TaxTMI 
TaxTMI 
2018 (5) TMI 1381
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....nsactional Net Marg-in Method ("TNMM") in respect of software services provided to Associated Enterprises (" AEs") Rejection of transfer pricing documentation maintained 1. Rejection of the transfer pricing documentation maintained by the Appellant in accordance with the provisions of the Act read with the Income-tax Rules, 1962 ('Rules') and making an adjustment of Rs. 8,03,03,098 to the international transactions relating to provision of software services to its AE by undertaking a fresh economic analysis during the course of assessment proceedings. Rejection of use of multiple year data 2. Rejecting the use of multiple year data and using data for the FY 2009-10 only. Aggregation of distribution of software products with software services 3. Aggregating the international transactions of the following two business segments for determining the ALP of all the international transactions: * Software Development services and * Sales and Distribution services Use of additional filters 4. Inter-alia use of the following additional/modified filters in undertaking the comparative analysis and rejecting compara....
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....ds of appeal without prejudice to each other and craves leave to add, alter, delete or modify all or any of the above grounds of appeal". 2. At the time of hearing, the learned Counsel for the assessee did not advance any arguments in support of Ground of appeal Nos. 1 to 4. Therefore, these grounds are rejected as not pressed. 3. As regards Ground No.5, brief facts are that the assessee company, a wholly owned subsidiary of Cordys B.V. Netherlands, providing software services primarily to its Associate Enterprises and is also an authorized distributor of Cordys Products in India., entered into international transactions of providing software development services, distribution of software products and reimbursement of costs by AE during the relevant financial year. In its TP study, the assessee had segregated the transactions relating to distribution of products and provision of software services and had conducted search for comparables separately in respect of these transactions. The TPO, upon analyzing the nature of the transactions, observed that the transactions are closely linked to the software development services provided by the taxpayer and therefore, the same are to....
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.... almost 8.5% of the total cost and such impact does not occur regularly every year. In support of this contention, the learned Counsel for the assessee placed reliance upon the decision of the Delhi Tribunal in the case of Honda Trading Corporation India Pvt Ltd vs. ACIT in ITA No.5297/Del/2011 wherein it was observed that foreign exchange fluctuation should not form part of the operating income of the assessee. 6. The learned DR, on the other hand, submitted that the foreign exchange gain or loss is part of the operating income and therefore, should be considered as operating profit or operating cost respectively and therefore, the DRP is justified in not accepting the assessee's objections. 7. Having regard to the rival contentions and the material on record, we find that the foreign exchange fluctuation loss is not abnormal only to the assessee. Such fluctuation would affect the margins of the comparable companies as well as long as the transactions are in the same currency. In a number of cases, we have already held that the foreign exchange fluctuation profit or loss is also part of the operating revenue. In fact, in the case of Honda Trading Corporation India Pvt. Ltd (....
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....ions, IT Services, IT Enabled Services etc., It is also seen that the assessee is into research & development to enhance the quality of its products and the revenue from the sale of software products and courseware materials is recognized when sale has been completed, with the passing of title or licenses or raising invoices as the case may be. As against these activities of CompU Learn Tech, the assessee is into simple software development services. The Coordinate Bench of the Tribunal in the case of M/s. Wissen Infotech Pvt. Ltd in ITA No.99/Hyd/2015 for the A.Y 2010-11 has taken note of these dissimilarities to hold that it is different in line from the activities of the said assessee company and following the decision of the Coordinate Bench in the case of Pegasystems Worldwide Services (P) Ltd, and E-Infochips Bangalore Ltd, has directed the exclusion of the said company. Facts and circumstances of the case before us being similar, respectfully following the above decisions, we direct the AO to exclude this company from the final list of comparables. 11. As regards E-Infochips Bangalore Ltd is concerned, it is the case of the assessee that this company is also functionally ....
