TaxTMI 
TaxTMI 
2017 (4) TMI 1377
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....,112/- under normal tax computation and Rs. 15,59,07,737/- as book-profits u/s.115JB. The assessee claimed deduction of Rs. 18,62,45,826/- u/s.10A under the normal computation. While completing the assessment, when computing the deduction under section I0A, the AO has reduced Rs. 32,54,872/- being telecommunication charges and Rs. 9,88,27,170/- being expenses incurred in foreign currency from the export turnover. However, he has not reduced them from the total turnover. Accordingly, the deduction claim u/s 10A has been reduced by Rs. 1,64,75,929/-. On the international transactions, the assessee had two segments as under: Description Amount (Rs) Software Development Services 1,153,947,360 Sales and Marketing Services 250,464,151 03. In its TP study , the assessee adopted Transactional Net Margin Method ( "TNMM" ) as the most appropriate method for software development services and sales and marketing services. With respect of software development services segment, the assessee selected 14 companies as comparables. Adopting operating profits to cost as the Profit Level Indicator (PL), the arithmetic mean (weighted average) of the comparables was comput....
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....loyee cost filter (i.e, 9.8% on sales) However, the DRP rejected this company for the reason that this is an Onsite Software Company, low employee cost & functionally different. Before us , the assessee submitted that this company needs to be rejected as it is functionally not comparable and fails employee cost filter based on Applied Materials India P. Ltd v. ACIT [TS-815-ITAT- 2016(Bang) ay 2011-12] & on employee cost filter : Zavata India P. Ltd [TS-156-ITAT-2013(Hyd)] First Advantage Offshore Services P. Ltd [IT(TP)A.1086/Bang/2011] 2. E-Zest Solutions Ltd : The assessee submitted before the DRP that this company is not a pure software development company as it is engaged in rendering both software development services and software products. The DRP rejected this company for the reason that this company is functionally different. Before us, the assessee submitted that this company needs to be rejected as it is functionally not comparable and fails lower turnover filter of 10 times based on Applied Materials India P. Ltd v. ACIT [TS-815-ITAT-2016(Bang) ay 2011-12] AMD India P. Ltd [IT(TP)A.417 & 457/Bang/2013-AY 2008-09] On turnover filter on McAfee Software India P. Ltd....
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.... Ltd [TS-355-ITAT-2016 (Del) AY 2011-12] Alcatel-Lucent India P. Ltd [74 Taxmann.com-105-Delhi-AY 2010-11] On turnover filter : McAfee Software India P. Ltd v. ACIT [TS-136-ITAT-2016(Bang) -AY 2005-06] 6. Larsen & Toubro Infotech Ltd : The assessee submitted before the DRP that this company has the following features : 1. It has a high turnover of Rs. 2331.81 crores 2. It is not a pure software development company as it is engaged in rendering both software development services and software products and segmental information is not available. 3. TPO has computed incorrect margin. The DRP rejected this company for the reason that this company is an onsite software company. Before us, the assessee submitted that this company needs to be rejected as it is functionally not comparable and fails lower turnover filter of 10 times based on : Applied Materials India P. Ltd v. ACIT [TS-815-ITAT-2016(Bang) ay 2011-12] Alcatel-Lucent India P. Ltd [74 Taxmann.com-105-Delhi-AY 2010-11] Saxo India P. Ltd v. ACIT [TS-41-ITAT-2016(Bang)-Confirmed by HC -ITA.682/2016] On turnover filter : McAfee Software India P. Ltd v. ACIT [TS-136-ITAT-2016(Bang) - AY 2005-06] 7. Persistent Systems....
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....y HC -ITA.682/2016] 10. Tata Elxsi (Seg) : The assessee submitted before the DRP that this company has the following features : 1. It has a high turnover of Rs. 358.19 crores 2.1t is functionally dissimilar since it is engaged into software development and services as well as systems integration & support as per Annual Report. 3. The TPO has computed incorrect margin. The DRP rejected this company for the reason that it is functionally different company. Before us , the assessee submitted that this company needs to be rejected as it is functionally not comparable based on : Applied Materials India P. Ltd v. ACIT [TS-815-ITAT-2016(Bang) ay 2011-12] Alcatel-Lucent India P. Ltd [74 Taxmann.com-105-Delhi-AY 2010-11] 07. Thus, the AR pleaded for exclusion of 3 comparables , viz Persistent Systems & Solutions Ltd , Persistent Systems Ltd & Sasken Communication Technologies , mainly on dissimilar functionality, which were held as comparables by the DRP . The assessee accepted exclusion of 3 comparables viz Evoke Technologies , Mindtree Ltd (seg) & RS Software (India) Ltd, which were rejected by the DRP on which Revenue is on appeal and thus supported Revenue's appeal grounds. The....
