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TMI Blog2013 (10) TMI 599X X X X Extracts X X X X X X X X Extracts X X X X ..... he same, the Assessing Officer made a reference to the TPO under section 92CA of the I.T. Act to determine the ALP. During the proceedings before the TPO under section 92CA of the I.T. Act, the assessee filed its transfer pricing study and the details of the comparables adopted by it and justified with reasons the adoption of these companies as comparables. The TPO observed that the assessee has taken 40 companies as comparables with an average profit margin @ 15.96% on cost. The assessee had been compensated by the Associated Enterprise at cost plus method and therefore, the margin earned by the assessee at 16.06% on operating cost was treated as at arms length by the assessee. The TPO also asked the assessee to substantiate the cost plus method adopted by the assessee and to communicate the objections, if any, for adopting TNMM as Most Appropriate Method (hereinafter referred to as "MAM") to determine the ALP. In response to the same, the assessee filed reply dated 25.8.2007 stating that they have no objection to adopt TNMM as MAM for arriving at the ALP and that they have prepared the documentation accordingly. The TPO observed that the assessee has not applied various filters f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as additional comparables taken by the TPO, the assessee objected to the adoption of following companies only :- (1) Foursoft Limited (2) Sankhya Infotech Limited (3) Igate Technolgoies Limited (4) Infosys Technologies Limited (5) Satyam Computer Services Limited (6) Flextronics Software Limited (7) Thirdware Software Solution Limited 6. After considering the assessee's contentions at length and rejecting them for the reason given in the Transfer Pricing Order, the TPO computed the arithmetic mean of operating profit to total cost at 26.59% and after giving the working capital adjustment of 0.81%, he arrived at the adjusted arithmetic mean of PLI at 25.78%. He, accordingly, made the adjustment of the short-fall under section 92CA at Rs. 1,44,00,953/-. 7. In consonance with the Order of the TPO, the Assessing Officer determined the taxable income of the assessee by making the suitable adjustments to the price received by the assessee for its services to the AE. Aggrieved by the additions made by the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urnover as well as total turnover for the purpose of computing the deduction under section 10A of the I.T. Act. Thus, ground of appeal No.3 is allowed. 11. Ground Nos. 1 and 4 being general in nature, needs no adjudication. 12. Ground No.2 relates to the various comparable companies adopted by the TPO and as to why they should not be taken as comparables. At the time of hearing, the learned Counsel appearing on behalf of the assessee, has filed before us a chart giving details of the companies which have been considered by the TPO as comparable companies to the assessee and as to how the financial results of these companies should not be considered for the purpose of determination of the ALP. Therefore, we proceed to dispose of the assessee's appeal on the basis of this chart after hearing both the parties. 13. The assessee has mainly objected to the adoption of the following companies before us as comparables. 14. Exensys Software Solutions Limited: As regards this company, the learned Counsel appearing on behalf of the assessee submitted that the operating profit by operating cost of this company is 70.68%. He submitted that though the assessee has not objected to the adoptio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to compare a company with another company, both the companies have to be brought on par with each other after making the necessary adjustments wherever necessary and possible. However, where there are extraordinary events such as this, then those events have to be taken note of and where no adjustment can be made on account of this extraordinary event, then such company cannot be considered as a comparable. The objections to this company by the assessee are made for the first time before the Tribunal. The Tribunal being the final fact finding authority is bound to take note of the objections of the assessee. As the material relied upon by the learned Counsel for the assessee clearly denotes that there is an extraordinary event which has resulted in the high operating margin of the company, we deem it fit and proper to remand this issue to the file of the Assessing Officer/TPO for reconsideration. If it is found that there is an amalgamation of Exensys Software Limited and Holool India Limited and formed as one entity viz., Exensys Software Solutions Limited. during the relevant previous year and the financial result is the combined result of these two companies, then, we direct t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O is placed before us. As this communication was not before the TPO at the time of transfer pricing adjustment we deem it fit and proper to remand this issue also to the file of the TPO to reconsider adopting this company as the comparable in the light of observations of this company to the TPO in the case of another assessee. In the result, the Assessing Officer/TPO is directed to reconsider the issue in accordance with law, after affording a reasonable opportunity of being heard to the assessee. 23. The other companies which are objected to by the assessee are Flextronics Software Limited, Foursoft Limited and Thirdware Software Solution Limited. As far as these three companies are concerned, the learned Counsel appearing on behalf of the assessee submitted that they are into both software as well as product development. He submitted that the TPO has taken note of the fact these companies are also into product development but has selected these companies as comparables by applying the filter of more than 70% of its revenue being from software development services. The learned Counsel submitted that the functions of these companies are different from the assessee who was into sol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to call for details with regard to the various companies. As seen from the annual report of Foursoft Limited which is reproduced at page 7 of the TPO's Order, the said company has derived income from software licence also and AMCs. 26. As far as Thirdware Software Solution Limited is concerned, we find from the information furnished by the said company that though the said company is also into product development, there are no software products that the company invoiced during the relevant financial year and the financial results are in respect of services only. Thus, it is clear that there is no sale of software products during the year but the said company might have incurred expenditure towards the development of the software products. 