TaxTMI 
TaxTMI 
2018 (1) TMI 1151
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....lopment services by the Appellant to its Associated Enterprise ('AE'). 2. In doing so, the Ld. CIT(A)/Ld. AO/Ld. TPO erred in: 2.1. rejecting the transfer pricing ('TP') documentation which was maintained in good faith and with due diligence; 2.2. rejecting the search process followed by the Appellant in the TP documentation and carrying out a fresh comparability analysis for determining the arm's length price; 2.3. using the data available at the time of assessment proceedings instead of those available as on the date of preparing the TP documentation; 2.4. rejecting multiple year data and relying on contemporaneous information which was not available at the time of preparation of TP documentation; 2.5. including companies in the comparability analysis which are different from the Appellant in functions, asset base and risk profile; 2.6. not considering companies similar to the Appellant in functions, asset base and risk profile while performing comparability analysis; 2.7. not granting risk adjustment; and 2.8. not granting benefit of +/- 5% under the proviso to section 92C(2) of the Act" 2. Brief facts of the case are that the ass....
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.... for their exclusion. 6. The learned DR, on the other hand, relied upon the orders of the authorities below. 7. Having regard to the rival contentions, the appeal is disposed of on the basis of the material available in the paper books and those documents which are specifically referred to by the assessee and the Revenue. 8. The first company challenged by the assessee is M/s. Megasoft Ltd. According to the assessee, the said company is functionally different as it is into software development and also product development. The learned Counsel for the assessee fairly conceded that in all the decisions relied upon by him, the said company has been retained as a comparable but a direction was given to the AO/TPO to consider only the segmental results of software development. He prayed that similar direction may be given in the case of the assessee as well. 9. We have gone through the decisions relied upon by the learned Counsel for the assessee and find that the Tribunal in the cases cited by him, have directed that only segmental details of the software development services to be considered for comparability. Therefore, similar direction is given in this case also. 10. As regard....
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.... and networking, enterprise system management, embedded system, VLSI designs, CAD/CAM/BPO (iv) Accel Animation Studies software services for 2D/3D animation, special effect, erection, game asset development." 7.8.1. On careful perusal of the business activities of Accel Transmatic Ltd. DRP agreed with Assessee that the company was functionally different from Assessee company as it was engaged in the services in the form of ACCEL IT and ACCEL animation services for 2D and 3D animation and therefore assessee's claim that this company was functionally different was accepted. It directed the Assessing Officer to exclude ACCEL Transmatic Ltd. from the final list of comparables for the purpose of determining TNMM margin. A similar view was taken in the following cases : (a) M/s. Conexant System India P. Ltd. ITA. No. 1978/Hyd/2011. (b) Intoto Software India P. Ltd. ITA. 2102/H/2010 (c) Bearing Point Business ITA. No. 1124/Bang/2011 (d) LG Soft India P. Ltd. ITA. 1121/Bang/2011 (e) Transwitch India P. Ltd. ITA. 948/Bang/2011 (f) Mercedes Benz Research & Development ITA. No. 1222/Bang/2011 (g) CSR India P. Ltd. ITA. No. 1119/Bang/2011 (h) HCL EAI Services ....
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....wlett-Packard (India) Globalsoft P Ltd v. DCIT (ITA 1031/Bang/2011) ii) SAP Labs India P Ltd (IT(TP)A No.1006/Bang/2011) iii) Triology E Business Software India P Ltd vs. DCIT (ITA No.10545/Bang/2011) iv) Tevapharm P Ltd vs. DCIT (ITA No.6623/Mum/2011). 17. We find that in the case of SAP Labs India Private Ltd (cited Supra), the Coordinate Bench of the Tribunal has considered the issue at length at at Para 8 and has reproduced the decision of the Coordinate Bench of the Tribunal in the case of First Advantage Offshore Services (P) Ltd v. Dy.CIT (IT(TP) No.1086/Bang/2011) for the A.Y 2007-08 wherein the decision with regard to Celestial Lab is given as under: "(c) Celestial Labs Ltd. 42. As far as this company is concerned, the stand of the assessee is that it is absolutely a research & development company. In this regard, the following submissions were made:- In the Director's Report (page 20 of PB-II), it is stated that "the company has applied for Income Tax concession for inhouse R&D centre expenditure at Hyderabad under section 35(2AB) of the Income Tax Act." As per the Notes to Accounts - Schedule 15, under "Deferred Revenue Expenditure" (page 31 of PB-I....
