TaxTMI 
TaxTMI 
2015 (12) TMI 1824
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..... 16,674). 4. The assessee carried on software design, development and maintenance activities during the previous year from the undertaking registered with the STPI Authorities. The assessee company is eligible for and accordingly claimed deduction in respect of profits of business of the said undertaking u/s. 10A of the Act. Accordingly, deduction of Rs. 3,53,52,679 u/s. 10A of the Act was claimed by the assessee in relation to profits earned by tile STPI unit. 5. The assessment was completed computing an income of Rs. 2,33,07,708. In dong so, the Assessing Officer made an addition of Rs. 1,08,39,448 on account of arm's length price (ALP) of international transactions entered into by the assessee with its Associated Enterprises (AEs) in respect of software design, development and maintenance services, pursuant to the order dated 26.10.2009 passed by the Transfer Pricing Officer (TPO). The AO also made an addition of Rs. 16,05,774 on account of re-computation of deduction claimed u/s. 10A of the Act. Aggrieved by the draft assessment order, the assessee filed its objections before the Dispute Resolution Panel (DRP). The DRP upheld the order passed by the AO. Consequently, the....
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.... upper limit of Rs. 200 crores by applying the turnover filter, as is consistently being held by this Hon'ble Tribunal. 5.7 That, Geometric Software Solutions Co. Ltd. ought to stand rejected in view of its related party transactions exceeding 15% of its sales." 14. The ld. counsel for the assessee submitted that due to inadvertence and oversight, it had not raised specific grounds seeking the rejection of the above comparables. It was submitted that consideration of the aforesaid additional grounds will not require examination of any additional evidence and the assessee is entitled to raise the same. 15. The learned DR strongly objected to admission of above additional grounds and submitted that in case these were admitted, the comparability of the concerned companies has to be referred back to the AO/TPO for verification afresh. 16. After considering the averments of the counsels with regard to admission of additional grounds, we find force in the contention of the learned AR that by virtue of Special Bench decision in the case of M/s Quark Systems Pvt. Ltd (Supra), assessee can raise additional grounds seeking exclusion of comparables selected by it or not obje....
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....tionally 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 I T 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 submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contra....
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....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 be excluded as comparables." 12. The facts and circumstances under which the aforesaid companies were considered as comparable are identical in the case of the Assessee as well as in the case of Trilogy E-Business Software India Pvt. Ltd. (supra). Respectfully following the decision of the Tribunal referred to above in the case of Tril....
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....purpose of comparability analysis, it is essential that the characteristics and the functions are by and large similar as that of the assessee company and T.P. analysis/study can be made with fewest and most reliable adjustment. If a company has employed heavy capital in development of a product then profitability in the sale of product would be entirely different from the company, who is involved in service sector. Therefore, this company cannot be treated as having same function and profitability ratio. In our view, due to non-availability of full information about the segmental details as to how much is the sale of product and how much is from the services, therefore, this entity cannot be taken into account for comparability analysis for determining arms length price in the case of the assessee." ......... 7.4 Infosys Technologies Ltd.: The parameter for identifying comparable entity has to be seen from the angle of functions formed by the company, size of the company in terms of the sale revenue, stage of business cycle and company's growth cycle. In the case of Infosys, there are huge intangible assets which as per the information provided ....
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....unal in the case of Telcordia Technologies India Private Ltd. (supra) wherein on the aforesaid two companies, the Tribunal held as follows:- "7.6 Flextronics Software Systems Ltd. ........... 7.7. Tata Elxsi Limited.: From the facts and material on record and submissions made by the learned AR, it is seen that the 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 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 fit for comparability analysis for determining the arms length price for the assessee, hence, should be excluded from the list of comparable parties." 15. In view of the above, the ld. counsel for the assessee fairly admitted that comparable company at Sl.No.6 viz., Flextronics S....
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....nce between the transactions compared or the enterprises entering into such transaction, which are likely to materially affect the price or cost charged or paid or profit arising from such transaction in the open market. Further it is also necessary to see that wherever there are some differences such differences should be capable of reasonable accurate adjustment in monetary terms to eliminate the effect of such differences. It was his submission that size was an important facet of the comparability exercise. It was submitted that significant differences in size of the companies would impact comparability. In this regard our attention was drawn to the decision of the Special Bench of the ITAT Chandigarh Bench in the case of DCIT v. Quark Systems Pvt. Ltd. 38 SOT 207, wherein the Special Bench had laid down that it is improper to proceed on the basis of lower limit of 1 crore turnover with no higher limit on turnover, as the same was not reasonable classification. Several other decisions were referred to in this regard laying down identical proposition. We are not referring to those decisions as the decision of the Special Bench on this aspect would hold the field. Reference was al....