27. As far as Flexitronics Software Limited is concerned, we find that at page 90 of his Order, the TPO has also observed that the said company has incurred expenditure for selling of products and has incurred R & D expenditure for development of the products. The above facts clearly demonstrate that there is functional dissimilarity between the assessee and these companies and without making adjustment for the dissimilarities brought out by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mited 9. Wipro Limited 10. Accel Transmatic Limited 11. Avani Syncom Technologies Limited 32. As far as first two companies are concerned, these two companies were also adopted as comparables in the assessee's own case for the A.Y. 2005-2006 and for the A.Y. 2005-2006 we have already held that these companies are functionally different and the Assessing Officer/TPO could not have taken these companies as comparable companies without making the suitable adjustments for the differences. Respectfully following our own decision, even dated, these two companies are directed to be excluded from the list of comparables. As far as Infosys Technologies Limited and Wipro Limited are concerned, we find that both are giant companies and are into diversified activities and for the detailed reasons given by us in the assessee's own case for the A.Y. 2005-2006 even dated, we direct that these two companies are to be excluded from the list of comparables. 33. As far as Tata Elxsi Limited is concerned, the learned Counsel appearing on behalf of the assessee has relied upon the communication of Tata Elxsi Limited to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ength the reasons for not considering the said company as comparable to software development services company. The relevant portion of the respective order is reproduced hereunder : "(d) KALS Information Systems Ltd. 46. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual report, the salary cost debited under the software development expenditure was Q 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal's decision of the ITAT in the case of Bindview India Private Limited v. DCI, ITA No. ITA No 1386/PN/1O wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows: ''16. Another issue relating to selectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp; (E) Lucid Software Limited 3.4.2. The above company has been rejected as comparable in the case of Telcordia Technologies Pvt. Ltd. v. ACIT (supra). The submissions and the finding of the Hon'ble Mumbai Tribunal is reproduced below:- ''7.2 Lucid Software Limited: It has been submitted before us that this company, besides doing software development services, is also involved in development of software product. The learned AR has tried to distinguish by pointing out that product development expenditure in this case is around 39% of the capital employed by the said company, and, therefore, such a company cannot be considered as tested party. Even as per the information received in response to notice under section 133(6), the company has described its business as software development company or pure software development service provider. This information itself is very vague as the segmental details of operating revenue has not been made available to examine how much is the ratio of sale from software product and sale of software service and development. Looking to the fact that it has developed a softwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yncom Technologies Limited are concerned, the learned Counsel for the assessee submitted that these companies are also to be excluded from the list of comparables on the basis of the decision of the Tribunal at Bangalore in the case of Trilogy E-Business Software India (P.) Ltd. (supra). We find that the Tribunal in the case of Trilogy E-Business Software India (P.) Ltd. (supra) at page 27 at para 39 and at page 34, para 48 has given details as to why these two comparable should be excluded from the list of comparables. We have also brought out the similarity of functions performed by the assessee with that of M/s. Trilogy E-Business Software India Pvt Ltd. The relevant portions of the decision of the Tribunal in the case of Trilogy E-Business Software India (P.) Ltd. (supra) is reproduced hereunder. "(b) Avani Cimcon Technologies Ltd 39. As far as this company is concerned, the plea of the Assessee has been that this company is functionally different from the assessee. Based on the information available in the company's website, which reveals that this company has developed a software product by name "DXchange", it was submitted that this company would h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant observations of DRP as extracted by the ITAT in its order are as follows: "In regard to Accel Transmatics Ltd. the assessee submitted the company profile and its annual report for financial year 2005-06 from which the DRP noted that the business activities of the company were as under. (i) Transmatic system - design, development and manufacture of multi function kiosks Queue management system, ticket vending system. (ii) Ushus Technologies - offshore development centre for embedded software, net work system, imaging technologies, outsourced product development. (iii) Accel IT Academy (the net stop for engineers)- training services in hardware and networking, enterprise system management, embedded system, VLSI designs, CAD/CAM/BPO (iv) Accel Animation Studies software services for 2D/3D animation, special effect, erection, game asset development.' 4.3 On careful perusal of the business activities of Accel Transmatic Ltd. DRP agreed with the assessee that the company was functionally differen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lter. The order of the TPO on this aspect is not very clear as to how he has got over the aforesaid objection of the assessee. The TPO seems to have relied on the reply given by the company to the notice issued u/s. 133(6) of the Act. It was further brought to our notice that the Bangalore Bench of the Tribunal in the case of CSR India Ltd. in ITA No.1119/Bang/2011, order dated 29.01.2013for AY 07-08, had considered the comparable of this company with a software service provider like the assessee and has come to the conclusion that the same is not comparable, on the ground that it does not satisfy the related party transaction filter. The following are the observations of the Tribunal:- (iii) Related party transaction: 3.5 Ishir Infotech Limited: The assessee had objected to the inclusion of Ishir Infotech Limited as a comparable being related party transaction in excess of 15% of total sales/revenue. The TPO had set a limit of 25% on the related party transaction. According to the assessee, the recent order of the Tribunal in the case of 24/7 Customer Com Private Ltd. had held that if comparable company has related party transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial year 2003-04'. 3.5.3 Following the Coordinate Bench order of the Tribunal in the case cited supra, we direct the Assessing Officer/TPO to exclude, after due verification, those comparables from the list with the related party transactions or controlled transactions in excess of 15% of the total revenue for the financial year 2006-07. It is to be mentioned here, Geometric Ltd. is also to be removed from the comparable list, since that company was having RPT at 19.98% (going by assessee's own calculation), however, no argument was raised for its exclusion by the assessee, probably, on account of low margin of Geometric Ltd.' 16. Respectfully the aforesaid decision of the Tribunal, comparable at Sl.No.11 of the list of comparable chosen by the TPO has to be excluded for the purpose of comparison while determining the ALP of the impugned transaction in this appeal". 41. Respectfully following the said decision of the Coordinate Bench of the Tribunal, we direct that this company is also to be excluded from the list of comparables. 42. In addition to the above, the assessee has also raised a ground relating to the computation of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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