TaxTMI 
TaxTMI 
2022 (2) TMI 1532
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....f the Act and a book profit of Rs. 3,37,56,248 under the provisions of section 115JB of the I.T. Act. The assessment was selected for scrutiny and notice u/s. 143(2) and 142(1) of the Act was issued to the assessee. During the course of assessment proceedings, the matter was referred to the Transfer Pricing Officer (TPO) for determining the Arm's Length Price (ALP) of the international transactions entered by the assessee with its Associate Enterprises (AEs). For the international transactions pertaining to software development services with AEs, the assessee in its transfer pricing study had undertaken the comparability analysis selecting Transactional Net Margin Method (TNMM) as the most appropriate method and computed the average net margin of 13.60% on operating cost. The net margin earned by the assessee for the software development services being at 15.80%, the ALP of the international transaction undertaken by the assessee was sought to be justified on TP study. During the TP proceedings, the TPO retained certain comparables chosen by the assessee, introduced few new comparables and then recomputed the average net margin of comparables at 24.82% on operating cost. The TP....
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....d 16.37% 9. Sasken Communication Technologies Limited 24.13% 10. Akshay Software Technologies Limited 0.72% Arithmetic Mean 18.16% 4. The revised Arm's Length Margin (ALM) for the assessee after factoring the +/- 5 range, the entire adjustment in relation to the international transaction of provision or software development services would stand deleted. 5. Aggrieved by the order of the CIT(A), the Revenue has filed the appeal and the assessee has filed the cross objection. We shall first adjudicate the Revenue's appeal. IT(TP)A No. 2358/Bang/2019 (Revenue's appeal) 6. The grounds raised read as follows:- "1 The order of the CIT(Appeals) is opposed to law and the facts and circumstances of the case. 2. On the facts and circumstances of the case, whether the ld. CIT(A) is justified in directing to exclude the company, E-Infochips Ltd. on the ground of the company failing the software Development revenue/Sales filter, without taking into consideration the TPO's integration of the hardware maintenance revenue with the SWD revenue while applying the filter? 3. On the facts and circumsta....
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....102/Bang/2011 (order dated 09.12.2016). 10.1. Aggrieved the Revenue has raised this issue before the Tribunal. The learned Departmental Representative relied on the order of the Assessing Officer. 10.2. The learned AR, apart from supporting the order of the CIT(A), submitted that the above company should be excluded from the comparable list for the following reasons:- (a) The company offers product engineering along with software development services. Key offering includes product design and development, product feature enhancement, product platform migration, Enterprise Application Development, IT services - Onsite/offshore software development, Software testing etc. However, the revenue break-up for each of the services is not available. The company has only one segment. (b) Engaged into outsourced product development services. (c) Provides EPO services. (d) The company has opening and closing stock. Hence, the company is involved in sale of products. 10.3. in support of his contentions, the learned AR relied on the following orders of the Tribunal:- (i) Arcot R & D Software Private Limited [IT(TP)A No. 397/Bang/2016, IT(TP)A ....
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....s in previous year. Further, the company has been considered by the ITAT in the case of M/s. Comsco Networks India Pvt. Ltd. in IT(TP)A No. 166/Bang/2016, where under similar circumstances held that this company is not functionally comparable. Therefore, we are of the considered view that the ld. DRP was right in rejecting this company from the list of comparables and hence reject ground taken by the Revenue." 10.5. In view of the co-ordinate Bench order of the Tribunal in the case of Arcot R & D Software Pvt. Ltd. (supra), we hold that E-Zest Solutions Limited is not functionally comparable to that of the assessee and the CIT(A) has rightly directed the A.O. to exclude the same from the list of comparables. E-Infochips Limited 11. The CIT(A) had excluded the above company from the list of comparables since it fails the service revenue filter as revenue from software development contributes only 74% of the operating revenue. 11.1. The learned DR supported the order of the A.O. 11.2. The learned AR, apart from relying on the order of the CIT(A), submits that the above company ought to be excluded from the list of comparables for the following reasons:- (a) Th....
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....The software development and IT enabled services and products are considered as one reportable segment. Even in the profit and loss account the expenses have been debited under the head manufacturing and other operating expenses, therefore, held that this company cannot be compared with profile of the assessee company which is mainly engaged in software development service segment. The Revenue fails to counter the findings of facts recorded by the ld. DRP with any evidences. Further, the ITAT has considered this company as comparable in earlier assessment years therefore, we are of the considered view that there is no error in the findings given by the ld. DRP for excluding this company from the list of comparables, hence we reject ground taken by the Revenue." 11.5. In the light of the order of the co-ordinate Bench of the Tribunal, we hold that the CIT(A) is justified in excluding the above company from the list of comparable companies. Infosys Limited 12. The above company was excluded by the CIT(A) by stating that it is functionally different from that of the assessee by relying on the order of the Bangalore Bench of the Tribunal in assessee's own case for assessme....
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....ng India [IT(TP)A No. 212/Bang/2015 for A.Y. 2010-2011] 12.4. We have heard rival submissions and perused the material on record. The Bangalore Bench of the Tribunal in the case of Arcot R & D Software Pvt. Ltd. (supra), had excluded the company from the list of comparable companies. The relevant finding of the Bangalore Bench of the Tribunal, reads as follows:- "30. The ld. DRP has rejected Infosys Ltd. and TATA Elxsi Ltd. on the ground that this company has been consistently rejected by various courts and tribunals based on very large scale or functional dissimilarity. Further, we noticed that these two companies have been rejected by the ITAT in assessee's own case for A.Y. 2010-11, on the ground that this company is functionally dissimilar of its size, profits, turnover, brand value and it operates in diversified markets. Therefore, we are of the considered view that the ld. DRP was right in rejecting these two companies from the list of comparables and hence, we reject the ground taken by the Revenue." 12.5. In the light of the order of the co-ordinate Bench of the Tribunal, we hold that the CIT(A) is justified in excluding the above company from the list of....
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....d Infosys Ltd. and TATA Elxsi Ltd. on the ground that this company has been consistently rejected by various courts and tribunals based on very large scale or functional dissimilarity. Further, we noticed that these two companies have been rejected by the ITAT in assessee's own case for A.Y. 2010-11, on the ground that this company is functionally dissimilar of its size, profits, turnover, brand value and it operates in diversified markets. Therefore, we are of the considered view that the ld. DRP was right in rejecting these two companies from the list of comparables and hence, we reject the ground taken by the Revenue." 13.5. In the light of the order of the co-ordinate Bench of the Tribunal, we hold that the CIT(A) is justified in excluding the above company from the list of comparable companies. Inclusion of Akshay Software Technologies Limited (Ground 5) 14. The CIT(A) directed the AO/TPO to include Akshay Software Technologies Limited in the list of comparables, since it was functionally comparable to that of the assessee. The relevant directions of the CIT(A) reads as follows:- "During the appellate proceedings it was submitted by the AR that the inclus....