TaxTMI 
TaxTMI 
2016 (8) TMI 1426
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....ed for the purposes of travel of the directors for obtaining orders and for sending people abroad for training etc. These are clearly not incurred for the delivery of software outside India as your appellant did not render any onsite service and hence ought not to have been deducted while computing the export turnover. 2. Even if the view of the DCIT, that these are to be reduced from export turnover, is to be accepted for the sake of argument without conceding it, then this should be deducted from the calculation of Total Turnover also. The Deputy Commissioner has wrongly disallowed the claim of the assessee for a full deduction under Section 10A for all its profits and gains from the software business of the STPI unit at Bangalore by adopting as the denominator, total turnover of the business without deducting the expenditure on delivery of software outside India although export turnover which is the nominator was computed after reducing all these expenses ignoring the parity principle which ought to have been considered based on the decision of the jurisdictional High Court in the case of CIT Vs Tata Elxsi Limited (Karnataka High Court - 2011). 3. Total turnove....
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....ilable to your appellant. iv) Your appellant functions in a limited risk environment vis-à-vis entrepreneurial risk borne by comparable companies who are independent service providers. It is operating under economic circumstances that warrant adjustments to the margins earned by the comparable companies, so as to make the comparison between the margins earned by the comparable companies and Softbrands appropriate. This view finds support in the decision of this Hon'ble Tribunal in the case of M/s. SAP Labs India Pvt. Ltd vs. ACIT. v) The TPO has not made any adjustments to the margins determined by him for the margins attributable to the marketing function carried on by the comparable companies as selected by him whereas your appellant do not carry out any marketing functions. Significant profits have to be attributed to this functional difference. Not making any adjustment for this is a major flaw in your analysis. The Hon ITAT has attributed 35% of the total margins as attributable to marketing function while disposing off the case of Rolls Royce PLC Vs. DDIT dated January 30th, 2009. He has also adopted a wide variety of companies enjoying margins in the....
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....nt to its customer is to be held as at arm's length and the addition proposed by the TPO and acted upon by the Assessing Officer based on approval of the DRP in the Assessment Order is to be ordered to be deleted. Ground III For these and other grounds that may be adduced at the time of hearing, the order of the Deputy Commissioner of Income Tax may be modified to the extent appealed against." 3.1 Ground Nos.1 to 3 are regarding exclusion of the expenditure incurred in foreign currency from the export turnover for the purpose of computing the deduction under Section 10A of the Act. 3.2 We have heard the rival submission and perused the material on record. The Hon'ble Jurisdictional High Court in the case of CIT v M/s Tata Elxsi Ltd. & Others 349 ITR 98 (Kar) had held that while computing the exemption u/s 10A, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded from the total turnover in the denominator. The relevant finding of the Hon'ble High Court reads as follows:- "...........Section 10A is enacted as an incentive to exporters to enable their products to be competitive i....
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....xport turnover. The components of the export turnover in the numerator and the denominator cannot be different. Therefore, though there is no definition of the term 'total turnover' in section 10A, there is nothing in the said section to mandate that, what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. When the statute prescribed a formula and in the said formula, 'export turnover' is defined, and when the 'total turnover' includes export turnover, the very same meaning given to the export turnover by the legislature is to be adopted while understanding the meaning of the total turnover, when the total turnover includes export turnover. If what is excluded in computing the export turnover is included while arriving at the total turnover, when the export turnover is a component of total turnover, such an interpretation would run counter to the legislative intent and impermissible. Thus, there is no error committed by the Tribunal in following the judgments rendered in the context of section 80HHC in interpreting section 10A when the principle underlying both these provisions is one and the same". In the light of the above b....
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.... total income". It may be noted that when s. 10A was recast by the Finance Act, 2001 (sic- 2000), the Parliament was aware of the character of relief given in Chapter III. Chapter III deals with incomes which do not form part of total income. If the Parliament intended that the relief under s. 10A should be by way of deduction in the normal course of computation of total income, it could have placed the same in Chapter VI-A which houses the sections like 80HHC, 80-IA, etc. The Parliament was aware of the various restricting and limiting provisions like s. 80A and s. 80AB which were in Chapter VI-A which do not appear in Chapter III. The fact that even after its recast, the relief has been retained in Chapter III indicates the intention of Parliament that it is to be regarded as an exemption and not a deduction. The Act of the Parliament in consciously retaining this section in Chapter III indicates its intention that the nature of relief continues to be an exemption. Chapter VII deals with the incomes forming part of the total income on which no income-tax is payable. These are the incomes which are exempted from charge, but are included in the total income of the assessee. The Par....