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...., we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which arc loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet & Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs. 1.0....
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....ion of Arm's length price in an international transaction and it provides:- (1) that the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely :- (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board. (2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed: Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices: Provided further that if the variation between the arm's length price so determined and price at which the international transacti....
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....erred to in sub clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction. (2) For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual te....
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.... the category of companies in the range of turnover between 1 crore and 200 crores (as laid down in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010). Thus, companies having turnover of more than 200 crores have to be eliminated from the list of comparables as laid down in several decisions referred to by the ld. counsel for the assessee. Applying those tests, the following companies will have to be excluded from the list of 26 comparables drawn by the TPO viz., Turnover Rs. (1) Flextronics Software Systems Ltd. 848.66 crores (2) iGate Global Solutions Ltd. 747.27 crores (3) Mindtree Ltd. 590.39 crores (4) Persistent Systems Ltd. 293.74 crores (5) Sasken Communication Technologies Ltd. 343.57 crores (6) Tata Elxsi Ltd. 262.58 crores (7) Wipro Ltd. 961.09 crores. (8) Infosys Technologies Ltd. 13149 crores." 18. Respectfully following the aforesaid decision of the Tribunal in the case of Trilogy E-Business Software India Pvt.Ltd. (supra), we hold that the following companies should be excluded from the list of comparable companies. (1) ....
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.... - 5% range permitted under second proviso to Sec.92CA(2) of the Act and therefore the addition made by the TPO and confirmed by the DRP needs to be deleted. Accordingly the same is deleted. The relevant grounds of appeal of the Assessee are allowed." 23. Respectfully following the decision of the coordinate Bench of this Tribunal in the case of Cypress Semiconductor India P. Ltd. (supra), we direct that the companies viz., Aztech Software Ltd. and Megasoft Ltd. wherein the related party transactions exceed 15% be excluded from the list of comparables chosen by the TPO. 24. As regards Geometric Solutions Ltd., since the assessee has raised additional ground before the Tribunal, we set aside the issue to the file of the Assessing Officer to examine whether Geometric Solutions Ltd. exceeds 15% RPT, following the decision in case of Cypress Semiconductor India P. Ltd. (supra) / M/s. Quark Systems India (P) Ltd., (2011) 62 DTR 0182. 25. Thus, after exclusion of the above 13 comparables, according to the assessee, the arithmetic mean of the remaining 7 comparables would be as follows:- 26. The assessee submitted that +/- 5% of the arithmetical mean for software development s....
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....djustment as computed by the TPO, the AO/TPO erred in not considering the advances received from the customers as part of trade payables in determination of working capital adjustment and thereby erred in not providing an appropriate adjustment towards working capital. It was submitted that in the TP order, the TPO has determined the arm's length markup as 20.08% (after working capital adjustment of 0.59%) for software development services provided by the assessee. However, the TPO has not considered advances from ARM Ltd. UK and ARM Inc., USA in computation of the working capital adjustment. 32. It was further submitted that the TPO has considered the assessee's trade payables as on March 31, 2006 at Rs. 53,56,602 and as on April 1, 2006 at Rs. 11,79,063. The TPO has thereby not considered the advances received from ARM Ltd. UK amounting to Rs. 13,62,30,811 as on March 31, 2006 and Rs. 6,27,66,411 as on April 1, 2005 (schedule 8A of audited financial statements - Current Liabilities). The assessee's contention is that it receives compensation for their contractual services in advance and subsequently adjusts these advances against the invoices raised. Given that the assessee is....
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....d from total turnover. On the alternative submission, reliance was placed upon the decision of the Hon'ble High Court of Karnataka in CIT v. Tata Elxsi Ltd [2012] 349 ITR 98 (Kar). In this judgment, it has been held that whatever is excluded from the export turnover, has also to be excluded from the total turnover. Accordingly, we direct the AO to recompute the deduction u/s. 10A in respect of travel expenses and telecommunication charges by reducing the same from total turnover also. 36. In the result, the appeal by the assessee is partly allowed for statistical purposes. A.Y. 2007-08 37. The assessee filed its return of income for the relevant assessment year 2007-08 on 29.10.2007 declaring a total income of Rs. 40,47,198 and a tax liability of Rs. 13,62,288 (including interest of Rs. 21,585). 38. The assessee carried on software design, development and maintenance activities during the previous year from the undertaking registered with the STPI Authorities. The assessee claimed deduction of Rs. 9,12,57,120 u/s. 10A of the Act in relation to profits earned by tile STPI unit. 39. The assessment was completed computing an income of Rs. 6,36,40,660. In dong so, the As....
