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TMI Blog2014 (6) TMI 371X X X X Extracts X X X X X X X X Extracts X X X X ..... n nature and therefore, they need not be adjudicated. 3. Ground Nos.3 to 6 are as under : "3. The Ld. AO/TPO erred in selecting functionally dissimilar companies as comparables for bench marking analysis, not justified in adopting the high arithmetic mean and working capital adjustment at the rate of 27.67% (24.35% + 3.32%). 4. The Ld. AO/TPO ought to have accepted and excluded Rs.5.66 crores from the cost base for calculating profit margin of the assessee company for bench marking analysis. 5. The Ld. AO is erroneous in law in not adjusting the losses against the income assessed. 6. The Ld. AO/TPO legally erred in applying the Profit Level Indicator (PLI) on the total operating cost instead of applying PLI on cost relating to international transactions entered with Associated Enterprises (AE)". 4. The above four grounds are with reference to adjustment made under the T.P. provisions. 4.1. Briefly stated, assessee AxSys Healthtech Ltd. (Axsys), is a company incorporated under Indian Companies Act situated at Hyderabad is in the business of developing Healthcare related software products and has a full-fledged development centre. It has an AE by name AxSys Technology Ltd(ATL) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting to taking the operating cost at Rs.7.55 crores as against Rs.1.89 crores arrived by it and referred to the objections before the DRP which were not considered. 8. It was submitted that assessee is objecting to selection of comparables by the TPO and mainly about 14 comparables which are already rejected by ITAT in various orders as not comparable on valid reasons. 9. The next issue as stated is with reference to negative working capital adjustment made. It was submitted that even otherwise if the operating cost and comparables are correctly selected, then the average of balance of comparables would be within the limits as prescribed in the Act and no adjustment is required on the facts of the case. 10. Learned D.R. however, objected to various issues. The detailed contentions of the respective parties are discussed in the course of this order. 11. We have considered the rival contentions and examined the facts on record. The issues in this appeal can be classified under two heads 'operating cost' and 'selection of comparables', for the sake of discussion. 11.1 Operating cost: With reference to determination of operating cost, assessee has spent a total amount of Rs.10,72, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r at para 2.3 stating that no evidence was furnished in respect of the costs that are excluded. DRP also inspite of specific objection by the assessee neither commented about the nature of expenditure nor given any directions either to verify to exclude or include. 11.2. Before us, Ld. Counsel submission was that this amount was spent for developing new products and he placed on record the agreement dated 15.09.2004 between the assessee company and its AE and also filed a chart indicating the allocation of 'percentage of man-hours' used for new product development. He has placed a chart bifurcating the amount of Rs.7,55,48,212/- into Rs.56,58,56,111/- towards proportionate amount towards R & D and cost of others R & D at Rs.1,89,62,201/-. 11.3 Even though these two statements were furnished, we are unable to give any finding on this issue as neither TPO nor DRP examined the said expenditure. For that one has to understand nature of development of new products by the assessee and its capitalisation of expenditure as such. Assessee incurred expenditure as a 'start-up' expenditure in the nature of software development between FY 1999-2000 to 2001-2002 and that expenditure was claime ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ears P & L account, Balance sheets are not before us and we are not made aware about such claims/accounting treatment in later years. In view of this, the issue of 'operating cost' is set aside to the file of the TPO/A.O. for fresh examination of the assessee's contentions for determining the operating cost. 12. Selection of Comparables: The next issue for consideration is with reference to comparables. As briefly stated above, out of 26 comparables selected by the TPO, DRP excluded 2 comparables vide its order in page No.17. A.O/TPO was directed to exclude two concerns i.e., 1. Celestial Labs Ltd., and 2. Geometric Ltd., from the list of comparables and to re-compute the margin. However, A.O. vide his order dated 30.12.2010 ignored the directions of the DRP and made addition of same amount of Rs.7,52,40,804/- proposed by the TPO in the draft assessment order. To that extent, order of the A.O. is not consistent with the directions of the DRP. A.O. is directed to exclude the above 2 comparables. There is no need to discuss about these 2 comparables by us as these are already excluded by the DRP. Therefore, to the extent of these 2 comparables, we direct the A.O/TPO to exclude the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ind of details provided by the TPO, we are unable to persuade ourselves to include it as comparable party. Learned CIT DR has provided a copy of profit loss account which shows that mainly its earning is from software exports, however, the details of percentage of export of products or services have not been given. We, therefore, reject this company also from taking into consideration for comparability analysis." 3. KALS INFORMATION SYSTEMS LTD: "We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 from the list of comparables." 7. INFOSYS TECHNOLOGIES Ltd.: "We have heard both the parties. We find that Infosys Technologies Ltd., though, is into the similar business of the assessee as software development, cannot be considered as a comparable to any other companies which are also involved in similar activities. It is not only a giant company but is also engaged in development of various niche products. It cannot be compared to the assessee in any manner. Similar directions have been given by the Tribunal at Delhi and Hyderabad Benches in the cases cited (supra)". 8. 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), Hyderaba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No.1231/Bang/2010) . Thus, companies having turnover of more than 200 crores have to be eliminated from the list of comparables as laid down in several decisions referred to by the ld. counsel for the assessee. Applying those tests, the following companies will have to be excluded from the list of 26 comparables drawn by the TPO. 14. HELIOS & MATHESON information Technology ltd This comparable is objected on the reason of low employee cost of 1.36%. Thus it fails the employee cost filter. Therefore, not comparable. Assessee relied on the judgment of Mentor Graphics P. Ltd. vs. DCIT 109 ITD 101 (Del.) with reference to this comparable. 15. After considering the contentions, we are of the opinion that these 14 comparables are required to be excluded by the TPO. Respectfully following the decisions of the Coordinate Benches of the Tribunal, we direct that these companies should be excluded from the list of comparables as assessee turnover is only 2.18 crores and employee cost is more. Many of the companies are also found to be not functionally similar. The various filters and reasons accepted in other cases do apply to the assessee as TPO selected same 26 comparables in all the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X
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