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....iately succeeding the last of the relevant assessment years, or of any previous year, relevant to any subsequent assessment year, sub-s. (2) of s. 32, cl. (ii) of sub-s. (iii), s. 32A cl. (ii) of sub-s. (3) of s. 32A, cl. (ii) of sub-s. (2) of s. 33 and sub-s. (4) of s. 35 of the Act or the second proviso to cl. (ix) of sub-s. (1) of s. 36 shall not be applicable in relation to any such allowance or deduction. Similarly no loss as referred to in sub-s. (1) or in s. 72 or sub-s. (1) or sub-s. (3) of s. 74 insofar as such loss relates to the business of the undertaking was permitted to be carried forward or set off where such loss relates to any of the relevant assessment years. 21. It is in this background the Finance Act, 2003 was introduced by inserting the words "the year ending upto the first day of April, 2001", for that in cls. (1) and (2) of sub-s. (6) restricting the disallowance only upto the first day of April, 2001 and granting the benefit, of those provisions even in respect of units to which ss. 10A and 10B are applicable. The Finance Act, 2003, amended this subsection with retrospective effect from 1st April, 2001 by lifting the embargo in the aforesaid clause....
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....usiness income and the depreciation as per the provisions of the Act should be made for each year of the tax holiday period. While so computing, attention will have to be given to provisions of ss. 70, 71, 72 and s. 32(2). The amount of depreciation and business loss remaining unabsorbed at the end of the tax holiday period should be determined so that the same may be set off against the income post tax holiday period. 4.4 We further note that this view has been reiterated by the Hon'ble jurisdictional High Court in the case of M/s.Aurigene Discovery Technologies Ltd., in ITA No.549/13. A similar issue was considered by the co-ordinate bench of this Tribunal in the case M/s.Biocon Ltd. (supra) and held in para.23 to 26 as under: "23. We have given a very careful consideration to the rival submissions. The issue raised by the assessee in ground no.21 is identical to the ground raised by the assessee in Biocon (supra). The facts of the case before the Tribunal in the case of Biocon (supra) were that the assessee during the previous year had four units which were entitled to claim deduction u/s. 10B of the Act viz., CMZ Unit, SAP Unit, RHI Unit and IFP Unit. The assess....
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....n provision. The CIT(Appeals) noticed that the aforesaid decision was followed by the ITAT Bangalore Bench in the case of Intelnet Technologies India Pvt. Ltd. v. ITO, ITA No.1021/Bang/2009 dated 12.3.2010. Similar view expressed by the Delhi Bench of the Tribunal in the case of Global Vantage Pvt. Ltd. v. DCIT, 2010 TIOL 24 ITAT (DEL) was also referred to by the CIT(A). A contrary view was expressed by the Bangalore Bench of the Tribunal in the case of KPIT Cummins Info Systems (Bangalore) Pvt. Ltd. v. ACIT, 120 TTJ 956. The CIT(A) found that in the case of Global Vantage Pvt. Ltd. (supra) decided by the Delhi Tribunal this decision has been held to be not in tune with the decision of the Hon'ble High Court of Karnataka in the case of Himatsingike Seide Ltd. (supra). The CIT(A) also referred to the decision of the Chennai Bench of the Tribunal in the case of Sword Global India Pvt. Ltd. v. ITO, 306 ITR 286 (AT), wherein the provisions of section 10A and 10B have been held to be deduction provisions and not exemption provisions. For all the above reasons, the CIT(Appeals) confirmed the order of the Assessing Officer. Against the order of the CIT(A), the Assessee was in appeal befor....
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....undertaking. The Hon'ble Court thereafter held that though the expression used in Sec.10A was "Deduction" but in effect it was only an exemption section. These conclusions clearly emanate from para 17 of the Hon'ble Court's judgment. 65. The situation with which we are concerned in the present case is a situation where there is positive income of the eligible unit then the same should be allowed deduction u/s.10B of the Act without setting of the loss of non-eligible unit. The Hon'ble Karnataka High Court in the case of Yokogawa (supra) was concerned with similar situation as set out above. In view of the aforesaid decision of the Hon'ble Karnataka High Court, we are of the view that the claim as made by the Assessee for carry forward of loss of the noneligible unit had to be allowed without set off of profits of the 10A/10B unit. We hold accordingly and allow the relevant grounds of appeal of the Assessee. 66. We may also observe that the Hon'ble Karnataka High Court's decision in the case of Himatasingike Seide (supra) has held that unabsorbed depreciation (and business loss) of same (s. 10A/10B) unit brought forward from earlier years have to be set off against....
