TaxTMI 
TaxTMI 
2016 (5) TMI 1541
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....nt. The assessee provides software development services to its AE. Therefore, the assessee is purely a captive service provider. The assessee has been recognised as 100% EOU registered under the Software Technology Park of India (STPI) Scheme. As per the terms of the contract with its AE, the assessee is remunerated at cost plus 12.01% for the services rendered by it to its AE. For the impugned assessment year, the assessee earned revenue of Rs. 107,28,61,819/- from international transaction with its AE. The assessee for the impugned assessment year filed its return of income on 30-09-2008 declaring total income of Rs. 10,13,83,900/-. Along with return of income, the assessee also submitted a TP study report wherein transaction Net Margin Method (TNMM) was adopted as most appropriate method and operating profit/operating cost as the profit level indicator (PLI). The assessee in the TP study, after conducting a search in the data bases on the basis of functions, assets and risk (FAR) analysis, selected 18 companies as comparables with an average margin of 10.98% as against assessee's margin shown at 12.01%. Hence, the price charged to the AE was considered to be within arm's length.....
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....he Assessing Officer, the assessee has preferred this appeal raising various grounds both on transfer pricing issues as well as corporate tax issues, which are as follows: "1. General 1.1 Based on the facts and circumstances of the case and in contrary to law, D.E. Shaw India Software Private Limited (hereinafter referred to as 'Appellant') respectfully craves leave to prefer an appeal against the order passed by the Assistant Commissioner of Income Tax, Circle 1(2), Hyderabad (hereinafter referred as 'AO') in pursuance of the directions of the Dispute Resolution Panel (hereinafter referred as 'DRP'), Hyderabad dated 03 August 2012 under section 253 of the Income-tax Act, 1961 (Act'). 2. Transfer Pricing Adjustments 2.1 General Grounds 2.1.1 The assessment order passed by the Learned AO under section 143(3) read with section 144C and read with the order passed by the Learned Transfer Pricing Officer (hereinafter referred as 'TPO'), under section 92CA(3) of the Income Tax Act, 1961 (hereinafter referred as 'the Act') is bad in law and void abinitio. 2.1.2 The Learned AO/ DRP erred in ho....
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.... 2.5.1 The Learned AO/DRP erred in law and facts in disregarding the comparability factors specified under Rule 10B(2) of the Rules and the provisions contained in Rule 10B(3) of the Rules that specify that an adjustment should be made to account for differences between the transactions that may materially affect the price of such transactions. 2.5.2 The Learned AO/DRP erred in disregarding the differences in risk profile of the Appellant (being a captive service provider) and the alleged comparable companies selected by him, by not allowing the risk adjustment made by the Appellant. 2.5.3 The Learned AO/DRP ought to have appreciated that dissenting DRP member agreed to the contention of the Appellant that risk adjustment should be provided to the Appellant. 2.6 Com parables 2.6.1 Without prejudice to above, the Learned AO/DRP erred in confirming the TPO's stand of rejecting the independent comparable companies selected by the Appellant in its transfer pricing study report without providing any cogent reasons. 2.6.2 The Learned AO/DRP erred in confirming the acceptance of alleged comparable companies selected by the TPO with....
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....e assessment year. It was submitted that when the assessee came in appeal before the ITAT against the final assessment order, the ITAT after considering the submissions of the assessee had upheld assessee's objection in respect of the aforementioned 8 companies and directed for excluding the same for determining the ALP. In support of such contention, the learned AR submitted a copy of the order passed by the ITAT, Hyderabad Bench "B" in case of of M/s Intoto Software India (P) Ltd., in ITA No.1810/Hyd/201 relating to the assessment year 2008-09. The learned AR further submitted that the facts of the assessee's case being identical to that of M/s Intoto Software India (P) Ltd.,(supra) the order passed by the co-ordinate Bench squarely covers the issue with regard to the comparables objected to by the assessee. 8. With regard to AVANI CIMCON TECHNOLOGY LIMITED, the learned AR submitted that the website of Avani Cimcon Technology Limited clearly reveals that the said company is engaged in product development, hence is functionally different from the assessee. He submitted that segmental information is not available. The learned AR further submitted that in case of M/s Intoto Softw....
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.... the said company from the list of comparables. He also relied on the following cases: 1. 3DPLM Software Solutions Pvt. Ltd., ITA No. 1303/Bang/2012. 2. Triology E-Business Software India Pvt. Ltd., ITA No. 1054/Bang/2011 12. So far as Wipro Ltd. is concerned, the learned AR submitted that this company cannot be considered to be comparable with the assessee as it is engaged in both software development and product development and owns intellectual property in the form of patents. In support of such contention, the learned AR relied upon decisions of the co-ordinate bench in the case of M/s Intoto Software India (P) Ltd. (supra) as well as in the following decisions: 1. NTT Data India Enterprise Application Services Ltd., ITA No. 1862/Hyd/2012. 2. 3DPLM Software Solutions Pvt. Ltd., ITA No. 1 303/Bang/2012. 3. Patni Telecom Solutions Pvt. Ltd., ITA No. 1846/Hyd/12 13. The learned AR objecting to selection of TATA ELXSI LIMITED as a comparable submitted that the said company cannot be considered as a comparable to the assessee as it is engaged in product designing services. The learned AR submitted that the ITAT Hyderabad Bench in ca....
