TaxTMI 
TaxTMI 
2017 (5) TMI 1700
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....12(l), Bangalore ['AO'], is bad on facts and in law, and is in violation of the principles of natural justice. Without prejudice to the above, the final assessment order issued by the learned AO is bad in law insofar as the fact that the AO did not issue to Mphasis Limited ('the Appellant or 'the Company'), a show-cause notice, as per proviso to section 92C(3) of the Income-tax Act, 1961 ['the Act']. (b) The AO has erred in making a reference to the Additional Commissioner of Income-tax -Transfer Pricing - II, ['TPO'], inter alia, since he has not recorded an opinion that any of the conditions in section 92C(3) of the Act, were satisfied in the instant case. The AO also erred in not following the provision contained in section 92CA(1) of the Act. 2. The fresh comparable search undertaken by the TFO is bad in law (a) The AO/TPO erred on facts and in Jaw in conducting a fresh benchmarking analysis using non contemporaneous data and substituting the Appellant's analysis with fresh benchmarking analysis on his own conjectures and surmises. (b) On the facts and in the circu....
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....under section 133(6), which is grossly unjustified. 4. Comparability analysis adopted by the TPO/AO for determination of arm's length price in relation to the IT support services segment (a) The AO/TPO erred on facts in rejecting the comparable companies arrived at in the Transfer Pricing Study, without considering the functional and risk analysis of the Appellant in respect of the IT support services segment. (b) Without prejudice to Ground 4(a), the AO/TPO erred in law in applying arbitrary filters to arrive at a fresh set of companies as comparables to the Appellant, without establishing functional comparability. (c) Without prejudice to Ground 4(a), the AO/TPO grossly erred in law in deviating from the uncontrolled party transaction definition as per the Income-tax Rules, 1963 and arbitrarily applying a 25% related party criteria in accepting / rejecting comparables. (d) Without prejudice to Ground 4(a), the AO/TPO also erred on facts and in law in arbitrarily rejecting companies with different year ending (i.e. other than 31 March 2007). (e) Without prejudice to Ground 4(a), the AO/TP....
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....and in the circumstances of the case, the learned AO has erred in reducing the travel expenses amounting to Rs. 43,486,353 and Rs. 111,493,741 from the export turnover of units while computing the deduction under section 10A and section 10B of the Act respectively, irrespective of the applicant's submission that it is engaged in the business of software development and not in rendering technical services. (b) On the facts and in the circumstances of the case, the learned AO has erred in reducing the telecommunication expenses amounting to Rs. 2,637,554 and Rs. 37,541,039 only from the export turnover and not from the total turnover of the units while computing deduction under section 10A and section 10B of the Act respectively. (c) Without prejudice to the above, on the facts and in the circumstances of the case, the learned AO has erred, inter alia, in: * Reducing total travel expenses from export turnover instead of the travel expenses incurred in foreign currency, as stipulated in the definition of the term export turnover under section, 10A and section 10B of the Act; * Not making any corresponding reduction in the....
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.... 15. Directions issued by the Honorable Dispute Resolution Panel (a) The DRP has erred in law and facts in not taking cognizance of the objections filed by the Appellant in relation to the draft-assessment order and TP order issued by the AO/TPO in the proceedings before them. (b) The DRP further erred on facts and in law confirming the draft order of the AO. 16. Relief (a) The Appellant prays that directions be given to grant all such relief arising from the above grounds and also all relief consequential thereto. (b) The Appellant craves leave to add to or alter, by deletion, substitution, modification or otherwise, the above grounds of appeal, either before or during the hearing of the appeal. (c) Further, the Appellant prays that the adjustment in relation to transfer pricing matters made by the learned AO/TPO and upheld by Hon'ble DRP is bad in law and liable to be deleted. 3. Subsequently, vide application dated 18/10/2016, the assessee sought for admission of the following additional grounds of appeal: 1. The lower authorities have erred in adop....
