TaxTMI 
TaxTMI 
2016 (6) TMI 1280
X X X X Extracts X X X X
X X X X Extracts X X X X
....AO") of making an adjustment to the transfer price of the Appellant in respect of contract Software Development services provided to its associated enterprises holding that the international transactions do not satisfy the arm's length principle envisaged under the Income Tax Act, 1961 (the 'Act') 4. That the learned CITCA) erred in upholding the learned TPO approach of rejecting the Transfer Pricing ("TP") documentation maintained by the Appellant. 5. That the learned CIT(A) erred in upholding inclusion of companies in the comparability analysis, which are different from Appellant in functions, assets and risk profile and rejection of the companies that are similar to the Appellant, while performing comparability analysis by the learned TPO and in doing so also erred in ignoring the limited risk nature of the software development services provided by the Appellant and not providing adjustment on account of risk differential with entrepreneurial comparables, as required while determining the arm's length price of the international transactions of the Appellant. 6. That the learned CITCA) erred in upholding application of different quantita....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion of the learned AO/learned TPO in limiting the working capital adjustment while determining the arm's length price. 11. That the learned CIT(A) erred in upholding the action of the learned TPO in inclusion of companies with huge turnover as comparable to the Appellant. 12. That the Appellant prays to allow the benefit of range of +/-5% as provided in proviso to Section 92C(2) of the Act, while determining the arm's length price. 13. That the Appellant prays to compute the arm's length price by considering correct operating margins of some of the comparable companies. That the Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein above or produce further documents before or at the time of hearing of this Appeal." 3. The assessee has also raised two additional grounds which are as under: "14. That the ld. ITO, Ward-1(2), Bangalore (AO) and the ld. CIT(A) erred in confirming the action of the ld. DCIT, TP-V, Bangalore of accepting Persistent Systems Ltd/which fails the test of comparability and thus not comparable to the appellant in respect of its software development services. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....anies by including the foreign exchange gains or loss without appreciating the fact that the foreign exchange loss or gain though attributable to operating activity is not derived by the operating activity. 6. The CIT(A) erred in directing the AO to compute the margin of both the assessee as well as the comparable companies by including the foreign exchange gains or loss without appreciating the fact that operational expenses are those expenses which are incurred to earn that income and that foreign exchange loss or gain cannot be said to be one derived from international transaction though they may be attributable to the international transactions and therefore they should be excluded while determining the operating cost. 7. The CIT(A) erred in not appreciating the fact that if any filter or criteria applied by the assessee is accepted or if any filter or criteria applied by the TPO is relaxed, the entire accept/reject matrix changes resulting in a new set of comparables including those comparables which are neither taken by the assessee or the TPO and which do not find a place in the order under Section 92CA. 8. The CIT(A) erred in directing the AO to v....
X X X X Extracts X X X X
X X X X Extracts X X X X
....self after obtaining remand report from the AO if required. But considering this fact that more than two years have already lapsed by this time and the AO might have given effect to the order of the ld. CIT(A), we feel it proper that instead of restoring this matter back to the file of ld. CIT(A) for deciding the issues afresh after obtaining remand report from the AO, it is better to restore this matter back to the file of the AO for fresh decision after providing reasonable opportunity of hearing to the assessee. We order accordingly. 9. Ground No. 4 to 8 are allowed for statistical purposes. 10. Ground No. 9 & 10 are general and they do not require any specific adjudication. 11. Regarding assessee's appeal, it was submitted by the ld. AR of the assessee that ground No. 1 is general and in respect of ground No. 2 to 13, it was submitted by him that these are in respect of Transfer Pricing (TP) issues. He submitted a chart as per which the assessee is requesting for exclusion of certain comparables as noted hereunder; In addition to this, the assessee has also requested in the chart for consideration of correct operating margin in the case of M/s. Sakaen Communicat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dered in the case of M/s. Cisco Systems (Ind.) Pvt. Ltd., (Supra) and in particular, our attention was drawn to para-26.1 available on page No. 98 to 99 of Case Law Compendium. In this case, it is noted by the Tribunal that this company is in the business of software product and was engaged in providing open and end to end web solutions software consultancy and design and development of software using latest technology and therefore, the same cannot be considered as a comparable in the case of companies rendering software development services, as in the present case. Therefore, by respectfully following this Tribunal order, we hold that this company is also excluded from the list of final comparables. 3. M/s. Tata Elxsi Ltd., For exclusion of this company also, reliance has been placed on the same Tribunal order rendered in the case of M/s. Cisco Systems (Ind.) Pvt. Ltd., (Supra) and our attention was drawn to para-26.4 to 26.5 of the order available on pages 103 to 105 of the case law compendium. For the sake of ready reference these paras are reproduced hereunder; "26.4 Tata Elxsi Ltd.:- As far as this company is concerned, it is not in dispute before us that in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng of royalty income as well as regular software services income, for which revenue break-up is not available. He finally submitted that this was a good reason to exclude this company also from the list of comparables. 20. On the other hand, the learned DR supported the order of the lower authorities regarding the inclusion of Tata Elxsi and Flextronics Software Systems Ltd., in the list of comparables. He reiterated the contents of para 14.2.25 of the TPO's order. He also read out the following portion from the TPO's order: "Thus as stated above by the company, the following facts emerge: 1. The company's software development and services segment constitutes three sub-segments i) product design services; ii) engineering design services and iii) visual computing labs. 2. The product design services sub-segment is into embedded software development. Thus this segment is into software development services. 3. The contribution of the embedded services segment is to the tune of Rs. 230 crores in the total segment revenue of Rs. 263 crores. Even if we consider the other two sub-segments pertain to IT enabled services, the 87.45% (....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n the case of Yodlee Infotech Pvt. Ltd. Vs. ITO held as follows: "5.12. ............... This Tribunal in the case of 3DPLM Software Solutions Ltd., Vs. DCIT (IT(TP)A No. 1303(Bang.)/2012 dated 28-11-2013) has also held that Persistent Systems Pvt. Ltd., was in product designing services and into software product development. In the same decision it was also held that M/s. Infosys Technologies Ltd., had considerable intangibles like IPR, and was also into software product development. It was also held that M/s. Tata Elxsi Ltd., was developing niche products and into product designing services. Hence, these companies would in any case have to be excluded from the comparables being functionally different." 37. Following the said decision, we direct that Persistent Systems Ltd., be excluded from the final list of comparable companies chosen by the TPO." The ld. DR of the revenue supported the orders of the authorities below; 16. We have considered the rival submissions. We find that in this case, the Tribunal has followed another Tribunal order rendered in the case of M/s. Yodlee Infotech Ltd., Vs. ITO in IT(TP)A No. 108(Bang.)/2014. The relevant portion of that....