2020 (11) TMI 335
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....tary ground pressed by the learned AR, viz., ground No. 3(d) (revised ground) reads as follow:- "The AO/TPO/Hon'ble DRP erred on facts and in law in considering Acropetal Technologies Limited, E-Infochips Limited, e-Zest Solutions Limited, ICRA Techno Analytics Limited and Persistent Systems & Solutions Limited as comparable to the captive software development services function rendered by the Appellant." 3.1. Brief facts of the case are as follow: The assessee is a wholly owned subsidiary of JDA Software Inc. [Associated Enterprises (AE)]. The assessee is primarily engaged in the business of development of software and other allied services to its AE. During the relevant assessment year, the assessee had entered into three international transactions with its AE. One of the international transactions was provision of software development services amounting to Rs. 110,75,19,991. The operating margin of the assessee was declared at 14.87%. The profit level indicator was OP/OC. The details of the same are as follow:- Operating Income Rs. 1,10,75,19,991 Operating Cost (Less forex loss) Rs. 96,41,66,619 Operating Profit (Op. income -Op.Cost) Rs. 14,33,53,373 Operating /....
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....nbsp; AVERAGE MARGIN 24.82 25.58 Computation of arm's length price by the TPO and the adjustment made Arm's length mean margin on cost 24.82% Less : Working capital adjustment -0.95% Adjusted mean margin 25.77% Opearting cost Rs. 96,41,66,6519 Arm's Length Price - 125.33% of operating cost Rs. 121,26,32,357 Price Received Rs. 1,10,75,19,991 Shortfall being adjusted u/s 92CA Rs. 10,51,12,366 3.4. Aggrieved by the TPO's order proposing ALP adjustment of Rs. 10,51,12,366, the assessee preferred objections before the DRP. The DRP vide its order dated 24.11.2015, directed the following comparables to be excluded by applying the turnover filter:- (i) Infosys Limited (ii) Larsen & Toubro Infotech Limited (iii) Mindtree Limited (iv) Persistent Systems Limited (v) Sasken Communications Technologies Limited (vi) Tata Elxsi Limited. 3.5. Pursuant to the direction of the DRP, the TP adjustment was reworked out at Rs. 10,08,70,033 and the final list of comparables subsequent to the DRP's order are as follow:- (i) Acropetal Technologies Limited (seg.) (ii) e-Zest Solutions Limited (iii) E-Infochips Limited (iv) Evoke Technologies P....
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....llows:- "16.4 We have considered the rival submissions as well as the relevant material on record. As per the segmental reporting at page 53 of the Annual Report the income from information Technology Services is Rs. 81.40 crores out of the total income of Rs. 141 crores. Therefore the revenue from Information Technology transactions services is less than 75% and consequently this company does not satisfy the filter of information technology revenue applied by the TPO itself. Accordingly, we do not find any reason to interfere with the order of the DRP for this issue." 4.3. In view of the above order of the Tribunal, which had considered a case of a similarly placed assessee and for the same assessment year, we direct exclusion of Acropetal Technologies Limited from the list of comparables. It is ordered accordingly. II. e-ZEST SOLUTIONS LIMITED 5. The assessee is seeking to exclude the above company from the list of comparables. According to the assessee, the above company is functionally different from the assessee because e-Zest Solutions Limited is engaged in product engineering and software development. It is primarily a product company having presence of inventories and ....
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....cluded from the final list of comparables. III. E-INFOCHIPS LIMITED 6. The learned AR submitted that E-Infochips Limited is to be excluded on the ground that it is functionally dissimilar as it is engaged in rendering software development service, IT enabled services and products. It was submitted that there is no segmental information regarding its diverse functions. It was further submitted that it is an IP driven company and it undertakes R & D activities. Further, it was submitted that it fails the software service income filter at 75%. 6.1. The TPO held that 88% of the company's revenue is from software development services, hence, qualifies as a comparable. The DRP confirmed the view by holding that TPO has done a detailed analysis before selecting a comparable. The learned Departmental Representative supported the order of the TPO and DRP. 6.2. We have heard the rival submissions and perused the material on record. The above company is engaged in diverse activities such as product development and provisions for IT enabled services for which no separate segmental information is available in its Annual Report. On the contrary, the diverse activities of software develop....
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....CHNO ANALYTICS LIMITED 7. The assessee seeks exclusion of ICRA Techno Analytics Limited on the ground that it is functionally incomparable to the assessee. According to the assessee ICRA Techno Analytics Limited is engaged in diversified activities such as software development, consultancy services, engineering services, web development and hosting services. It was further submitted that ICRA Techno Analytics Limited concentrates in niche areas of business intelligence and analytics space. 7.1. According to the TPO, just because the company analysis statistical data of the client before providing software solution services does not make the company functionally dissimilar (page 9 of the TPO's order). The view taken by the TPO was affirmed by the DRP. The learned Departmental Representative supported the order of the TPO and DRP. 7.2. We have heard the rival submissions and perused the material on record. A perusal of the Annual Report of ICRA Techno Analytics Limited (page 538 to 544 of the paper book), it is clear that the company has significant growth in the business intelligence and analytics space which shows that the activities carried out by ICRA Techno Analytics Limi....
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....rded by the DRP as well as by the co-ordinate bench of this Tribunal are not correct. Accordingly, in view of the decision of the co-ordinate bench of this Tribunal in the case of DCIT v. Electronics for Imaging India Pvt. Ltd. (supra), we do not find any error or illegality in the order of the DRP on this issue." 7.3. In view of the above said reasoning and the Bangalore Benches of the Tribunal in the case of Applied Materials India Pvt. Ltd. (supra), we hold that the above company is to be excluded from the final list of comparables. V. PERSISTENT SYSTEMS & SOLUTIONS LIMITED 8. The learned AR is seeking to exclude the above company on account that it is not functionally comparable to the assessee. It was stated that the company is engaged in software development, consultancy and systems integration. It owns products and R & D activities. It was stated that the segmental results are not available. The learned AR relied on the order of the Bangalore Benches of the Tribunal in the case of Applied Materials India Pvt. Ltd. v. ACIT (supra), Electronics for Imaging India P. Ltd. v. DCIT (supra) and Commscope Networks (I) Pvt. Ltd. ITO (supra). 8.1. According to the TPO, product dev....
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....eparate segment has been given in respect of software services. Accordingly, the composite data of revenue as well as margins of this company pertaining to the sale of software services and products cannot be considered as comparable with the software development services segment of the assessee. In view of the above facts and circumstances, we do not find any error or illegality in the directions of the DRP in excluding this company from the list of comparables. This ground of CO is dismissed. ......................" We further find from the Annual Report that there is no change in the activity and functions of these companies during the year under consideration in comparison to the Assessment Year 2010-11. Accordingly, following the decisions of the co-ordinate benches of this Tribunal (supra), we direct the AO/TPO to exclude these two companies from the set of comparables." 8.3. In the light of the above reasoning and the order of the Tribunal in the case of Applied Materials India Pvt. Ltd. (supra), we direct that Persistent Systems & Solutions Limited to be excluded from the list of comparables. 8.4. Since we have directed the exclusion of five comparables, the final lis....