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....h marking the international transactions. The assessee-company's profit margin was computed at 14.22% in respect of software services segment, 9.76% in respect of ITeS segment and and 9.76% in respect of IT support services. The assessee-company claimed that the same was comparable with other companies rendering software development services, and ITe services. For the purpose of transfer pricing study, the assessee-company had chosen 28 companies as comparable entities in respect of 'software development services and 9 comparables in IT support services arithmetic average of operating profit margins of said comparables was computed at 14.53%% in respect of software development services and 26.14% in respect of ITeS segment and 9.26% in respect of IT support services segment. According to the assessee-company, its PLI was much higher than the arithmetic mean of the comparable entities. Hence, it was claimed that the transactions with its AE are at arm's length. 6. The Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO). The TPO, by an order dated 29/10/2010 passed u/s 92CA of the IT Act, 1961 computed the transfer pricing adjustment at Rs.....
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....8% 0.36% 5 E-Zest Solutions Ltd 6.23 36.12% 37.01% 6 Flextronics Software Systems Ltd (Seg) 848.66 25.31% 26.02% 7 Geometric Ltd (seg) 158.38 10.71% 10.59% 8 Helios & Matheson Information Technology Ltd 178.63 36.63% 35.40% 9 iGate Global Solutions Ltd 747.27 7.49% 6.59% 10 Infosys Technologies Ltd 13,149.00 40.30% 39.94% 11 Ishir Infotech Ltd 7.42 30.12% 31.39% 12 KALS Information Systems Ltd (Seg.) 2.00 30.55% 24.39% 13 LGS Global Ltd (Lanco Global Solutions Ltd) 45.39 15.75% 16.14% 14 Lucid Software Ltd 1.70 19.37% 18.02% 15 Mediasoft Solutions Pvt Ltd 1.85 3.66% 2.59% 16 Megasoft Ltd (Seg.) 139.33 60.23% 52.29% 17 Mindtree Ltd 590.35 16.90% 16.33% 18 Persistent Sytems Ltd 293.75 24.52% 24.40% 19 Quintegra Solutions Ltd 62.75 12.56% 10.20% 20 R S Software (India) Ltd 101.04 13.47% 14.11% 21 R Systems International Ltd (Seg.) 112.01 15.07% 14.22% 22 Sasken Communication Technologies Ltd (Seg.) 343.57 22.16% 27.0....
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....ted 4.28 12.40% 12.59% 10 Datamatics Financial Services Limited (Seg) 2.92 5.07% 7.54% 11 Ecleix Services Limited 86.12 89.33% 87.41% 12 Flectronics Software Systems Limited (seg) 12.93 8.62% 7.30% 13 Genesys International Corporation Limited 19.17 13.35% 9.78% 14 H C L Comnet Systems & Services Limited (Seg) 260.18 44.99% 45.32% 15 1 C R A Techno Analytics Limited (Seg.) 7.23 12.24% 12.65% 16 Informed Technologies India Limited 4.08 35.56% 36.06% 17 Infosys BPO Limited 649.56 28.78% 29.87% 18 I Services India Private Limited 16.29 49.47% 49.85% 19 Maple Esolutions Limited 12.29 34.05% 31.48% 20 Mold Tek Technologies Limited (Seg) 11.40 113.49% 116.61% 21 R Systems international Limited (Seg) 17.43 20.18% 19.54% 22 Spanco Limited (Seg) (Earlier known as Spanco Telesystems & Solutions Ltd) 35.00 25.81% 20.89% 23 Triton Corporation Limited 53.37 34.93% 26.87% 24 Vishal Information Technologies Limited 30.60 51.19% 43.57% 25 Wipro Limited (Seg) 9....
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....rst instance, we shall now deal with IT support services. Before us, learned counsel for assessee-company argued that the following companies finally chosen by the TPO should be excluded for the reason of functional dissimilarity placing reliance on the decision of the Tribunal in the case of First Advantage Offshore Services Pvt. Ltd. v. Dy. CIT in [IT Appeal No.l086 (Bang.) 2011, dated 30-4-2013] and Symphony Marketing Solutions India (P.) Ltd. v. ITO 2014 (2) TMI 83 - ITAT BANGALORE. i. Asit C Mehta Financial Services Ltd. ii. Bodhtree Consulting Ltd.(seg) iii. Eclerx Services Ltd. iv. Infosys BPO Ltd, v. Mold Tek Technologies Ltd.(Seg.) vi. Vishal Information Technologies Ltd. vii. Wipro Ltd. (Seg) viii. Apex Advanced Tech Pvt. Ltd. 11.1 Now, we shall deal with each of them. Bodhtree Consulting Ltd., Eclerx Services Ltd., and Mold-Tek Technologies Ltd., were excluded from the list of comparables by this Tribunal in the case of First Advantage Offshore Services (P.) Ltd. (supra) on the ground of functional dissimilarity. The Tribunal further observed that th....
