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TMI Blog2014 (1) TMI 1031X X X X Extracts X X X X X X X X Extracts X X X X ..... oducts during the year but the said company might have incurred expenditure towards development of software products - The company should not be taken as comparable. Infosys Technologies Ltd. - This being a big company in all respects including the range of turnover is not a comparable to small companies which are captive service providers having considerably low turnover - Merely because the assessee had selected it as a comparable it cannot operate as an estoppel in raising objections with regard to comparability of the aforesaid company - The company should not be taken as comparable. Tata Elxsi Ltd - It cannot be treated as comparable with any other company since it is a specialized embedded software development provider - Because of the specialization and also because of diverse nature of its business, it is very difficult to scale-up the operations of Tata Elxsi Limited - Decision in Intoto Software India Pvt. Ltd. [2013 (10) TMI 599 - ITAT HYDERABAD] followed - The issue has been remitted back for fresh adjudication. Bodhtree Consulting Ltd. - Its related party transaction as a percentage to the total revenue is 34% which is more than the accept/reject matrix of mor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Reddy ORDER Per Saktijit Dey, JM: This appeal by the assessee is directed against the order of the CIT(A) III, Hyderabad dated 29.9.2010 for A.Y. 2005 06. 2. The assessee raised altogether 15 main grounds of appeal and two additional grounds. 3. At the outset the learned AR submitted that he would not like to press ground Nos. 2, 3, 4, 5, 6, 7, 9, 13 and 14. In view of such submission of the learned AR, these grounds are dismissed as not pressed. 4. In ground No. 8, the assessee has challenged selection of 5 companies as comparables in software services segment for determining the arms' length price (ALP) under TNMM. In the additional ground No. 1, the assessee had included two more companies as un comparables in the same segment. 5. Briefly, the facts relating to the issue in dispute are that the assessee is a company incorporated under the Companies Act, 1956. It is engaged in the business of software development services and ITES services. The assessee during the year under dispute provided such services in the sector of software development and ITES only to its Associated Enterprise (AE). For the impugned assessment year, the assessee filed its return of inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pectively. On the basis of transfer pricing adjustment computed by the TPO, the AO passed the assessment order making an addition of Rs. 5,00,16,805. Being aggrieved by the assessment order, the assessee went in appeal before the CIT(A). The CIT(A), however, dismissed the appeal of the assessee rejecting all its contention. Being aggrieved by such order, the assessee is in appeal before us. 6. The grievance of the assessee in ground No. 8 is in respect of selection of certain companies as comparables in the software service segment. Now we will deal with each company that was objected by the assessee: (a) Exensys Software Solutions Ltd. : Objecting to the aforesaid company's selection as a comparable, the AR submitted that it is a product company as it is involved in development of software products which is evident from significant intangibles owned by that company. That apart it is also an exceptional year of operation in case of the said company. There is merger of Holool India with effect from 14.2004 which had a material impact in the financial results for the year. In support of such contention, the learned AR referred to the decisions of the co ordinate Bench of the Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the Assessing Officer /TPO to exclude this company from the list of comparables." The other decisions relied upon by the learned AR also expresses the same view. Therefore, considering the totality of facts and circumstances and respectfully following the view expressed by the co ordinate Bench in case of Intoto Software India Pvt. Ltd. (supra), we direct the AO/TPO to examine the issue afresh in conformity with the direction given in the case of Intoto Software India Pvt. Ltd. (supra). Accordingly, this issue is remitted back to the file of the AO. (b) Sankhya Infotech Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... development of software products. The co ordinate Bench on that basis directed the AO/TPO to exclude Thirdware Solutions Ltd. from list of comparables. The same view has also been expressed by the Delhi Bench of the ITAT in the case of Colt Technology Services India Pvt. Ltd. (supra) and in case of Sonata Software (supra). Respectfully following the decisions of the co ordinate Benches, as noted above, we direct the AO/TPO to exclude the aforesaid company from the list of comparables. (d) Infosys Technologies Ltd. The learned AR objected to the aforesaid company being treated as a comparable in view of its extraordinary high turnover of about Rs. 6,859 crores compared to the total turnover of about Rs. 66 crores of the assessee from both the segments and it was contended by the learned AR that under no circumstances Infosys Technologies Ltd. and WIPRO can be treated as comparable to the