AI Drafter - (New and Powerful) 
Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter. 
TaxTMI 
TaxTMI 
2017 (11) TMI 908
X X X X Extracts X X X X
X X X X Extracts X X X X
....ake and engaged in export of software, computer skilled manpower and other computer related activities to carry out development in the area of information technology, computer systems, software, application software, integrated tolls for computer systems and application development, data communication and network. During the year under consideration, the assessee entered into international transaction of Rs. 20,61,19,812 regarding rendering of services i.e. "Software Development Services". The assessee used TNMM as the method and OP/TC as the PLI. The assessee arrived at a set of 9 companies with an average margin of 7.64%. The assessee used multiple year data. The assessee's own margin worked out to be 13.48%. Based on this analysis, the assessee concluded that its international transactions are at arm's length. A show cause notice dated 07.12.2015 was issued to the assessee. The assessee filed reply dated 28.12.2015 in response to the show cause notice and the personal hearing was conducted on the same day. The TPO rejected the objections raised by the Assessee by rejecting the economic analysis of the assessee. Foreign exchange fluctuation was also treated as non operating incom....
X X X X Extracts X X X X
X X X X Extracts X X X X
....draft order u/s. 143(3) r.w.s. 144C of Income Tax Act, 1961 was passed by the then Assessing Officer on 15.03.2013 while making adjustment of Rs. 2,61,32,755/- on account of TP adjustment. The assessee company filed objection before the Dispute Resolution Panel (DRP) and DRP issued certain directions to the TPO vide order dated 18.11.2016. The TPO followed the DRP directions as follows: S. No. Name of the Company OP/OC (%) DRP directed to consider forex as operating OP/OC (%) 1 Acropetal Technologies Ltd. (seg) 65.92 65.92 2 Akshay Software Technologies Ltd. 7.77 9.87 3 Celstream Technologies Pvt. Ltd. 11.34 7.13 4 Cigniti Technologies Ltd. 8.28 9.08 5 Infosys Ltd. 42.15 42.15 6 Sasken Communication Technologies Ltd. 14.58 14.58 7 Lucid Software Ltd. 11.10 11.64 8 Larsen & Toubro Infotech Ltd. (Industrial Cluster) 27.16 16.06 9 Persistent Systems Ltd. 26.92 26.27 10 R S Software (India) Ltd. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pplication of intellectual property. The Ld. AR further submitted that from the profit and loss account, it is evident that the company is earning revenue from sale of products, namely, product hardware and product software. As on 31st March 2012, the company held inventories amounting to Rs. 21,01,502, which clearly establishes the fact that the company is engaged in the business of sale of software product. Thus, the company is engaged in two business segments, i.e., sale of products and sale of services but segmental profitability is not available in the audited financial statements. The TPO rejected the contentions of the assessee company during the TP proceedings and held that Information Technology segment providing outsourced SWD services has been considered. The Ld. AR submitted that operating expenses and operating income are not allocated in the segmental details provided in the financial statements. Accordingly, correct and accurate operating profit margin of the IT segment cannot be computed. The Ld. AR further submits that the company acquired two US based companies, namely, Line Beyond Inc, and Optech Consulting Inc. The company acquired 100% stake in Line Beyond Inc.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ability of segmental data: * Macquarie Global Services (P.) Ltd (ITA 6803/Delhi/2013) * Vodafone India Services vs. DCIT The Ld. AR relied upon the following decisions wherein consistently a view taken to exclude companies having extra-ordinary event during the year under consideration: * Stream International (ITA No.8997/Mum/2010) * CRM Services ITA No. 4068/Del/2009 * Toluna India Pvt. Ltd. Vs. ACIT (ITA No. 5645/Del/2011. * Lear Automotive India P. Ltd, Vs, ACIT (ITA No, 5612/Del/2011) and * Global Logic India Pvt. Ltd. vs ACIT (ITA No. 5809/Del/2011) * Bechtel India Pvt. Ltd. vs. DCIT (ITA No. 1478/Del/2015) * Equant Solutions India (P.) Ltd, vs. DCIT (ITA No. 1202/Del/2015) 4.3 The Ld. DR submits that the segment is of IT service only and there is no product included in the same. The Ld. DR further submits that % is very less so hardly it will make any difference. The Ld. DR relied upon the orders of the TPO and the DRP. 4.4 We have heard both the parties and perused the records available before us. This company is engaged in provision of high end healthcare services and develops & owns r....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... unique intangibles in the form of proprietary products, patents, brands etc which leads to creation of significant competitive advantage resulting high operating margins which are valuable intangibles due to which it is earning exceptionally high operating margins. The Ld. AR submitted that since Infosys Ltd is engaged in development and sale of software products. The software products developed by the company includes Finacle TM, Finacle core banking solution, Finacle digital commerce solution, Finacle WatchWiz, Infosys Health Benefit Exchange, etc. Thus, this company is functionally different from the assessee company. The Ld. AR relied upon the order of Delhi Bench of the Tribunal in the case of Toluna India Pvt. Ltd. vs. ACIT (ITA No, 5645/del/2011) wherein the Tribunal directed to exclude Infosys holding that the company is a giant risk taking company and cannot be compared with a captive service provider. Delhi Bench of the Tribunal in the case of Ut Starcom Inc. (India Branch) vs. DDIT (ITA No. 5848/Del/2011), also directed to exclude Infosys holding that the company is a giant risk taking company and cannot be compared with a captive service provider. Delhi Bench of the Tr....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Ltd. vs. ACIT (ITA No. 5809/Del/2011) 4.6. The Ld. DR relied upon the orders of the TPO and the DRP. 4.7 We have heard both the parties and perused the records available before us. This company has set up a network of research labs and granted 42 patents. Infosys is a giant risk taking company besides that, it is engaged in development & sale of Software Products and also owns intangible assets. Thus, as held by the Hon'ble High Court and this Tribunal in various decisions, this company has to be excluded. We, therefore, direct TPO to exclude this company from comparable. 4.8. Larsen & Turbo Infotech Ltd. The Ld. AR submitted that segmental data is not available. As per the annual report, the company is IT BPO service provider. The Ld. AR relied upon the order decision of Delhi Bench of the Tribunal in case of Saxo India Pvt. Ltd. vs. ACIT (ITA No. 6148/Del/2015), wherein, L&T Infotech Ltd. was directed to be excluded holding that the company is also engaged in business of software product and segmental information is not available. The appeal filed by the Revenue was dismissed by the Hon'ble Delhi High Court in ITA No 682/2016. The Ld. AR further submits that Delhi Be....
