TaxTMI 
TaxTMI 
2016 (6) TMI 1258
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....ices : Rs. 37961871 - Reimbursement of expenses Rs. 3,09,403 3. Ld. TPO did not dispute the ALP of reimbursement of expenses. Ld. TPO analysed the transactions pertaining to software development services. There is no dispute between assessee and TPO on the method employed for bench marking viz. TNM method. Ld. TPO noted that assessee had applied following filters to identify the comparables. 1. Companies for which sufficient financial data is not available to undertake analysis were excluded 2. Companies that have foreign shareholding more than 26% were excluded. 3. Companies which have trading sales, mfg. sales and scrap sales more than 5% of total sales were excluded. 4. Companies that have net worth and net PBT less than 10% were excluded. 4. Assessee identified 19 comparables. The average profit margin of comparables was 11.48% on cost and the assessee's operating margin was 15% of operating cost and, therefore, assessee had treated the transaction of software development services at arm's length. Ld. TPO applied the additional filters and also obtained information u/s 133(6) and on that basis selected following 26 comparables, which included only 4 c....
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....7. As the assessee provides software development support services to its AEs only, it is not responsible for entering into contract with final customers and negotiating the prices. It is the AE only, which is responsible for the same. 8. Ld. counsel submitted that the main dispute in the present appeal is regarding selection of comparables. 9. At the time of hearing, ld. counsel for the assessee did not press ground nos. 2, 3b, d and e. Ld. counsel submitted that primarily assessee is pleading for exclusion of following comparables: - Accel Transmatic Ltd. - Celestial Labs Ltd - Helios & Matheson Information Technology Ltd. - Infosys Technologies Ltd. - KALS Information Systems Ltd. - Persistent Systems Ltd. - Tata Elxsi Ltd. - Wipro Ltd. 10. Ld. counsel for the assessee has primarily relied on following decisions relating to A.Y. 2007-08 in support of its contention that since the aforementioned companies were in the same line of business viz. software development services, therefore, the comparables accepted/ rejected in the cases should get the same treatment in the present case also. - Toluna India Pvt. Ltd. (ITA no. 5645/Del/2011 for AY 2007....
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....ities include providing information about Avaya Products, customer Awareness etc. 15. Thus, it is evident that this company is also performing similar functions as assessee. 16. In the case of Lear Automotive India P. Ltd.( supra), The Tribunal in para 2.2 of its order has observed as under: "Brief stated the facts of the case are that the assessee is a subsidiary of Lear Corporation USA, which holds the entire share capital of the assessee-company through its affiliate viz. Lear Corporation (Mauritius) Ltd. The assessee is primarily engaged in the manufacture/ assembly of automotive seating Systems (i.e. seats and seat trims) and interior parts. The assessee provides design and engineering support services along with embedded software development support services to group companies, and design and engineering services to automotive industry customers, like general Motors Ltd. and Mahindra& Mahindra (M&M)". 17. Further we find that in para 4.5 the Tribunal has observed as under: "4.5. The assessee is involved in stages c) and d) alone. other words, the other stages in the provision of design and engineering services by the Lear Group to its customers are performed by....
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....from the perspective of functions performed by assessee, are applicable to the facts of present case. 21. Now, we proceed to consider various comparables, the inclusion of which has been impugned by assessee. Accel Transmatic Ltd.: 22. Ld. TPO noted that this company did not figure in the Accept/ Reject matrix of the taxpayer's TP study. He pointed out that as software segment of this company qualified all the filters applied by him, therefore, the same is to be considered as comparable. After considering the assessee's submissions he pointed out that the company's software segment did not have any product revenue as is evident from the Annual Report as well as the reply received from the company. He further pointed out that the filter of software development service revenues being more than 75% was applied at enterprise level as well as segment level. He, accordingly, rejected the assessee's contention that Accel Transmatic Ltd derived more than 45% of the total operating revenue from hardware products/ services. 23. Ld. CIT(A) had upheld the ld. TPO's contention. 24. Ld. counsel for the assessee referred to page 772 of the PB, wherein the annual report of Accel Tra....
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..... Celestial Labs Ltd.: 28. In regard to this comparable also ld. counsel has relied on aforementioned 4 decisions of the Tribunal and pointed out that this comparable has been rejected in all the cases. 29. Having heard both the parties we find that in the case of Toluna India Pvt. Ltd. (supra), the Tribunal has excluded this comparable from the list of comparables by observing as under: "18.1. The TPO included this company in the list of comparables by observing that it was rendering mainly software development services. 18.2. After considering the rival submissions and perusing the relevant material on record, we find from the annual accounts of this company, a copy of which is available on page 41 of the paper book, that it is engaged mainly in the developing the software products in the shape of tools etc., which are protected using the patent. This company developed a tool, "CELSUITE" to drug discovery in finding the lead molecules for drug discovery. As this company is engaged in developing software tools after enough research and development activity and the tools so produced by it are its intellectual property, it cannot be considered as comparable to the ass....
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....idered as comparable and is, hence, directed to be excluded from the list f comparables. The assessee succeeds." 32. Keeping in view the functional profile of Toluna India Pvt. Ltd. (supra) vis-a-vis the assessee, respectfully following the decision of coordinate Bench, this comparable is directed to be excluded from the list of comparables. Infosys Technologies Ltd. 33. We find that in the case of Toluna India Pvt. Ltd. (supra), the Tribunal has excluded this comparable from the list of comparables by observing as under: "25. From the nature of services rendered by the assessee to its AE on a cost plus basis without having any intangible assets or retaining any intellectual property in the work done by it, we find that Infosys Technologies Ltd., which is a giant company in terms of risk profile, scale, nature of services, revenue ownership of branded/proprietary products, onsite and offshore services, etc., cannot be compared with the assessee. Our view is fortified by the judgment of the Hon'ble jurisdictional High Court in the case of CIT vs. Agnity India Technologies Pvt. Ltd. [(2013) 219 Taxman 26 (Del)] in which Infosys Ltd. has been held to be not comparable ....