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....nd rejected in view of their turnovers being Rs. 747.27 crores, Rs. 590.35 crores and Rs. 343.57 crores respectively, and thus beyond the upper limit of Rs. 200 crores by applying the turnover filter, as is consistently being held by this Hon'ble Tribunal. 9. That Persistent Systems Ltd. ought to stand rejected in view of it being functionally dissimilar to the Appellant and also in view of its turnover being Rs. 293.75 crores and thus beyond the upper limit of Rs. 200 crores by applying the turnover filter, as is consistently being held by this Tribunal." 47. The ld. counsel for the assessee submitted that due to inadvertence and oversight, it had not raised specific grounds seeking the rejection of the above comparables. It was submitted that consideration of the aforesaid additional grounds will not require examination of any additional evidence and the assessee is entitled to raise the same. 48. The learned DR strongly objected to admission of above additional grounds and submitted that in case these were admitted, the comparability of the concerned companies has to be referred back to the AO/TPO for verification afresh. 49. After considering the averments of ....
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....I Division does the business of product software. This company develops packaged products for the wireless and convergent telecom industry. These products are sold as packaged products to customers. While implementing these standardized products, customers may request the company to customize products or reconfigure products to fit into their business environment. Thereupon the company takes up the job of customizing the packaged software. The company also explained that 30 to 40% of the product software 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 ....
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....ystems 30.55% 20.12% 3. R Systems 15.07% 9.64% 4. Sasken Communication 22.16% 10.57% 5. Tata Elxsi 26.51% 26.47% 29. In case of all the above comparables, the learned TPO has used segmental margins for comparability purpose. In all these cases, the revenues from software development exceeded 75% of the total revenues of the entity. Considering margins of Megasoft at the entity level would be inconsistent with the TPO's position in case of other comparables. It was submitted that a different approach was adopted in case of Megasoft possibly because in case of Megasoft, the margins at the entity level are higher than that at the segment level; whereas in case of other comparables (Eg: Kals, Sasken, Tata Elxsi, Geometric, R Systems) margins at the segment level were higher. It was submitted that learned TPO's approach is arbitrary and without basis. The Assessee therefore submitted that if at all Megasoft is considered as comparable then only the segmental margins, if at all, should be used for comparability purpose. Both the segments being substantially different, considering the margins at entity level would vitiate the comparabilit....
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....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 approach should be to eliminate both and not consider only the high or low margin comparables as i....
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....D guidelines but cannot be said to be in tune with Indian TP regulations. However, if there are specific reasons for abnormal profits or losses or other general reasons as to why they should not be regarded as comparables, then they can be excluded for comparability. It is for the Assessee to demonstrate existence of abnormal factors. 36. In the present case factors for abnormal profits have not been highlighted by the Assessee. In such circumstances it is not possible to accept the submission of the Assessee to exclude this company for the purpose of comparison. 37. The next plea of the Assessee is that if at all this company is considered as a comparable then the segmental margin of 23.11% (which is the margin for software service segment) alone should be considered for comparability. On the above submission, we find that the TPO considered the segmental margin (Software service segment) in the case of Geometric, Kals Info systems, R Systems, Sasken Communication and Tata Elxsi. Before DRP the Assessee pointed out that the segmental margin of 23.11% alone should be taken for comparability. The DRP has not given any specific finding on the above plea of the Asses....
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....ng to the Megasoft as a result of the existence of the software product segment and no finding has been given that reasonably accurate adjustments can be made to eliminate the material effects of such differences. For this reason, we are inclined to hold that the profit margin of 23.11% which is the margin of the software service segment be taken for comparability. In view of the above conclusion, we do not wish to go into the question as to whether 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." 51. Respectfully following the decision of this Tribunal in the case of Logica Pvt. Ltd., (supra), we are of the view that only software services segment margin of the comparable, Megasoft Ltd., is to be considered. 52. It was next contended by the ld. counsel for the assessee that the following 9 companies of the TPO's list of comparables have to be rejected as functionally dissimilar to that of the assessee company in view of the decision of this Tribunal in the case of NXP Semiconductors India P. Ltd. v. ACIT in ITA No.1174/Bang/2010:- ....
