AI Drafter 
TaxTMI 
TaxTMI 
2020 (6) TMI 237
X X X X Extracts X X X X
X X X X Extracts X X X X
....extent prejudicial to the Appellant, is bad in law and liable to be quashed. [corresponding to original grounds of appeal ("GoA") No. 1] 2) The CIT(A) erred in not deleting the entire adjustment made to the arm's length price of the international transactions by the AO amounting to INR 114,032,864 in respect of software development services ("SWD") segment and INR 4,601,438 with respect to information technology services ("ITeS") segment. [corresponding to original GoA No. 2] 3) (i). The Ld. CIT(A) erred in law and on facts in upholding the comparability analysis performed by the Ld. Transfer Pricing Officer ("TPO") in its TP Order and thereby wrongly upholding inclusion of various comparable in IT and ITeS segments which are functionally dissimilar. [corresponding to original GoA No. 3(a)] (ii). The Ld. CIT(A) erred in applying related party transaction filter at zero percent instead of 15% filter which has been upheld by Jurisdictional Income tax Appellate Tribunal in various cases. [corresponding to original GoA No. 3(b)] (iii) The Ld. CIT(A) erred in law and on facts in upholding the comparability analysis performed by the Ld. TPO, who fa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....in view of the pending SLP before the Hon'ble Supreme Court. 4. On the facts and in the circumstances of the case the learned CIT(A) erred in holding that the assessee is eligible for a standard deduction of 5% from the Arm's Length price under the provisio to Section 92C(2) of the Act. 5. On the facts and in the circumstances of the case the learned CIT(A) erred in holding that the TPO ought to have excluded comparables having any related party transactions, not only those with more than 25% related party transactions of sales 6. The CIT(A) erred in holding that the size, turnover & brand of the company are deciding factors for treating a company as a comparable, and accordingly erred in excluding M/s Infosys technologies Ltd & M/s Wipro Ltd (Seg.) in software development segment and Infosys BPO Ltd and Wipro Ltd (seg.) in ITES segment as comparables. 7. The Ld. CIT(A) erred in holding that profit on cost of more than 50% of the comparable company(ies) is abnormal without giving reasons how functions discharged, assets deployed and risks assumed of such companies were different from the appellant company. 8. On the facts and in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... charges 3,60,474/- Provision of technical and customer support services 3,04,54,765/- Reimbursement of expenses paid 4,27,042/- Ld.TPO observed that, assessee used TNMM as most appropriate method for software development services and technical and customer support services (hereinafter known as ITES services) and OP/TC as PLI for computing the margin under these segments. Assessee computed 10% to be its margin for both segments under dispute. 2.3. For software development segment, assessee used 18 comparables with average margin of 13% and 4 ITES segment assessee used 12 comparables with average margin of 12%. Thus, it is held the price to be at arm's length. Ld.TPO rejected the transfer pricing analysis carried out by assessee as according to him it suffered certain defects. Ld.TPO thus applied various filters to reject comparables selected by assessee. 2.4. Ld.TPO selected new set of comparables under both segments as under: Software Development Segment Sl. No. Comparables Margin Margin 1. Allsec Transmatic Ltd (SEG) 18.91% 2. Avani Cincom Technologies Ltd 49.97% 3. Celestial Labs Ltd 53....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 26. HCL Comnet Ltd 43.16% 27. Nittyan Outsourcing Ltd 9.62% Average Margin 26.62% 2.6. Ld.TPO thus computed proposed adjustment being difference between the margins towards arm's length price of the transactions as under: Particulars Proposed Adjustment Software Development Service segment Rs. 11,40,32,864/- ITES Segment Rs. 46,01,438/- Aggrieved by proposed adjustment, assessee preferred appeal before the Ld.CIT(A). Ld.CIT(A) upheld objection regarding inclusion of certain comparables under both segments. Against order passed by Ld.CIT(A), both assessee as well as revenue are in appeal. 3. At the outset Ld.Counsel submitted that, in revised grounds of appeal, Assessee seeks exclusion/inclusion of following comparables under both segments: Software Development Segment Comparable Sought for Exclusion: • Avani CincomTechnologies • KALS Information Systems Ltd • Lucid Software Ltd • e-Zest Solutions Ltd • Thirdware Solutions Ltd. • Persistant Systems Ltd., ITES segment Comparables Sought for Exclusion: • Vishal Information....
