TaxTMI 
TaxTMI 
2017 (4) TMI 1511
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....n the Financial year 2011-12 and ought to have held that the following companies are not comparable as their turnover was in excess of Rs. 500 Crores. i. Mindtree Limited {segmental} (1255.8 Cr) ii. Larsen & Turbo Infotech Ltd (2959.5 Cr) iii. Persistent Systems Ltd (810.36 Cr) 2.2 The Hon'ble DRP ought to have appreciated that even the Safe Harbour Rules are treating companies with turnover of Rs. 500 crores as a separate class. 3. Companies having diverse activities and hence not comparable with the Appellant. The LTPO/Hon'ble DRP ought to have appreciated that the following companies having regard to the diverse nature of functions could not be compared to the appellant which renders simple software coding services to its associated enterprise. i. Thirdware Solutions Limited ii. Acropetal Technologies Limited iii. Spry Limited 4. Comparables accepted by the Learned TPO but excluded by the Hon'ble DRP The Hon'ble DRP erred in incorrect reasoning and inconsistent positions in regard to their own positions elsewhere in the order and excluding the following comparables which have been ....
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.... ISS Group and its nominees since 2007 and engaged in design and development of the software used in rendering the services to the Shipping Industry by the ShipNet and ISS group. ShipNet has been promoting the integrated solution as the key value for buying the ShipNet products. 3.0. During the previous year relevant to the AY 2012-13, the assessee has entered into the international transaction with the AE for an amount of Rs. 22.52 Cr. as under: Sl. No. Name of the Associated enterprise Description of the transactions Amount (In Rs) 1 JSS Group Holdings Software Development services 7,16,13,370 2 Shlpnet As, Norwa 15,16,33,240 3 ISS Group Holdings, UK Miscellaneous Expenses 3,11,454 4 Inchcape Shipping Services (Dubai) LLC, UAE Reimbursement of expenses 62,821 5 Inchcape Shipping Services (UK) Limited 3,59,305 6 ISS UK Hub Office, UK 6,37,081 7 Shipnet Asia Pte Ltd, Singapore 1,06,800 8 Shipnet As-Norway 3,46,889 9 ISS Shipping India Pvt. Ltd 1,47,943 10 Inchcape Shipping Services India Private Limited 3,376 Total Rs. 22,52,22,278 4.0 The AO has re....
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....mputed by the assessee, rejected the TP study of the assessee and made independent search process and selected the separate set of comparables and issued show cause notice for adopting the comparables selected by the TPO and called for the objections of the assessee. The assessee filed objections and after considering the objections raised by the assessee, the Assessing Officer (in short 'AO') selected the final list of comparables as under: Name of the Company Margin (OP/OC) Evoke technologies Ltd 11.71 Mindtree Ltd 15.01 R S Software India Ltd 15.31 Larsen & Toubro Infotech 23.82 Persistent Systems Ltd 24.59 Thirdware Solutions Ltd 28.18 Goldstone technologies ltd 10.88 CTIL Umited 15.83 Acropetal technologies ltd 10.87 Spry Resources P Ltd 25.18 NDS Infotech Ltd 3.56 Sankhya Infotech 5.59 Kals Information 7.05 Average 15.20 Average mean of the comparable companies was worked out to 15.20%. The assessee has claimed economic adjustment towards unutilized premises amounting to Rs. 1,41,92,554/-, adjustment towards depreciation and working capital. After careful study of the objections raise....
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....nt and uncomparable. The huge turnover is one of the vital factors to determine the margins. Both the TPO and the DRP have not considered the important and vital factor regarding the turnover. Therefore, the Learned AR (in short 'Ld.AR') argued that the above three companies should be excluded from the list of the comparables. On the other hand, the Ld.DR argued that the assessee has adopted the TNMM as most appropriate method and TNMM neutralizes the deficiencies of turnover filter. Therefore, the Ld.DR vehemently opposed the exclusion of the above comparables from the list of comparables. 8.1 We heard the rival submissions and perused the material placed before us. Admittedly, the turnover of the assessee companies is Rs. 22 Crrores and the turnover of the comparable companies selected by the TPO/AO was more than Rs. 800 Cr. The Ld DRP considered the issue of high turnover and relied on the decision of ITAT Bangalore Bench in the case of Society General Global solution Centre (P) Ltd v. DCIT (2016) 69 taxmann.com 336 and Symantec Software Solutions (P)Ltd v ACIT (2011) 11 taxmann.com 264(Mum) and held that the assessee has not made out a case as to how the high turnov....