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.... Like M/s Intoto, in case of the present assessee also, as has been observed by the TPO in his order, neither the assessee nor the TPO has gone into verticals /functional or service lines of the comparable companies. Like in case of M/s Intoto the TPO has classified the assessee as a purely software development service provider. In fact the TPO has selected the same set of 26 comparable companies in case of the assessee which were also selected in case of M/s Intoto. Therefore, in our view, the decision of the co-ordinate bench in case of M/s Intoto Software India Pvt. Ltd.(supra),will also apply to the facts of the present case in so far as selection of comparables are concerned. The coordinate bench in case of Intoto Software India Pvt. Ltd., held as follows: 7. Having considered the rival contentions and the material on record, we find that the Coordinate Bench of this Tribunal in the case of NTT Data India Enterprise Application (cited supra), has recorded the following reasons for exclusion of the following companies from the final list of comparables. "2. SELECTION OF COMPARABLES. 9. The next issue for consideration is with reference to ....
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....or the sake of record, the findings of various companies decided by the Coordinate Benches of Tribunal (supra) are as under : 1. "Avani Cincom Technologies Ltd., 7.6.1 We have heard both parties and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the final set of comparables only on the basis of information obtained under section 133(6) of the Act. In these circumstances, it was the duty of the TPO to have necessarily furnished the information so gathered to the assessee and taken its submissions thereon into consideration before deciding to include this company in its final list of comparables. Nonfurnishing the information obtained under section 133(6) of the Act to the assessee has vitiated the selection of this company as a comparable. 7.6.2 We also find substantial merit in the contention of the learned Authorised Representative that this company has been selected by the TPO as an additional comparable only on the ground that this company was selected in the earlier year. Even in the earlier year, it is seen that this company was not selected on the basis on any searc....
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....directed. 4. Infosys Technologies Ltd. 11.4. We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee has brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) for Assessment Year 2007-08 is applicable to this year also. We are inclined to concur with the argument put forth by the assessee 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. 5. KALS Information Systems Ltd., : 10.4. We have heard both parties and perused and carefully considered the material on record. We find from the record that the TPO has drawn conclusions as to the comparability of this ....
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.... 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 portion." As can be seen from the extracts of the Annual Report of this company produced before us, the facts pertaining to Tata Elxsi have not changed from Assessment Year 2007- 08 to Assessment Year 2008-09. We, therefore, hold that this company is not to be considered for inclusion in the 14 ITA.No.1810/Hyd/2012 Intoto Software India P. Ltd., Hyderabad. set of comparables in the case on hand. It is ordered accordingly. 8. Wipro Ltd., 12.4.1. We have heard both parties and carefully perused and considered the material on record. We find merit in the contentions of the assessee for exclusion of this company from the set of comparables. It is seen tha....
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....ns Ltd., holds intangibles such as Trademark, registrations for products. c) Softsol Ltd., is both functionally different as well as fails RPT filter as held by the Tribunal in the case of 3DPLM. 7.3. We find that the facts and circumstances before us are similar and are for the very same A.Y. both in the case of the assessee company as well as NTT Data India Enterprise Application Services P. Ltd., (cited supra) and the Ld. Counsel for the assessee has also relied upon the decision of this Tribunal in the case of 3DPLM Software Solutions P. Ltd., (cited supra), wherein these companies were held to be not comparable in the following paragraphs: "17. Persistent Systems Ltd. 17.1.1. This company was selected by the TPO as a comparable. The assessee objected to the inclusion of this company as a comparable for the reasons that this company being engaged in software product designing and analytic services, it is functionally different and further that segmental results are not available. The TPO rejected the assessee's objections on the ground that as per the Annual Report for the company for Financial Year 2007-08, it is mainly a software develo....
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....not given separately. Therefore, following the principle enunciated in the decision of the Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. (supra) that in the absence of segmental details/information a company cannot be taken into account for comparability analysis, we hold that this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. It is ordered accordingly. 18. Quintegra Solutions Ltd. 18.1 This case was selected by the TPO as a comparable. Before the TPO, the assessee objected to the inclusion of this company in the set of comparables on the ground that this company is functionally different and also that there were peculiar economic circumstances in the form of acquisitions made during the year. The TPO rejected the assessee's objections holding that this company qualifies all the filters applied by the TPO. On the issue of acquisitions, the TPO rejected the assessee's objections observing that the assessee has not adduced any evidence as to how this event had an any influence on the pricing or the margin earned. 18.1.2. Before us, the assessee objected....
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....resentative 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 service provider as is the assessee in the case on hand. It is also seen that this company is also engaged in proprietary software products and has substantial R&D activity which has resulted in creation of its IPRs. Having applied for trade mark registration of its products, it evidences the fact that this company owns intangible assets. The co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (ITA No.227/Bang/2010 dt.9.11.2012) has held that if a company possesses or owns intangibles or IPRs, then it cannot be considered as a comparable company to one that does not own intangibles and requires to be omitted form the list of comparables, as in the case on hand. 18.3.2. We also find from the Annual Report of Quintegr....