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....of the Hon'ble Karnataka High Court in the case of Himatasingike Seide Ltd. (supra). As we have already seen, in Yokogawa India Ltd. 341 ITR 385 (Kar), it was held that even after s. 10A/10B were converted into a "deduction" provision w.e.f 1.4.2001, the benefit of relief u/s 10A/10B is in the nature of "exemption" with reference to "commercial profits" and that as the income of the s. 10A unit has to be excluded at source itself before arriving at the gross total income, the question of setting off the loss of the current year's or the brought forward business loss (and unabsorbed depreciation) against the s. 10A profits does not arise. Therefore the decision of the Hon'ble Karnataka High Court in the case of Himatasingike Seide (supra) will not apply to the facts of the present case." 26. In view of the aforesaid decision, we are of the view that the claim made by the assessee deserves to be accepted. We may also observe that CBDT circular No.7 dated 16.07.2013, on the facts and circumstances of the present case is not a benevolent circular vis-àvis, the assessee, and therefore the decision to the contrary of the Hon'ble Karnataka High Court in the case of Yok....
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....services) 1,04,83,909 M/s. Softbrands Manufacturing Inc. (Receipts for software development and Product support services) 9,07,02,772 M/s. Softbrands Malaysia Sdn. (Receipts for software development and Product support services) 3,77,753 Total : 12,34,86,776 The assessee has selected 24 comparable companies in its TP Analysis document with an average PLI 4.31% and accordingly claimed its international transactions at Arm's Length. There is no dispute regarding Transactional Net Margin Method ('TNMM') accepted as Most Appropriate Method ('MAM') as it was accepted in the earlier year by this Tribunal. The TPO rejected 19 out of 24 companies selected by the assessee and added 21 more companies by carrying out fresh search. Thus the TPO has considered total 26 comparable companies to determine the Arm's Length Price ('ALP') as under : Sl.No. Company Name Op to Total Cost % 1 Accel Transmatic Ltd. (Seg.) 21.11 2 Avani Cimcon Technologies Ltd. 52.59 3 Celestial Labs Ltd. 58.35 4 Datamatics Ltd. 1.38 5 E-Zest Solutions Ltd. 36.12 6 Flextronics Software Systems Ltd. (Seg.) 25.31 7 Geometr....
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....considered the rival submissions and relevant material on record, we note that the TPO has rejected this company by citing the reason that this company's entire revenue is from GIS which is in the nature of ITES and it is functionally different. This fact recorded by the TPO has not disputed by the learned Authorised Representative of the assessee that part of the revenue of this company is from ITES segment. Since this company is earning revenue from Hybrid service activities which includes ITES as well as software development services therefore, in the absence of segmental results, this company cannot be considered as a good comparable for software development services providing activity of the assessee. Accordingly, we do not find any reason to interfere with the orders of the authorities below in rejeting this company. (ii) Hyper Soft Technology Ltd. a) The learned Authorised Representative of the assessee has submitted that this company provides strategic off shore development and software services including application, development and hence is functionally comparable with the assessee. b) On the other hand, the learned Departmental Representative has sub....
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.... of the Act was also not responded by the company to submit the information. Therefore, there was no information available regarding the basic facts and revenue details of this company. The assessee has not filed any record before us even the Annual Report of this company is not available. Accordingly, we do not find any merit or substance in the objections raised by the assessee against the rejection of this company by the TPO. 7. The assessee is also seeking exclusion of 16 companies from the set of 26 comparable companies selected by the TPO. We deal with these comparability one by one as under : (i) Accel Transmatics Ltd. (Seg.) 7.1 The learned Authorised Representative has submitted that the company is engaged in healthcare equipment, consumer electronics, net working, CAD, Embedded Software Services, software testing, imaging technologies and reengineering software training. Therefore, this company is functionally different from the assessee and cannot be considered as comparable. In support of his contention he has relied upon the following decisions : i. Serial Innovations India Pvt. Ltd. Vs. DCIT in IT(TP)A No.1330/Bang/2011 Dt.30.6.2015. ii. Tri....
