AI Drafter 
TaxTMI 
TaxTMI 
2015 (12) TMI 1753
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.... the approved Software Technology Parks located at Pune and Bangalore. Hence, the assessee is entitled for the benefit u/s. 10 of the Act. The assessee filed return of income for the assessment year 2007-08 on 29-10-2007 declaring its income at Rs. 42,20,130/- after claiming exemption u/s. 10A of the Act. During the assessment proceedings, the income of the assessee was enhanced to Rs. 5,68,15,190/- by virtue of addition of Rs. 5,25,95,056/- on account of adjustment made to arm's length price of International Transactions with Associated Enterprises (AE). 3. During the period relevant to the impugned assessment year the assessee had entered into International transactions for rendering software development services with its AE to the tune of Rs. 31,30,40,056/-. To benchmark the same, the assessee adopted CPM method. The TPO after examining the documents submitted and the benchmarking done by the assessee in respect of international transactions rejected the same. The assessee had originally selected 27 comparables. The assessee had applied following filters for selection of comparables:- i. Companies for which data is not available. ii. Sales < Rs. 1 crore ....
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.... AE. Ground No. 2 - Rejection of transfer pricing analysis conducted by the Appellant Erred in rejecting of the economic analysis conducted by the Appellant and rejecting the comparable companies indentified by the Appellant in the TP Study. The ground Nos. 1 and 2 raised in the appeal are general in nature and thus, requires no adjudication. 7. Ground No. 3 - Eligibility under section 10A of the Act : Erred in ignoring the fact that since Appellant is availing tax holiday under section 10A of the Act, there is no intention to shift the profit base out of India, which is one of the basic intentions of the introduction of transfer pricing provisions. Ground No. 4 - Use of single year data Erred in not considering multiple year data for determining the arm's length price Ground No. 5 - Use of additional filters/modification of filters Erred in inappropriately introducing additional filters (selection criterias) and modifying the filters adopted by the Appellant and therefore, inappropriately rejecting certain comparable companies and determining inappropriate companies as comparables to the Appellant. The ld.....
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....findings of DRP and TPO. The ld. DR submitted that Object One Information Systems Ltd. is engaged in software development, media business, internet TV etc. The segmental information for software services is not available in respect of the said company. Therefore, the company is not functionally comparable. In respect of Quintegra Soutions Ltd. the ld. DR contended that the company is engaged in management, product engineering, enterprise solution such as SAP, testing and validation, technology consulting, etc. The company has diversified activities. Segmental analysis for software development services is not available. In respect of Synfosys Business Solution Ltd. the ld. DR submitted that company is engaged in product development in the areas of mobile security and health care. Moreover, the total expenses of the company during the year are Rs. 5.56 crores and the expenditure towards remuneration and salaries paid to the employees is only Rs. 22 crores. Therefore, the company is not a good comparable. The ld. DR vehemently supported the findings of the TPO in rejecting the aforesaid companies. 10. We have heard the submissions made by the representatives of rival sides and have....
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....ted out that the inventory shown in the balance sheet is generated from software products. In case of software services no inventory is generated. Therefore, the said company cannot be considered as a good comparable. The ld. AR further submitted that Kals Information Systems Ltd. has been rejected as comparable by the Tribunal in the following decisions:- i. SunGard Solutions (India) (P.) Ltd. (supra) ii. PTC Software (India) (P.) Ltd. (supra) iii. Barclays Technology Centre India (P.) Ltd. v. Asstt. CIT [2015] 56 taxmann.com 386 (Pune) 11.2 In respect of Avani Cimcon Technologies Limited the ld. AR submitted that the company is not a good comparable as it is functionally different. The said company developed software products named 'DXchange' and 'Carma'. The company would have earned revenue from sale of said softwares in the market. Whereas, the assessee is providing R and D facilities to its holding company only and is not engaged in development of software to be sold in the open market. In the absence of segmental details Avani Comcon Technologies Limited cannot be considered as a comparable entity. To support of his submissions t....
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....se, and excluded the same for the purposes of comparability analysis. Notwithstanding the assessee's 6 primary plea that the threshold limit of 25% adopted by the TPO was inappropriate, it has been submitted before us that even after applying the filter adopted by the TPO, the aforestated two concerns are liable to be excluded as they have related party transactions in excess of 25% of the total transactions. It has been pointed out that the RPT percentage has been wrongly calculated by the TPO and for that matter it referred to the detailed submissions made in this regard to the DRP which are placed at pages 815 - 816 of the Paper Book. 12. In this connection, we find that the TPO defined the RPT filter to mean that in cases where the RPT transactions exceed 25% of the total transactions, the same are liable to be excluded for the purposes of comparability analysis. The TPO further decided to compute the limit of 25% of RPT transactions with reference to the appropriate base, which was either sales or total operating expenses, as the case may be. In para 6.3.2. of his order, the TPO has noticed in relation to FCS Software ltd that the said company had sales revenues f....
