TaxTMI 
TaxTMI 
2017 (7) TMI 1335
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....vice Segment. The TPO refused the TP Study of the assessee; and carried out the fresh search for selection of comparable companies. The TPO finally selected 13 companies in software development services and 3 companies in Sales & Marketing Software Services segment and accordingly proposed adjustment under Section 92CA of Rs. 4,87,86,247 in respect of software development transactions and Rs. 22,40,047 in respect of transactions of ITES. The assessee challenged the action of the TPO/AO before the DRP by filing the objections. The DRP rejected 10 companies out of the set of 13 companies selected by the TPO in the software development segment and one company in the Sales & Marketing Support Services segment. Thus both the assessee as well as department are aggrieved by the directions of DRP and raised the following grounds: Assessee's Grounds. General Grounds:- 1. Passing the Order which is bad in law. 2. Passing the Order disregarding the principles of natural justice. Grounds relating to Transfer Pricing:- 3. Making transfer pricing adjustment of Rs. 4,93,98,250/-. 4. Making a reference to Transfer Pricing Officer f....
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....rs applied by the TPO and were proposed as comparable before the TPO; h. Not making proper adjustment for enterprise level and transactional level differences between the Appellant and the comparable companies; i. Not appropriately computing working capital adjustment; and j. Not recognizing that the Appellant was insulated from risks, as against comparables, which assume these risks and therefore an appropriate risk adjustment has to be provided. Computation of Arm's Length Price for Sales and Marketing segment 10. Without prejudice, the lower authorities have erred in:- a. Adopting inappropriate filters for selecting comparables; b. Rejecting comparables selected by the Appellant in the TP study and additional comparables proposed by the Appellant on unjustifiable grounds; c. Rejecting Transfer pricing analysis performed by the Appellant on unjustifiable grounds and performing fresh TP analysis; d. Selecting inappropriate comparables and selecting companies as comparables despite which are not functionally comparable. e. The Honourabl....
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....ight in seeking exact comparability while searching for comparable companies of the assessee under TNMM method whereas requirement of law and international jurisprudence require seeking similar comparable companies. Grounds of appeal: (1) In the facts and circumstances of the case, Whether the Hon'ble DRP is correct in holding that the, M/s. Evoke Technologies Ltd. cannot be taken as comparable, when it satisfies all the qualitative and quantities filters adopted by the TPO. (2) Whether while seeking the exact comparability as mentioned above the DRP was right in fact and in law in imposing condition beyond law where the requirement of law is to acknowledge only those differences that are likely to materially affect the margin. Grounds of appeal: (a) Whether the Hon'ble DRP erred in fact and law by holding the company M/s. ICC International Agencies as functionally dissimilar without analysing the facts of the company. (b) Whether the Hon'ble DRP erred in fact and law by considering the comparable as functionally dissimilar based on the grounds that there is lack of clarity in the segment report without analysi....
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....ndia) Limited. We note that the assessee did not raise any objection against two companies viz. Evoke Technologies Pvt. Ltd. and R.S. Software (India) Limited before the DRP. However, the DRP rejected these two companies on its own. Now the assessee has no objection if these two companies are restored to the set of comparables. Further the assessee is also not raising any objection in respect of the company Mindtree Limited if the same is restored to the set of comparables. Hence in view of the submission of ld. AR these three companies namely Evoke Technologies Pvt. Ltd., Mindtree Limited (Seg) & R S Software (India) Limited are restored to the set of comparables and to that extent the grounds of the revenue's appeal are allowed. 5. As regards the comparability of the remaining 10 companies, the learned Authorised Representative of the assessee has submitted that the comparability of all these companies except the companies E-Infochips Limited and Sasken Communication Technologies Limited have been considered by the co-ordinate bench of this Tribunal in the Applied Material India Ltd. v. ACIT vide order dt. 21.9.2016 IT (TP) A Nos. 17 & 39/Bang/2016 for the same assessme....