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....vant assessment year. Accordingly we reject the assessee's contention to exclude the above companies as comparables on the basis of turnover filter. 8.2 Next contention of the assessee is to exclude the above three comparables on functional differences. This issue has been considered by the DRP in its order dated 31/08/2016 in detail in Para No.4.3 to 4.5 of it's direction. For the sake of convenience we extract the relevant paragraphs of the DRP directions. 4.3 As regards assessee's claim that M/s.Mindtree is functionally different, from the annual report of this company it is evident that it is operating in two segments and segmental details are available and the same have been used by the TPO. In fact, the assessee has wrongly mixed up the functions of group companies of M/s.Mindtree with that of the company itself to arrive at its conclusion of functional difference. Considering above, the objection of the assessee in relation to this comparable is not accepted. 4.4 The assessee has also objected to inclusion of M/s.L&T Infotech as comparable by claiming that the same is involved in other segments of business and that segmental details are not available. Ho....
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....olutions Ltd. 2. Acropetal Technologies Ltd. 3. Spry Resources Pvt. LTd., 9.1 During the appeal, hearing the Ld.AR argued that all the above three companies should be excluded from the list of comparables due to functional dissimilarity and diverse activities. The Ld.AR submitted the functional dissimilarities of the above companies independently companywise. The assessee company is engaged in the functions as per the functional profile designing, architecture, testing, implementation, support and IT infrastructure which are major functions of the assessee company. As per the TP document, the assessee company provides software design, development, support maintenance data processing services to its parent company. Whereas the functions of the comparable companies selected by the TPO in the case of the above three companies are not similar to that of the assessee company and having diverse nature functions. The objections raised by the Ld.AR for each company has been examined by us and the decision of this Tribunal is as under: 9.2 M/s.Thirdware Solutions Ltd: The TPO has selected the M/s.Third Ware Solutions Ltd., with 28.18% of PLI and Rs. 105.68 C....
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....ly different from that of the assessee company, the Ld.AR relied on the decision of ITAT Bangalore 'C' Bench in the case of M/s.Symphony Marketing Solutions India Pvt. Ltd. v. ITO reported in (2013) 38 Taxmann.com 55. (Bangalore-Trib.) The Hon'ble ITAT Bangalore given a ruling that this company could not be selected as comparable in view of functional dissimilarity. We reproduce here under the relevant part of the decision of the Hon'ble ITAT in respect of M/s.Acropetal Technologies Ltd. in the case of M/s.Symphony Marketing Solutions India Pvt. Ltd., as under: M/s.Acropetal Technologies Ltd. (Seq.) * On a perusal of notes to accounts which gives segmental revenue of this company, it is clear that the major source of income for this company is from providing Engineering Design Service and Information Technology Services. The functions performed by the Engineering Design Services segment of the company cannot be considered as comparable to the ITES/BPO functions performed by the assessee. * The performance of Engineering Design Services is regarded as providing high end services among the BPO which requires high skill whereas the services performed by the ....
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....s. The assessee's argument that in Government projects margins are very high is not well founded .The Ld.AR has not brought on record any evidence to establish that the assessee's margins are less and the margins in government projects are very high. Therefore, the objection of the assessee to exclude M/s.Spry Resources Ltd., from the list of comparables is rejected and the decision of the AO/TPO/DRP is upheld. 10.0 Ground No.4 is related to the exclusion of the following comparables Suo moto by the DRP: * M/s.Sankhya Infotech Ltd. * KALS Information Systems * Goldstone Technologies Ltd. The Ld.AR submitted that the above three companies were selected by the TPO holding that the companies are functionally comparable but the DRP has removed the above companies from the list of comparables on its own accord. Since the functions of the companies and the turnover of the company are comparable, the same should be included in the list of comparables. 10.1 We heard the rival submissions and perused the material placed before us and deal with the companies removed by the DRP independently as under: 10.2 M/s.Sankya Infotech Ltd: The DRP has fo....
