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TMI Blog2014 (5) TMI 923X X X X Extracts X X X X X X X X Extracts X X X X ..... total income of Rs.16,83,925/- after claiming deduction u/s 10A of the Act. The assessee being a captive service provider to its AE is remunerated on a cost plus markup basis for the services provided. During the financial year 2007-08 relevant to the assessment year under dispute, the assessee had disclosed operating revenue of Rs.17,65,67,915/- from international transaction with its AE. 4. During the scrutiny assessment proceedings, the Assessing Officer made a reference u/s 92CA (1) of the Act to the Additional. CIT (Transfer Pricing) i.e., TPO for determining the ALP of the International transactions with its AE. For establishing the price received towards international transaction is within the arms length, the assessee made a TP study. On the basis of FAR analysis, the assessee categorized it as a risk mitigated contract service provider and selected itself as the tested party. Transactions Net Margin Method (TNMM) was chosen as the most appropriate method for determining ALP. Operating profit/operating cost was selected as the profit hence Indicator (PLI). The assessee conducted search from the database to select comparable companies and finally selected 28 companies as co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intangible assets. It was submitted the brands of these companies enjoy premium pricing and due to scale of operations, these companies enjoy economies of scale in lower cost of infrastructural facilities and employees. It was further submitted, these companies are engaged in diversified activities including products, consultancy and solution. It was submitted that the financials of Wipro Ltd are not audited, manually corrected and are collected from TP report and hence cannot be relied upon. The learned AR submitted that the assessee is a service provider operating in a risk mitigated environment having a turnover of about Rs.17 crores and as such cannot be compared with these two companies. In support of such contention, the learned AR relied on the order of the Income-tax Appellate Tribunal in its own case for assessment year 2007-08 in ITA No.1801/Hyd/09 dated 31-1-2013 and judgment dated 10-7-2013 of Hon'ble Delhi High Court in case of CIT v. Agnity India Technologies (P.) Ltd.(ITA No. 1204/Hyd/2011). 7. The leaned DR, on the other hand relied on the orders of the DRP as well as TPO. 8. We have heard the parties and perused the orders of the revenue authorities as well ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Departmental Representative's contention that the assessee itself has selected Infosys as a comparable is concerned, we find merit in the contention of the learned AR that the TPO cannot adopt a pick and choose method while selecting comparables, when he has rejected the entire TP study report of the assessee. The co-ordinate bench of the Income-tax Appellate Tribunal in the case of Capital IQ Information Systems (India) Private Limited (supra) held as under:- "The assessee has objected for these three companies being taken as comparables mainly on the ground that these companies are industrial giants considering their turnover compared to that of the assessee, whose turnover is only Rs.60 crores. In this context, the assessee has referred to the annual turnover of these three companies, which are as below- Company Turnover (in Rs.Crores) (1) HCL Comnet Systems & Services Limited 260.19 (2) Infosys BPO Limited 649.57 (3) Wipro Limited 939.78 It is the contention of the assessee that these three companies are industrial giants in the area of so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of Satyam Computers Services Ltd., thereby reducing the arm's length margin to 25.6%. It is argued that the case of the assessee is not comparable with Infosys Technologies Ltd., the reason being that the later is giant in the area of development of software and it assumes all risks, leading to higher profit. On the other hand, the assessee is a captive unit of its parent company in the USA and it assumes only limited currency risk. Having considered these points, we are of the view that the case of the aforesaid Infosys and the assessee are not comparable at all as seen from the financial data etc. of the two companies mentioned earlier in the order. Therefore, we are of the view that this case is required to be excluded." Similar view has also been expressed by the Hyderabad Bench of the Tribunal in the case of Trinity Advanced Labs (P.) Ltd. (supra). In the case of Genesys Integrating India P. Ltd. (supra), the Bangalore Bench of the Tribunal has observed in the following manner- "9. Having heard both the parties and having considered the rival contentions and also the juridical precedents on the issue, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax Appellate Tribunal, Hyderabad Bench in case of Brigade Global Services Pvt. Ltd (supra). Following the aforesaid decisions of co-ordinate bench, we hold that the Infosys Technologies and Wipro Limited cannot be taken as comparables in the case of the assessee. Accordingly, we direct the Assessing Officer to re-compute the ALP after excluding Infosys Technologies Limited and Wipro Limited as comparables. Hence, grounds raised on this issue are partly allowed.' 9. The Hon'ble Delhi High Court in case of Agnity India Technologis (P.) Ltd. (supra) has also upheld the view of the Income-tax Appellate Tribunal Delhi Bench holding that big companies like Infosys Technologies Limited cannot be considered as comparable to small captive service providers. Respectfully following the decision of Hon'ble Delhi High Court as aforesaid and the decision of the co-ordinate bench in assessee's own case for the assessment year 2007-08, we hold that Infosys Technologies Limited and Wipro Limited cannot be considered as comparable to the assessee. We therefore direct the Assessing Officer /TPO to compute arms' length price after excluding the aforesaid two companies from the li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of transaction did not fall within the ambit of software export and should not form part of profit of the undertaking engaged in the business of software development services. The DRP after considering the submissions of the assessee held as under:- "The assessee had utilised the loan taken for the software development activities, which was/is prime business objective and accrued interest on such loan in its books of accounts as business expenditure. Subsequently, when the assessee reversed the accrual, as per section 41(1) of the Act, such reversal/cessation of liability shall be deemed to be the profits and gains of business carried on by the company. Section 10A(4) of the Act clearly defines as to what constitutes 'the profits and gains derived from the export of articles or things or computer software. Accordingly, for the purpose of computing the deduction, the profits of the business (which would also include the element with regard to reversal of interest expense) can be considered. The Assessing Officer is directed to verify this and if the claim of the assessee is correct, shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X
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