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....ally different from the assessee company as it was engaged in the services in the form of ACCEL IT and ACCEL animation services for 2D and 3D animation and therefore assessee's claim that this company was functionally different was accepted. DRP therefore directed the Assessing Officer to exclude ACCEL Transmatic Ltd. from the final list of comparables for the purpose of determining TNMM margin." " By following the above decision of the Mumbai Tribunal, the co-ordinate bench has held that this company is not comparable and should be excluded from the list of comparable in para 50 as under : " 50. We have considered the submissions and are of the view that the plea of the assessee that the aforesaid company should not be treated as comparables was considered by the Tribunal in Capgemini India Ltd (supra) where the assessee was software developer. The Tribunal, in the said decision referred to by the ld. counsel for the assessee, has accepted that this company was not comparable in the case of the assessees engaged in software development services business. Accepting the argument of the ld. counsel for the assessee, we hold that the aforesaid company should be excluded as....
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....t and observed that in the absence of segmental details, Avani Cincom cannot be considered as comparable to the assessee who was rendering software development services only and it was held as follows:- "7.8 Avani Cincom Technologies Ltd. ('Avani Cincom'): Here in this case also the segmental details of operating income of IT services and sale of software products have not been provided so as to see whether the profit ratio of this company can be taken into consideration for comparing the case that of assessee. In absence of any kind of details provided by the TPO, we are unable to persuade ourselves to include it as comparable party. Learned CIT DR has provided a copy of profit loss account which shows that mainly its earning is from software exports, however, the details of percentage of export of products or services have not been given. We, therefore, reject this company also from taking into consideration for comparability analysis." " It was also highlighted that the margin of this company at 52.59% which represents abnormal circumstances and profits. The following figures were placed before us:- Particulars FYs 05-06 06-07 07-08 08-0....
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....well as the relevant material on record. We note that the comparability of this company has been considered by the co-ordinate bench of this Tribunal in Trilogy E-Business Software India Pvt. Ltd. (supra) in paras 43 & 45 as under : " 43. Further reference was also made to the decision of the Mumbai Bench of the Tribunal in the case of Teva Pharma Private Ltd. v. Addl. CIT - ITA No.6623/Mum/2011 (for AY 2007-08) in which the comparability of this company for clinical trial research segment. The relevant extract of discussion regarding this company is as follows: "The learned D.R. however drew our attention to page-389 of the paper book which is an extract from the Directors report which reads as follows: 'The Company has developed a de novo drug design tool "CELSUITE" to drug discovery in, finding the lead molecules for drug discovery and protected the IPR by filing under the copy if sic (of) right/patent act. (Apprised and funded by Department of Science and Technology New Delhi) based on our insilico expertise (applying bio-informatics tools). The Company has developed a molecule to treat Leucoderma and multiple cancer and protected the IPR by filing th....
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....t is in the business of providing software development services. The Assessee in reply to the proposal of the AO to treat this as a comparable has pointed out that this company provides software products/services as well as bioinformatics services and that the segmental data for each activity is not available and therefore this company should not be treated as comparable. Besides the above, the Assessee has point out to several references in the annual report for 31.3.2007 highlighting the fact that this company was develops biotechnology products and provides related software development services. The TPO called for segmental data at the entity level from this company. The TPO also called for description of software development process. In response to the request of the TPO this company in its reply dated 29.3.2010 has given details of employees working in software development but it is not clear as to whether any segmental data was given or not. Besides the above there is no other detail in the TPO's order as to the nature of software development services performed by the Assessee. Celestial labs had come out with a public issue of shares and in that connection issued Draft Red H....
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....that the comparability of these companies have been considered by the co-ordinate bench of this Tribunal in the case of Serial Innovations India Pvt. Ltd. Vs. DCIT (supra) in paras 27 & 28 as under : " 27. As far as comparable companies at Sl.No.5, 18, 19 and 25 of the final list of comparable companies chosen by the TPO are concerned, viz., M/S. E-Zest Solutions Ltd., Persistent Systems Ltd., Quintegra Solutions Limited and Thirdware Solutions Ltd., this Tribunal in the case of 3DPLM Software Solutions Ltd. IT(TP)A No.1303/Bang/2012 (Assessment Year: 2008-09) order dated 28.11.2013 was pleased to hold that the aforesaid companies are not comparable with a company engaged in Software Development Services such as the Assessee. The following were the relevant observations of the Tribunal: "14. E-Zest Solutions Ltd. 14.1 This company was selected by the TPO as a comparable. Before the TPO, the assessee had objected to the inclusion of this company as a comparable on the ground that it was functionally different from the assessee. The TPO had rejected the objections raised by the assessee on the ground that as per the information received in response to notic....
