TaxTMI 
TaxTMI 
2016 (1) TMI 1367
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....Solutions Ltd. As per the Ld. DR by virtue of the judgment of Hon'ble Delhi High Court in the case of Crhyscapital Investment Advisors (India) (P.) Ltd. v. Dy. CIT [2015] 56 taxmann.com 417/232 Taxman 20/376 ITR 183, level of margins of profit could not be considered as a criteria for exclusion while arriving at a list of comparables. 4. Per contra Ld. AR submitted that Exensys Software Solutions Ltd, which was excluded by the CIT (A) for a reason that one Halool India Ltd, was amalgamated with the said company during the relevant previous year resulting in the exceptional performance. Further as per the Ld. AR, the said company was engaged in the business of BPO services and segmental result were not available. 5. We have perused the orders and heard the rival contentions. Before deciding on the issue raised it would be appropriate to cull out the facts relating to the case. Assessee, an off-shore development centre had international transactions with its AE during the relevant previous year in the software development segment. Though it had revenue also from Bio informatics Division, there was no related party transactions in the said segment. Assessee had filed TP docu....
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....seg) 146.46 24.35 Nil 8.63 5.89 11. Visual soft Technologies Ltd (seg) 185.43 23.52 Nil 0 0 12. Sasken communication Technologies Ltd(seg) 189.05 14.42 Nil 0.44 0.23 13. Igate(seg.)* 406 4.32 Nil 28.83 7.10 14. Flextronics(seg) 457.45 32.19 70(15%) 24.91 5.45 15. L&T Infotech 562.45 10.33 Nil 46.8 8.32 16. Salyam 3464.2 29.44 Nil 67.1 1.94 17. Infosys 6859.7 42.83 212(3%) 254.07 3.7 Avg. 26.59% 3.59% 5.17% 8. On the arithmetic mean PLI of 26.59% of the comparables, AO made a negative working capital adjustment of 3.49% and arrived at adjusted arithmetic mean PLI of 23.10%. Though the assessee had sought for a risk adjustment citing that it was providing services to a single customer, TPO was of the opinion that the business environment of the assessee as well as its comparables did not have significant differences, warranting any such adjustment. As per the TPO assessee could not show how market risks borne by the comparable enterprises had an effect on their profits a....
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....enue stands dismissed. 11. Vide its ground 3 Revenue is aggrieved that CIT (A) directed exclusion of Infosys Technologies, iGate Global Solution Ltd, Flextronics Software & Systems Ltd, (seg) and L & T Infotech Ltd, as comparables by applying the turnover filter. 12. CIT (A) had held that assessee's turnover being only Rs. 9.77 crores could not be comparable with companies having huge turnover. He went by the decision of a coordinate bench of the Tribunal in the case of Genisys Integrating Systems (India) (P.) Ltd. v. Dy. CIT [2012] 53 SOT 159/20 taxmann.com 715 (Bang.) and directed exclusion of companies having turnover in excess of Rs. 200 crores from the list of comparables. By virtue of this direction above mentioned companies went out of the list of comparable. 13. Now before us, Ld. DR strongly assailing the order of CIT (A) placed strong reliance once again on the decision of Hon'ble Delhi High Court in the case of Cryscapital Investment Advisors (India) (P.) Ltd. (supra). According to her, AO had made an analysis of the turnover of various companies and came to a conclusion that there was no linear relationship between the turnover and profits. When the com....
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....o exclusion of certain comparables selected by the TPO admission of ten new Comparables, along with its ground for risk adjustment were considered, other grounds relating to TP matter could be adjudicated at a later stage in proceedings when these were relevant. 18. Accordingly we are confining ourselves to the grounds relating to exclusion of certain comparables and inclusion of new comparables and risk adjustments sought by the assessee. 19. Ld. AR submitted that out of the comparables selected by the TPO, M/s. Flextronics Software Systems Ltd. M/s. L & T Info Tech Ltd., iGate Solutions Ltd., and M/s. Infosys Ltd. went out on application of turnover filter. Insofar as Bodhtree Consulting Ltd. was concerned, as per the Ld. AR, coordinate bench of this Tribunal in the case of Dy. CIT v. Kodiak Networks India (P.) Ltd. IT(TP) Appeal No. 532 (Bang.) of 2013 and CO. 119/Bang/2015, dated 30.07.2015 had held that M/s. Bodhtree Consulting Ltd. was not a proper comparable in the software development segment. As per the Ld. AR the said decision was for the very same assessment year viz., 2005-06, and the segment considered was also very same. 19.1 Per contra, Ld. DR submitted that....
