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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 ..... in the course of present appeal also filed revised grounds of appeal. However, all the grounds pertain to determination of ALP on the international transactions undertaken by the assessee. 4. Briefly stated, the assessee is a private limited company engaged in software development and maintenance services to its AE and is 100% subsidiary of M/s. CDOC Inc., USA. The assessee is engaged in providing software development services to M/s. Conseco Services LLC, USA, which is also another subsidiary of the group. For the A.Y. 2005-2006 assessee filed return of income on 22.10.2005 showing income of Rs.1,81,459/- after claiming deduction under section 10A for Rs.1,72,34,991/-. As the assessee had international transactions, the matter was referred to the TPO. The assessee has done software development services to its AE to an extent of Rs.13,11,18,072/- in addition to reimbursement of expenses to the tune of Rs.18,07,596/-. Assessee has undertaken software development services on cost plus method (actual cost incurred plus 15% mark-up). However, in the T.P. study undertaken by the assessee, assessee even though justified the price on CUP method, however, preferred TNMM as a method for j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taking fresh comparability analysis by the TPO, to which, the learned D.R. has no objection. Since, these grounds were not pressed, these were treated as withdrawn. 7. Ground No. 7 pertain to using the data available at the time of assessment proceedings instead of those available as on the date of T.P. documentation, not applying multiple year data and also obtaining information under section 133(6) which was not available to the assessee in public domain. This ground was also not pressed and accordingly, treated as withdrawn. 8. Grounds No. 4, 5 and 6 are pertain to selection of comparables and ground No. 8 pertain to risk adjustment requested by assessee. 9. We have heard the learned Counsel and the learned CIT/DR in detail and perused the paper book placed on record. 10. At the outset, learned Counsel submitted that the facts in assessee's case are exactly similar to the facts in the case of Intoto Software India Pvt. Ltd. Hyderabad vs. ACIT decided vide ITA.No. 1196/Hyd/2005-2006 on 24-05-13 and submitted that most of the comparables which the assessee is objecting have already been decided in the above Order and accordingly, most of the issues are covered. Learned Counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Geometric Software Solutions Co. Ltd. were objected now. These companies are not functionally dissimilar and TPO has discussed elaborately each of the company. Therefore, it cannot be said that these companies are functional dissimilar. Moreover, assessee is also making products for the group and therefore, if there are certain product sales, that alone does not make a company dissimilar. 12. In response, learned A.R. submitted that A.O. has taken the data pertaining to particular segments only as far as Igate Global Solutions Ltd., (Seg) is concerned, as can be seen from the order. Even though Igate Global Solutions Ltd. may be involved in product development, but the data pertaining to software services only and therefore, were taken on segmental profits basis, on which, assessee has no objection. Likewise, learned Counsel also submitted referring to the paper book that income from software services is more and within the filters prescribed by the A.O. and therefore, R.S. Software (India) Ltd. was accepted as a comparable. The companies objected to by the assessee were decided by the Coordinate Bench after due analysis in various other orders also. 13. We have considered the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal IQ vide ITA.No.1961/Hyd/2011, Market Tools Research Pvt. Ltd. vide ITA.No.2066/Hyd/2011 wherein also it has been held that companies which have exceptional circumstances and events like merger/demerger, which impact the financial statements, have to be excluded. Not only in the case of Intoto Software Solutions Pvt. Ltd. but also in other cases like M/s. NTT Data India Enterprise vide ITA.No.1612/Hyd/2010, Integrated Decisions & Systems vide ITA.No.27/JP/2011 and Colt Technology Services vide ITA.No.609/Del/2011, Exensys Software Solutions Limited have been excluded as a comparable. The Order in the case of Intoto Software Solutions Pvt. Ltd. (supra) is extracted for the sake of reference : "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 adoption of this company as comparable before the TPO, it has come to its knowledge subsequently that there is an extraordinary event in the company which has effected the margins of the company for the relevant assessment year. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts 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 the Assessing Officer/TPO to exclude this company from the list of comparables". Respectfully following the same, since this comparable has been excluded in number of other cases also, after due analysis, this company can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the annual report, it was submitted that this comparable was rejected by the ITAT, Pune in the case of Egain Communications Ltd. This company having revenue from product license and earning extraordinary profit due to intangible owns. 15.6. These three comparable above Flextronics Software Limited, Foursoft Limited and Thirdware Software Solution Limited were analysed by the Coordinate Bench of the Tribunal in the case of Intoto Software Solutions Pvt. Ltd. (supra) wherein it has been held as under : "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ower 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 softrware 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r to use its financial numbers to compare it with any other company. The communication dated 25th August, 2009 to the TPO 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." Keeping the assessee's objections and the decisions of the Coordinate Bench, prima facie, we are of the view that TATA Elxsi Limited is functionally different and has incomparable size to that of the assessee. Further, we are unable to verify whether the segmental profits adopted by the TPO pertain to entire software development services or pertain to limited service akin to assessee services. Since, these aspects are not clear 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, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve of success or failure of the products undertaken at a global level. Assessee follows the assured return revenue model. The selection of uncontrolled comparables bear certain risks of operations and hence, their returns are volatile, consequent on their entrepreneurial risk profile of the comparables. Therefore, assessee has asked the risk adjustment of about 7.6% using Capital Asset Pricing Model(CAPM). The TPO in his order arrived at a risk adjustment of 0.85%. However, even, this risk adjustment was not granted holding that it was insignificant and negligible. It was the contention that assessee's risk prevailed should be analysed and risk adjustment should be provided based on the decisions of the Coordinate Bench in the case of Intoto Software Solutions Pvt. Ltd. ITA.No.1196/Hyd/2010 etc., dated 24.05.2013, DE Shah India Software Pvt. Ltd. ITA.No.2071/Hyd/2011 and DCIT vs. Hellosoft India Pvt. Ltd. ITA.No.645/Hyd/2009 dated 15.01.2013. 16.2. After considering the rival contentions, as seen from the Orders of the TPO, he 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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