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.... be even the tools required are different which may result in different economic results of both the segments. Thus, in such circumstances, we are of the opinion that they cannot be compared with each other and have to be excluded from the list of comparables. " The Hon'ble Delhi High Court in the case of Rampgreen Solutions Ltd. v. CIT [2015] 377 ITR 533 held that KPO company cannot be compared with BPO company. The learned DR has not controverted that these companies are KPO companies. In the result, we hold that these companies cannot be considered as comparables following the ratio laid down in the cases cited supra. 11.2 Infosys BPO Ltd. and Wipro Ltd. This Tribunal excluded these companies from the list of comparables in the case of Symphony Marketing Solutions India (P.) Ltd. (supra) holding that Infosys BPO Ltd., was a subsidiary of Infosys Ltd., and having brand value etc. Similar observations were made by the Tribunal in the case of Capital IQ Information Systems (India) (P.) Ltd. v. Dy. CIT [2013] 32 /57 SOT 14 (URO)(Hyd. - Trib.). The Hon'ble Delhi High Court in the case of CIT v. Agnity India Technologies (P.) Ltd. 2013 (7) TMI 696 - DELHI HIGH COURT h....
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....DRP/TPO by the Assessee and the figures given by the Assessee before Tribunal needs verification. We are of the view that the plea put forth by the learned DR is acceptable and in respect of these two companies the employee cost to sales should be examined afresh by the AO/TPO after due opportunity to the Assessee. In respect of the other two companies there is no dispute that the employee cost to sales is less than 25% and therefore these two companies are directed to be excluded from the list of comparable companies." Learned Standing Counsel has not brought anything controverting the findings of the Tribunal in the above case. Therefore, we have no reason to differ with the reasoning adopted by the co- ordinate bench in the case of e4e Business Solutions India (P.) Ltd. (supra) as TPO himself has applied the filter of employer cost of more than 25% of sales. Therefore, we direct the AO/TPO to exclude these companies form the list of comparables. 11.4 The assessee seeks exclusion of the following companies as they fail RPT filter of 15%: i. Appollo Heaithstreet Ltd, ii. Caliber Pint Business Solutions Ltd. iii. HCL Comnet Systems....
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.... in the case of Stream International Services (P.) Ltd. v. Asstt. CIT [2015] 53 taxmann.com 19/152 ITD 664 (Mum. - Trib.) held: " (x) Caliber Point Business Solutions Ltd.:- At the outset, the ld. Counsel for the assessee stated that this company deserves to be rejected as the related party transaction is more than 25% which is a filter adopted by the TPO himself. We find that the DRP has not considered this objection because it was of the opinion that related party transaction is mainly for reimbursements and recoveries and therefore would not affect the company. We find that an identical issue came up before the Tribunal in assessee's own case in A.Y. 2006-07 in ITA No. 8997/Mum/2010 wherein the Tribunal has rejected this contention of the Department. The Tribunal at para 13 of its order has observed that "A pure reimbursement of expenses by one AE to another AE is very much a 'transaction' as per section 92F(v) and consequently is equally an international transaction as per section 92B requiring consideration as per section 92 of the Act". These observations were in relation to a company namely Datamatics Financial Services Limited. We therefore do not find any fo....
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.... ground on adopting this company as a comparable before the DRP. Before us, the learned counsel for the assessee has submitted that the TPO did not furnish the information obtained from this company in exercise of his powers u/s. 133(6) of the Act. It was further pointed out that even as per the TPO, the annual report of this company for F. Y. 2006-07 was not available. The TPO has gone by the data available on capita line data base. The learned counsel for the assessee therefore made a prayer that the question of considering the aforesaid company as a comparable should be remanded back to the TPO/Assessing Officer for fresh consideration and the issue decided in the light of the published annual report for F.Y. 2006-07 and also on the basis of the information furnished by this company to the Assessing Officer in response to notice u/s. 133(6) of the Act. We have considered the submissions and are of the view that the same deserves to be accepted. The TPO/Assessing Officer will obtain the annual report of the company for F.Y. 2006-07 and also furnish the assessee copies of the same together with the information obtained by the TPO pursuant to issue of notice u/s. 133(6) of the Act.....