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....hat comparability of this company with software development provider was considered by this Tribunal in Mindtech India Ltd. v. DCIT ITA No. 70/B/2014 for AY 2009-10, order dated 21.8.2014 and it was held as under:- "14. The next aspect that was canvassed by the learned counsel for the assessee was with regard to the exclusion of the following comparables form the list of final comparables chosen by the TPO: 1. Bodhtree Consulting Ltd. : As far as this company is concerned, the submission of the learned counsel for the assessee was that this company made extraordinary profits during the previous year: Our attention was drawn to the fact that the operating profit/operating cost of this company jumped from 17% for FY 2007-08 to 56% in FY 2008-09. It dipped in FY 2009-10 to 40% and in FY 2010-11 it became (-) 2% and 5% in FY 2011-12 and finally touched (-) 9% in FY 2012-13. Our attention was drawn to the fact that the Special Bench of the Tribunal, Mumbai, in the case of Maersk Global Centres (India) P. Ltd., in ITA. 7466/Mum/2012, dt. 07.03.2014 for AY 2008-09 had an occasion to consider the question as to whether companies having abnormal profits should be excluded as a c....
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....ee drew our attention to the fact that Bodhtree Consulting admittedly follows a fixed price project modal whereby revenues from software development is recognised based on software and billed to clients. In such business model expenditure for developing software would be billed in an earlier year but the revenue would be recognized in a subsequent year. It was his submission that this fact is recognized by the DRP in its order. According to him this circumstance would be sufficient to show that the margin reflected of this company does not reflect the normal business condition. 15. The learned DR placed reliance on the reason given by the DRP in its Order. 16. We have considered the rival submissions. The Special Bench of the ITAT in the case of Maersk Global Centres (supra) had on occasion to deal with the question as to whether high profit margin making companies should be excluded as a comparable. The Special Bench after considering several aspect held in para 88 of its order that the potential comparable companies cannot be excluded merely on the ground that their profit is abnormally high. The Special Bench held that in such cases it would require further investigation t....
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....h Kodiak Networks India (P.) Ltd. (supra) would apply on all four squares. We therefore direct exclusion of M/s. Bodhtree Consulting Ltd., from the list of comparables. 22. Arguing for exclusion of M/s. Sankhya Infotech Ltd., Ld. AR submitted that the said company also appeared in the list of comparables in the case of Kodiak Networks India (P.) Ltd. (supra). According to him, Tribunal had directed its exclusion at para 25 of its order mentioned supra. 23. Per contra, Ld. DR took the same pleading as he took in the case of M/s. Bodhtree Consulting Ltd. 24. We have perused the orders and heard the rival contentions. In the case of Kodiak Networks India (P.) Ltd., this Tribunal at paras 29 to 31 of its order held as under : Sankhya Infotech Limited ('Sankhya') '29. It was submitted by the learned counsel for the assessee that Sankhya is engaged in the business of development of software products & services and training. The company focuses on the development of niche products for the transport and aviation industry. However, segmental information in relation to the above mentioned activities is not available in public domain. Therefore, as Sankhya engages i....
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....ter of 15% and reliance was placed a decision of coordinate bench in the case of 24/7 Customer.com (P.) Ltd. v. Dy. CIT [2013] 140 ITD 344/28 taxmann.com 258 (Bang.). 26. Ld. DR made similar submissions as she had made in the case of M/s. Bodhtree Consulting Ltd. 27. We have perused the orders and heard the rival contentions. This Tribunal had in the case of Kodiak Networks India (P.) Ltd. (supra) had held as under at para 22 of its order : "22. Having heard both the parties and having gone through the material on record, we find that the TPO at page 37 of his order has brought out the differences between a product company and a software development services provider. Thus, it is clear that he is aware of the functional dissimilarity between a product company and a software development service provider. Having taken note of the difference between the two functions, the Assessing Officer ought not to have taken the companies which are into both the product development as well as software development service provider as comparables unless the segmental details are available. Even if the has adopted the filter of more than 75% of the revenue from the software services for sel....