assessee as it is a giant in the sector of software development and ITES having considerable brand value. The learned DR, on the other hand, while strongly opposing contention of the assessee, submitted that the assessee itself in its own TP Study had selected Infosys Technologies as a comparabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gy E Services, LG Soft, etc. The learned DR, on the other hand, relied on the order of the TPO. We have heard contentions of the parties and perused materials on record. We record our findings as under: The assessee has sought the exclusion of the aforesaid company by placing reliance upon a letter of the said company to the Additional. CIT (Transfer Pricing), Hyderabad relating to a proceeding in case of another assessee wherein the said company has admitted that it cannot be treated as comparable with any other company since it is a specialized embedded software development provider. In this context, it would be relevant to note the finding of the co ordinate bench of this Tribunal in case of M/s. Intoto Software (supra) which is as under: "22. Tata Elxsi Limited : As regards this company, the learned Counsel appearing on behalf of the assessee, filed before us the reply of Tata Elxsi Limited to the Addl. CIT (Transfer Pricing), Hyderabad, wherein the concerned Officer has been informed that Tata Elxsi Limited is specialized Embedded Software Development Service Provider and that it cannot be compared with any other software development company. It was submitted that beca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the present case as they relate to different assessment years. However, on perusal of the orders cited before us, we find many of them to be relating to the impugned assessment year. Hence, contention of the learned DR is not acceptable. 7. In ground No. 10 and additional ground No. 2, the assessee has sought exclusion of 4 comparable companies selected by the TPO in the ITES segment. Having heard the parties, hereinafter we will deal with each of the companies objected by the assessee: (a) Vishal Information Technologies Ltd.: Objecting to the aforesaid company having been selected as comparable by the TPO, the learned AR submitted that apart from the fact that the said company is functionally different as it is in the business of providing designing and printing solutions, the primary reason why this company should not be selected as comparable is it has outsourced a considerable part of its business to third party vendors. This is proved from the fact that only 2% of the revenue is spent towards employee cost and there is huge vendor payment. In support of such contention, the leaned AR relied on the decisions of Hyderabad ITAT in the following cases: Capital IQ Inform ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that this company cannot be treated as a comparable. Therefore, considering the aforesaid fact, we are of the view that M/s Vishal Information Technology Ltd., cannot be taken as a comparable and direct for excluding the same from the list of comparables." In aforesaid view of the matter, we direct the TPO to verify whether similar situation exists in the impugned assessment year also. If the employee cost of the aforesaid comparable is also in similar low range, then it has to be assumed that the said company has outsourced its business activities to third party vendor, hence cannot be treated as comparable to the assessee. (b) Maple E Solutions Ltd. : The learned AR objected to the aforesaid company being treated as comparable as it provides design service on line and outline media ranging from interface to logo design. The service include website evaluation, intranet/extranet, email list management content management, security etc. Hence, the companies is functionally dissimilar to the assessee. He further submitted that the said company cannot also be treated as comparable as the directors of the said company were found to be involved in fraud, hence financial results of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia Pvt. Ltd., in ITA No. 1624/Hyd/2010 dated 28.6.2013. We have heard the parties. The sole contention of the assessee for excluding the aforesaid company is the employee cost as a percentage of the operating revenue is much lower compared to the assessee. On a perusal of the order passed by the co ordinate Bench in the case of HSBC Electronic Data Processing India Pvt. Ltd. (supra), it is to be noted that the co ordinate Bench while considering the objection of the assessee with regard to the aforesaid company in para 13 accepted assessee's contention that the company outsourced its work and has held that the company cannot be selected as a comparable on account of its low employee cost. In view of such order of the co ordinate Bench, we direct the AO/TPO to examine this aspect and if there is substantial difference between the assessee and the aforesaid company, then this company cannot be treated as a comparable. (d) WIPRO BPO Solutions Ltd. : We have heard the contentions of the parties and perused the materials on record in the context of assessee's objection with regard to aforesaid company. The ground on which the assessee has sought exclusion of the aforesaid company ..... X X X X Extracts X X X X X X X X Extracts X X X X
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