comparable in the case of the assessee's engaged in software development services business. Accepting the argument of the Id. counsel for the assessee, we hold that the aforesaid company should be excluded as comparables. " 13. In view of the aforesaid decision of the Tribunal, Kals Info Systems Ltd., and Accel Transmatics Ltd. are to be excluded for the purpose of comparison while determining the ALP of the impugned transaction in this appeal. It is ordered accordingly." Facts being materially same and since it pertains to the same assessment year, following the view adopted by the ITAT, Bangalore Bench in the aforesaid case, we are also of the view that this company cannot be comparable to the assessee. For the very same reasons, II. KALS Info. Systems Ltd. also cannot be a comparable to the assessee. We, therefore, direct the AO/TPO to exclude the aforesaid companies from the list of comparability....
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....n the pricing of its products and services due to its goodwill, reputation and brand value. Further, due to scale of operations, Infosys enjoys economies of scale, which results in lower cost of infrastructural facilities and overheads. Finally, the learned AR submitted that the issue of comparability of Infosys to a captive service provider is no longer RES INTEGRA, due to following decisions of the different benches of the Tribunal : 1. Telcordia Technologies India P. Ltd. (ITA No. 7821/Mum/2011-Para 7.4) 2. Adaptee (India) Pvt. Ltd. Vs. DCIT (ITA No. 1801/Hyd/2009) 3. Patni Telecom Solutions Pvt. Ltd., Vs. ACIT (ITA No. 1846/Hyd/2012) 4. Trilogy E Business Services Software Ltd. Vs. DCIT (ITA No. 1054/Bang/2011 - Para 20) 5. Agnity India Technologies Vs. ITO (ITA No. 3856/Del/2010) 6. Agnity India Technologies Pvt. Ltd. Vs. ITO (High Court decision) ITA No. 1204/2011 7. Huawei Technologies India Pvt. Ltd. Vs. ITO (ITA No. 1338/Bang/2010) (AY 2006-07 8. Cincom Systems India P. Ltd., Vs. ACIT (ITA No. 761/Del/2012 (AY 2006-07) 9. Adobe Systems India Pvt. Ltd. (TS-320-ITAT-2011 (Del.) 10. Virt....
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....relation to A.Y. 2006-07, we are of the view that Tata Elxsi Ltd. is also to be excluded from the list of comparables while determining the, ALP of the international transaction. 6.2. Respectfully following the same, we direct the A.O. to exclude the following comparables. 1. Accel Transmatic Ltd., 2. KALS Info Systems Ltd., 3. Infosys Ltd., 4. Tata Elxsi Ltd., (seg.). So far as Megasoft Ltd., is concerned, the TPO is directed to consider only segmental details pertaining to software development service only. Ordered accordingly. 6.3. As far as ground 2(e) is concerned, we have already excluded the company Tata Elxsi and Accel Transmatic Ltd., So far as Megasoft Ltd., is concerned, the A.O./TPO is directed to examine the margin to be considered as directed above in para 6.2. 6.4. Ground No.2(f) is on the issue that proper opportunity was not given to the assessee by TPO in show cause and DRP failed to examine the ground-7 raised before them. However, this becomes academic as the assessee has not made serious objections before DRP and in many cases the comparables were examined and accepted. In the case of Megasoft Ltd., this Bench als....