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....arned AR has placed reliance on the order of the co-ordinate bench in the case of i2 Technologies India (P.) Ltd. (supra) to submit that the following 12 companies are not functional comparable with that of pure software Development Company. 13. We heard rival submissions and perused the material on record. The comparability of the above companies had come up for consideration before the co-ordinate bench of this Tribunal in the case of i2 Technologies India (P.) Ltd. (supra), wherein it has been held; "11. M/s Accel Transmatic Ltd, M/s Avani Cinicon Tech. Ltd., M/s Celestial Labs Ltd. and M/s KALS Information Systems Ltd, were 4 of the companies among the comparables considered in the case of M/s NXP Semiconductors India Pvt Ltd. (Supra). Co-ordinate Bench at para-18 to 19 of its order dated 14-11-2014 held as under: 18. As far as comparable companies listed at Sl.Nos.1,2,3 and 12 of the final list of comparable companies chosen by the TPO viz., M/S. Accel Transmatic Limited (seg.), Avani Cincom Technologies . Ltd., Celestial labs Limited and KALS Infosystems Ltd., are concerned, this Tribunal in the case of First Advantage OffshoreServices Pvt Ltd v. DGIT IT ....
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.... 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 08-09 Operating Revenue 2176161 35477523 29342809 28039851 Operating Expns. 16417661 232496....
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....ion 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 the patent. The patent details have been discussed with Patent officials and the response is very favourable. The cloning and purification under wet lab procedures are under progress with our collaborative Institute, Department of Microbiology, Osmania University, Hyderabad. In the industr....
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....p to AY 06-07 this company was classified as a Research and Development company. According to the TPO in AY 07-08 this company has been classified as software development service provider in the Capitaline/Prowess database as well as in the annual report of this company. The TPO has relied on the response from this company to a notice u/s. 133(6) of the Act in which it has said that it 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 but that this company provide software products/services as well as bioinformatics services and that the segmental data for each activity is hot 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 da....
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....onally different from software companies. The relevant extract are as follows: "16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of IT enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the. said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds. Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. 47. We have given a careful consideration to the submissio....
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....ionally 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." 49. Besides the above, it was pointed out that this company has related party transactions which is more than the permitted level and therefore should not be taken for comparability purposes. The submission of the ld. counsel for the assessee was that if the above company should not be considered as comparable. The ld. DR, on the other hand, relied on the order of the TPO. 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 he excluded as comparables." 20.....
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.... consulting services. These services, the learned Authorised Representative contends, are high end ITES normally categorised as knowledge process Outsourcing ('KPO') services. It is further submitted that this company has not provided segmental data in its Annual Report. The learned Authorised Representative submits that since the Annual Report of the company does not contain detailed-descriptive information on the business of the company, the assessee places reliance on the details available on the company's website which should be considered while evaluating the company's functional profile. It is also submitted by the learned Authorised Representative that KPO services are not comparable to software development services and therefore companies rendering KPO services ought not to be considered as comparable to software development companies and relied on the decision of the co-ordinate bench in the case of Capital IQ Information Systems (India) (P) Ltd. in ITA No. l961 (Hyd.)/2011 dt. 23.11.2012 and prayed that in view of the above reasons, this company i.e. e-Zest Solutions Ltd., ought to be omitted from the list of comparables. 14.3 Per contra, the lear....
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.... (ii) In the case of E-Gain communications Pvt. Ltd. (2008-TII-04-ITAT-PUNE-TP), the Tribunal has directed that this company be omitted as a comparable for software service providers, as its income includes income from sale of licences which has increased the margins of the company. The learned A. R. prayed that in the light of the above facts and in view of the afore cited decision of the Tribunal (supra), this company ought to be omitted from the list of comparables. 15.2 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the list of comparables. 15.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the material on record that the company is engaged in product development and earns revenue from sale of licenses and subscription. However, the segmental profit and loss accounts for software development services and product development are not given separately. Further, as pointed out by the learned Authorised Representative, the Pune Bench of the Tribunal in the case of E-Gain Communications Pvt. Ltd. (supra) has directed th....