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....ts, held that the aforesaid two companies viz., Four Soft Ltd., and Thirdware Solutions Ltd., are not comparable companies in Software Development Services companies. The following were the relevant observations:- 15.4 FOURSOFT LIMITED : This comparable is objected on the same reason as this company is involved in product development and owns products namely 4S eTrans and 4S eLog. These products are used in Sun Microsystems Inc, in an Application Verification Kit Certified for Enterprises and assessee have been investing continuously on product developments. Since assessee is in the product development having I.P. rights, the same is not comparable. 15.5 THIRDWARE SOFTWARE SOLUTIONS LIMITED : This company is objected to by the assessee on the reason that the said Thirdware Software Solutions Ltd. is engaged in sale of software licence and related services and not a service provider. Referring to the annual report, it was submitted that this comparable was rejected by the ITAT. Pune in the case of Egain Communications Ltd. This company having revenue from product license and earning extraordinary profit due to intangible owns. 15.6 These three comparable above. Flextronics ....
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....a product company and a software development service provider. Having taken note of the difference between the two functions, the Assessing Officer ought not to have taken the companies which are into both the product development as well as software development service provider as comparables unless the segmental details are available. Even if he has adopted the filter of more than 75% of the revenue from the software services for selecting a comparable company, he ought to have taken the segmental results of the software services only. The percentage of expenditure towards the development of software products may differ from company to company and also it may not be proportionate to the sales from the sale of software products. Under section 133(6) of the I.T. Act, the TPO has the power to call for the necessary details from the comparable companies. It is seen that the Assessing Officer/TPO as exercised this power to call for details with regard to the various companies. As seen from the annual report of Foursoft Limited which is reproduced at page 7 of the TPO's Order, the said company has derived income from software licence also and AMCs. 23. As far as Thirdware Softwar....
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....he ITAT Hyderabad bench in the case of CNO IT Services (India) Pvt. Ltd. (Formerly known as Conseco Data Services (India) Pvt. Ltd.) Hyderabad v. DCIT, Circle, 1(2) Hyderabad, in ITA. No. 1280/Hyd/2010 Assessment year 2005-2006 order dated 12-2-2014. The ITAT Hyderabad Bench on identical facts, held on comparability of TATA Elxsi Ltd. as follows: "15.7 Tata Elxsi Limited : The objection of the assessee is that Tata Elxsi operating two segments - system communication services and software development services. The TPO accepted the software development services segment in his T.P. analysis and assessee's objection is the software development services segment itself comprises of three sub-services namely (a) product design services (b) design engineering services and (c) visual computing labs. It was submitted that these services are not akin to assessee software services and segmental information of only product design services could have been accepted by the TPO as a comparable but not the entire software development service. Since company's operations are functionally different as such, the same is not comparable. Further, assessee is also objecting on the basis of....
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....of comparable companies.' 36. Per contra, Ld. DR submitted that Tata Elxsi (seg) was doing very similar work as that of the assessee and hence ought not to be excluded. 37. We have perused the orders and heard the rival contentions. Finding of the Tribunal as it appear at paras 18 and 19 in the case of Kodiak Networks India (P.) Ltd. (supra) has been reproduced in para 35 above, Accordingly we direct exclusion of Tata Elxsi (seg) from the list of comparables. 38. Vis-a-vis Sathyam Computers Service Ltd, Ld. AR submitted that its turnover exceeded Rs. 200 crores and by virtue of turnover filter it had to be excluded. Further as per the Ld. AR its financial statements were not reliable. 39. Ld. DR made the very same submissions as for Bodhtree Consulting Ltd. 40. We have perused the orders and heard the rival contentions. This Tribunal in the case of ITO v. Sunquest Information Systems (India) (P.) Ltd. [IT Appeal No. 299 (Bang) of 2015], relied on by the Ld. AR, had held that the financial results of M/s. Sathyam Computers Ltd. was not reliable. Same view was taken by the Delhi Tribunal in the case of Agnity India Technologies (P.) Ltd. v. ITO [IT Appeal No. 3856/....
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....rables also except those which we have specifically directed to be excluded. 44. Coming to the pleading of the assessee that risk adjustment for under utilization of capacity should be given, we find that CIT (A) had not dealt with this issue of risk adjustment. However the TPO's findings as it appear at pages 99 to 105, show that after verifying the agreements entered by the assessee with its AE namely Lead Pharma Systems Inc. on 01-04-2002. TPO had reached a conclusion that risk borne by the assessee due to its dependence on one client was comparable to market risks faced by other companies in software development sector. TPO did note that AE could terminate the agreement with the assessee and AE did not guarantee any specific quantum of business. However as per TPO the risk borne by independent enterprises was more considering the vagaries of market condition. In our opinion assessee could not show how it was eligible for any risk adjustment. AE had assured a particular cost + margin. Just because funds required for the infrastructure was given by the parent company or because the agreement with the parent company was for a long-term would not mean that assessee was beari....