TaxTMI 
TaxTMI 
2016 (7) TMI 1370
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....com Technologies 2. e- zest Solutions Ltd. 3. Flextronics(Aricent) 4. iGate Global Solution Ltd. 5. Infosys 6. Kals Information Systems Ltd.(seg) 7. Persistent Systems Ltd. 8. Softsol India Ltd. 9. Tata Elxsi(Seg) 10. Thirdware Solution Ltd. 11. Wipro Ltd.(Seg) 3. A perusal of the record shows that the exclusion of the above 11 comparables was requested for by the assessee on the basis of the following chart in the original round before the ITAT :- 3. Ld counsel for the assessee Shri Pawan Kumar submits as under: Inclusion of functionally different companies and companies engaged in development of software products by the Ld. TPO/ DRP 3.1. The Appellant places reliance on the decision of the Delhi Tribunal in its own case dated November 4, 2010 in ITA No. 3856 (Del)/2010 for the AY 2006-07, wherein the Tribunal has excluded software product, functionally dissimilar and full fledged risk bearing entrepreneur company (i.e. Infosys) as a comparable, in analysing the arm's length nature of the transfer price of a captive software service provider i.e. the Appellant. I....
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....fied operations; products company. (2) Non availability of segmental details. (3) Highly volatile margins. (4) Erroneous margin computation. 9. Tata Elxsi (seg) 22.86% (1) Engaged in diversified business including the software products. (2) High turnover of Rs. 343 crores i.e. approx 19 times. (3) Fails the R&D filter i.e. 3.39% (4) Fails net fixed assets filter i.e. approx 246$ (5) Rejected in Telecordia Ruling. 10. Thirdware Solution Ltd. 24.15% (1) Functionally different - product company. (2) Non availability of segmental details. 11. Wipro Ltd. (seg) 33.77% (1) Dissimilar functional/risk profile (2) Ownership of branded/proprietary products. (3) High turnover of Rs. 1,12,58.4 crores (i.e. 631 times) (4) Huge R&D spend. (5) Rejected in the recent ruling in case of Market Tools, Telcordia, Maersk Global & Deloitte Consulting." 3.1. Considering the same the comparables were deleted by the ITAT holding as under:- 5. "We have heard the rival contentions and perused material on the record. The issue about exclusion of above list of comparables while making t....
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....aring captive service provider. The assessee it was submitted is remunerated on an arm's length cost-plus basis i.e. it is compensated for all its operating costs, plus a mark-up of 15% thereon. In the year under consideration, it was submitted that the assessee had undertaken the following international transactions with its AE:- S.No. Description of international transactions Amount (in Rs.) 1. Provision of software development services 178,333,635 2. Assets provided on loan/returnable basis by the AE 12,685,075 4.1. During the FY 2007-08, the assessee was stated to be engaged in providing software development services to its AEs. It was explained that the assessee carries out routine functions and assumes minimal risks associated with carrying out such business. The activity was stated to be carried out in a business which was riskinsulated. The assessee was stated to be primarily involved in the last three stages of the software development life cycle i.e. coding, testing and post-production support. These activities it was submitted were either wholly or partly sub-contracted by group companies to the assessee and the assessee also helps....
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.... 26.27% 29.39% 4.4. The assessee carried the issue before the Dispute Resolution Panel (hereinafter referred to as "DRP") who directed the exclusion of Celestial Biolabs and also directed that the operating margin of Softsol Limited after excluding rental income and corresponding rental expenses for the said company be reworked. The direction of the DRP summarized by the assessee in the synopsis filed is reproduced hereunder:- (a) "exclude one comparable (Celestial Biolabs) since it fails the TPO's own filter of employee cost and has dissimilar functional profile. (b) rectify the operating margin of Softsol limited after excluding rental income and corresponding rental expense for this company's margin computation. (c) included comparable companies passing all the filters applied by the TPO including those where the data has been obtained under Section 133(6) of the Income Tax Act, 1961 for the purposes of comparability analysis and (d) exclude provision for doubtful debts and foreign exchange loss or gain from mark up of comparables and then verify and recomputed operating profit margins accordingly." 4.5. It has been argued....