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.... Ltd. had rendered a finding that in the absence, of segmental information, a company be taken into account for comparability analysis. This principle is squarely applicable to the company presently under consideration, which is into product development and product design services and for which the segmental data is not available. The learned Authorised Representative prays that in view of the above, this company i.e. Persistent Systems Ltd. be omitted from the list of comparables. 17.2 Per contra, the learned Departmental Representative support the action of the TPO in including this company in the list of comparables. 17.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that this company i.e. Persistent Systems Ltd., is engaged in product development and product design services while the assessee is a software development services provider. We find that, as submitted by the assessee, the segmental details are not given separately. Therefore, following the principle enunciated in the decision of the Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd.....
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....ation 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 software products and the business of software services, and therefore, it was not appropriate to adopt the application software segment of the said concern for the purposes of comparability with the assessee's IT-Services Segment. The TPO however, noticed that though the application software segment of the said concern may be engaged in selling of some of the software products which are developed by it, however, the said concern was not into trading of software products as there were no cost of purchases debited in the Profit & Loss Account....
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....rmation 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 pointed out in support. Considered in the aforesaid light, on the basis of the discussion in relation to KALS Information Solutions Ltd. (Seg), in the instant case also we find that the said concern is liable to be excluded from the list of comparables." 29. Respectfully following the decision of the Tribunal referred to above, we direct the AO/TPO to exclude the aforesaid company from the final list of comparable companies for the purpose of determining ALP. We therefore, direct exclusion of M/s Helios & Matheson Informatio....
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.... in designing high performance structural systems. (v) The assessee also placed reliance on the following judicial decisions :- (a) ITAT, Delhi Bench decision in the case of Agnity India Technologies India (P.) Ltd (ITA No.3856/Del/2010) and (b) Trilogy E-Business Software India Pvt. Ltd. (ITA No. 1054/Bang/2011) 12.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the operating margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 12.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee has brought on record sufficient evidence to establish that this company is functionally dissimilar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) for Assessment Year 2007-08 is applicable to this y....
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....ials of the assessee; which is not an appropriate comparison. 13.4.2 We also find that this company owns intellectual property in the form of registered patents and several pending applications for grant of patents. In this regard, the co-ordinate bench of (his Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (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 such intangible and hence does not have an additional advantage in the market As the assessee in the case on hand does not own any intangibles, following the aforesaid decision of the co-ordinate bench of the Tribunal i.e. 24/7 Customer.Com Pvt. Ltd. (supra), we hold that this company cannot be considered as a comparable to the assessee. We, therefore, direct the Assessing Officer/TPO to omit this company from the set of comparable companies in the case on hand for the year under consideration. 14. (6) Tata Elxsi Ltd. 14.1 This company was a comparable selected by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the set of comparables on several counts like, functiona....
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....9;s length price for the assessee, hence, should be excluded from the list of comparable portion." As can be seen from the extracts of the Annual Report of this company produced before us, the facts pertaining to Tata Elxsi have not changed from Assessment Year 2007- 08 to Assessment Year 2008-09. We, therefore, hold that this company is not to be considered for inclusion in the set of comparables in the case on hand. It is ordered accordingly." 25. Respectfully following the decision of the Tribunal referred to above, we direct the AO/TPO to exclude the aforesaid companies from the final list of comparable companies for the purpose of determining ALP. Accordingly, we direct the exclusion of the above three companies from the list of comparables. 15. M/s Ishir Infotech Ltd. and M/s Lucid Software Ltd were directed to be excluded by the Tribunal in the order mentioned above, vide paras-20-22 & 23, reproduced here under; "20. As far as comparable companies listed at Sl Nos. 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 F....
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....ompanies for the purpose of determining ALP, Thus, we direct exclusion of these two companies also from the list of comparables." As regards Megas of Ltd., the only objection of the learned AR is that only margins of software segment alone should be considered for the purpose of comparison and reliance was placed on the decision of the co-ordinate bench of Tribunal in the case of 12 Technologies India (P.) Ltd., (supra). The relevant para is extracted below: 16. As far as M/s Megasoft Ltd., is concerned this Tribunal had in the case of M/s NXP Semi-conductors India Pvt. Ltd. (supra) held it as a good comparable, but certain modification to the operating results of the said company were required. This is mentioned at para-22-23 of its order, which is reproduced hereunder; 22. As far as comparable companies listed at Sl. No.16 of the final list of comparable companies chosen by the TPO viz., M/S. Megasoft Limited is concerned, this Tribunal in the ease of First Advantage Offshore Services Pvt. Ltd. v. DCIT IT (TP) No. 1086/Bang/2011 for A.Y. 07-08 held that the aforesaid companies are not comparable companies in the case of software development services ....
