TaxTMI 
TaxTMI 
2026 (5) TMI 691
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....der section 143(3) read with section 144(C ) read with section 144B of the Act, for the assessment year ("AY") 2009-09 by INR 44,06,38,092/- as against the returned income of INR 9,46,63,523 under the normal provisions of the Act. 2. On facts and in law, the Hon'ble DRP /Ld. TPO erred in rejecting the economic analysis adopted by the Appellant in its Documentation, thereby modifying/ adding/selecting filters and selecting non-comparable companies, thereby contravening the provisions of Rule 10B(2) of the Income Tax Rules, 1962('the Rules'). 3. On facts and in law, the Hon'ble DRP/ TPO/AO erred including the following companies having different functional profile than that of the appellant; a) Celestrial Lab Limited b) Infoys Technologies Limited. c) Wipro Limited d) Kals Information systems Limited e) Tata Elxi Limited f) Avani Cincom Technologies Limited g) E-Zest Solutions Ltd. h) Presistent Systems Private Limited 4. On facts in law, the Hon'ble DRP/ Ld. TPO/ AO have erred in incorrectly computing the Net Cost Plus (NCP) margin and working capital adjustment margin of Softsol Limit....
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....s is how the assessee demonstrated that its international transaction with its AEs under this segment is in compliance with the transfer pricing regulations. 3.1 During the transfer pricing proceeding, the Ld. TPO after analysing the data bases, annual reports, application of filters and considering objections raised by the assessee, modified the search to arrive at the following final set of 19 comparable companies with arithmetical mean of 26.20% and 23.89% after working capital adjustment and arm's length price (ALP) pertaining to provision of software development support services segment (page no 79 of the TPO order) Sl. No Name of the company Sales (Rs. Cr.) OP to Total Cost 1 Avani Cincom Technologies 3 21.65 2 Bodhtree Consulting Ltd. 10.42 19.14 3. Celestial Biolabs 20.21 87.94 4 e-Zest Soulations Ltd. 7.66 28.95 5 Flextronics (Articlent) 958 8.07 6 iGate Global Solution ltd 781.51 13.9 7 Infosys 15648 13.9 8 Kals Information systems ltd(seg) 2.05 41.94 9 LGS Global Ltd. 136.52 26.64 10 Mindtree Ltd(seg) 572.96 17.51 11 Persistent Syst....
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....23.45 66.5 11 Genesys International 47.52 48.15 12 Hcl Commet system & services Ltd (Seg) 388.05 32.97 13 ICRA(Seg) 82.29 11.22 14 InfosysBPO 825.08 20-03 15. I-Service Ind P Ltd 13.39 9.73 16 Mold Tek 17.84 96.66 17 Spanco Ltd. (Seg) 42.27 8.94 18 Acropetal Techonologies Ldt. (Seg) 20.8 35.3 19 Wipro BPO 1158.8 30.23 20 R System International Ltd. (seg) 21.33 4.3 AVG 29.16 Arm's Length Price (ALP) Arithmetic mean PLI 26.16% Less Working Capital Adjustment 2.81% Adj. Arithmetic mean PLI 26.35% Arm's Length Price Operating Cost Rs.1,685,532,374/- Arm's Length Margin 26.35% of the operating cost Arm's Length Price Rs.2,129,670,154/- Price changed in the international transactions Rs.1,887,828,792/- Shortfall being adjustment u/s. 92CA Rs.241,841,362/- 5. The Ld. AO in his final assessment order dated 24-08-2012 enhanced the income of the assessee by making addition of Rs. 440,638,092/- proposed by the Ld. TPO. 6. The Hon'ble Dispute Resolution Panel ("DRP") ....