X X X X Extracts X X X X
X X X X Extracts X X X X
....services between NetApp India and AE, NetApp India works on cost plus 5% basis. 4.2 Assets As is common in the case of software service provider companies, the technical manpower employed and trained by a company is its most important asset. Taxpayer also deploys well qualified workforce in its business. The taxpayer also owns computers, software etc which are essential to the business of a software development company. The asset profile of the company is given as under in the TP Report As per the taxpayer, NetApp India does not own any significant intangibles and does not undertake any significant Research and Development on its account that leads to the development of non-routine intangibles. NetApp India uses the trademarks, process, know-how, technical data software, operating / quality standards etc. developed /owned by NetApp Group. All companies of the Group leverage from these intangibles for continued growth in revenues and profits. Accordingly, NetApp India does not own any significant non-routine intangibles. 4.3 Risks It is claimed that being a captive service provider and being compensated on Cost plus mark-up basis, the tax....
X X X X Extracts X X X X
X X X X Extracts X X X X
....th assessee. He it has been submitted that, revenue from software development is more than 75% and earns its revenue from software services and products for which there is no segmental details available. Ld. Counsel submitted that, this company was excluded by this Tribunal in assessee's own case for assessment year 2006 - 07 and 2008-09 (supra). Ld.CIT DR on the contrary placed reliance upon orders passed by Ld.CIT (A) and supported for its inclusion. We have perused submissions advanced by both sides in light of records placed before us. It is observed that, besides the objections by assessee, this company is engaged in providing training. Further, for assessment year immediately preceding year under consideration this Tribunal excluded this company for very same reasons. Revenue has not brought anything contrary on record to show that there is any change in financials of this comparable for year under consideration vis-a-vis assessment year 2006-07 & 2008-09. We therefore do not find any reason to deviate from view taken by this Tribunal in assessee's own case. Respectfully following the same, we direct Ld. AO/TPO to exclude this comparable from the finalist. b) L....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mpany ought to be excluded from the list of comparables on the ground that it is functionally different to the assessee. He submitted that this company is engaged in 'e-Business Consulting Services', consisting of Web Strategy Services, I T design services and in Technology Consulting Services including product development consulting services, and 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, and does not contain detailed descriptive information on the business of the company. It is also submitted 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. In support of, he placed reliance on decision of co-ordinate bench of this Tribunal in case of Hewlett Packard (I) Ltd., Vs. DCIT in ITA No. 1031/Bang/2011. On the contrary, Ld. DR supported the inclusion of this company in the list of comparables by the TPO. We have heard the rival submissions and perused and carefully considered material on record. I....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s company. Even growth of software industry for previous year as per NASSCOM was 32%. The growth rate of this company was double the industry average. In view of the above, it was argued that this company ought to have been rejected as a comparable. It was observed by this Tribunal in case of Telcordia Technologies Pvt. Ltd. v. ACIT (supra) that margin of this company is 52.59% which represents abnormal circumstances and profits. Following figures were relied by Ld.Counsel, as observed by coordinate bench of this Tribunal in case of First Advantage Offshore Services Pvt. Ltd., Vs DCIT (supra):- Particulars 05-06 06-07 07-08 08-09 Operating Revenue 21761611 35477523 29342809 28039851 Operating Expns. 16417661 23249646 23359186 31108949 Operating Profit 5343950 12227877 5983623 (3069098) Operating Margin 32.55% 52.59% 25.62% - 9.87% It is also been submitted that, in assessee's own case for assessment year 2008-09 this company was excluded for similar reasons. Revenue has not been able to place on record any details contrary to the observations made by this Tribunal for assessment year 2008-09 and theref....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y be omitted from the list of comparables for the period under consideration in the case on hand. (f). Persistent Systems Ltd. Ld.Counsel submitted that, this comparable has been included by Ld.TPO, however in assessee's own case for assessment year 2008-09 this Tribunal in ITA No.5401/Del/2012 directed exclusion of the same on the ground that it is functionally different with that of assessee. Ld.Counsel submitted that, there is lack of segmental accounting in the financials of this company. He also submitted that there are no bifurcations between the services rendered by this company. This Tribunal while considering this comparable for assessment year 2008 - 09(supra) has observed that during the relevant assessment year company developed its own software products, and its revenue included licensing of software products. Ld. CIT, DR submitted that this company is into software services and products. And segmental accounting of software services and products are available for the year under consideration. We have perused the submissions on the basis of the records. It is observed that, assessee has developed software during the year, and has earned royalties from sale ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....om the view taken by this Tribunal in assessee's own case. Respectfully following the same, we direct Ld. AO/TPO to exclude this comparable from the finalist. 