AI Drafter 
TaxTMI 
TaxTMI 
2016 (3) TMI 1300
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....rnational transactions are as under: Particulars Amount in Rs. Outcome of TP order Provision of SWD 323,49,75,252 Adjustment of Rs. 24,63,25,395/- Provision of ITeS 63,03,93,353 Adjustment of Rs. 4,03,38,142/- Reimbursement of expenses 7,70,20,731 Accepted to be at arm's length Management fee written back 5,50,16,833 Accepted to be at arm's length Interest on unsecured loan 16,78,381 Accepted to be at arm's length 3. In the TP study by the company in SWD division it reported 15.27% of OP/OC and reported income of Rs. 323.49 Crores was considered arm's length by selecting TNMM as most appropriate method, 17 comparable companies whose OP/OC was arrived at 13%. 4. In the study for ITES division, assessee reported 17.69% of OP/OC and reported income of Rs. 63.03 Crores was considered as Arm's Length in the TNMM method by selecting 14 comparables with a mean of 11%. 5. TPO rejected the study as assessee has used multiply year data and for other reasons. He adopted a different filters, selected databases and finally selected 11 companies with an arithmetic mean of 24.05% after working capital adjustment and proposed....
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.... Ltd.,342 ITR 98(Kar) which the Ld CIT(A) has followed. We do not see any reason to interfere with the above. CIT(A) direction that whatever is excluded from the export turnover should also be excluded from the total turnover is upheld. Revenue's grounds on this issue are accordingly dismissed. 9. Ground No. 4 and Ground No. 5 in Revenue's appeal are on the issue of adopting turnover filter by CIT(A). 9.1. After considering the rival contentions, we see no reason to interfere from the findings of Ld.CIT(A). The CIT(A) rightly held that the turnover of comparable companies ought to be within a range of Rs. 1 Crore to Rs. 2000 Crore in relation to the SWD segment of assessee as its turnover for the SWD segment for FY. 2008-09 was Rs. 323 Crores, and that, in relation to its ITeS segment, as its turnover was Rs. 63 Crores, only those companies whose turnovers fell within a range of Rs. 1 Crore to Rs. 200 Crores ought to be retained, by following this Tribunal's decision in the case of Genisys Integrating Systems India (P) Ltd., Vs. DCIT [15 ITR (Trib) 475], apart from other decision in Kodiak Networks Vs. ACIT [15 ITR (Trib) 610] and Trilogy E-Business Software India Pvt. Ltd., ....
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.... ii. KALS Info Systems Limited. iii. Tata Elxsi Ltd. It was submitted that these are considered and rejected in (1) Mindteck (India) Ltd.vs DCIT in ITA(TP) no 70/Bang/2014, (2) M/s. CISCO Systems (India) Private Ltd., in IT(TPA) No 271/Bang/2014 (3) 24/7 Customer Care Pvt. Ltd., in IT(TPA) No 227/Bang/2011. 11.2. The above three comparables were already considered and rejected in M/s. CISCO Systems (India) Private Ltd., in IT(TP)A No. 271/Bang/2014 dt. 14-08-2014 by the Co-ordinate Bench and the decision is as under: "26. COMPANIES INCLUDED IN THE FINAL LIST OF COMPARABLES WHICH THE ASSESSEE WANTS TO BE EXCLUDED:- 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....
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.... 11.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee in the case on hand. The learned Authorised Representative drew our attention to various parts of the Annual Report of this company to submit that this company commands substantial brand value, owns intellectual property rights and is a market leader in software development activities, whereas the assessee is merely a software service provider operating its business in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that :- (i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any intangible and hence does not have an additional advantage in the market. It is submitted that this decision is applicable to the assessee's case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the asses....
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.... The decision rendered as aforesaid pertains to A.Y. 2008-09. It was affirmed by the learned counsel for the Assessee that the facts and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY 08-09 as far as this comparable company is concerned. Respectfully following the decision of the Tribunal referred to above, we hold that Infosys Ltd. be excluded from the list of comparable companies. 26.3 KALS Information Systems Ltd.:- As far as this company is concerned, it is not in dispute before us that this company has been considered as not comparable to a pure software development services company by the Bangalore Bench of the Tribunal in the case of M/s. Trilogy e-business Software India Pvt. Ltd. (supra). The following were the relevant observations of the Tribunal:- "(d) KALS Information Systems Ltd. 46. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the an....