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....1.67 lakhs. and no segmental information related to software products training income, translation and interpretation fee is available. The translation and interpretation fee received by the comparable company is functionally dissimilar from the tested party and there was no segmental information with regard to the software products, training income, translation fee is available. The Ld.AR except stating that the M/s.KALS Information Systems is functionally comparable company, no evidence was placed before the DRP to controvert the findings, hence DRP has removed M/s.KALS as comparable though it was selected by the TPO. No other details were furnished controverting the findings given by the DRP by the Ld.A.R. From the findings of the DRP it is established that the company is functionally not comparable and we do not find any infirmity in the direction of the DRP and the same is upheld. 10.4 M/s.Goldstone Technologies Ltd: With respect to the M/s.Gold Stone Technologies Ltd., also the DRP observed that the functions of the company were dissimilar and it is only engaged in the IT segment not in software development. The findings of the DRP are made available in Para No.4.....
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....re development both, onsite and offshore operations'. On the above, we find that this company has clarified in response to notice of the u/s. 133(6) of the Act that it is not in the business of software development but in ITES. The alternative plea of the Assessee is that it should be allowed opportunity to cross examine this' company on its reply to the notice of TPO u/s.133(6) of 'the Act. We have seen the objections of the Assessee which is based only on a reading of the Annual report and the claim of the assessee is not on sound basis and is purely on surmises. We are of the view that the rejection by the TPO of this company as a comparable is on sound basis and the same is upheld." 4.16 The functional profile of this company remains the same during the year under consideration. Considering above, this company should not have been taken as a comparable by the TPO. So the TPO is directed to exclude this company from the list of comparables. The Ld.AR of the assessee failed to rebut the findings of the DRP. The DRP relied on the decision of ITAT Bangalore in M/s. Trilogy EBusiness Software v. DCIT ITAT No.1054/Bang/2011 AY 2007-08. Therefore, we do not find any reason....
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....action would not reflect a normal business situation. In the present case, the comparable in question has incurred a loss; notably, incurrence of loss in business operations is a normal incident of business and there is nothing to suggest in the present case that it has been incurred in any abnormal situation. It is also not the case the revenue that the said concern is a consistently loss making concern. Therefore, the said concern cannot be excluded merely because of incurrence of loss in relevant year, especially when the said loss has not been established to be an abnormal business condition and more so in the context that the said concern is not denied to be functionally comparable to the assessee. Therefore, on this aspect, the plea of the assessee for including the said concern in the final set of comparables in order to determine the arm's length price of the international transaction is upheld. [Para 29]. From the decision of the Hon'ble ITAT, it is also observed that the Hon'ble ITAT directed to include the company in the list of comparables for the reasons that the company is not making consistent losses. In the case of comparable company, the company is making persis....
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....al adjustment: The DRP has rejected the objections raised by the assessee for giving working capital adjustment since there was no negative working capital and the assessee could not demonstrate the material impact on the margins for adjustment of working capital. The Ld.DRP also relied on the decision of this Tribunal in the case of M/s.Mobis India Ltd., in ITA No.2112/Mds/2011 AY 2007-08. The issue is set-aside to the file of the AO to examine the facts with relevance to the observations made by this Tribunal, in the case cited supra with the facts of the assessee's case. Apart from the above, the assessee is required to furnish the pricing model of the AE as well as the tested party to verify whether the working capital margin of interest is included in the sales price of the product. The AO is directed to examine the above issues and allow the suitable working capital adjustment while determining the ALP. 14.0 Ground No.7 is related to depreciation adjustment charged in excess of Schedule-4 of Companies Act: The DRP has rejected the assessee's request for adjustment of excess Depreciation placing reliance on the decision of Lason India Pvt. Ltd. V. ACIT [20....
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.... 6.2 The submissions of the assessee have duly been considered. The assessee has relied on some decisions as referred supra. In the case of Arision Thermo india Limited (supra) it was initial year of operation for the assessee. So the facts were different and assessee's reliance on same is misplaced. The issue has been discussed in detail by the TPO in para 7.3.1 of his order. Assessee was asked to provide details, which it failed to do. Assessee is a captive service provider and getting remunerated on cost plus basis. It has not shown that it could not claim part of the expenditure (due to underutilization of capacity) from AE. It could not show that it was providing services to any independent party apart from AE. The assessee has not controverted the findings of the TPO. The assessee's claim that it tried to let out the premises would not change the position. During hearings before this Panel, the assessee was asked to provide the details of capacity utilization of other comparables, however it could not provide any data for the same also. Since assessee has not provided any data to show that the other comparables were working at 100% capacity of all their resources and only i....