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....income of IT services and sale of software products have not been provided so as to see whether the profit ratio of this company can be taken into consideration for comparing the case that of assessee. In absence of any kind of details provided by the TPO, we are unable to persuade ourselves to include it as comparable party. Learned CIT DR has provided a copy of profit loss account which shows that mainly its earning is from software exports, however, the details of percentage of export of products or services have not been given. We, therefore, reject this company also from taking into consideration for comparability analysis." (emphasis provided) 5.1. The Ld.CIT DR inviting attention to internal page 62 to 63 of the TPO submitted that information u/s 133(6) has been sought and as per the reply Avani is into pure software development company and fulfilled all the filters. Accordingly it was his prayer that the comparable be retained. 5.2. We have heard the rival submissions and perused the material available on record. We find that the order of the Mumbai Bench heavily relied upon by the assessee in the case of Telecordia Technologies India Pvt. Ltd (cited supra) pertain....
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....her of the parties to inclusion or exclusion of a comparable has to be necessarily justified on the basis of facts available on record and not on an issue which was neither argued or considered or on facts not referred or available. The present case is a fine example of the Hon'ble High Court of not approving the practice of following precedent qua these issues as in clear unambiguous terms the approach has been deprecated as the Hon'ble High Court has not even approved the blind acceptance/rejection of comparables following the precedent available in one's own case relying upon the settled position of earlier years which stood upheld by the Hon'ble High Court itself. Thus in view of the discussion on material facts namely whether information sought u/s 133(6) and relied upon was confronted to the assessee or not the issue is accordingly restored to the TPO in order to afford an opportunity to the taxpayer to address the same. 6. Addressing E-Zest Solutions Ltd. it was submitted its exclusion is sought on the ground that it is functionally different as it has Diversified business as per its website of E-Zest Solutions (Source: http://www.e-zest.net). It was submitted that this c....
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....ncluded this company in the list of comparables after collecting information u/s 133(6) which disclosed that it was engaged in rendering software development services only. The assessee's objections about the unreliable information and non-availability of information in public domain, were rejected by the TPO. 16.2. We have heard the rival submissions and perused the Annual report of this company, which is available on page 1 onwards of the paper book. Page 6 of the Annual report, being an annexure to the Auditor's report, clearly indicates under (ii) that: 'there is no inventory with the company since it is engaged in software development.' From the balance sheet of this company, it is noticeable that there is no closing stock of any software products. Since the assessee is also engaged in rendering software development services and this company is also doing the same business, we are of the considered opinion that this company was rightly included in the list of comparables. 16.3. The Ld. AR's contention this company, being in KPO business as against the assessee's BPO business, is unsubstantiated. Neither it has been shown that ....
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....ntion was invited to the fact that the approach of the ITAT in excluding the said comparable relying upon the view taken by the ITAT in the immediately preceding assessment year which view had been upheld by the Hon'ble High Court itself the Hon'ble High Court still considering the facts remanded the issues back for fresh determination thereby making it clear that instead of following precedence specific facts need to be addressed for which purposed the issues had been remanded as the approach of the ITAT, following the precedent available in assessee's case has not been upheld. Accordingly it was his submission that the comparable should be retained. 7.2. In reply no arguments contrary to the factual submissions made by the Ld.DR were advanced by the Ld.AR. 7.3. Having heard the rival submissions and perused the material available on record we find that in the peculiar facts and circumstances of the case where the Hon'ble High Court has not approved of the approach of the ITAT in relying upon the precedent available in assessee's own case for the immediately preceding assessment year which precedent stood approved by the Hon'ble High Court itself, we find that the prayer of ....