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.... i) that the company is engaged in development of software (Annexure to directors report. Hence it is not functionally different.) ii) As per schedule 7 & 8 of P&L A/c, the income derived is from software services. iii) In notes to accounts, it was mentioned as revenue from software development. iv) Hence this company cannot be rejected as comparable. 1.3. Considered the submissions of both the parties and perused the material facts on record. We find that the coordinate bench in the case of Pegasystems Worldwide India Pvt. Ltd. (supra) held as under: "8.3. After considering the rival contentions and perusing the annual reports placed on record, we are of the opinion that this company cannot be selected as comparable company for TP analysis. First of all, this company is engaged in both software development as well as ITES. Assessee being only captive service provider, the above company cannot be considered as comparable on functional basis. Not only that, as pointed out, segmental I.T.A. Nos. 1758 & 1936/Hyd/14 Pegasystems Worldwide India Pvt. Ltd., :- 7 -: information pertaining to the above company is not available. As seen from t....
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....s and law. Needless to state that A.O/TPO shall grant adequate opportunity of hearing to the ITA No 771/AHD/2014 . A.Y. 2009-2010 13 Assessee. The issue of respect to determination of ALP is thus set aside to the file of A.O/TPO and the ground of appeal raised by the Assessee is thus allowed for statistical purposes." 1.5 In view of the above, in line with the decisions of the various benches of this Tribunal, we hold that this company is to be omitted from the list of comparable companies. With regard to DR submissions, he strongly submitted that in the case of M/s Virtusa India (supra), the matter was remitted back to the AO, in this case also, it should be remitted. We observe that the observations of the coordinate bench also that when the segmental data is not available, we cannot keep the company as comparable. In the present case also, there is no segmental data available on record. Hence, we do not find merits in the submissions of the DR". 14. Respectfully following the same, we direct the AO to exclude this company from the list of comparables. 15. As far as E-Zest Solutions Ltd is concerned, the contention of the assessee is that it is functionally differe....
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....l. We find that this company has been directed to be excluded from the final list of comparables in the case of Oakton Global Technology Services Centre (India) Pvt. Ltd (Supra) by observing as under: "2. Kals Information Systems Ltd., 2.1 Objecting to the aforesaid company as comparable, the AR of the assessee submitted that the said company is functionally different and dealing with software products. He submitted that the ITAT has rejected this company in the following cases: 1. Pegasystems Worldwide India Pvt. Ltd., ITA No. 1758/Hyd/2014, AY 2010-11. 2. CNO IT Services (India) Pvt. Ltd., ITA No. 336/Hyd/2015, AY 2010-11. 3. Planet Online Pvt. Ltd., ITA No. 464/hyd/2014, AY 2009-10. 2.2 Ld. DR relied on the orders of revenue authorities and submitted as under: I) As per Pg. 22 of annual report, the company is engaged in the business of computer software. Hence, it is not functionally different. ii) As per segmental information, Page 23 of annual report, revenue is earned from application software and training. iii) As per age 21 of annual report, the inventories are in the nature of computer spares and not p....
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....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 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, ....
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....of its business and specialization. We find that the Coordinate Bench of the Tribunal in the case of Oakton Global Technology Services Centre (India) Pvt. Ltd has directed the exclusion of this company on the ground of functional dissimilarity only. The relevant paragraph is reproduced hereunder: "3. Tata Elxsi Ltd. (Seg.) 3.1 Objecting to the aforesaid company as comparable, the ld. AR submitted that this company's business is of complex nature, functionally different and segmental information is not available. He submitted that the ITAT has rejected this company in the following cases: 1. Pegasystems Worldwide India Pvt. Ltd., ITA No. 1758/Hyd/2014, AY 2010-11. 2. CNO IT Services (India) Pvt. Ltd., ITA No. 336/Hyd/2015, AY 2010-11. 3. Planet Online Pvt. Ltd., ITA No. 464/hyd/2014, AY 2009-10. 3.2 Ld. DR relied on the orders of revenue authorities and submitted as under: i)The company has two segments including software development services, which forms 89.52% of total revenues. ii) In response to notice u/s 133(6) the company has merely stated that it is engaged in SDS. iii) This company was considered as....
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....013. Following were the relevant observations of the Tribunal:- II. UNREASONABLE COMPARABILITY CRITERIA : 19. The learned Chartered Accountant pleaded that out of the six comparables shortlisted above as comparables based on the turnover filter, the following 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." 3.5 In view of the above, in line with the decision of the various benches of this Tribunal, we direc....