TaxTMI 
TaxTMI 
2016 (9) TMI 1434
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.... 16,08,944 incurred in foreign currency from-the total turnover- also while computing the deduction u/s 10A of the LT. Act as the decision of the High Court is binding, without appreciating the fact that there is no provision in section 10A that such expenses should be reduced from the total turnover also, as clause (iv) of the explanation to section 10A provides that such expenses are to be reduced only from the export turnover. 3. The DRP erred in not appreciating the fact that the jurisdictional High Court's decision in the case of Tata Elxsi Limited 349 ITR 98 has not been accepted by the department and an appeal has been filed before the Hon'ble Supreme Court. 4. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the DRP be reversed and that of the Assessing Officer be restored. 5. The appellate craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of the appeal." 3. The issue that arises for consideration in this appeal is as to whether the DRP was justified in directing the AO to exclude telecommunication charges of Rs. 2....
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.... Larsen and Toubro Infotech 19,50,83,831,374 15,64,12,76,626 24.72% 11 Infosys Ltd. 2,02,64,0000,000 1,39,17,00,00,000 45.61% Average mean 24.32% 7. Further the TPO in his order dated 15.3.2013 passed u/s 92CA(5) r.w.s. 154 revised the adjustment to the ALP to an amount of Rs. 3,16,01,043. The Assessing Officer passed a draft assessment order u/s. 143(3) r.w.s. 144C of the Act, against which the assessee appealed before the DRP. The DRP issued directions u/s. 144C(5) of the Act. Aggrieved by the order of the DRP, the assessee is in appeal before us. 8. Though several grounds are raised in the appeal by the assessee, the ld. counsel for the assessee pressed for only grounds Nos.3 (a), (d) & ground No.7. Thus, the other grounds are dismissed as not pressed. 9. As far as ground No.7 is concerned regarding deduction u/s. 10A of the Act, this issue has already been considered by us while dealing with the revenue's appeal hereinabove, confirming the order of the DRP. Therefore, ground No.7 raised by the assessee on this issue is also dismissed. 10. Ground Nos. 3(a) & (d) raised by the assessee read as follows:- "3(a) The AO/....
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....evenue 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 Private Limited Vs. DCI, ITA No. ITA No 1386/PN/1O 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. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be ex....
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....time, Learned Counsel also submitted that the companies which are functionally not similar, having RPT of more than 15% and high turnover cases require reconsideration and made various submissions on the issue. Ld. DR also made submissions on the filters of RPT, turnover etc., and comparability of each of the companies. 8. As a general proposition, various filters are required to be adopted in selecting a company as a comparable. This is part of FAR analysis. However, there cannot be rigid rule or percentage fixed in adopting various filters. Generally, a turnover filter is adopted to avoid selection of high end companies (big companies) with that of 'minnows' in the similar line of business. How to adopt the filter depends on each case. Say for example, in the TP analysis of a company having 20 Crores receipts, a company with 2 Crores to 200 Crores can be stated to be within the range i.e., factor of ten as upper and lower limits. In certain cases, the ITAT also accepted turnover filter of 1 Crore to 200 Crores. But the range cannot be fixed, as the facts may vary from case to case. Simply a comparable can not be excluded on upper turnover limit when infact in number of c....
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....e Tribunal at para 26.1 are as under:- "26.1 Bodhtree Consulting Ltd.:- As far as this company is concerned, it is not in dispute that in the list of comparables chosen by the assessee, this company was also included by the assessee. The assessee, however, submits before us that later on it came to the assessee's notice that this company is not being considered as a comparable company in the case of companies rendering software development services. In this regard, the ld. counsel for the assessee has brought to our notice the decision of the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. v. ITO, ITA No.7633/Mum/2012, order dated 6.11.2013. In this case, the Tribunal followed the decision rendered by the Mumbai Bench of the Tribunal in the case of Wills Processing Services (I) P. Ltd., ITA No.4547/Mum/2012. In the aforesaid decisions, the Tribunal has taken the view that Bodhtree Consulting Ltd. is in the business of software products and was engaged in providing open & end to end web solutions software consultancy and design & development of software using latest technology. The decision rendered by the Mumbai Bench of the Tribunal in the case of N....
