TaxTMI 
TaxTMI 
2018 (12) TMI 1665
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....ssing Officer has erred both on facts and in law in assessing the income at Rs. 92,06,510/- as against income of Rs. 61,681/- declared by the assessee. 3. On the facts and circumstances of the case, the learned Assessing Officer has erred both on facts and in law in making an addition of Rs. 91,44,831/- as difference in arm's length price. 4. On the facts and circumstances of the case, the learned DRP has erred both on facts and in law in including the following comparables, despite the appellant company bringing sufficient material and evidences on record to the effect that line of activities of these com parables is totally different from that of line of activities of the assessee company: i) Infinite Data System Private Limited ii) Infosys Limited iii) Persistent Systems Limited iv) Sonata Software v) Tata Elxsi vi) Zylog Systems Limited vii) Thirdware Solutions Limited 5. On the facts and circumstances of the case, the learned DRP has erred in rejecting the contention of the assessee that the inclusion of Infosys Limited and Sonata Software is bad in law as the same are not comparable ....
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....ly pertaining to the current year. 12. On the facts and circumstances of the case, the learned DRP has erred both on facts and in law in rejecting the calculation of the assessee for making appropriate adjustment to account for varying risk profiles and difference in working capital of the assessee vis-a-vis com parables. 13. On the facts and circumstances of the case, the learned DRP has erred both on facts and in law in rejecting the contention of the assessee that the benefit of arms' length range of +/- 5% be given in view of proviso to Section 92C(2) of the Act." 2. Briefly stated the facts necessary for adjudication of the controversy at hand are : M/s. Lime Labs (I) Pvt. Ltd., the taxpayer's 99.99% shares were held by Lime Labs India Holdings A LLC, USA whereas balance 0.01% shares were held by Lime Labs India Holdings B LLC, USA. The taxpayer is involved into providing software development support services for the Lime Domains, Lime Wire and Lime Exchange Lines of business as per specifications provided by the Associated Enterprises (AEs). The taxpayer is providing AEs with prototype software for quality testing and approval. On the basis of AE's in....
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....ions Ltd. -8.20% 7. R S Software (India) Ltd. 10.18% 8. Sonata Software 35.87% 9. Tata Elexi (Segment) 20.29% 10. Thinksoft Global Services Ltd. 17.35% 11. Thirdware Solutions Limited 33.43% 12. Zylog Systems Limited 25.07% AVERAGE 25.79% 9. Ld. TPO, by computing the average PLI of OP/OC at 25.79% as against 14.6% of the taxpayer computed the arm's length price of international transaction qua software services rendered by the assessee as under :- Operating Cost 8,17,56,986 Arm's Length Price at a margin of 125.79% 10,28,42,113/- Price received 9,36,97,282/- Shortfall being adjustment u/s 92CA 91,44,831/- 10. The ld. TPO thereby enhanced the income of the taxpayer by Rs. 91,44,831/- i.e. on account of difference of adjustment u/s 92CA of the Act. 11. The ld. AR for the taxpayer in order to cut short the controversy contended that 7 comparables, namely, (i) Infinite Data System Private Limited, (ii) Infosys Limited, (iii) Persistent Systems Limited, (iv) Sonata Software, (v) Tata Elexi, (vi) Zylog Systems Limited and (vii) Thirdware Solutions Limited introduced....
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....ng years makes Infinite as invalid comparable. So, we direct the AO/ TPO to exclude Infinite from the final set of comparables. INFOSYS LIMTIED (INFOSYS) 16. This is again TPO's comparable. The taxpayer raised objection before the TPO for its inclusion in the final set of comparables on the grounds inter alia that Infosys is not only an established player but a giant in its field; that it has abnormally high turnover having its own brand value; that it is a full-fledged risk entrepreneur; that it is incurring substantial amount on R&D activities. 17. When we examine the functional profile of Infosys in its annual report, available at pages 208 of the paper book, it shows that the Infosys provides end-to-end business solutions that leverage cutting edge technology, thereby enabling clients to enhance business performance. The company provides solutions that span the entire software lifecycle encompassing technical consulting, design, development, re-engineering, maintenance, systems integration, package evaluation and implementation, testing and infrastructure management services. In addition, the company offers software products for the banking industry. Furthermore, Infos....
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....nces. This is partly correct as the tribunal has stated that Infosys Technologies Ltd. should be excluded from the list of comparables for the reason latter was a giant company in the area of development of software and it assumed all risks leading to higher profits, whereas the respondent-assessee was a captive unit of the parent company and assumed only a limited risk. It has also stated that Infosys Technologies Ltd. cannot be compared with the respondentassessee as seen from the financial data etc. to the two companies mentioned earlier in the order i.e. the chart. In the grounds of appeal the Revenue has not been able to controvert or deny the data and differences mentioned in the tabulated form. The chart has not been controverted." 19. Keeping in view the functional dissimilarity between Infosys vis-à-vis the taxpayer and the fact that Infosys is incurring huge expenditure to the tune of 2.1% of its total revenue on its R&D activities leading to the creation of significant intangible property and the fact that Infosys is a brand in itself and the fact that it assumes entrepreneurial risk and it also deals in software product and following the decision rendered by H....
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....specificity of the Transfer Pricing Rules under Rule 10 (b) to 10 (e) of the Income Tax Rules, the data of the said firm, i.e., Persistent Systems Ltd. could not have been included." 23. In view of what has been discussed above, we are of the considered view that Persistent is not a valid comparable vis-à-vis taxpayer. So, we direct the AO/ TPO to exclude Infinite from the final set of comparables. SONATA SOFTWARE LTD. (SONATA) 24. This is again TPO's comparable who has chosen the same on the ground that it is also a software development services provider. The taxpayer sought to exclude the same on ground of functional dissimilarity as well as on ground of substantial Related Party Transactions (RPT). When we examine functional profile of Sonata, available at page 742 of the paper book, it goes to prove that Sonata is primarily engaged in development of software product and it also provides Information Technology (IT) solutions, IT consulting, Development services globally, enhancing competitive advantage of its customers. The company also provides both onsite as well as offshore services in the area of RP customization conversion and migration projects, data wareho....
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....Ltd. (supra), we find Tata as not a suitable comparable for benchmarking the international transaction." 29. So in view of what has been discussed above and by following decision rendered by Co-ordinate bench of Tribunal in M/s. NEC Technologies India Ltd. (supra,) Toluna India Pvt. Ltd. and Telcordia Technologies India Pvt. Ltd. (supra) Tata Elxsi is being functionally dissimilar vis-à-vis tax payer is ordered to be excluded from the final list of comparable for benchmarking the international transactions. ZYLOG SYSTEMS LIMITED (ZYLOG) 30. This is again a TPO's comparable which the taxpayer has sought to exclude on ground of extraordinary event that it has acquired directly M/s. Matrix Primus Partners Inc., USA, M/s. Algorithm Solutions Private Limited, India and acquired M/s Brainhunters Inc. Canada. 31. Perusal of the annual report available at page 457 goes to prove that Zylog has acquired directly M/s. Matrix Primus Partners Inc. USA, M/s. Algorithm Solutions Private Limited, India and acquired M/s. Brainhunters Inc., Canada, through our WOS Zylog Systems (Canada) Ltd., during the Financial years 2009-10 relevant for year under assessment in case of the tax ....