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....see. From the details on record, we find that while the assessee is into software development services, this company i.e. e-Zest Solutions Ltd., is rendering product development services and high end technical services which come under the category of KPO services. It has been held by the co-ordinate bench of this Tribunal in the case of Capital I-Q Information Systems (India) (P) Ltd. Supra) that KPO services are not comparable to software development services and are therefore not comparable. Following the aforesaid decision of the coordinate bench of the Hyderabad Tribunal in the aforesaid case, we hold that this company, i.e. e-Zest Solutions Ltd. be omitted from the set of comparables for the period under consideration in the case on hand. The A.O. /TPO is accordingly directed. 15. Thirdware Solutions Ltd. (Segment) 15.1 This company was proposed for inclusion in the list of comparables by the TPO. Before the TPO, the assessee objected to the inclusion of this company in the list of comparables on the ground that its turnover was in excess of Rs. 500 Crores. Before us, the assessee has objected to the inclusion of this company as a comparable for the reason t....
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....is company being engaged in software product designing and analytic services, it is functionally different and further that segmental results are not available. The TPO rejected the assessee's objections on the ground that as per the Annual Report for the company for Financial Year 2007-08, it is mainly a software development company and as per the details furnished in reply to the notice under section 133(6) of the Act, software development constitutes 96% of its revenues. In this view of the matter, the Assessing Officer included this company i.e. Persistent Systems Ltd., in the list of comparables as it qualified the functionality criterion. 17.1.2 Before us, the assessee objected to the inclusion of this company as a comparable submitting that this company is functionally different and also that there are several other factors on which this company cannot be taken as a comparable. In this regard, the learned Authorised Representative submitted that : (i) This company is engaged in software designing services and analytic services and therefore it is not purely a software development service provider as is the assessee in the case on hand. (ii) Pag....
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.... vii) Flextronics Software Systems Ltd. (Seg.) 11. The learned Authorised Representative of the assessee has submitted that this company is having a high turnover as incomparable to the assessee. Therefore this company enjoys economy of scale on the basis of the size of the operation. Therefore this company this company cannot be considered as a good comparable of the assessee. In support of his contention he has relied upon the following decisions : i. Serial Innovations India Pvt. Ltd. Vs. DCIT in IT(TP)A No.1330/Bang/2011 Dt.30.6.2015. ii. Triology E-Business Software India Pvt. Ltd. Vs. DCIT in ITA No.1054/Bang/2011 Dt.23.11.2012. 11.1 On the other hand, the learned Departmental Representative has relied upon the orders of the TPO and DRP and submitted that the functional comparability has been examined by the TPO and it was found that this company is functionally comparable with the assessee and also satisfies all the filters applied by the TPO. 11.2 We have considered the rival submissions as well as the relevant material on record. We find that the comparability of this company was not an issue before this Tribunal in the cases relied upon by the a....
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....oresaid concerns are engaged in development and sale of software products which is functionally different from the services undertaken by the assessee in its IT-services segment. 17. As per the discussion in para 6.3.2. of the order of the TPO, the reason advanced for including KALS Information Systems Ltd., is to the effect that the said concern's application software segment is engaged in the development of software which can be considered as comparable to the assessee company. The said concern is engaged in two segments namely application software segment and Training. As per the TPO, the application software segment is functionally comparable to the assessee as the said concern is engaged in software services. The stand of the assessee is that a perusal of the Annual Report of the said concern for F.Y. 2006-07 reveals that the application software segment is engaged in the business of sale of software products and software services. The assessee pointed out this to the TPO in its written submissions, copy of which is placed in the Paper book at page 420.3 to 420.4. The assessee further pointed out that there was no bifurcation available between the business of sale of ....