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....llowing two companies, namely (i) Tata Elxsi Ltd; and (ii) M/s. Flextronics Software Systems Ltd., deserve to be eliminated for the following reasons : (i) Tata Elxsi Ltd., : The company operates in the segments of software development services which comprises of embedded product design services, industrial design and engineering services and visual computing labs and system integration services segment. There is no sub-services break up/information provided in the annual report or the databases based on which the margin from software services activity only could be computed. The company has also in its response to the notice u/s.133(6) stated that it cannot be considered as comparable to any other software services company because of its complex nature. Hence, Tata Elxsi Ltd., is to be excluded from the list of comparables. (ii) Flextronics Software Systems Ltd. : ......................... ................................ 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 th....
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....y is engaged in providing licensing of products and sale of products. It has revenue from export of services and products. This company is engaged in outsourced product development services for independent software vendors and enterprises. The income includes both software services and product sales and segmental details are not available. It owns intangibles of Rs. 11.35 million and incurs marketing expenses. The turnover criterion is of Rs. 519 crores. Hence it was submitted that this company is not comparable with that of the assessee. (6) Larsen & Toubro Infotech Ltd. 11.6.1 It was submitted that this company is providing offshore operations but the comparable has majority of onsite revenue of 52.72% of the total revenue. It develops inhouse intangibles and owns intangibles of Rs. 2,253 lakhs for FY 2008-09. The turnover criterion is of Rs. 1,950.83 crores. Hence this company was sought to be rejected as a comparable. (7) Infosys Ltd. 11.7.1 It was submitted that Infosys Ltd. has brand related profits. It has brand earnings of Rs. 3,253 crores and owns significant intangibles. The onsite revenue is to the extent of 49.30% of total revenue. It had total turnover of R....
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....fference in size could be removed by a quantitative adjustment to the margins or price being compared if it is possible to do so reasonably accurately. He submitted that size as one of the selection criteria has also been approved by various Benches of the Tribunal, in the following cases : 1. Dy. CIT vs. Quark Systems (P) Ltd. (2010) 132 TTJ (Chd)(SB) 1 : (2010) 42 DTR (Chd)(SB)(Trib) 414 : (2010) 38 SOT 307 (Chd)(SB), wherein it was held that even the filter of lower turnover of Rs. 1 crore is without any reasonable basis and there is no filter for higher turnover also. The application of turnover filter also leaves much to be desired and has to no rationale basis. In our considered view, it is improper to proceed on the basis that the turnover of Rs. 1 crore to infinite is a reasonable classification as turnover base. 2. E-Gain Communication (P) Ltd. vs. ITO (2008) 118 TTJ (Pune) 354 : (2008) 13 DTR (Pune)(Trib) 65; 3. Sony India (P) Ltd. vs. Dy. CIT (2008) 118 TTJ (Del) 865 : (2008) 14 DTR (Del)(Trib) 228 : (2008) 114 ITD 448 (Del); 4. Dy. CIT vs. Indo American Jewellery Ltd., ITA No. 6194/Mum/2008 [reported at (2010) 131 TTJ (Mumbai) 163 : (....
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....ver filter. 9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which are making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various Benches of the Tribunal, when companies which are loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classificatio....
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....s observed as under; "9.........we find that the TPO himself has rejected the companies which are making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, a held by the various benches of the Tribunal, when companies which are loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun and Bradstreet is more suitable ad reasonable. In view of the same we hold that the....
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....logies Ltd, had considerable intangibles like IPR, and was 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." 12.2 Further, this Tribunal in the case of M/s. Unisys India Pvt. Ltd. (supra) with regard to the comparables viz., Infosys Ltd. and Persistent Systems Ltd., on the functional comparability has held at para 32 and 36 as follows:- "32. Infosys Ltd.:- As far as this company is concerned, it is not in dispute before us that this company has been considered to be functionally different from a company providing simple software development services, as this company owns significant intangibles and has huge revenues from software products. In this regard, we find that the Bangalore Bench of the Tribunal in the case of M/s. TDPLM Software Solutions Ltd. v. DCIT, ITA No.1303/Bang/2012, by order dated 28.11.2013 with regard to this comparable has held as follows:- "11.0 Infosys Technologies Ltd. 11.1 This was a comparable selected by the TPO. Before t....
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....of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded from the list of comparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 11.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee has brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) for Assessment Year 2007-08 is applicable to this year also. We are inclined to concur with the argument put forth by the assessee that Infosys Technologies Ltd is not functionally comparable since it ow....