TaxTMI 
TaxTMI 
2018 (4) TMI 578
X X X X Extracts X X X X
X X X X Extracts X X X X
....s a subsidiary of Steria UK Corporate Ltd., which is an associated enterprise ('AE') of the appellant under section 92A of the Act. The appellant is engaged in providing software and BPO services to its AE. 3. For the financial year 2009-10 (corresponding to assessment year 2010-11), the appellant reported international transaction of provision of software services. The appellant selected Transactional New Margin Method (TNMM) as the most appropriate method for benchmarking the international transaction under the software development services segment. 4. The Transfer Pricing Officer (TPO) passed an order on 17.01.2014, under Section 92 CA(3) of the Act, inter alia, recommending upward transfer pricing adjustment of Rs. 93,53,35,000 to the software development services segment of the appellant. The TPO rejected some comparables selected by the appellant and added fresh comparables, thereby selecting 16 final comparables for benchmarking the international transaction. 5. On 20.10.2015 the Dispute Resolution Panel (DRP) passed an order under Section 144C (5) of the Act, inter-alia, excluding three companies from the final set of comparables drawn by the TPO. Subsequently on 1....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... having 100% of its income from exports to its AEs, the limit of 25% is inadequate and the filter is required to be applied with the thresh hold of 75%. vi. Reject companies that have substantial (excess of 25%) related party transactions. This is an appropriate filter. vii. Reject companies incurring Persistent operating losses. This is an appropriate filter. However, only companies which are incurring losses persistently are to be rejected as against companies which have made loss once in a while. This is an appropriate filter because of the reason that software industry has been growing at a rate of more than 20% and in such an environment, a company making persistent losses does not reflect the industry conditions and is in persistent losses because of company specific issues. viii. Reject companies that had exceptional year of operation. The reasons for exceptional year need to be analysed. The company can be rejected or data may be modified to exclude the income attributable to factors other than operations. ix. Reject companies that were duplicated in the databases with different names or merged to form another company. I....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ue of threshold of related party transactions, it can be stated that when the RPT exceeds 25% of sales, it can be said to be the stage when it will start affecting the price paid/received. The rationale given for the use of the limit of 25% is sound and this threshold limit has been approved explicitly an implicitly in quite a few judicial pronouncements. f) Companies that have employee cost that is less than 25% of total cost: The rationale for this filter is that companies that are engaged in providing services similar to yours will require a minimum level of expenditure as personnel expense. Employees cost constitutes the major component of cost in any service sector. Very low employee cost, viz., less than 25% of total cost, indicates that company is either engaged in some other business or it has outsourced the service functions to a third party, i.e., it is not rendering services on its own. Such companies cannot be treated as functionally comparable to the assessee. g) Companies that are affected by some peculiar economic circumstances: Companies that are affected by factors like persistent losses, declining sales, extraordinary income or expense, mergers and acquisiti....
X X X X Extracts X X X X
X X X X Extracts X X X X
....was held to be comparable. 11. This court is also of the view that said Company's operation comprised of software development, implementation and support services. Primary segmental reporting is based on geographical areas. Said company's earning are to a significant extent export oriented. Separate books of account were maintained for the reported segments and wherever costs are directly identifiable with the reported segment, Revenue in the overseas segment came from export of software services, which are comparable to the assessee company. It is discernible from the segment reporting, that the figures had, been given on the basis of Geographical segments, i.e. 'India' comprising of Products and other services and 'Overseas' comprising of Software services. The TPO had taken only the 'Overseas' segment for the purposes of inclusion in the list of comparables, which encompassed only export of software services. The segment of the assessee under consideration is also only Software services, said segment of Thirdware Solutions - taken by the TPO fully matched and was held to be comparable. These are findings of facts based upon record. Consequently, taking of Thirdware Solutions ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ftware & Exports Ltd. was in order and cannot be interfered with. 15. Coming to the third company in issue i.e. Quintegra Solutions Ltd. TPO held that the said company was an abnormal company as on one hand, sales were declining, receivables and write-offs were also increasing. Further, the debtors of earlier years were affecting the working capital adjusted OP/TC of the company significantly. It was held that in a normal situation, there would be some debtors pertaining to earlier years, but they would be limited and would be counter balanced by creditors. In the said company same was not happening and there were significant debtors from previous year which though were not affecting the normal OP/TC of the company but were affecting working capital adjusted OP/TC so significantly that it was clear that said company did not have a sustainable business model. Further, it was found that as per the Annual Report there appeared to be different export percentages as per different portions of the annual report and the figures did not appear to be reliable. Said Company has thus not been taken as a comparable. 16. The ITAT found that the sales of said company were on falling trend. ....