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TMI Blog2014 (3) TMI 171X X X X Extracts X X X X X X X X Extracts X X X X ..... ion that this exceptional profit with the fact of amalgamation effected operating profit of the company and this cannot be taken as comparable - Relying upon Intoto Software India (P.) Ltd. Versus Assistant Commissioner of Income-tax, Circle -2(1), Hyderabad [2013 (10) TMI 599 - ITAT HYDERABAD] - There is an extra-ordinary event which resulted in high operating margin of that company – thus, the AO is directed to exclude these companies from the list of comparables - Decided in favour of Assessee. - ITA.No.1256/Hyd/2010 - - - Dated:- 28-2-2014 - Shri B. Ramakotaiah And Shri Saktijit Dey,JJ. For the Petitioner : Mr. KC Devdas For the Respondent : Ms. Haritha ORDER Per B. Ramakotaiah, A. M. This appeal by the assessee against the Order of the CIT(A)-III, Hyderabad dated 14.07.2010. Assessee has raised 11 grounds, out of which, ground Nos. 1 to 4 have not been pressed. Accordingly, they are treated as withdrawn. 2. Ground No.5 pertain to use of the additional filters in selection of comparables and ground Nos. 6 to 8 pertain to selection of comparables by TPO / rejection of comparables suggested by the company. Ground No. 9 is with reference to the is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stment of 2.33%, the arithmetic mean of the PLI was arrived at 24.26%. On operating cost of Rs.23.97 crores, arms length price of operating cost was arrived at Rs.29,79,42,116/- and the shortfall was arrived at Rs.2.24 crores. As briefly stated above, Ld. CIT(A), however, deleted one company Satyam technologies as not comparable and assessee got relief to that extent. The final list of 16 cases selected after the order of the CIT(A) are as under :- S.No. Name of the Company TP Order (WC adjusted) 1. iGate Global Solutions Ltd. 2.11% 2. Flextronics (Seg.) 30.02% 3. Geometric Software Solutions Co.Ltd.18.18% 4. Lanco Global Systems Ltd. 9.84% 5. Larsen Toubro Infotech Ltd. 8.87% 6. R S Software (India) Ltd. 7.07% 7. Sasken Communication Techn Ltd. (Seg) 13.62% 8. Sasken Network Systems Ltd. 14.41% 9. Visualso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roduct development. b) Exceptional year of Operations: There was amalgamation of the company with Holool India Ltd. with retrospective effect from April 01, 2004, which had a material/significant impact on the results of the company for financial year ended March 31, 2005 and confirmed by the company in its response to 133(6) notice. c) Error in margin computation: The ld TPO has excluded the deferred revenue expenditure while computing the net margin of the company. If the same is included, the net margin of the company would be 32.68%. It was submitted that the following rulings have analysed and rejected this company as it has software products and held as not comparable to a service provider: - Intoto Sof tware India Pvt. Ltd. ( ITA No. 1196/Hyd/2010) - ITO Vs. Colt Technology Services India Pvt. Ltd. (ITA No. 609/Del/2011) - Integrated Decisions Systems India (P) Ltd. Vs. DCIT ( ITA No. 27/JP/2011) - ACIT Vs. Sonata Sof tware ( ITA No. 3514/Mum/2010) 3. Foursoft Ltd. The learned counsel submitted that this company is functionally different as evident from various disclosures in the annual report (Directors report, Management discussion and website ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Systems India (P) Ltd. Vs. DCIT ( ITA No. 27/JP/2011) - ACIT Vs. Sonata Sof tware ( ITA No. 3514/Mum/2010) - DCIT Vs. M/s Hellosoft India Pvt. Ltd. (ITA No. 645/Hyd/09) 6. Thirdware Solutions Ltd.: Ld. Counsel submitted that this company is functionally different for the following reasons: As per reply to notice issued u/s 133(6), the company informed that it is engaged in implementation and customer services which include training, customized development and help desk services for ERP software and distribution of products of Quad Inc. and Hyperion Solutions Corporation. Various news articles available on the internet http://www.hinduonnet.com/2001/07/11/stori es/0611000h.htmstated that the company is a distributor of products; As per the company s website www.thirdware.net/ourcapabilities.htm. has stated the company has partnered with QAD Inc to deliver the entire business cycle of MGF/PRO, a product of QAD Inc. from Presales, sales, training, consulting, implementation and support to application management services. The following rulings have analysed and rejected this company as it is into trading of software licenses: - Intoto Software Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Further, that company has charged deferred expenditure and the amount claimed in this year is Rs. 1.22 crores as against Rs. 30.21 lakhs in earlier year. This was clearly stated in Notes that claim was with reference to the AS-14 and also due to amalgamation of two companies. Vide page 957 of paper book, it was seen that out of gross assets of Rs. 7.95 crores, Brands alone consist of Rs. 5 crores, therefore, intangible assets comprising of substantial part of this company s assets. Not only in the correspondence with the TPO that Assessee expressed its inability to furnish separate accounts for two amalgamated companies but also further it has clearly mentioned vide letter dated 26-04- 2007 to the TPO that there is a gap in the expenditure expected to incur and actual expenditure incurred which made the company record high operating margin on cost. These factors indeed support assessee s contention that this exceptional profit with the fact of amalgamation effected operating profit of the company and this cannot be taken as comparable. Other issues were also analysed and accepted in various cases as relied upon by the learned counsel. In the case of Intoto Software India Pvt. Ltd., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO for examination as was done in the case of Intoto Software(supra). We are, therefore, of the opinion that on the basis of facts placed on record, the case of Exensys Software Solutions Ltd. cannot be taken as comparable. 13. Similarly, the other cases, Four Soft Ltd, Infosys,., Sankhya Infotech Ltd., Thirdware Solutions Ltd, Tata Elexi (seg) etc, as mentioned above, are also to be excluded as they are considered and analysed in various cases relied on about functionality and why the same are not comparable to the companies like assessee. In view of this, we are not discussing other comparables in detail, but, suffice to say that assessee s submissions are valid. The AO is directed to exclude the above comparable and re-work out the arm s length margin accordingly. The ground No.7 raised by Assessee are considered as allowed. Inclusion of 2 Comparables : Birla Technologies Ltd. VJIL Consulting Limited 14. The assessee is requesting for inclusion of the above companies on the reason that TPO erred in not selecting these companies of extraneous reasons stating that Birla Technologies Limited was incurring persistent losses. It was submitted that company has operating profit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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