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....n to submit that the said comparable has to be excluded:- 7.5. Wipro Ltd.-IT Services Segment ('Wipro'): "This company is also a global IT Company having varieties of service and products and looking to the magnitude of its operations, sales and expenses, the same cannot be taken into consideration for comparability analysis. Moreover, 67% of its sales relates to its product which are sold on premium resulting into higher profitability, therefore, cannot be compared with the assessee company at all. There are several judgements of ITAT which have been referred in para 6.5 above, that Wipro cannot be taken as comparable case for comparable case with the company like assessee. In view of these facts and the reasoning given in the case of Infosys, we hold that Wipro also cannot be considered as a comparability analysis, hence, would not be included in the list of the comparable entities as identified by the TPO." (emphasis provided) 8.1. The Ld. CIT DR relying upon internal page 80 to 91 of the TPO's order submitted that the reasons brought out on record by the TPO for retaining the comparable have not been assailed by the assessee. In the facts of the present ....
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....on having been sought under section 133 (6) however the fact that it was confronted to the assessee and its reply was taken into consideration is not evident from the record. The argument of the assessee that reliance has been placed on evidence which is not available in public domain is of no help. The law is well-settled and needs no precedence to cite that the TPO has the power u/s 92C(3) to use information in his possession and the power to gather material under the said section which is akin to the provisions similar to the power vested with the AO in the proceedings u/s 143(3). Sub-section (7) of section 92CA empowers the TPO to utilize the same under section 133(6)/131 and any falsity in the information provided is liable for pending action. Thus the provision enables the TPO to call for information u/s 133(6). The impediment to use the same is only if it is not confronted to the assessee. 9.3. In the facts of the present case, the consistent argument of the assessee has been that segmental information is not available in the public domain thus it appears it has been confronted. The TPO has also given the finding that the software product and training constitutes 4.24% of....
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....chnologies India Private Limited wherein the said comparable had been rejected. 11.1. The Ld. CIT DR inviting attention to internal pages 65 of the TPO's order submitted that herein also information had been sought under section 133 (6) which would show that 100% income of the said company had been returned only from software development segment. It was his argument that since segmental's have been taken into consideration and it qualified all the filters applied and these have not been objected to before the ITAT. Accordingly it was correctly included. 11.2. We have further heard the rival submissions and perused the material available on record and considering the peculiar facts and circumstances of the case we are of the view that in the facts of the present case segmental have been utilized however whether these were confronted to the assessee or not is not coming out from the record especially in the face of the assessee's objection that the company was engaged in diversified activities which casts a serious doubt on whether segmentals were confronted. Accordingly, we deem it appropriate to restore the issue back to the TPO to address this aspect. The reliance placed on ....
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....nformation under section 133 (6) was called for and segmental were available. The information was confronted to the taxpayer also and on a reading of the specific reasons brought out in the TPO's order which stand unassailed on record it was argued that the comparable should be retained. Emphasis was also laid on the fact that in 2007-08 assessment year, the exclusion of this comparable was not insisted upon by the taxpayer. The decision in Telecordia Technologies India Pvt.Ltd.(cited supra) it was submitted did not pertain to the year under consideration 13.2. We have heard the rival submissions and perused the material available on record. We find on facts that the prayer of the tax payer for exclusion of the said comparable cannot be ousted on the ground that it was not objected to in the previous assessment year. Whether a particular comparable is accepted or rejected in a previous assessment year consciously or inadvertently by the assessee or the authorities is not the basis on which the issues can be decided. As and one challenge is posed to the inclusion or exclusion of a comparable the challenge has to be considered on the basis of facts and evidence on record for that ....
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.... for the FY 2007-08. Thus it qualifies the TPO's filter of more than 75% revenues from SWD services and is considered as a comparable. The same was communicated to the taxpayer vides this office show cause notice. In its response, the taxpayer has stated that this is a product company which is not correct as evident from the above. During the year the company has revenue from software development service of Rs. 3641.19 Million, which constitutes 95.1% of total revenue. Thus it passed the service income filter. Hence this company retained as a comparable. However it is pertinent to mention here that the taxpayer didn't object this company as a comparable in AY 2007-08." 13.3. Accordingly in the facts as they stand which remain uncontroverted, we find that the prayer of the Ld.AR has to be rejected. 14. Exclusion of Tata ELXSI Limited (Seg) was sought on the grounds that as per the annual report and the website of the company it was evident that the company had diversified business. The revenue from the software development and services segment it was submitted comprised of the following 3 activities:- • Product design services (design and development of ha....