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....here any argument put forth by the Revenue and nor is there any discussion emerging from the orders of the lower authorities as to in what manner the functional profile of the said concern has undergone a change from that in the immediately preceding year. Therefore, having regard to the factual aspects brought out by the assessee, it is correctly asserted that the application software segment of the said concern is not comparable to the assessee's segment of IT services. 20. With regard to the inclusion of Helios & Matheson Information Technology Ltd., the assessee has raised similar arguments as in the case of KALS Information Solutions Ltd. (Seg). We have perused the relevant para of the order of the TPO i.e., 6.3.21, in terms of which the said concern has been included as a comparable concern. The assessee pointed out that as in the case of KALS Information Solutions Ltd. (Seg), in the instant case also for A.Y. 2006-07 the said concern was found functionally incomparable by the assessee in its Transfer pricing study and the said position was not disturbed by the TPO. The relevant portion of the Transfer pricing study, placed at page 432 of the Paper book has been poin....
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....g revenue of this as per Schedule 12 of the Balance Sheet of Rs. 7,42,00,000. Therefore the employee cost is only 3.96% of the turnover. In support of his contention he has relied upon the decision of Serial Innovations India Pvt. Ltd. Vs. DCIT (supra). 14.1 On the other hand, the learned Departmental Representative has relied upon the orders of the TPO and DRP and submitted that the functional comparability has been examined by the TPO and it was found that this company is functionally comparable with the assessee and also satisfies all the filters applied by the TPO. 14.2 We have considered the rival submissions as well as the relevant material on record. We note that the comparability of this company has been considered by the co-ordinate bench of this Tribunal in the case of Serial Innovations India Pvt. Ltd. (supra) in paras 21 & 22 as under : " 21. As far as comparable companies listed at Sl.No.11 & 14 of the final list of comparable companies chosen by the TPO viz., M/s.Ishir Infotech Ltd., and Lucid Software Ltd., is concerned, this Tribunal in the case of First Advantage Offshore Services Pvt. Ltd. Vs. DCIT IT (TP) No.1086/Bang/2011 for AY 07-08 held that th....
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....pport of his contention he has relied upon the decisions of - i. Serial Innovations India Pvt. Ltd. Vs. DCIT in IT(TP)A No.1330/Bang/2011 Dt.30.6.2015. ii. Triology E-Business Software India Pvt. Ltd. Vs. DCIT in ITA No.1054/Bang/2011 Dt.23.11.2012. 15.1 On the other hand, the learned Departmental Representative has relied upon the orders of the TPO and DRP and submitted that the functional comparability has been examined by the TPO and it was found that this company is functionally comparable with the assessee and also satisfies all the filters applied by the TPO. 15.2 We have considered the rival submissions as well as the relevant material on record. We note that the comparability of this company has been considered by the co-ordinate bench of this Tribunal in Trilogy E-Business Software India Pvt. Ltd. (supra) in paras 46 & 47 as under : " 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 annual re....
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...., we direct the A.O./TPO to exclude this company from the list of comparable for determining the ALP. xii) Megasoft Ltd. 16. The learned Authorised Representative of the assessee has submitted that this company has two divisions i.e. Blue Alloy Division and which is an offshore and online consulting Division and XIUS BCGI Division which is a product division. Therefore the product division of this company is completely different from the service activity of the assessee. In any case only Blue Ally Division may be remotely compared with that of assessee. The TPO has considered the functional comparability of both divisions as composite data which is not comparable with the assessee being a purely service oriented company. In support of his contention, he has relied upon the following decisions : i. Serial Innovations India Pvt. Ltd. Vs. DCIT in IT(TP)A No.1330/Bang/2011 Dt.30.6.2015. ii. Triology E-Business Software India Pvt. Ltd. Vs. DCIT in ITA No.1054/Bang/2011 Dt.23.11.2012. 16.1 On the other hand, the learned Departmental Representative has relied upon the orders of the TPO and DRP and submitted that the functional comparability has been examined by ....
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....e regarded as comparable. In the case of Quark Systems Pvt. Ltd. (supra), the Special Bench had to deal with cases where the results were abnormal. The special Bench observed as follows: "Even if the taxpayer or its counsel had taken Datamatics as comparable in its T.P. audit, the taxpayer is entitled to point out to the Tribunal that above enterprise has wrongly been taken as comparable. In fact there are vast differences between tested party and the Datamatics. The case of Datamatics is like that of "Imercius Technologies" representing extreme positions. If Imercius Technologies has suffered heavy losses and, therefore, it is not treated as comparable by the tax authorities, they also have to consider that the Datamatics has earned extraordinary profit and has a huge turnover, besides differences in assets and other characteristics referred to by Shri Aggarwal." The above observations of the special Bench is a pointer to the fact that where there are extraordinary profits and those companies are considered by the TPO for comparability but loss making companies are not considered as comparable, that would improper. The Tribunal found that such contradiction in approach....
