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TMI Blog2014 (2) TMI 560X X X X Extracts X X X X X X X X Extracts X X X X ..... portionate to the sales from the sale of software products – u/s 133(6) of the I.T. Act, the TPO has the power to call for the necessary details from the comparable companies - the Assessing Officer/TPO has exercised this power to call for details with regard to the various companies - The method adopted by the TPO to allocate expenditure proportionately to the software development services and software product activity cannot be said to be correct and reasonable - Wherever, the Assessing Officer/TPO cannot make suitable adjustment to the financial results of the comparable companies with the assessee-company to bring them on par with the assessee, these companies are to be excluded from the list of comparables – thus, the AO/TPO directed to exclude the comparables as ordered – Decided in favour of Assessee. Risk adjustment relief – Held that:- The TPO has accepted that assessee has a risk free entity and risk adjustment is required - However, as against 7.6% quantified by the assessee, the A.O. arrived at risk adjustment of 0.85% - Even this was not granted to the assessee – thus, the TPO is directed to re-examine the issue and grant risk adjustment after analysing the risk p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis of the arithmetic mean of the margins of comparables i.e., OP/TC, the assessee justified the amounts received from its AE under T.P. provisions. In the course of T.P. assessment proceedings, TPO selected revised comparable companies. TPO adopted various filters which are different from the assessee's filters adopted and considered the margin of comparable companies using only the relevant year data i.e., F.Y. 2004- 2005. After due search process and giving opportunity to the assessee, the TPO finally selected 17 companies as comparables which include 6 comparables from the T.P. document of assessee itself. TPO also issued two show-cause notices during the proceedings, in response to which, assessee put-forth its arguments. After receiving the objections of the assessee, TPO computed the arms length margin of comparables at 26.59% and after allowing working capital adjustment, determined the arms length margin at 26.54% as against assessee's margin of 15.14%. The above resulted in an upward T.P. adjustment of Rs.1,31,16,086/-. The A.O. incorporated the order of TPO in the assessment order and made the addition to the income returned, without allowing any deduction under secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... both the companies are engaged in providing software development services to its AEs on a cost plus mark- up basis and assessee can be termed as 'Captive Service Provider' having least complex operations and shares lesser risks; and in both the cases, method used for ascertaining arms length price was TNMM. It was submitted that based on the above order of the Coordinate Bench of the Tribunal in the case of M/s Intoto Software India Pvt. Ltd. (supra), the learned Counsel wanted the following comparables selected by the A.O. to be deleted on the basis of the above order : (A) Exsensys Software Solutions Ltd. Reason : * Company having extraordinary circumstance i.e., Amalgamation of M/s. Holool India with Exensys Software during FY 2004-05 which has resulted in peculiar circumstance. *Company having super normal profit (B) Infosys Technologies Ltd. Reason : *Company is a giant and market leader having substantially high turnover. *Company is engaged in development of several niche products. (C) Flextronics Software Limited (D) Four Soft Limited (E) Thirdware Software Solutions Limited (F) Tata Elexy Ltd(seg) (G) Geometric Software Solutions Co ltd (H) Sankhya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovider to the group companies and is providing services on cost plus mark- up basis like in the case of Intoto Software India Pvt. Ltd. which was decided by the Coordinate Bench in ITA.No.1196/Hyd/2010 etc., A.Y. 2005-2006 2007-2008 dated 24.05.2013. 14. The following 16 comparables have been selected by the TPO and approved by the CIT(A) in arriving at the arm's length margin. S.No. Name of Company OP/TC as per TPO 1. Lanco Global Systems Ltd. 13.65% 2. L T Infotech Ltd (Seg) 10.33% 3. R.S. Software (India) Ltd. 8.07% 4. Sasken Network Systems Ltd. 16.64% 5. Sasken Communication 14.42% Technologies Ltd. (Seg) 6. Igate Global Solutions Ltd. (Seg) 4.32% 7. Bodhtree Consulting Ltd. 24.85% 8. Visual Soft Technologies Ltd. 23.52% (Seg) 9. Exensys Software Solution Ltd. 70.68% 10. Infosys Technology Ltd. 42.83% 11. Flextronics Software Ltd. (Seg) 32.19% 12. Four Soft Ltd. 22.98% 13. Thirdware Solutions Ltd. 66.09% 14. Tata Elxsi Ltd. (Seg) 24.3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is an extraordinary event in the company which has effected the margins of the company for the relevant assessment year. He submitted that during the relevant previous year, the Exensys Software Limited was amalgamated with another company by name Holool India Limited and the operating margin of 70.68% is the combined result of the amalgamated company. Thus, according to him, the data collected by the TPO is not reliable and therefore, this company should be excluded from the list of comparables. 