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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 ..... emitted back to the TPO - Decided in favour of Assessee. Selection of comparables – Functionally dissimilar – Employee cost filter – Held that:- Following Trilogy E-Business Software India (P.) Ltd. Versus Deputy Commissioner of Income-tax. Circle 12(4). Bangalore [2013 (1) TMI 672 - ITAT BANGALORE] - The 14 comparables are required to be excluded by the TPO – these Companies are directed to 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 cases relied on and decided earlier in various cases - the mean PLI of the rest of the comparables selected by the TPO would come to 18.66% and this is within the margin as arrived at by the assessee after excluding the R&D cost – Decided in favour of Assessee. - ITA. No. 2076/Hyd/2011 - - - Dated:- 28-5-2014 - Shri B. Ramakotaiah And Smt. Asha Vijayaraghavan,JJ. For the Petitioner : Mr. PVSS Prasad For the Respondent : Mr. Solgy Jose T. Kottaram ORDER Per B. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xsys product Excelicare incorporates advanced telecommunication technologies within a clinician friendly electronic patient record. Excelicare is an enterprise wide solution that addresses the complete spectrum of healthcare from management of patients at Home, through primary Care to acute tertiary-care hospitals. During the relevant period, the company had international transactions by way of sale of software to its AE to an extent of Rs.2.18 crores. In its T.P. report, assessee selected itself as a tested party and after analyzing various methods, the most appropriate method selected was TNMM. The assessee has selected some (5) comparables and arrived at average PLI (OP/Operating Cost) at (-) 10% and assessee PLI (OP/OC) at (-) 71% (sic) and therefore, considered it as arms length which meets the law. 5. However, the TPO rejected the assessee s comparables and undertook fresh comparables and selected 26 comparables whose arithmetic mean PLI was arrived at 25.14%. He made negative working capital adjustment of (-) 3.32% and determined the ultimate arithmetic mean PLI at 28.46%. Taking the operating cost (excluding R D expenditure written off and extraordinary item) at Rs.7,5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laimed as 1/5th deferred revenue expenditure having been incurred in financial years 1999-2000 to 2001-02. The total amount of Rs.10,98,25,000/- was claimed over a period of 5 years at Rs.2,11,65,000/- from FY 2002-03 to FY 2006-07. Therefore, the amount of Rs.2,19,65,000/- was the final and 5th year amount claimed in the P L account this year. In addition, assessee also incurred an amount of Rs.2,76,62,453/- in development of software analysis systems and products which were shown under the head Research Development expenditure. This amount also was claimed as deferred revenue expenditure over a period of 5 years commencing from F.Y. 2004-05 to F.Y. 2008-09 at Rs.55,32,491/-. Thus, in this year total amount of Rs.2,74,97,491/- was debited to P L account. As noticed from the orders in earlier years, the A.O. excluded this amount from the computation of income as well as from computation of operational cost in the preceding assessment year and assessee even though objected before the DRP, withdrew the claim, as by excluding this amount from operational cost assessee s arithmetic mean of PLI was above the comparables in that year. The DRP vide its order dated 30.09.2010 for A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st of the product on which, proportionate write-off or depreciation was allowable which would be part of operating cost, like depreciation for use of assets. However, for the reasons best known to the assessee and the DRP, the expenditure claimed as deferred revenue expenditure was excluded from the operating cost. Difficulty in this year is with reference to claim of Rs.5.65 crores claimed in the P L account. The expenditure stated to have been incurred for development of new product was not categorised as Research and Development expenditure in the P L account or in the Balance sheet. It was shown/claimed as part of administrative and other expenses . Moreover, even the charts furnished before us indicate only proportionate allocation of expenditure rather than actual expenditure incurred on R D. The basis for proportionate allocation was also not placed before us. But it was stated to be man-hours spent. Even otherwise as seen from the agreement, assessee has undertaken to engage in software development and customization for AE. Therefore, the cost of development of new product seems to be not on the assessee but on the AE. However, these contentions were neither ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.75 4. Media Soft Solutions P. Ltd. 03.66 5. Quintegra Solutions Ltd. 12.56 6. R S Software India Ltd. 13.47 7. R Systems International 15.07 8. SIP Technologies Exports Ltd. 13.90 9. Thirdware 25.12 10 Megasoft ltd 23.11 12.2. Assessee is objecting to the following 14 comparables 1. Accel Transmatic Ltd. 2. Avani Cimcon Technologies Ltd. 3. KALS Information Systems Ltd. 4. Lucid Software Ltd. 5. Ishir Infotech Ltd., 6. Flextronics Software Systems Ltd. 7. Infosys Technologies Ltd. 8. Tata Elxsi Ltd. 9. Wipro Ltd. 10. iGate Global ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue 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 comparable . 4. LUCID SOFTWARE LIMITED: The objections raised by the assessee for inclusion of Lucid Software Ltd. as a comparable is placed at pages 244 to 248 of the paper book filed by the assessee. We find identical objection has been raised against the inclusion of Lucid Software in case of Telcordia Technologies. Since the facts and the assessment year are identical, following the order of the Tribunal in the case of Telcordia Technologies Pvt. Ltd. v. ACIT (supra), we direct the Assessing Officer/TPO not to include Lucid Software Limited as a comparable. 2.employee cost filter: 5. ISHIR INFOTECH LTD: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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), Hyderabad, wherein the concerned Officer has been informed that Tata Elxsi Limited is specialised Embedded Software Development Service Provider and that it cannot be compared with any other software development company. It was submitted that because of the specialisation and also becauseof diverse nature of its business, it is very difficult to scale-up the operations of Tata Elxsi Limited. In view of this, Tata Elxsi Limited has informed that it is not fair to use its financial numbers to compare it with any other company. The communication dated 25th August, 2009 to the TPO is placed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 cases relied on and decided earlier in various cases. 16. Respectfully following the Coordinate Bench decisions in the above companies, we direct that these 14 companies should be excluded from the computation of PLI. It was submitted that the mean PLI of the rest of the comparables selected by the TPO would come to 18.66% and this is within the margin as arrived at by the assessee. after excluding the R D cost contested above. However, these aspects require examination by the TPO as the issue of operating cost has a bearing on working the ALP. The AO/TP ..... X X X X Extracts X X X X X X X X Extracts X X X X
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