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....DRP and submitted that the functional comparability has been examined by the TPO and it was found that this company is functionally comparable with the assessee and also satisfies all the filters applied by the TPO. 18.2 We have considered the rival submissions as well as the relevant material on record. The main objection of the assessee against this company is that it follows a different financial year ending on 31.12.2006. Therefore, the financial data is not relating to the same period from 1.4.2006 to 31.3.2007. Since the contemporaneous data are not available in respect of this company as provided under Rule 10B(4) of the IT Rules, therefore, we are of the view that this company cannot be considered as a good comparable for want of contemporaneous financial data to be compared with the assessee. Accordingly, we direct the Assessing Officer / TPO to exclude this company from the list of comparables. xv) Sasken Communication Technologies Ltd. (Seg.) 19. The learned Authorised Representative of the assessee has submitted that this company is having a high turnover as incomparable to the assessee. Therefore this company enjoys economy of scale on the basis of the size of....
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.... India Pvt. Ltd. 2010-TII- 44-ITAT Bang-TP had observed as follows: "86. At the cost of repetition, we have to say that extreme cases should not be included in samples and extreme comparables mean not only the positive higher side but also the lower side. In the list of 22 comparables, many of them are having very low margin rate, not only less than 10 or 5, even below that. We have already considered that the agreement entered into by the assessee with its German associate concern has contemplated a compensation of cost plus 6 per cent, or 1.5 times of the total wages bill, whichever is higher. This point we have to consider in the light of the fact that the assessee is working in a risk mitigated environment. That is why we have agreed with the argument of the assessee-company that there may not be extreme profits in the case of the assessee. When extremes are excluded from the samples, all sorts of extremes should be avoided. Otherwise, samples selected for comparative study may not be representative." 33. Even in the aforesaid decision the point that has been emphasized is that when the margins of comparable companies are either extremely low or high, the appr....
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....ejected these objections raised by the assessee on the grounds that turnover and brand aspects were not materially relevant in the software development segment. 12.2 Before us, the assessee contended that this company is not functionally comparable to the assessee and in this context has cited various portions of the Annual Report of this company to this effect which is as under :- (i) The company has an Intellectual Property (IP) Cell to guide its employees to leverage the power of IP for their growth. In 2008, this company generated over 102 invention disclosures and filed an aggregate 10 patents in India and the USA. Till date this company has filed an aggregate of 119 patent applications (pending) in India and USA out of which 2 have been granted in the US. (ii) This company has substantial revenues from software products and the break-up of the software product revenues is not available. (iii) This company has incurred huge research and development expenditure to the tune of approximately Rs. 200 Crores. (iv) This company has a revenue sharing agreement towards acquisition of IPR in AUTOLAY, a commercial software product used in des....
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....ons made. (ii) The TPO had adopted the consolidated financial statements for comparability purposes and for computing the margins, which contradicts the TPO's own filter of rejecting companies with consolidated financial statements. 13.3. Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the set of comparables. 13.4.1 We have heard both parties and carefully perused and considered the material on record. We find merit in the contentions of the assessee for exclusion of this company from the set of comparables. It is seen that this company is engaged both in software development and product development services. There is no information on the segmental bifurcation of revenue from sale of product and software services. The TPO appears to have adopted this company as a comparable without demonstrating how the company satisfies the software development sales 75% of the total revenue filter adopted by him. Another major flaw in the comparability analysis carried out by the TPO is that he adopted comparison of the consolidated financial statements of Wipro with the stand alone financials of the asse....
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.... that the segment "software development services" relates to design services and are not similar to software development services performed by the assessee. 14.4.2 The Hon'ble Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. V ACIT (ITA No.7821/Mum/2011) has held that Tata Elxsi Ltd. is not a software development service provider and therefore it is not functionally comparable. In this context the relevant portion of this order is extracted and reproduced below :- " .... Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of the learned Authorised Representative that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company as fit for comparability analysis for determining the arm's length price for the assessee,....