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....hem to Interested Pharma and Bio Companies across the GLOBE. The proposed Facility will be set up in Genome Valley at Hyderabad in Andhra Pradesh' According to the learned D.R. celestial labs is also in the field of research in pharmaceutical products and should be considered as comparable. As rightly submitted by the learned counsel for the Assessee, the discovery is in relation to a software discovery of new drugs. Moreover the company also is owner of the IPR. There is however a reference to development of a molecule to treat cancer using bioinformatics tools for which patenting process was also being pursued. As explained earlier it is a diversified company and therefore cannot be considered as comparable functionally with that of the Assessee. There has been no attempt made to identify and eliminate and make adjustment of the profit margins so that the difference in functional comparability can be eliminated. By not resorting to such a process of making adjustment, the TPO has rendered this company as not qualifying for comparability. We therefore accept the plea of the Assessee in this regard.' " 44. It was submitted that the learned DR in the above case vehemen....
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.... to know as to whether the primary business of this company is software development services as indicated in the annual report for FY 06- 07 or clinical research and manufacture of bio products and other products as stated in the DRHP. There is no reference to any reply by Celestial labs to the above clarification of the TPO. The TPO without any basis has however concluded that the business mentioned in the DRHP are the services or businesses that would be started by utilizing the funds garnered though the Initial Public Offer (IPO) and thus in no way connected with business operations of the company during FY 06-07. We are of the view that in the light of the submissions made by the Assessee and the fact that this company was basically/admittedly in clinical research and manufacture of bio products and other products, there is no clear basis on which the TPO concluded that this company was mainly in the business of providing software development services. We therefore accept the plea of the Assessee that this company ought not to have been considered as comparable". 18. We have also gone through the financial results of this company which are filed in the paper book filed by the....
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....lopment services company. The relevant portion of the order is reproduced hereunder: (d) KALS Information "Systems Ltd. 46. As far as this company is concerned, the contention of Assessee is that the aforesaid company has revenues from both software development 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 Pvt. Limited v. DCIT ITA No.1386/PN/2010 wherein KALS as comparable was rejected for AY 2006.07 on account of it being functionally 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 functionally the company is not comparable. With reference to pag....
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....India P. Ltd. ITA. No. 1119/Bang12011 (g) First Advantage ITA. No. 1086/Bang/2012 Therefore, respectfully following the decision of the Coordinate Benches (supra), we direct the Assessing Officer/TPO to exclude the company from the list of comparables". 21. Respectfully following the same, the AO is directed to exclude this company from the list of comparables. 22. As regards Lucid Software Ltd is concerned, it is the case of the assessee that this company is also engaged in the development of software products and sale thereof. The learned Counsel for the assessee has drawn our attention to the P&L A/c for the year ended on 31.3.2006 and 31.3.2007 to demonstrate that the product development expenses have been amortized and unamortization development expenses has been shown in the balance sheet also. He submitted in the case of Virtusa (India) Pvt. Ltd in ITA No.1962/Hyd/2011, the Coordinate Bench of this Tribunal has considered this aspect to direct the AO to exclude the said company from the final list of comparables. On perusal of the order of the Tribunal, we find that at Para 4 of its order, the Tribunal has held as under: "4. Lucid Software Ltd. 4.1 Objecting to....
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....n the functional difference, but also on the ground of incomparable scale of operations and segmental data not being available. The learned Counsel for the assessee placed reliance upon the following decisions in support of his contention: i) Agnity India Technologies Pvt Ltd (TS 180 High Court 2013 Del T.P, High Court Delhi) ii) Conexant Systems India P Ltd (ITA No.1429/Hyd/2010 & ITA No.1978/Hyd/2011) iii) DE Shaw India Software P Ltd (ITA No.2071/Hyd/2011 iv) Vortisa (India) Pvt Ltd (ITA No.1962/Hyd/2011 v) NTT Data India Enterprises Application Services P Ltd in ITA No.2190/Hyd/2011 vi) ADP Pvt. Ltd in ITA No.1711/Hyd/2011. 25. We find that the Hon'ble Delhi High Court in the case of Agnity India Technologies Pvt. Ltd (Supra) has held that big companies like Infosys Ltd cannot be considered as comparable to software development service providers like Agnity. Following the same analogy, the Coordinate Bench of this Tribunal have directed exclusion of Wipro Ltd also from the final list of comparables. For the sake of ready reference, the relevant paragraphs of the directions of the Tribunal in the case of Virtusa (India) (Pvt.) Ltd is reproduced hereunder: "7. ....