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.... that these companies are- 1) Accel Transmatic 2) Avani Cimcon Technologies Ltd. 3) Celestial Labs Ltd. 4) KALS Information Systems Ltd. 19. The Tribunal in the case of Trilogy E-Business Software India Pvt.Ltd., while considering the issue of improper selection of comparables has held as under: "(b) Avani Cimcon Technologies Ltd. 39. As far as this company is concerned, the plea of the Assessee has been that this company is functionally different from the assessee. Based on the information available in the company's website, which reveals that this company has developed a software product by name "DXchange", it was submitted that this company would have revenue from software product sales apart from rendering of software services and therefore is functionally different from the assessee. It was further submitted that the Mumbai Bench of the Tribunal to the decision in the case of Telcordia Technologies Pvt. Ltd. v. ACIT - ITA No.7821/Mum/2011 wherein the Tribunal accepted the assessee's contention that this company has revenue from software product and observed that in the absence of segmental details, Avani Cincom can....
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....s company is concerned, the stand of the assessee is that it is absolutely a research & development company. In this regard, the following submissions were made:- i. In the Director's Report (page 20 of PB-Il), it is stated that "the company has applied for Income Tax concession for in-house R&D centre expenditure at Hyderabad under section 35(2AB) of the Income Tax Act." ii. As per the Notes to Accounts - Schedule 15, under "Deferred Revenue Expenditure" (page 31 of PB-II), it is mentioned that, "Expenditure incurred on research and development of new products has been treated as deferred revenue expenditure and the same has been written off in 10 years equally yearly installments from the year in which it is incurred." An amount of Rs. 11,692,020/- has been debited to the Profit and Loss Account as "Deferred Revenue Expenditure" (page 30 of PB-II). This amounts to nearly 8.28 percent of the sales of this company. It was therefore submitted that the acceptance of this company as a comparable for the reason that it is into pure software development activities and is not engaged in R&D activities is bad in law. 43. Further reference was a....
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....herefore cannot be considered as comparable functionally with that of the Assessee. There has been no attempt made to identify and eliminate and make adjustment of the profit margins so that the difference in functional comparability can be eliminated. By not resorting to such a process of making adjustment, the TPO has rendered this company as not qualifying for comparability. We therefore accept the plea of the Assessee in this regard.' " 44. It was submitted that the learned DR in the above case vehemently argued that this company is into research in pharmaceutical products. The ITAT concluded that this company is owner of IPR, it has software for discovery of new drugs and has developed molecule to treat cancer. In the ultimate analysis, the ITAT did not consider this company as a comparable in clinical trial segment, for the reason that this company has diverse business. It was submitted that, however, from the above extracts it is clear that this company is not into software development activities, accordingly, this company should be rejected as a comparable being functionally different. 45. From the material available on record, it transpires that the TPO h....
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....made by the Assessee and the fact that this company was basically/admittedly in clinical research and manufacture of bio products and other products, there is no clear basis on which the TPO concluded that this company was mainly in the business of providing software development services. We therefore accept the plea of the Assessee that this company ought not to have been considered as comparable." 55. As regards Accel Transmatics Ltd., for A.Y. 2006-07 we have already held in paras 17 & 18 hereinabove that this company is to be excluded as a comparable. However, for the present AY 2007-08, since with regard to comparability of Accel Transmatics Ltd. as functionally dissimilar, the assessee has raised additional ground before the Tribunal, we therefore set aside the issue to the file of the Assessing Officer to examine whether it is functionally dissimilar, following the decision in case of M/s. Quark Systems India (P) Ltd., (2011) 62 DTR 0182. 56. Respectfully following the decision of the Tribunal in the case of NXP Semiconductors India Pvt. Ltd. (supra), we direct the AO/TPO to exclude the 2 companies viz., Avani Cincom Technologies Ltd. and Celestial Labs. from the final....
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.... 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.1961(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 learned Departmental Representative supported the inclusion of this company in the list of comparables by the TPO. 14.4 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the list of comparbales only on the basis of the statement made by the company in its reply to the notice under section 133(6) of the Act. It appears that the TPO has not examined the services....
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.... 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 that since the income of this company includes income from sale of licenses, it ought to be rejected as a comparable for software development services. In the case on hand, the assessee is rendering software development services. In this factual view of the matter and following the afore cited decision of the Pune Tribunal (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand. 17. ......... ....