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....0% The following TP adjustment on Non-US related transactions are before the tribunal. Particulars Non-US transactions(around7%) Software development services segment 1,02,18,152 ITeS Segment 1,24,30,646 Total 2,26,48,798 10. We have heard the parties and perused the material available on record. Inclusion/ Exclusion of comparables 11. The assessee has objected to the inclusion / exclusion of certain comparable companies by the Ld. DRP/TPO/AO in software support service segment as well as ITeS segment. A. Software Support Services Segment Comparables selected by the Ld. TPO Infosys Technologies Limited 12. The Ld. TPO included this company in the final list of companies on the ground that company earns most of its revenue from software development services. More than 90% of its revenue come from maintenance or enhancement of the software. The Ld. TPO observed in his order that ITAT observed in the case of ST Micro, the taxpayer is not being compared with the Infosys alone, Infosys is one of the 19 comparables selected by TPO and selected as a comparable. 12.1 The Hon'ble DRP in its order dated 13-06-2012 recorded that the revenue f....
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....ompany was rejected in the TP document saying that it is "functionally different". However, no reasons were given in the Annexure. The company qualifies all the filters applied by TPO. Hence the company was proposed as a comparable to the taxpayer vide tis office show cause notice. xxxx All the above services, such as R&D services, application development and maintenance package implementation, consulting services etc, from part of software development services. Thus, even if we do not consider infrastructure outsourcing as software development services, 79% of consolidated revenues from IT services are in the nature of software development services and the taxpayer did not go into horizontals within software development services as discussed above. Even the TPO did not into horizontals. Further as can be seen from above the IT services segment revenues do not constitute any sales by way of software products. Thus, on standalone basis, the IT services segment is into software development services and it qualifies all the filters applied by the TPO. Thus, the company's IT services segment is considered as a comparable on standalone basis as this segment is....
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....es on functional comparability with the assessee. Respectfully following the decision of the assessee's own case, we, direct the AO/TPO to exclude this company from the final list of comparable companies. Tata Elaxi Limited 14. This company was selected by the assessee himself for the TP report. The Ld. AR has submitted that if it is found that this company cannot be held as comparable to the assessee than the assessee has a right to challenge the comparable because rule of estoppel is not applicable in this case. Reliance is placed the decision of the tribunal in the case of Cadence Design System (India) (P.) Ltd. v/s DCIT [IT A nos. 2074/Del/ /2014 in this case the Tribunal held that; "15.... If the assessee points out some mistake or any irregularity in the arm's length result then it is incumbent upon the TPO to examine and consider the same and if the assessee's contentions are found to be correct or tenable, then he has to accept the same. There cannot be estoppel against correct procedure of law and principles solely on account of acquiescence or mistake of the assessee. The TPO is required under law to analyze every comparables and then only determine the cor....
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....en by the assessee. In view of above, it is necessary to remit back this comparable to the file of the Ld. TPO for its fresh consideration, after giving adequate opportunity of being heard to the assessee. We hold and direct accordingly. Kals Information Systems Limited 15. The Ld. TPO included this company for the reason that this company is into two segments i.e. software development services and training and it qualifies all the filters applied by the him. The relevant extract of the Ld. TPO's order is as under: The company is into software development and training. As per the information submitted by the company in response to 133(6) notice, it is into two segment i) software development services and ii) training. This, segmental details are also submitted. It qualifies all the filters applied by the TPO. However, the taxpayer has objected this company stating that it is functionally different. 15.1 The Hon'ble DRP has not given specific observation/findings in respect of this comparable. 15.2 The assessee's contention is that the Ld. TPO considered the applications software segment for TNMM analysis. The application software segment comprises of sale of so....
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....In its response the taxpayer objected that this fails the employee cost filter without adducing any evidence. In any case, the employee cost is only a trigger and not a conclusive filter. It is used to know the functionality i.e. whether the company is a trader of software or is in software development or in development of software product. As the functionality has been already established by way of 133(6) reply, it is retained as a comparable." 16.1 The Hon'ble DRP has not provided any comments on this comparable. 16.2 The Ld. AR of the assessee submitted that this company is functionally dissimilar as it is engaged in clinical research and manufacture of bio products. The company provides customized enterprise solutions, bioinformatics services to health and life science sector like gene sequence comparision and analysis, prediction, modeling, design, and development of drug molecules and development of industrial enzymes. The Hon'ble DRP has not given any decision of the objection of the assessee so this company cannot be included in the comparable. The Ld. AR also submitted that the company filed the copy right/ patent for its drug design tool 'CELSUITE', which is used to....