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.... would constitute packaged product and around 50% to 60% would constitute customized capabilities and expenses related to travelling, boarding and lodging expense. Based on the above reply, the TPO proceeded to hold that the comparable company was mainly into customization of software products developed (which was akin to product software) internally and that the portion of the revenue from development of software sold and used for customization was less than 25% of the overall revenues. The TPO therefore held that less than 25% of the revenues of the comparable are from software products and therefore the comparable satisfied TPO's filter of more than 75% of revenues from software development services. The basis on which the TPO arrived at the PLI of 60.23% is given at page-115 and 116 of the order of the TPO. It is clear from the perusal of the same that the TPO has proceeded to determine the PLI at the entity level and not on the basis of segmental data. 25. In the order of the TPO, operating margin was computed for this company at 60.23%. It is the complaint of the assessee that the operating margins have been computed at entity level combining software services an....
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....transaction. As regards Flextronics Software Systems Ltd. (seg), it is submitted that it is engaged in the business of providing end to end provider of communication products, services and solutions to network equipment providers, handset manufacturers, service providers and business process outsourcing sectors. In this regard the learned AR relied on the decision of the co-ordinate bench in the case of Tata McGraw Hill Education (P.) Ltd. v. Asstt. CIT 154 ITD 109 (Delhi - Trib.) wherein it has been held that Flextronics Software Systems Ltd. is functionally different and should be rejected as a comparable to companies rendering software development services. The learned AR therefore submitted that this company should be rejected as a comparable. We heard rival submissions and perused the material on record. In the case of Tata McGraw Hill Education (P.) Ltd, (supra), the co-ordinate bench held that: "(iv) Flextronics Software Systems Ltd, (Seg.) 10.1 The TPO included this company with operating profit ratio of 25.31%, in the list of comparables despite the assessee's contention that it is a software products company as well as a service provider. ....
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....is only in the nature of export out of India of computer software and not rendering technical services. He further submitted that the Hon'ble jurisdictional High Court in the case of CIT v. Mphasis Ltd. in ITA No, 1075/2008 & 196/2009 and CIT v. Keshema Technologies Ltd. [2016] 66 /381 ITR 435 (Kar.) held that freight, telecommunication charges or insurance incurred in foreign currency should not be reduced from both export turnover and total turnover when the business of the taxpayer is in the nature of export out of India of computer software and not rendering technical services. Alternatively, he submitted that the same should be reduced from both export turnover as well as total turnover for the purpose of computing deduction u/s 10A and 10B placing reliance on the decision of the Hon'ble jurisdictional High Court in the case of CIT v. Tata Elxsi [2012] 349 ITR 98/204 Taxman 321/17 taxmann.com 100 (Kar.). We heard rival submissions and perused the material on record. The issue in the present case is no more res Integra as the Hon'ble jurisdictional High Court in the case of M/s. Kshema Technologies Ltd. (supra) held as follows: "13. We have perused the r....
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....software supplied to the client, appears to be technical in nature, it does not fail within the clause of providing technical service outside India in connection with the development or production of computer software and accordingly such expenditure cannot be excluded in computing export turnover. To decide the question on hand, the Tribunal has placed reliance on the Judgment passed by the Tribunal in the Case of Mphasis Ltd. (supra). The very same Judgment was subjected to judicial scrutiny before this court in ITA No. 1075/2008 connected with ITA No. 196/2009, wherein this court, following the Judgment, of Motor Industries Co. Ltd. (supra), answered the substantial question of law in favour of the assessee and against the revenue. This court has held that the expenditure incurred in the development or production of computer software though is in the nature of technical services, is not so, for the purposes of the Act and the said expenditure cannot be excluded in computing export turnover. Thus, we are of the view that the said Judgment is squarely applicable to the facts of the present case. Accordingly, we answer the first question in favour of the assessee and against the re....