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....essee. The decision of this Tribunal in the case of M/s. Electronics for Imaging India Pvt. Ltd. Vs. DCIT (supra) relied upon by the learned Authorised Representative is based on two aspects. (i) The information received under Section 133(6) of the Act was considered by the TPO without sharing with the assessee and (ii) nature of the activity is KPO. It is pertinent to note that the question of BPO and KPO is relevant only in ITES segment and not for software development services segment. On the contrary, the decision in the case of Toluna India Pvt. Ltd. Vs. ACIT (supra), pertains to the Assessment Year 2007-08, therefore the facts of the different year cannot be applied without verification. Accordingly, we set aside this issue of comparability of E-Just Solution Ltd. to the record of the Assessing Officer / TPO for deciding the same after verification of the relevant facts as well as considering the objections of the assessee. (ii) Persistent Systems and Solutions Ltd. (iii Persistent Systems Ltd. 9.2.1 These two companies were part of the TP Study analysis however the assessee raised objections against these companies before the TPO as well as DRP. 9.2.2 Before us, the learne....
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....s company by considering the relevant details as given in the annual report of this company. The DRP has given the finding that the entire revenue has been earned by this company from the sale of software services and products and in the absence of segmental details, it cannot be considered as comparable with software services segment. We find that this company has shown the income from sale of software services and products to the tune of Rs. 6.67 crores. We further note that as per Schedule 11, the entire revenue has been shown under one segment i.e., sale of software services and products. Therefore, no separate segment has been given in respect of software services. Accordingly, the composite data of revenue as well as margins of this company pertaining to the sale of software services and products cannot be considered as comparable with the software development services segment of the assessee. In view of the above facts and circumstances, we do not find any error or illegality in the directions of the DRP in excluding this company from the list of comparables. This ground of CO is dismissed. (4) Persistent Systems Ltd. 24. We have heard the ld. DR as well as ld. AR ....
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........ "15. The revenue is also seeking inclusion of some of the companies in the list of comparables which were reflected by the DRP. We will deal with the issues one by one as under : (i) Acropetal Technologies Ltd.(Seg.) 16.1 The DRP rejected this company on the ground of employee cost filter. The ld. DR has submitted that the TPO has applied the employee cost filter and this company satisfies the same. 16.2 On the other hand, the learned Authorised Representative of the assessee has submitted that the total employee cost of this company is 11.51 of the total operating revenue therefore it fails the employee cost filter of 25%. Further he has pointed out that this company also fails the software development services revenue filter of 75%. He has referred the details at page Nos.39 and 53 of the Annual Report and submitted that the income from software development is Rs. 81.40 Crores out of total revenue of Rs. 141 Crores. Therefore this company fails this filter. 16.3 In a rejoinder the ld. DR has submitted that the TPO has considered only Information Technology transactions segment and therefore it satisfies software development services income filter as well as emplo....
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....s." 15. We find that the facts recorded by the DRP in respect of business activity of this company are not in dispute. Therefore, when this company is engaged in diversified activities of software development and consultancy, engineering services, web development & hosting and substantially diversified itself into domain of business analysis and business process outsourcing, then the same cannot be regarded as functionally comparable with that of the assessee who is rendering software development services to its AE. 16. In view of the above facts, we do not find any error or illegality in the findings of the DRP that this company is functionally not comparable with that of a pure software development service provider." Nothing has been brought before us to show that the facts recorded by the DRP as well as by the co-ordinate bench of this Tribunal are not correct. Accordingly, in view of the decision of the co-ordinate bench of this Tribunal in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra), we do not find any error or illegality in the order of the DRP on this issue. (iii) Infosys Ltd. 18. We have heard the learned D.R. as well as learned A.R. and cons....
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....ny has been considered by the co-ordinate bench of this Tribunal in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) in paras 62 to 65 as under : " 62. The assessee has raised objection against this company on the basis of high turnover in comparison to the assessee. It was also contended that related party transaction (RPT) of this company is 18.66%. The DRP rejected objections of the assessee on the ground that TPO has applied 25% filter of RPT and annual report of the company does not show any other services rendered other than software development services provided by this company. Thus the DRP held that software development segment is comparable to the assessee and therefore this company has to be retained as comparable. 63. We have heard the ld. AR as well as ld. DR and considered the relevant material on record. The ld. AR has submitted that this company is having 18.66% RPT and further this company earns revenue from both services and products. Thus, the ld. AR submitted this company is also in the software products and therefore cannot be considered as good comparable. He has further contended that in a series of decisions, the Tribunal has applied ....
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.... the software development and services segment of this company as comparable to that of assessee, however, the assessee contended that even within the software segment, this company is engaged in diverse activities. The assessee placed reliance on the information in the annual report under the Directors Report and submitted before the DRP that even under the software development services segment, this company is engaged in various diversified activities including product design service, innovation design, engineering service, visual computing labs, etc. The assessee also placed reliance on the decision of Mumbai Bench of the Tribunal in the case of Telcordia Technologies Pvt. Ltd. v. ACIT, 137 ITD 1 (Mum). 31. The DRP found that this company is not functionally comparable with assessee company as it is engaged in diversified activities even in the software development services. The DRP has followed the decision of the Mumbai Bench of the Tribunal in the case of Telcordia Technologies Pvt. Ltd. (supra). 32. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. We find that this company even in the software development segment is engaged in di....