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....ly engaged in providing software development support services. 17.3 The Ld. AR relied on the decision of the assessee's own case IAT No. 5736/Del/2011 wherein it has been held as under. "Based on the information available in the company website, which reveals that this company has developed a software product by name "DX change" 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 Telecordia Technologies Pvt. Ltd. Vs. ACIT_ITA 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 cannot be considered as comparable to the assessee who was rendering software development services only." [Emphasis supplied] 17.4 The Ld. DR relied upon the order of the Ld. AO/TPO. 17.5 It is evident from the material on record that the company is functionally different from the assessee and the company was engaged in development and ....
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....s not examined the services rendered by the company to give a finding whether the services performed by this company are similar to the software development services performed by the assessee. From the details on record, we find that while the assessee is into software development services, this company i.e. e Zest solutions Ltd. is rendering product development services and high-end technical services which come under the category of KPO services.... We hold that this company i.e. e-Zest Solutions Ltd. Be omitted from the set of comparables for the period under consideration in the case on hand. The AO/TPO is accordingly directed. [ Emphasis supplied] 18.4 The Ld. DR relied on the order of the Ld. TPO and submitted that the function of this company is same and this company was rightly included in the final list of the comparable. 18.5 On the careful consideration of the submissions of the assessee, material on record as well as the decision of the assessee's own case, we direct the Ld.AO/TPO to exclude this company from the final list of the comparable. Persistent Systems Private Limited 19. This company was selected by the assessee himself for the TP report. As in the....
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....t the company is into IT enabled services and qualifies all the filters. The Ld. AR of the assessee challenged the inclusion of this company but during the course of hearing not pressed this comparable. Because this comparable not pressed hence, we hold that this Company rightly included in the final list of the comparable. Mold-Tek Technologies Ltd. 21. The Ld. TPO selected this company on the ground that as per information of the company, the IT division of the company is mainly engaged in ITES. It qualifies all the filters applied by him. The relevant portion of the order as under; 13.10 As per the information and Annual Repot of the company, the IT division of the company is mainly engaged in ITES. It qualifies all the filters applied by the TPO. Thus, the IT division of the company is proposed as a comparable. 21.1 The Ld. AR submitted that this company is functionally dissimilar to the assessee as the company renders structural engineering KPO services, it is a leading provider of engineering and design services with specialization in civil, structural and mechanical engineering services. He further submitted that during the FY2007-08 the extraordinary event....
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....h-end services to its clients involving higher special knowledge and domain expertise in the field and the same cannot be taken as comparable to the assessee company which is mainly involved in providing low-end services.[Emphasis supplied] 21.3 We find that during the FY 2007-08 the extraordinary event happened and the scheme of arrangement involving amalgamation between Tekmen Tool Pvt. Ltd. and Mold-Tek and demerger between Mod-Tek and Mold -Tek Plastic Limited was sanctioned by the Hon'ble AP High Court vide order dated 25th July 2008. Thus, this company cannot be considered as a comparable. Upon consideration of the submissions made by the assessee material available on record and the decision of the assessee's own case we hold that this company is not a suitable comparable to the assessee. Hence, we direct the Ld. TPO/AO to exclude this company rom the final list of comparable companies. Accentia Technologies Ltd. 22 The Ld. TPO selected this company for the reason that it qualifies all filters applied by him. The Ld. TPO's findings is reproduced below; 13.1 The company was not part of the companies considered by the taxpayer in the accept/reject matrix give....
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....evenues by 75.33% Amalgamated the company Iridiun Technologies which is a software product company. 2. Functionally not comparable - The activity of medical transcription (considered by TPO), billing and coding and software development and implementation is not comparable to the services provided by the Appellant. 3 Business promotion expenses constitutes, 28.34% of the total operating revenue earned by the company." 23.4 Keeping in view the fact that an extraordinary event in the form of acquisition took place in this company in the year under consideration, the other facts also establishes that the company functionally dissimilarity between this company and the assessee and respectfully following the decision of the assessee's own case we hold that this company to be not a suitable comparable company. Accordingly, we direct the AO/TPO to exclude this company from the list of the Comparables. Eclerx Services Ltd. 24. The Ld. TPO selected this company for the reason that it qualifies all filters applied by him. The Ld. TPO's findings is reproduced below; 13.6 The data of the company is available in Prowess database. Annual Report is available for the AY. 133(6) no....