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....red the rival submissions as well as the relevant material on record, first we will deal with the functional comparability of the six companies namely Acropetal Technologies Limited (Seg.), E-Zest Solutions Ltd., L&T Infotech Ltd., Persistent System & Solution Ltd., Persistent Systems Ltd. and Tata Elxsi Limited. The business activities of these six companies have been examined on the point of functional comparability in the software development services provider by the co-ordinate bench of this Tribunal vide decision dt. 21.9.2016 in the case of Applied Materials India (P.) Ltd. (supra) in paras 9.1.1 to 9.2.4; 16.1 to 16.4 and 19 to 20 as under: ' (i) E-Jest Solutions Ltd. 9.1.1 The learned Authorised Representative has submitted that the assessee raised the objection before the DRP for exclusion of this company from the set of comparables but the DRP has not adjudicated the objections of the assessee. He has referred the objections raised before the DRP at page No. 1373 of the paper book as well as referred the relevant part of the Annual Report of this company at page Nos. 39, 42 & 50 of the Annual Report. The learned Authorised Representative has submitte....
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....ese companies are functionally not comparable to the assessee as these are engaged in diversified activity i.e. rendering of software development services and licensing, royalty of software products. Thus without having the separate segmental details and data these diversified activities cannot be compared with the assessee. He has further pointed out that the company Persistent Systems Ltd. also engaged in developing products and therefore the activities are not comparable with that of the assessee. In support of his contention, he has relied upon the decision of this Tribunal dt. 24.2.2016 in the case of DCIT v. Electronics for Imaging India (P.) Ltd. (supra) and submitted that this company was found to be not comparable with the software development services provider. He has further pointed out that in assessee's own case for the Assessment Year 2010-11, the DRP vide its order dt. 24.11.2014 has excluded Persistent Systems and Solutions Ltd. from the list of comparables by holding that this company is not comparable to the assessee. 9.2.3 On the other hand, the ld. DR has submitted that the TPO as well as DRP has examined the functional comparability of these compan....
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....vant material on record. The assessee raised objections against selection of this company on the ground that this company is functionally not comparable as engaged in the product development The segmental information for services and product is not available. Further, the assessee has also, pointed out that there was an acquisition and restructuring during the year under consideration. 25. The DRP has noted the fact that this company has reported the entire receipt from sales and software services and product. Therefore, no segmental information was found to be available for sale of software services and product. Further, the DRP has noted that as per Note l of Schedule 15, this company is predominantly engaged in outsource software development service. Apart from the revenue from software services, it also earns income from licence of products, royalty on sale of products, income from maintenance contract, etc. These facts recorded by the DRP has not been disputed before us. 26. Therefore, when this company is engaged in diversified activities and earning revenue from various activities including licencing of products, royalty on sale of products as well as incom....
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.... " (iv) L&T Infotech Ltd. 19. We have heard the learned DR as well as learned DR and considered the relevant material on record. The DRP rejected this company by recording the facts at page 15 as under: On perusal of schedule to the notes of the accounts, it is noticed by us that expenses incurred in foreign currency are 938.94 crore (48.84%), out of the total expenses of Rs. 1920.46 crore debited in profit and loss account, these expenses include the sub-contracting expenses to the extent of Rs. 118.01 crore, which indicates that the company has the on-site revenue of about 50%, it is also noticed by us that in the profit and loss account, the revenue has been shown from software development services and products, in the segmenting account it is mentioned that the segment revenue include sales directly identifiable with/allocable to the segment, in Schedule 18, the revenue have been shown from 3 segments, i.e. financial services, manufacturing and telecom. However, in paragraph 23, it is mentioned that the company is mainly engaged in the business of software development. The Assessing Officer has considered entire revenue from 3 segments from the softwa....
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.... the availability of the comparable is not an issue and therefore we do agree with the view taken by the coordinate Benches of the Tribunal that the threshold limit of tolerance range should not exceed 15% as far as RPT revenue is concerned. Therefore, we direct the AO/TPO to apply 15% RPT filter in respect of all the comparables." In view of the facts recorded by the DRP as well as the decision of the co-ordinate bench, we do not find any reason to interfere with the directions of the DRP. (v) Tata Elxsi Ltd. (Seg.) : 20. We have heard the learned Departmental Representative as well as learned Authorised Representative and considered the relevant material on record. The DRP has rejected this company by discussing the fact at page 16 as under: Directed to exclude as per paragraph 2.7 of the order, further, on perusal of annual report, it is noticed by us from page 14 that software development and services consist of embedded product design, industrial design and visual computing labs which are not comparable to the software development services provided by the assessee and therefore, we direct the Assessing Officer to exclude the above comp....