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....et aside the directions of the DRP qua these comparables and restore these three companies to the set of comparables. 21.3 As we have directed to exclude certain companies as well as include some of the companies in the set of comparables therefore the TPO/A.O is required to recompute the ALP on the basis of the final set of comparables after giving effect to this order. Needless to say the benefit of tolerance range of +/- 5% as per the proviso to section 92C(2) be also considered." 09. The relevant portion of the order from Saxo India P. Ltd v. ACIT [TS-41 ITAT-2016(Del)-Confirmed by the Delhi High Court in ITA.682 (Delhi) of 2016 dt 28.9.2016 is extracted as under: "(i) E-Infochips Limited: 10.1. The Transfer Pricing Officer included this company in the list of comparables. On being called upon to explain as to why it should not be considered as a comparable, the assessee contended that there was functional dissimilarity inasmuch as this company was engaged in software development and IT enabled services and also Products. The Transfer Pricing Officer observed that the revenues of this company from Products was only 15% of total revenue and hence the same qualified to be ....
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....tionally similar. The same is, therefore, retained in the list of comparables. (iii) L&T Infotech Ltd. 12.1. The assessee argued against the inclusion of this company in the list of comparables before the Transfer Pricing Officer by contending that it was functionally different and there was insufficient segmental information. Apart from that, it was also argued that it was exceptional year of its operations and there were significant intangible assets possessed by it. The Transfer Pricing Officer did not accept this contention and included the same in the list of comparables. 12.2. Having regard to the rival submissions and perusal of the relevant material on record, we find from the Annual report of this company, which is available in the third paper book that its Profit and loss account shows "Revenue - Revenue software development services and products". Profit and loss account of this company having a list of software development expenses contains an item `Cost of bought-out items for re-sale' with a value of Rs. 25.55 crore. Apart from that, the balance-sheet of this company shows certain `Software' in its Schedule of fixed assets under the head `Intangible assets'. The....
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....n the total revenue is less, as has been noted by the TPO, yet, we are inclined to take it as non-comparable because there is no precise information about the contribution made by such small sale of software products to the total profit of the company. As no segmental information is available in respect of this company and the figures have been adopted by the TPO at entity level, we, therefore, order for the exclusion of this company from the list of comparables. vi) Sasken Communications Technologies Ltd. 15.1. The TPO included this company in the set of comparables despite the assessee's objection that it was functionally different and also had Product portfolio. 15.2. After considering the rival submissions, we find from page 58 of the TPO's order that he has recognized sale of software products to the tune of Rs. 37 crore and odd. Though the break-up of revenue from software services and software products is available, but, the break-up of operating costs and net operating revenues from these two segments have not been given. It is further observed that the TPO has taken entity level figures for the purposes of making comparison. Since such entity level figures contain re....
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....the rival submissions and considered the relevant material on record. As it is clear that the assessee is providing sales and marketing services to its AE which includes identifying potential customers by conducting road shows, presentation and the like, the working also includes educating potential users of the benefit and features of the AEs range of products. However, products for which the ,ssessee is providing sales and marketing services is only software/information technology products. Therefore Asian Business-Exhibition & Conference Ltd. which is mainly engaged in the organization of exhibitions and events as well as conducting conferences on behalf of the various clients for their various products and businesses. The functions of this company are entirely different from the assessee who is providing sales and marketing support services to its AE for software/IT products. The Mumbai Bench of the Tribunal in the case of RGA Services India (P.) Ltd. (supra) while considering the functional comparability of this company has held at paras 11 and 12 as under:- "11. We have considered the submission of the parties and perused the relevant material on record. On perusal of the o....
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....is fairly well settled by the decision in case of DCITv. Quark Systems (P.) Ltd. (2010) 132 TTJ (Chd) (SB) 1 as well as decisions relied upon by the counsel for the assessee. In view of the aforesaid, we do not find any infirmity in the directions of DRP in excluding Asian Business Exhibition and Conferences Limited as a comparable. The ground raised is therefore dismissed." 54. In view of the above facts as well as decision of the Mumbai Bench of the Tribunal, this company cannot be considered as a good comparable with the assessee. 55. Accordingly, we direct the AO/TPO to recompute the ALP in marketing support services segment by excluding Asian Business Exhibition & Conference Ltd. from the comparables." We heard the rival submissions and gone through relevant material. Following the above decision, the assessee's plea is allowed. The AO/TPO is directed to exclude this comparable . 2. ICC International Agencies Ltd : The assessee submitted before the DRP that this company is functionally not comparable since it is engaged in trading activity and thereby functionally different. The DRP rejected this company for the reason that this company is functionally dissimilar and....