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....report, it is into ITES qualifies all the filters applied by the TPO. Thus, the company is proposed as a comparable. 29.1 The Hon'ble DRP has observed in the order that the usage of single year data impossibility of performance and marketing expenses. Turnover criterion has been elaborately discussed elsewhere in the order. Rightly accepted. 29.2 The contention of the assessee is that the revenue earned by ACPL in ITES segment is INR 188.78 crores whereas Infosys BPO"s revenue is INR 825.08 crores which exponentially higher than the assessee. Further extraordinary event that the company acquired shared service centre of Philps at Poland, Thailand and Chennai. The company incurred substantial expenditure on selling and marketing expenses i.e. 6.17% of the revenue. Further the company has a heavily brand name which has a significant value in the space (page no. 55 of the Annual Report compendium). The Ld. AR also submitted that relying the decision in the case of NTT Global Delivery Services Ltd. Vs. ITO (ITA No. 5339/Del/2011) the Tribunal in the assessee's own case excluded this company from the final list of the comparable. In the assessee's case the tribunal held as under: ....
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....0.3 The Ld. AR relied upon the decision of the assessee's own case ITA No. 5736/Del/2011 in this case the Co-ordinate bench relying the decision of ICC India Ltd. vs. DCIT (ITA No. 25/Del/2012) direct the Ld. AO/TPO to exclude this company from the list of comparable. The CO-ordinate bench held as under: "(v) the assessee has objected to the inclusion of this company on the ground that the company is into remote IT infrastructure management services, data centre management and user computing services managed security services net working services, tool and process consulting services and therefore functionally dissimilar. The other objections to the inclusion are that the company runs a highly capital- intensive industry, it operates 24/7 in 3 shifts, it has a significant brand value and huge assets base. It is also the assessee's plea that the company is a full risk bearing entrepreneur whereas the assessee is a Captive Services Provide to its AE. Having considered all the aspects, it is our considered opinion that the assessee's contention about being functionally dissimilar is correct.... Accordingly, we direct for the exclusion of the company from the final....
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....is is TPO's comparable in which segmental details has been obtained u/s. 133(6) of the Act. However, assessee has sought its exclusion on grounds of significantly higher turnover, abnormal margins, presence of intellectual property, diversified business, brand value and turnover and relied upon Calibrated Health Systems Ltd.(supra) available at page853 to 862 of the paper book. 40. Coordinate Bench of ITAT, Delhi examined comparability of WIPRO with Calibrated Health Systems Ltd. engaged in providing ITES services to its foreign entity as in the case of Assessee and ordered its exclusion on the ground that this is a giant entity with marked differences as regards risk profile nature of services, ownership of IP rights, expenditure on R&D etc. So, following the decision rendered by coordinate benches as well as the fact that the assessee company is captive service provider taking minimum risk having no intangibles cannot be compared with WIPRO which is having diversified business ownership of significant intangibles and huge expenditure on R&D etc. So, hereby order to exclude this company from the final list of comparables." [emphasis supplied] 31.4 In view of the vast d....
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....The Ld. TPO selected this company on the ground that it qualifies all filters by him. The Ld. TPO's finding in para 13.7 of his order is reproduced below: 13.7 As the company satisfied all the filters applied by the TPO, the same is considered as comparable. The company is considered as comparable. Xxxx As discussed under the head "Verticals/ Horizontals" the taxpayer did nod consider different functional lines within IT enabled services for selection of comparable companies. Thus, the company cannot be rejected on the basis that it is into different functional line within ITES. Hence the company is retained as a comparable. The taxpayer further contends that the company has intangibles research and development activities and it own products which make the company un comparable to the taxpayer in terms of functions. These objections of the taxpayer also deserve rejection on the same ground that the TPO has not gone into the functional and vertical lines of the comparable companies on which issue the taxpayer has not raised objections. 33.1 The Hon'ble DRP has observed in the order that the Board's Circular covers the areas of operation under ITES. The ....