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.... (iv) The TPO has applied the filter of excluding companies having peculiar economic circumstances. Quintegra fails the TPO's own filter since there have been acquisitions in this case, as is evidenced from the company's Annual Report for F.Y. 2007-08, the period under consideration. The learned Authorised Representative prays that in view of the submissions made above, it is clear that inter alia, this company i.e. Quintegra Solutions Ltd. being functionally different and possessing its own intangibles / IPRs, it cannot be considered as a comparable to the assessee in the case on hand and therefore ought to be excluded from the list of comparables for the period under consideration. 18.2 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the set of comparables to the assessee for the period under consideration. 18.3.1 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details brought on record that this company i.e.Quintegra Solutions Ltd. is engaged in product engineering services and is not purely a software development servi....
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....tance, the plea set up by the assessee is that both the aforesaid 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....
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....e IT Services segment. At the time of hearing, neither is there 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 pricin....
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....g Rs. 200 crores, following the decisions of Trilogy E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011) and Cypress Semiconductor India P. Ltd. v. DCIT, ITA No.1167/Bang/2010 dated 27.03.2015. 62. As far as comparable chosen by the TPO viz., M/s. Infosys Technologies Limited, Tata Elxsi Ltd. (Seg.) & Wipro Limited are concerned, the ld. counsel for the assessee submitted that these companies have to be excluded on application of more than one filter. These companies are functionally dissimilar in view of the decision of this Tribunal in the case of NXP Semiconductors India Pvt. Ltd. (supra) and M/s. Curam Software International Pvt. Ltd. Vs. ITO ITA No.1280/Bang/2012 for AY 08-09 order dated 31.7.2013, wherein it was held that the aforesaid companies are not comparable companies in the case of software development services provider. The following were the relevant observations in the case of M/S.Curam Software International Pvt.Ltd.(supra):- "12. (4) Infosys Technologies Ltd. 12.1 This was a comparable selected by the TPO. Before the TPO, the assessee objected to the inclusion of the company in the set of comparables, on the grounds of turnover and bra....
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....sessment Year 2007-08 is applicable to this year also. The argument put forth by assessee's is that Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the break up of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. It is ordered accordingly. 13.0 (5) Wipro Limited 13.1 This company was selected as a comparable by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the list of comparables or several grounds like functional dis-similarity, brand value, size, etc. The TPO, however, brushed aside the objections of the assessee and included this company in the set of comparables. 13.2 Before us, the assessee contended that this company is functionally not comparable to the assessee for several reasons, which are as under : (i) This company owns significant intangibles in the nature of customer related intangibles and technology related intangibles and quoted extracts from t....
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.... on several counts like, functional dis-similarity, significant R&D activity, brand value, size, etc. The TPO, however, rejected the contention put forth by the assessee and included this company in the set of comparables. 14.2 Before us, it was reiterated that this company is not functionally comparable to the assessee as it performs a variety of functions under the software development and services segment namely (a) Product design services (b) Innovation design engineering and (c) visual computing labs. In the submissions made the assessee had quoted relevant portions from the Annual Report of the company to this effect. In view of this, the learned Authorised Representative pleaded that this company be excluded from the list of comparables. 14.3 Per contra, the learned Departmental Representative supported the stand of the TPO in including this company in the list of comparables. 14.4.1 We have heard both parties and carefully perused and considered the material on record. From the details on record, we find that this company is predominantly engaged in product designing services and not purely software development ....
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....dinate Bench of this Tribunal in the case of Cypress Semiconductor India P. Ltd. (ITA No.1167/Bang/2010 dated 27.03.2015). Accordingly, for the present AY 2007-08 also, the issue is set aside to the file of the Assessing Officer with similar observations. 65. With respect to exclusion of Ishir Infotech Ltd. as a comparable, the ld. counsel for the assessee submitted that it has to be rejected as failing the TPO's own filter of 25% employee cost. Reliance was placed on the decision of this Tribunal in the case of NXP Semiconductors India Pvt. Ltd. (supra), wherein it was held as follows:- "20. 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 the aforesaid companies are not comparable companies in the case of software development services provider. The nature of services rendered by the Assessee in this appeal and the Assessee in the case of First Advantage Offshore Services Pvt.Ltd.(supra) are one and the same.....