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....as merged into this company pursuant to judgment of Hon'ble Bombay High Court w.e.f. 1.4.06. Because of the merger of subsidiary into this company, we hold that the financial position of this company cannot be construed as normal capable of a good comparison. Following the Mumbai Bench decision in Petro Araldite (P) Ltd. (supra), we direct the exclusion of this company from the list of comparables. The assessee succeeds". 38. Keeping in view the functional profile of Toluna India Pvt. Ltd. (supra) vis-a-vis the assessee, respectfully following the decision of coordinate Bench, this comparable is directed to be excluded from the list of comparables. Tata Elxsi Ltd. 39. We find that in the case of Toluna India Pvt. Ltd. (supra), the Tribunal has excluded this comparable from the list of comparables by observing as under: "39.1. The TPO included this company in the list of comparables by noticing that its 'Software development and services segment' matched with the assessee. On being called upon to explain as to why this company be not included in the list of comparables, the assessee stated that the nature of activity done by this company was different inasmuc....
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..... We find that in the case of Toluna India Pvt. Ltd. (supra), the Tribunal has excluded this comparable from the list of comparables by observing as under "17.1. The TPO found this company to be engaged in software development. Notice u/s 133(6) was issued to the company to tet complete information. According to the TPO, this company qualified all the filters. The assessee argued before the TPO that this company was into software products and the segmental results were not available. The TPO rejected such contention by relying on the specific information collected from the company u/s 133(6) which divulged that this company was a purely software development company engaged In providing software development and consulting IT services to its clients. This company was concentrating on internet enabled business formation systems in a wide range of industries. Resultantly, this company was included in the list of comparables. 1 7.2. After considering the rival submissions and perusing the relevant material on record, we find from the description of business activity of this company as reproduced on internal page 9o of the TPO's order, that it is a pure software development ser....
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....loyee cost was more than 25% by impliedly including the personnel cost included under the head 'Administrative expenses'. The assessee did not challenge the TPO's calculation before the DRP on this issue. As such, it becomes apparent that there is no merit in this objection again taken up before us which has already been successfully dealt with by the TPO. Insofar as the assessee's objection about the related party transactions is concerned, we have discussed this issue thoroughly while dealing with the comparable case of Accel Transmatics Ltd. (supra) in which it has been held that filter of 25 of RPT is good enough to make a controlled transaction and thus expunging it from the list of comparables, which can only be uncontrolled transactions. The Id. AR failed to point out any functional difference of this company vis-a-vis the assessee. As such, we approve the view taken by the TPO in including this case in the list of comparables. The assessee fails". 47. Keeping in view the functional profile of Toluna India Pvt. Ltd. (supra) vis-a-vis the assessee, respectfully following the decision of coordinate Bench, this comparable is directed not to be excluded from the l....
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....con technologies Ltd. 2. Bodhtree Consulting Ltd. 3. Celestial Labs Ltd 4. e-Zest Solutions Ltd. 5. Flextronics Software Systems Ltd. 6. iGate Global Solutions Ltd. 7. Infosys 8. Kals Information Systems Ltd. 9. LGS Global Ltd. 10. Mindtree Ltd. 11. Persistent Systems Ltd. 12. Quintegra Solutions Ltd. 13. R Systems International Ltd. 14. Sasken Communication Technologies Ltd. 15. Tata Elxsi (Seg.) 16. Thirdware Solutions Ltd. 17. Wipro Ltd (Seg) 18. Softsol India Ltd. 55. Ld. counsel referred to page 341 of PB and pointed out that arm's length margin was taken at 21.51% of the operating cost by ld. TPO and adjustment of Rs. 1,03,81,787/- was directed to be made. Ld. counsel further pointed out that ld. CIT(A) excluded Celestial Biolabs from the list of comparables as is evident from CIT(A)'s order. 56. In the present assessment year ld. counsel has relied on following decisions relating to A.Y. 2008-09:- - Sun Life India Service Centre Pvt. Ltd. (ITA no. 5799/Del/2012 - AY 2008-09) - Ciena India Pvt. Ltd. (ITA no. 3324/Del/2013 - AY 2008-09). - Pyramid IT Consulting Pvt. Ltd. (ITA no. 5401/Del/2012 - AY 2008- 09) ....
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....-08, we exclude this comparable from the list of comparables. Assessee succeeds. Persistent Systems Ltd. 63. For the very same reasons as in AY 2007-08, we exclude this comparable from the list of comparables. Assessee succeeds. Softsol India: 64. Ld. counsel referred to annual report of this comparable and pointed out that not much details are available. He referred to following observations from the Chairman's address: "I am proud to share with you that not only our team delivered excellent quality work for our clients, but also developed improved and perfected certain process, specialized tools, methodologies and best practices that are relevant for the area of our specialization, namely, Enterprise Technology Modernization. We are also creating Intellectual property as we perform our normal work. Once again this will improve profitability and intrinsic value of our company." 65. With reference to above, ld. counsel pointed out that assessee is not developing any intangible, therefore, it is not the right comparable. Ld. counsel further referred to page 318 of PB, wherein TP report is contained and pointed out that capacity utilization adjustment has not been a....