15. For this purpose, he has drawn our attention to pages 526 to 529 of the paper book filed along with the chart wherein while giving information to the TPO under section 133(6) of the I.T. Act, Exensys Software Limited has clearly mentioned that Holool India Limited and Exensys Software Limited got amalgamated w.e.f. 1.4.2004 and accordingly the financial statements as on 31.3.2004 had been combined and accounts for the financial year 2004- 2005 had been maintained as one entity i.e., Exensys Software Solutions Limited. It is also mentioned in the said communication that by virtue of the merger, there is a gap in expenditure expected to incur and actual expenditure incurred, whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ully following the same, since this comparable has been excluded in number of other cases also, after due analysis, this company cannot be selected as comparable for this assessment year. Accordingly, TPO is directed to exclude the same. 15.2. INFOSYS TECHNOLOGIES LIMITED : The assessee is objecting to the inclusion of this company on the reason of incomparable skill of operations having high turnover and being a complete software company including service product development, branded products etc., It was submitted that the Hon'ble High Court of Delhi in the case of CIT vs. Agnity India Technologies Pvt. Ltd. (TS-189-HC-2013 (Del)-(T.P.) has held that Infosys is not comparable based on its risk profile, nature of services, ownership of branded/ proprietary products, expenditure of advertisement/sales promotion, brand building and research and high turnover. Considering the Hon'ble Delhi High Court Judgment and also the decisions in the case of Hellosoft India Pvt. Ltd. Vide ITA.No.645/Hyd/2009 and C.O.40/Hyd/2009 and Delloite Consulting vide ITA.No. 1082 1084/Hyd/2010, wherein the Coordinate Bench of the Hyderabad Tribunal have excluded the high turnover cases as not comparabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oftware development services. The learned Counsel submitted that the functions of these companies are different from the assessee who was into sole ctivity of software development for its associated enterprise. He submitted that the TPO has allocated the expenditure in the proportionof the revenue of these companies from software services and software products and has adopted the figure as segmental margin of the company and has taken these companies as comparables. He submitted that by taking the proportionate expenditure, the correct financial results would not emerge. He submitted that nothing prevented the Assessing Officer/TPO from obtaining the segmental details from the respective comparable companies before adopting them as comparable companies and before taking the operating margin for arriving at the arms length price. He submitted that wherever the segmental details are not available, then the said companies should not be taken as comparables. For this purpose, he placed reliance upon the decision of the Bangalore Tribunal in the case of First Advantage Offshore Services Pvt. Ltd. vs. The DCIT in ITA.No.1252/Bang/2010 wherein these companies were directed to be excluded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is functional dissimilarity between the assessee and these companies and without making adjustment for the dissimilarities brought out by the TPO himself, these companies cannot be taken as comparable companies. The method adopted by the TPO to allocate expenditure proportionately to the software development services and software product activity cannot be said to be correct and reasonable. Wherever, the Assessing Officer/TPO cannot make suitable adjustment to the financial results of the comparable companies with the assessee company to bring them on par with the assessee, these companies are to be excluded from the list of comparables. Therefore, we direct the Assessing Officer/TPO to exclude these three companies from the list of comparables". Respectfully, following the same, we accept the assessee's objections and direct the TPO to exclude the above three companies from the list of comparables. 15.7. TATA ELXSI LIMITED : The objection of the assessee is that TATA Elxsi operating two segments -system communication services and software development services. The TPO accepted the software development services segment in his T.P. analysis and assessee's objection is tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar from the data furnished before us, we direct the TPO to examine and in case, the segmental profits of a particular service is not available, then, to exclude the TATA Elxsi Limited from the list of comparables. Accordingly, this issue is restored to the file of TPO for examination and to decide in accordance with law and facts, after affording reasonable opportunity of being heard to assessee. 15.8. GEOMETRIC SOFTWARE SOLUTIONS CO. LTD.: The objection of the assessee is on the reason that the said company has diversified operations consisting of software product and services. Though assessee objected to this, we find that the company was accepted as comparable in the case of Intoto (supra) which assessee admitted as of similar functionality.. This company was accepted in the case of Intoto Software Solutions Pvt. Ltd. (supra) wherein it was stated as follows : "4. Out of the 17 companies proposed by the TPO, the assessee has accepted 10 companies as comparables which are as follows : (1) Bodhtree Consulting Limited (2) Exensys Software Solutions Limited. (3) Geometric Software Solutions Co. Ltd. (4) Lanco Global Systems Limited (5) L T Infotech Ltd. (6) R S Sof ..... X X X X Extracts X X X X X X X X Extracts X X X X
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