TaxTMI 
TaxTMI 
2018 (12) TMI 1665
X X X X Extracts X X X X
X X X X Extracts X X X X
....essing 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 with the assessee. 6. On the facts and circumstances of the case, the learned Assessing Officer has erred both o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ment 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 input, the taxpayer undertakes requisite changes / re-work as required. 3. During the year under assessment, the taxpayer entered into international transactions with its AE as under :- S.No. Description of transaction Me....
X X X X Extracts X X X X
X X X X Extracts X X X X
....verage 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 by the ld. TPO are not valid comparables to benchmark the international transactions and consequently sought exclusion thereof. 12. We would examine the comparability of each of the aforesaid 7 comparables one by one as under. INFINITE DATA SYSTEMS PRIVATE LTD. (INFINITE) 13. This is TPO's comparable. The taxpayer sought exclusion of Infinite on two groun....
X X X X Extracts X X X X
X X X X Extracts X X X X
....iant 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, Infosys spent 2.1% of the total revenue on its R&D expenditure during the year under assessment as is evident from pages 187 & 188 of the paper book. Moreover, Infosys is having huge intangible assets, it being a "brand" in itself. 18. Comparability of Infosys vis-à-vis routine software development and support services provider has been examined by Hon'ble Delhi Hig....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 Hon'ble Delhi High Court in CIT vs. Agnity India Technologies Pvt. Ltd. (supra), it cannot be taken as a valid comparable. So, we direct the AO/ TPO to exclude Infinite from the final set of comparables. PERSISTENT SYSTEMS LIMTIED (PERSISTENT) 20. This is again TPO's comparable which has been challenged for exclusion by the taxpayer on the ground of functional dissimilarity. Perusal of the annual report, available at page 412 of the paper book, goes to prove that Persistent is into providing outsourced software product development services co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ices 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 warehousing, Business Intelligence, Web Development, Infrastructure Management amongst others. 25. Furthermore, when we examine Related Party Transactions of Sonata, available at page 726 of the paper book, it goes to prove that its RPT as percentage of sales is 53.83% whereas TPO himself has applied the filters to exclude the companies with more than 25% of RPT from the final set of comparables. So, keeping in view the functional dissimilarity as well as substantial Related Party Transactions, Sonata cannot be a valid comparable vis-à-vis taxpayer, hence....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 payer. 32. Furthermore the Zylog has invested in acquiring this business an amount of Rs. 62,12,04,848/- and has adopted the policy of amortizing this amount over a period of 5 years. Thus, the company has amortized a sum of Rs. 10,72,97,170/- in the year under assessment. So the acquisition being an extraordinary event has certainly affected the profitability of the company and as such cannot be a valid comparable. 33. Coordinate bench of Tribunal in case cited as Equant Solutions India Pvt. Ltd. v. DCIT (ITA no. 1202/Del/2015) has examined comparability of Zylog vis-....