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TMI Blog2014 (7) TMI 127X X X X Extracts X X X X X X X X Extracts X X X X ..... itted back to the AO/TPO for consideration as to whether to include or exclude the above two comparables selected by assessee – Decided in favour of Assessee. Working capital adjustment and risk adjustment – Held that:- With reference to quantification of risk adjustment, assessee arrived at the same at 4.63% based on difference in the average prime lending rate and the average bank rate – it cannot be accepted that the difference in prime lending rate and bank rate has to be considered as risk adjustment, TPO should examine the risk profile of the assessee and other comparables and arrive at appropriate risk adjustment if it can be quantified on any reasonable basis - on negative working capital adjustment as well as risk adjustment, the issue is restored to the TPO, as selection of comparables were also restored to the file of the TPO - TPO should examine the aspects and arrive at revised ALP, after giving due opportunity to the assessee – Decided in favour of Assessee. - ITA. No. 1451/Hyd/2010 - - - Dated:- 13-6-2014 - Shri B. Ramakotaiah And Shri Saktijit Dey,JJ. For the Petitioner : Mr. Ravi Bharadwaj For the Respondent : Mr. P. Somasekhar Reddy ORDER ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charges, was attributable to the delivery of computer software abroad, and the same has to be excluded from the amount of export turnover considered by the assessee, in view of the definition of export turnover as given in clause (iv) to Explanation-2 of section 10A of the Act, for the purpose of determining deduction u/s. 10A. Accordingly, after excluding the said amount from the amount of export turnover considered by the assessee at ₹ 32,85,72,616/-, he computed the eligible export turnover at ₹ 32,44,68,2l3/- and on that basis, computed the allowable deduction u/s. 10A at ₹ 2,98,46,381/-. He, thus, disallowed the excess amount claimed by the assessee. 2.2. On the basis of the above, the A.O. completed the assessment on a total income of ₹ 7,20,86,690/-, vide his order dated 14.10.2008 passed u/s. 143(3) of the Act. 3. Before the Ld. CIT(A), assessee challenged the disallowance made under section 10A, which the Ld. CIT(A) has given relief and Revenue is not in cross-appeal. 4. With reference to the transfer pricing adjustment, apart from various issues on obtaining the information u/s. 133(6), rejection of assessee s comparables etc., assessee al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted that the TPO and Ld. CIT(A) have given detailed reasoning while selecting the comparables or rejecting the comparables and supported the orders by referring to various findings. 8. We have considered the detailed submissions of the Counsels and analysed the issues before us. Ld. CIT(A) has confirmed the following 16 comparables. Sl.No. Name of the Company Operating Profit to Total Cost (OP/TC) % 1. Bodhtree Consulting Ltd., 24.85% 2. Lanco Global Systems Ltd., 13.65% 3. Exensys Software Solutions Ltd., 70.68% 4. Sankhya Infotech Ltd., 27.39% 5. Sasken Network Systems Ltd., 16.64% 6. Four Soft Ltd., 22.98% 7. Thirdware Solutions Ltd., 66.09% 8. R.S. Software (India) Ltd., 8.07% 9. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lutions and data cleansing services would come under the category of IT enabled services. 2. Exensys Software Solutions Ltd., The learned counsel submitted that this company should be rejected under the following TPO s filters: a) Functionally different: The company is a software product and ITES company. The company owns significant brand intangibles (almost 60% of its net block of assets), unlike the appellant, which is a contract captive services provider. Further, various disclosures on the site of the company also indicate that it is into product 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /2010) - Agnity India Technologies Pvt. Ltd. Vs. ITO (High Court decision ITA 1204/2011) - Invensys Development Centre India P. Ltd. in ITA no 1256/Hyd/2010 dt.20-02-2014 5. Sankhya Infotech Ltd. The learned counsel submitted that this company is functionally different as evident from the following: Various disclosures in the annual report and response to 133(6) notice indicates clearly that the company is into software products (services are supplementary to products licensing) The TP office has in subsequent year rejected this company as comparable relying on the same 133(6) response. The following rulings have analysed and rejected this company as it has software products : - 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 Software ( ITA No. 3514/Mum/2010) - DCIT Vs. M/s Hellosoft India Pvt. Ltd. (ITA No. 645/Hyd/09) - Invensys Development Centre India P. Ltd. in ITA no 1256/Hyd/2010 dt.20-02-2014 6. Thirdware Solutions Ltd.: Ld. Counsel submitted that this company is functionally different for the following reas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he profit margins and further the computations are also wrong as the deferred revenue expenditure, which was claimed regularly on the basis of accounting policy of the company, was excluded by the TPO in arriving at a different higher profit margin, which is not correct. 10. We have considered the issue and examined the record including paper books placed on record. There is a merit in assessee s contentions about non-comparability of various comparable companies selected by the TPO. 11. As regards the Exensys Software Solutions Ltd., as seen from the paper book placed on record, there is a merger of Holool India Ltd. and in the director s report (PB-951), there is a clear mention that the company s income of ₹ 737.79 lakhs is possible with the amalgamation of Holool India Ltd. It was further mentioned that Assessee company has got benefit by advanced latest technical expertise on various technology domains of the transferor company. Further, that company has charged deferred expenditure and the amount claimed in this year is ₹ 1.22 crores as against ₹ 30.21 lakhs in earlier year. This was clearly stated in Notes that claim was with reference to the AS-14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emand 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. 12. In view of the above, we are of the opinion that there is an extra-ordinary event which resulted in high operating margin of that company and we, therefore, direct the AO to exclude this company from the list of comparables. In the above referred case of Intoto Software India Pvt. Ltd., complete details were not placed on record, therefore, the matter was sent to AO for verification whereas in this case assessee has objected even before the AO/ CIT(A), therefore, there is no need to set aside the issue to the file of the 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 comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bout risk adjustments. It was the submission that assessee is functioning under a limited risk environment whereas the comparable companies being independent companies are working in a different functional profile. In order to neutralize the risk being taken by the comparable companies assessee wants risk adjustment and placed reliance on the following companies. a. E-Gain Communication (P) Ltd. vs. ITO 118 ITD 243 (Pune) b. Mentor Graphics P. Ltd. vs. DCIT 109 ITD 101 c. ACIT vs. Fiat India P. Ltd. 2010-TII-30-ITAT-Mum-TP d. Skoda Auto India P. Ltd. vs. CIT 30 SOT 319 (Pune) (Trib) e. Diamond Dye Chem Ltd. vs. DCIT 2010-TII-20-ITAT-Mum- TP f. Intervet India P. Ltd. vs. ACIT 2010-TII-12-ITAT-Mum.-TP g. Cisco Systemes India P. Ltd. vs. DCIT 49 SOT 108 h. Global Vantegde P. Ltd. vs. DCIT 1 ITR (Tribu.) 326 17.1. With reference to quantification of risk adjustment, assessee arrived at the same at 4.63% based on difference in the average prime lending rate and the average bank rate. Even though, we cannot accept that the difference in prime lending rate and bank rate has to be considered as risk adjustment, we are, however, of the opinion that TPO should exam ..... X X X X Extracts X X X X X X X X Extracts X X X X
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