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....on of the Tribunal, we hold that KALS Information Systems Ltd. should not be regarded as a comparable. 26.4 Tata Elxsi Ltd.:- As far as this company is concerned, it is not in dispute before us that in assessee's own case for the A.Y. 2007-08, this company was not regarded as a comparable in its software development services segment in ITA No.1076/Bang/2011, order dated 29.3.2013". 11.3. Since the objections of assessee are similar and facts being same AO/TPO is directed to exclude the above three companies. 11.4. Assessee seeks to include two companies Thinksoft Global Services Private Limited ('Thinksoft' for short) and FCS Software Solutions Private Limited ('FCS Software' for short). The said two companies were initially proposed as comparables by the TPO in her show cause notice dt. 14-11- 2012 (page 789 of the Paper Book), but were subsequently not included as comparables by the TPO despite assessee having accepted the said companies as comparables. The TPO having accepted that the said companies are functionally similar to assessee, excluded them on the sole ground that when their respective working capital adjustment is coming to more than 4%. It is submitted....
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.... as proper comparables. Reasons given by the TPO for excluding these two companies, appear at paras 3.6.5.1, of her order which reads as under : b) Two companies proposed in the show-cause notice are functionally similar to the taxpayer. However, when the working capital of these companies is considered, the profit margin gets distorted. It may not be out of context to mention that our search for comparable is primarily focus on those companies whose profit margin is predominantly from operating business and not from financial activities. This prerequisite is not different in case of software development companies as they do not need any interest bearing funds to manage their working capital requirement. Therefore, with the purpose to identify only those uncontrolled comparables who are having profit margin from core operating activities and not from financial activities, the following two companies having working capital impact of more than 4% on profit have been excluded. 21. TPO has accepted that these companies were functionally similar to that of the assessee. However, according to her, the margins of these companies had not come from its core operating activ....
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....after Ld.CIT(A)'s order is as under: Sl No. Name of the company RPT % 1. Microland Ltd (Both segments) 1.65% 2. Allsec Technologies Ltd., 15.82% 3. Accentia Technologies Ltd., 0% 4. Informed Technologies India Ltd., 9.82% 5. Cosmic Global Ltd., 0% 6. E-clerx Services Ltd., 13.76% 12.1. Assessee is objecting to the inclusion of three comparables: (1) Accentia Technologies Ltd., ; (2) Cosmic global : (3) E-clerx Services Ltd., on the basis of decisions of Capital IQ in ITA No. 170/Hyd/2014 and other decisions. 12.2. Co-ordinate Bench at Hyderabad has already considered (one of us, AM is the author) the same comparables in the case of Capital IQ Information Systems (India) P. Ltd., in ITA No. 124/Hyd/2014 dt. 31-07- 2014 as under: i. Accentia Technologies Limited: 21. This company was objected to by assessee on the reason of super profits as well as extra-ordinary events. It was submitted that acquisition of Oak Technologies & Trans Services has impact on the profits of the company and has taken inorganic growth as strategy to increase the profits because of the peculiar economic circumsta....
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....t appear to us to be a valid reason for eliminating this case from the list of comparables. On going through the Annual accounts of Cosmic Global Limited, a copy of which has been placed on record, we find that its total revenue from operations are at Rs. 7.37 crore divided into three segments, namely, Medical transcription and consultancy services at Rs. 9.90 lacs, Translation charges at Rs. 6.99 crore and Accounts BPO at Rs. 27.76 lac. The ld. AR has made out a case that outsourcing activity carried out by this company constitutes 57% of total expenses. The reason for which we are not agreeable with the ld. AR is that we have to examine the revenue of this case only from Accounts BPO segment and not on the entity level, being also from Medical transcription and Translation charges. When we are examining the results of this company from the Accounts BPO segment alone, there is no need to examine the position under other segments. The entire outsourcing is confined to Translation charges paid at Rs. 3.00 crore, which is strictly inthe realm of the Translation segment, revenues from which are to the tune of Rs. 6.99 crore. If this segment of Translation is not under consideration fo....
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....arned Departmental Representative, however, submitted that having accepted Aditya Birla Minacs Worldwide Ltd., as a comparable company, this company should also be included, as otherwise, both the companies should be excluded. 18.2 We have considered the issue and examined the Annual Report and the objections of assessee. As seen from the Annual Report, the above company is involved in diverse nature of services and there was no segmental data for diversified service port folio. Moreover this company can be considered as KPO and we are of the opinion that this company is not comparable to assessee's services. We therefore, direct the Assessing Officer/TPO to exclude this company. 12.3. Respectfully following the above, we direct the TPO to exclude the above comparables and arrive at the addition, if any, on the basis of provisions of Section 92C. Ordered accordingly. Corporate Tax issues: 13. Assessee is aggrieved on treating the expenditure on software licenses as 'capital in nature' and not giving credit of TDS by the AO. Software Licenses : 14. Assessee had claimed a deduction of Rs. 3,02,80,510/- as expenses incurred towards purchase of licenses for computer s....