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....ed by the TPO, the said concern in our view is also liable to be excluded from the list of comparables for the purpose of comparability analysis." In the present case the assessee is seeking rejection of Compucom Software Ltd. from the list of comparables on the ground of excessive RPT. Respectfully following the decision of Co-ordinate Bench, we direct the Assessing Officer/TPO to exclude the said company from the list of comparables. 13.1 As far as Kals Information Systems Limited is concerned the contention of the assessee is that it is functionally different. The assessee is engaged in software research and development solely for its AE. Whereas, Kals Information Systems Limited is engaged in development of software and software products. The Tribunal in the case of Barclays Technology Centre India (P.) Ltd. (supra) excluded the said company from the list of comparables being functionally different. The relevant extract of the findings of the Tribunal are reproduced here-in-under:- '18. Thirdly, assessee has contended that the concern M/s. Kals Information Systems Ltd. be excluded from the final set of comparables. On this aspect also, the case set up by the ....
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....asmuch it was engaged in the provision of software development and other related services to its associated enterprises as well as to the non-associated enterprises and, was not involved in development and sale of software products. The TPO did not accept the plea of the assessee for the reason that the Annual Report of the said concern did not reflect about sale of software products after development and therefore, according to him, it was not functionally different. 14. Before us, the learned counsel for the assessee has vehemently pointed out that the plea of the assessee has been rejected by the income-tax authorities without any justifiable reasons, as even on the basis of the information available in the public domain it is quite evident that Kals Information System Limited was a concern which was developing and selling software products, which was an activity quite distinct from the activity of software development undertaken by the assessee. In the course of hearing, the learned counsel has furnished the prints out from the Annual Report of Kals Information Systems Ltd. wherein various software products sold by the said concern have been detailed, which according t....
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....se of M/s 3DPLM Software Solutions Ltd. (supra) relied upon by the assessee squarely cover the controversy relating to Kals Information Systems Limited. In the aforesaid two precedents, the said concern has been sought to be excluded from the list of comparables on account of functional dissimilarities. The Bangalore Bench of the Tribunal in the case of M/s 3DPLM Software Solutions Ltd. (supra) has considered the functions undertaken by the said concern during the previous year relevant to the assessment year under consideration before us, and it has been found that the said concern was engaged in the business of developing and selling software products and was not purely or mainly a software service provider. There is no dispute to the fact position that the appellant before us has undertaken mainly software development services for its associated enterprises and the non-associated enterprises and that such activity is quite distinct from the developing and selling of software products. The Pune Bench of the Tribunal in the case of Bindview India Pvt. Ltd. (supra) has also found the said concern to be functionally dissimilar from a concern which was engaged in the business of soft....
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.... that this company has revenue from software product and observed that in the absence of segmental details, Avani Cincom cannot be considered as comparable to the assessee who was rendering software development services only and it was held as follows:- "7.8 Avani Cincom Technologies Ltd. ('Avani Cincom'): Here in this case also the segmental details of operating 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." It was also highlighted that the margin of this company at 52.59% which represents abnormal circumstances and profits. The following figures were placed before us:- Pa....
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....ables. However, the DRP has not given any findings on the issue. A perusal of the directions of DRP show that the assessee had raised this issue as Objection no. 8. However, the DRP has not given any findings on the objection raised by the assessee with regard to arbitrary selection of the companies as comparable entities. The assessee had purportedly suggested the following companies to the TPO for including in the list of comparable entities: (1) Akshay Software Technologies Limited. (2) Maars Software International Ltd. (3) Melstar Information Technologies Ltd. (4) VMF Software International Ltd. A perusal of the order of TPO, as well as the DRP shows that there is no reference of the aforesaid companies in the order. No reason whatsoever has been given for not considering the aforesaid companies in TP study. We, accordingly, deem it appropriate to remit this issue back to the file of TPO for considering the aforesaid companies and pass speaking order thereon accepting/rejecting the said companies as comparable entities, provided the assessee has furnished the data of said companies with a request to consider the same during the pendency of....