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....termine whether the NCP margin of the assessee company would be within the range of + / - 5% of the arithmetical mean and if so, the TP adjustment made by the TPO is liable to be set aside. Accordingly we set aside the issue to the file of AO for determination of NCP margin. 70. The next issue that arises for consideration is with respect to inclusion of reimbursement of expenses in the operating cost as well as operating revenue of the assessee company. The TPO has included the reimbursement of expenses received amounting to Rs. 2,935,123/- as part of the cost base for applying the adjusted operating cost plus markup. In this regard, the assessee submitted that the reimbursement of expenses received by the Company was incurred by it on behalf of its AEs, following the policy of reimbursing such expenses on cost to cost basis and no services have been rendered by the assessee in relation to the reimbursements, therefore, reimbursements purely relate to third party expenses incurred on behalf of the AEs. It was submitted that the Company had received reimbursement of these expenses at cost from its AEs and consequently, the amount received/receivable is deemed to be the arm's len....
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....se of assets or for incurring expenses, but ultimately such an advance is utilized towards performing contractual services. Therefore, it was the submission of the ld. counsel for the assessee that the advances received from its AEs should be considered as a part of trade payables in computation of working capital adjustment. The workings for average trade payables furnished by the assessee are as follows:- 75. Accordingly, the working capital adjusted arm's length mark-up for the 26 comparables selected by the TPO would be 20.38% (after working capital adjustment of 3.33%) for software development services provided by the assessee. Based on the remaining 7 out of the 26 comparables selected by the TPO, the assessee's margin of 11.48% is within the +/- 5% of the working capital adjusted mean of 10.43% as computed by the TPO. If the working capital adjustment is computed by including "Advances received from AEs" as part of trade payables, the working capital adjusted mark-up for the above 7 comparables would be even lower. 76. We are of the opinion that advances received from AEs should be considered as a part of trade payables in the computation of working capital adjustment.....
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....atabase Markup on Total Cost With Adjs. Markup on Total Cost Aztec Software & Technology Services Ltd. Prowess Blue Star Infotech Ltd. 9% 10% Prowess CG-V A K Software & Exports Ltd. 23% 20% Prowess 3% -2% California Software Co. Ltd. Prowess 9% 6% Compucom Software Ltd. Prowess 20% 19% E.Star Infotech Ltd. Prowess 19% 12% FCS Software Solutions Ltd. Prowess Goldstone Technologies Ltd. 13% 11% Prowess 7% KPIT Cummins Infosystems Ltd. 5% Prowess 14% 12% Larsen & Toubro Infotech Ltd. Prowess 8% 6% Mascon Global Ltd. Prowess 8% Mastek Ltd. 5% Prowess 20% Megasoft Ltd. 19% Prowess -4% Melstar Information Technologies Ltd. -11% Prowess 2% 1% NIIT Technologies Ltd. Prowess 20% Netvista Information Technology Ltd. 17% Prowess 17% 12% Ontrack Systems Ltd. Prowess 4% 1% Orient Information Technology Ltd. Prowess 15% 14% Document 2 Pentamedia Graphics Ltd. Prowess 21% 9% Satyam Computer Services Ltd. Prowess 28% 26% Shree Tulsi Onlin....
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....19 Lanco Global Solutions Ltd. 5.27% 5.71% 20 Flextronics Software Systems Ltd. 27.24% 27.74% ARITHMETIC MEAN 20.68% 20.08% Document 4 Arm's Length Mean Margin Less: Working Capital Adjustment 20.68% 0.60% Adjusted mean margin of the comparables 20.08% Operating Cost(Rs. 22,15,09,454 plus reimbursement 22,58,80,632/- received of Rs.43,71,178) Arms Length Margin (20.08% of Operating Cost) Arms Length Price (ALP) 120.08 % of Operating Cost 27,12,37,463/- Price Received ( Rs.24,70,26,837/- plus reimbursement 25,13,98,015/- received of Rs.43,71,178) Short fall being adjustment u/s. 92CA 1,98,39,448/- Document 5 Sl. Name of the Company No. Margin Margin - Unadj. WC % adjusted 1 2 3 Bodhtree Consulting Ltd. Lanco Global Solutions Ltd. Mediasoft Solutions P. Ltd. 15.99% 15.81% 5.27% 5.71% 6.29% 5.03% 4. R Systems International Ltd. 22.20% 21.17% 5. RS Software (India) Ltd. 15.69% 16.10% 6 SIP Technologies & Exports Ltd. 3.06% 1.94% 7 Synfosys Business Solutions Ltd. 10.61% 8.21% ARITHMETIC MEAN 11.30% ....