X X X X Extracts X X X X
X X X X Extracts X X X X
....erein the Tribunal held that companies undertaking R&D activity and owning IPRs cannot be regarded as an appropriate comparable for the purpose of benchmarking the international transactions undertaken by a captive software service provider. 4.12 The Ld. DR relied upon the orders of the TPO and the DRP. 4.13 We have heard both the parties and perused the records available before us. This company is engaged in development & sale of software product and also owns intangible assets (Patents). In assessee's case, the company is undertaking software development which is more of an event constituting a new stage in a changing situation, than a complete product. Therefore, Mindtree Limited is functionally different from the assessee company and should have been excluded by the TPO. Thus, as held by the Hon'ble Delhi High Court & this Tribunal in various decisions companies which are functionally different has to be excluded. Therefore, we direct TPO to exclude this company from comparables. 4.14. Persistent Systems Ltd. The Ld. AR submitted that Persistent Systems Ltd. is engaged in the business of development and sale of software products and therefore, cannot be regarded as ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n product development, product design and analysis service is functionally different from a pure software service provider and therefore ought to be excluded. Thus, this company is functionally different from that of assessee company. As held by the Hon'ble Delhi High Court & this Tribunal in various decisions companies which are functionally different has to be excluded. Therefore, this company should be excluded from the comparables. Thus, we direct the TPO to exclude this comparable. 4.17. Spry Resources Pvt. Ltd. The Ld. AR submitted that the audited financial statement for the Financial Year 2011-12 is not available. 4.18 The Ld. DR relied upon the order of the TPO and the DRP. 4.19. We have heard both the parties and perused the records. Since the audited financial statement for the Financial Year 2011-2 was not available to the assessee. The same can be seen in the TPO's order para 12 (F) wherein the assessee has asked for annual report of this company which was not given to the assessee. The TPO is directed to consider the objection of the assessee. The TPO is directed to take on record the financial statement and give opportunity to assessee for hearing to that....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... there is no segmental data available. The company invests heavily in development of new products and also owns IP rights with respect to various software products such as Field Power, Smart Migrator and Bank. Companion. As held by the Hon'ble Delhi High Court & this Tribunal in various decisions companies which are functionally different has to be excluded. Therefore, this company should be excluded from the comparables. Thus, we direct the TPO to exclude this comparable. 5. The Ld. AR submitted that Thinksoft Global Services Ltd., Sonata Software Ltd. should have been included as comparable which was rejected by the TPO as these companies are functionally comparable with the assessee company. 5.1 Thinksoft Global Services Ltd. The Ld. AR submitted that vide show cause notice dated 07.12.2015, TPO rejected Thinksoft Global Services Ltd. holding that the company is functionally not comparable to the assessee without pointing out any specific functional dissimilarity. In response, the assessee company vide reply dated 23.12.2015 submitted a detailed submission substantiating that the company is functionally comparable to the assessee company. However, the TPO failed to adju....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ave heard both the parties and perused the records. The TPO rejected Sonata Software Ltd. whereby holding that the company is functionally not comparable to the assessee company. In response, the assessee company vide reply dated 23.12.2015 submitted a detailed submission substantiating that the company is functionally comparable to the assessee company. However, the TPO failed to adjudicate the aforesaid objection in the Transfer Pricing order. Therefore, we direct the TPO to adjudicate the objection of the assessee. The TPO, thereafter, should consider whether this comparable is proper or not in assessee's case. 6. The Ld. AR submitted the final set of comparable companies for the consideration of the TPO as follows: S. NO. Company Name OP/OC(%) 1 Akshay Software Technologies Ltd. 9.87% 2 Celstream Technologies Pvt. Ltd. 7.13% 3 Cigniti Tech. 9.08% 4 Lucid Software Ltd. 11.64% 5 R S Software (India ) Ltd. 15.43% 6 Sankhya Infotech Ltd. 6.27% 7 Sasken Communication Technologies Ltd. 14.58% 8 Tata Elxsi Ltd. (Segmental) 15.17% 9 Thirdware Solution Ltd. (Overseas Segment) 11.10% ....