4.2. Ground no.6: This ground is against non granting of adjustment on account of risk profile. 4.2.1. It has been submitted that assessee is a low risk bearing company and therefore while computing risk adjustment risks assumed by the comparables for earning revenue in the particular segment needs to be analysed. Assessee is directed to provide for necessary details in respect of all comparables finally selected. Ld.AO/TPO shall then compute the risk as adjustment in accordance with law. 4.2.2. In the light of aforestated observations and directions, the transfer pricing issues raised by assessee is set aside to Ld.AO/TPO. Ld.AO/TPO is directed to pass a detailed order by considering all the submissions advanced by assessee in respect of each objections raised therein. Ld.AO/TPO shall granted proper opportunity to assessee of being represented as per law. Accordingly this ground raised by assessee stands allowed for statistical purposes. 4.3. Ground no.7 is against erroneous computation of working capital a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....has been consistently following the turnover limit of 1 to 200 crores in our view these comparables do not satisfy the criteria. We also note that these comparables have been examined by this Tribunal in a series of decision and has been excluded for having huge turnovers, owning huge intangibles and brand which makes it not comparable with a captive service provider like that of assessee. Accordingly, we do not find any infirmity in exclusion of these comparables. We, therefore, direct Ld. AO/TPO to exclude, Wipro Ltd, Infosys Technologies Ltd., Infosys BPO Ltd., from both segments. Accordingly, ground No.6-7 raised by revenue stands dismissed. 7. Ground no.5 along with Ground no.3(ii) of assessee's appeal: 7.1. Ld.CIT DR submitted that, various comparables under both segments have been excluded by Ld.CIT(A) for not satisfying RPT of 0%. He submitted that, different range of filter cannot be adopted by Ld.CIT(A) when Ld.TPO applied RPT filter being less than 25%. Assessee raised ground before Ld.CIT(A) that threshold for RPT should be 15% in view of various decisions passed by this Tribunal. It is observed that, Ld.CIT(A) rejected various comparable for not satisfyi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ies are of very small volume and integrally connected with functions of providing software services. On the contrary, Ld.CIT.DR submitted that there is no related party transaction during the year under consideration. We have heard the rival submissions of both sides in the light of records placed before us. We find from Annual report of this company placed in paper book that schedule of Income indicates its operating revenue from software development, hardware maintenance, information technology, consultancy etc. There is no segmental information available as regards revenue from sale of products and revenue from software development segment. As assessee is simply engaged in rendering software development services and there is no sale of any software products, this company, in our considered opinion, ceases to be comparable. It is obvious that from common pool of income from both streams of software products and software services, one cannot deduce revenue from software services and no one knows impact of revenue from Products on overall kitty of profit, which may be significant. Since no segmental data of this company is available indicating operating profit from soft....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ch laboratories for carrying out further R & D activities to develop new candidates' drug molecules and license them to Interested Pharma and Bio Companies across the GLOBE. The proposed Facility will be set up in Genome Valley at Hyderabad in Andhra Pradesh.' Further, reference was made to decision of this Tribunal in assessee's own case for AY 2008-09 in which company was excluded. According to Ld.CIT DR, this company is in the field of research in pharmaceutical products and should be considered as comparable. We have perused submissions advanced by both sides in light of records placed before us. As rightly submitted by Ld.Counsel, discovery is in relation to software discovery of new drugs. Moreover, the company also owns IPR. As explained earlier it is a diversified company and therefore cannot be considered as comparable functionally with that of the Assessee. We therefore accept the plea of the Assessee in this regard. Further for assessment year immediately preceding the year under consideration this Tribunal excluded this company for very same reasons. Revenue has not brought anything contrary on record to show that there is any change in financials of this co....