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.... learned AR 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, hence, should be excluded from the list of comparable parties." 33. No contrary view has been brought to our notice regarding comparability of this company with that of a pure software development service provider. Accordingly, in view of the decision of the Mumbai Bench of the Tribunal in the case of Telcordia Technologies Pvt. Ltd. (supra), we do not find any reason to interfere with the finding of the DRP. " In view of the facts recorded by the DRP as well as the decision of the Tribunal in the case of DCIT v. Electronics for Imaging India (P.) Ltd. (supra), we do not find any error or illegality in the directions of the DRP to exclude this company form the set of comparables.&....
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.... development services, we order to exclude this company from the list of comparables." " (vi) Sasken Communications Technologies Ltd. 15.1 The TPO included this company in the set of comparables despite the assessee's objection that it was functionally different and also had Product portfolio. 15.2 After considering the rival submissions, we find from page 58 of the TPO's order that he has recognized sale of software products to the tune of Rs. 37 crore and odd. Though the break-up of revenue from software services and software products is available, but, the break-up of operating costs and net operating revenues from these two segments have not been given. It is further observed that the TPO has taken entity level figures for the purposes of making comparison. Since such entity level figures contain revenue from both software services and software products, as against the assessee only providing software services, we are disinclined to treat this company as comparable. The assessee's contention is accepted on this issue." We further note that the Hon'ble High Court vide its decision dt.28.09.2016 has confirmed the decision of the Delhi....
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....d in Dy. CIT v. Electronics For Imaging India (P.) Ltd. [2016] 70 taxmann.com 299 (Bang. - Trib.) in paras 53 & 54 as under: " 53. We have considered the rival submissions and considered the relevant material on record. As it is clear that the assessee is providing sales and marketing services to its AE which includes identifying potential customers by conducting road shows, presentation and the like, the working also includes educating potential users of the benefit and features of the AEs range of products. However, products for which the assessee is providing sales and marketing services is only software/information technology products. Therefore, Asian Business Exhibition & Conference Ltd. which is mainly engaged in the organization of exhibitions and events as well as conducting conferences on behalf of the various clients for their various products and businesses. The functions of this company are entirely different from the assessee who is providing sales and marketing support services to its AE for software/IT products. The Mumbai Bench of the Tribunal in the case of RGA Services India (P.) Ltd. (supra) while considering the functional comparability of this company....
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....ionality or some other reason a company is not at all comparable, assessee cannot be precluded from objecting to selection of the company as a comparable. This legal proposition is fairly well settled by the decision in case of DCIT v. Quark Systems (P.) Ltd. (2010) 132 TTJ (Chd) (SB) 1 as well as decisions relied upon by the counsel for the assessee. In view of the aforesaid, we do not find any infirmity in the directions of DRP in excluding Asian Business Exhibition and Conferences Limited as a comparable. The ground raised is therefore dismissed." 54. In view of the above facts as well as decision of the Mumbai Bench of the Tribunal, this company cannot be considered as a good comparable with the assessee.' Thus when there is no change in the business activity of assessee for the year under consideration as well as in the functions of the said company then in view of the earlier order of this Tribunal in assessee's own case we hold that this company cannot be considered as a good comparable of the assessee and accordingly, the TPO/AO is directed to exclude the same from the set of comparables. ICC International Agencies Limited 14. We have heard the lea....
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....tfully following the same Tribunal order, we direct the AO/TPO to exclude this company from the list of final comparable because the ld. DR of the revenue could not point out any difference in facts. 29. Regarding exclusion of second company, it was submitted by the learned AR of the assessee that i.e. M/s ICC International Agencies Ltd., (Supra) this is the claim of the assessee that annual report of this company available on pages 1100 & 1104 of the paper book. As per the same, we find that this company is deriving income from trading activity and also maintaining inventories. Both these arguments are supported by annual report of this company available on pages 1100 & 1104 of the paper book. Since the assessee is not engaged in trading activity, in our considered opinion, this company cannot be considered as good comparable in the present case and hence, we direct the AO/TPO to exclude his company from the list of final comparable. 30. In the combined result, the appeal of the assessee and revenue are partly allowed." We heard the rival submissions and gone through relevant material. Following the above decision, the assessee's plea and the DRP'....