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TMI Blog2014 (7) TMI 181X X X X Extracts X X X X X X X X Extracts X X X X ..... der like assessee. Though the assessee has advanced detailed submissions for inclusion of the aforesaid companies, but, the DRP has simply brushed aside the same without considering in proper perspective - the assessee’s contention in respect of the companies requires reconsideration - so far as L&T Infotech Ltd. is concerned, this company is having a huge turnover of 790 crores and unlike the assessee it is not captive service provider - Therefore, the reasons for which Infosys Technologies Ltd cannot be treated as comparable to the assessee also equally applies to this company - except L&T Infotech Ltd., the comparability of the other companies selected by the assessee, but, rejected by the TPO is restored back to the file of the AO/TPO for fresh consideration. Exclusion of communication expenses – Held that:- The decision in CIT Vs. Gemplus Jewellery[ 2010 (6) TMI 65 - BOMBAY HIGH COURT] followed – a receipt such as freight and insurance which does not have any element of profit cannot be included in the total turnover - Freight and insurance do not have an element of turnover - these two items would have to be excluded from the total turnover particularly in the absenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... theless rejected the TP study of the assessee by pointing out various defects and deficiencies therein and primarily for the reason that the assessee has not used current year data in case of 27 companies and in respect of the rest 9 companies, assessee has considered current year data along with data relating to the preceding two years. After rejecting TP document furnished by the assessee, the TPO undertook a search in the data bases by adopting some of the filters applied by the assessee along with some other additional filters which yielded 20 comparables with average margin of 20.68%. After allowing working capital adjustment of 1.48%, TPO worked out ALP margin at 19.9% and applying that to the operating cost, he determined ALP at ₹ 19,83,82,459/- as against the price charged by the assessee of ₹ 18,25,29,242/-. Thus, the resultant short fall of ₹ 1,58,53,227/- was treated as adjustment to be made u/s 92CA of the Act. In consequence to the order passed by the TPO, the AO formulated a draft assessment order adding the transfer pricing adjustment of ₹ 1,58,53,227/-. Further, the AO also made adjustment to the deduction claimed u/s 10A of the Act by reduci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the assessee, which is a purely software development service provider. The learned AR submitted that ITAT, Bangalore Bench in case of Huawei Technologies India Pvt. Ltd. Vs. ITO (ITA No. 1338/Bang/2010 dated 30/04/2013 has held the aforesaid company not to be a comparable in respect of a purely software development service provider. For the same reason Ld. AR sought exclusion of KALS Infosystems Ltd. He also relied upon the following other decisions: 1. Trilogy E Business Services Software Ld. Vs. DCIT (ITA No. 1054/Bang/2001. 2. CSR India Pvt. Ltd. (TS-68-ITAT-2013(Bang.-TP) 3. Intoto Software India Pvt. Ltd., (ITA No. 1196/Hyd/2010) 4. Transwhich India Pvt. Ltd. Vs. DCIT (ITA No. 948/Bang/2011) iii. The learned DR, on the other hand, supporting reasoning of the TPO and DRP submitted that there is no need to exclude the above said company. iv. We have considered the submissions of the parties and perused the materials on record. As can be seen, the TPO at page 53 of his order has categorized the assessee as a pure software development service provider. The comments of the TPO in this regard are extracted hereunder for the sake of convenience: Software Produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual report, the salary cost debited under the software development expenditure was ₹ 45, 93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the. Pune Bench Tribunal's decision of the ITA T in the case of Bind view India Private Limited Vs. DC/, ITA No. ITA No 1386/PN/10 wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows: 16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Ka/s Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raining services in hardware and networking, enterprise system management, embedded system, VLSI designs, CAD/CAM/8PO (iv) Accel Animation Studies software services for 2D/3D animation, special effect, erection, game asset development 4.3 On careful perusal of the business activities of Acce/Transmatic Ltd. DRP agreed with the assessee that the company was functionally different from the assessee company as It was engaged in the services in the form of ACCEL IT and ACC EL animation services for 2D and 3D animation and therefore assessee's claim that this company was functionally different was accepted DRP therefore directed the Assessing Officer to exclude ACCEL Transmatic Ltd. from the final/ist of comparables for the purpose of determining TNMM margin. 49. Besides the above, it was pointed out that this company has related party transactions which is more than the permitted level and therefore should not be taken tor comparability purposes. The submission of the Id. counsel for the assessee was that If the above company should not be considered as comparable. The Id. DR, on the other hand relied on the order of the TPO. 50. We have considered the submissions and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2/Bang/2011). 7. Huawei Technologies India Pvt. Ltd. Vs. ITO (ITA No. 1338/Bang/2010) ii. The learned DR, on the other hand, submitted that the TPO having correctly considered the profit margin of the company by examining the annual report there is no need to modify the order of the TPO in this regard. iii. We have heard the parties and perused the materials on record. On a consideration of the contentions raised by the assessee vis- vis materials on record as well as decisions of different benches of the Tribunal placed before us, it is quite evident that this company has two separate segments i.e. product and services. Therefore, if at all, the AO/TPO considers the aforesaid company to be a comparable, then, he is directed to consider software development services segment alone for comparability analysis. IV, Infosys Technologies Ltd. i. Objecting to this company, the learned AR submitted that under no circumstances, This company can be considered as comparable, to a small captive service provider like assessee. It was submitted that Infosys is engaged in diversified activities including products, consultancy solutions. It commands a premium in the pricing of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he complex segments in which they are operating, it is not comparable to any other software services company. The AR relied on the following precedents in support of his submissions: 1. Conexant Systems India Pt. Ltd., (ITA No. 1429/Hyd/2010 and 1978/Hyd/2011) 2. Telcordia Technologies India P. Ld., (ITA No. 7821/Mum/2011) 3. Logica Pvt. Ltd. (IT(TP)A No. 1129/Bang/2011) 4. Huawei Technologies India Pvt. Ltd. Vs. IT) (ITA No. 1338/Bang/2010) AY 2006-07 ii. The learned DR, on the other hand, supported the orders of the DRP TPO. iii. We have heard the parties and perused the materials on record as well as decisions relied upon by the learned AR. We find that in case of Huawei Technologies India Pvt. Ltd. Vs. ITO (supra), ITAT Bangalore Bench excluded this company relying upon the decision of ITAT, Mumbai Bench in case of Telcordia Technologies India Pvt. Ltd. (supra) pertaining to the same assessment year i.e. 2006-07. iv. Following the view expressed by Bangalore and Mumbai Benches, of the Tribunal, which is in relation to A.Y. 2006-07, we are of the view that Tata Elxsi Ltd. is also to be excluded from the list of comparables while determining the, ALP of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ogy Ltd., is concerned, it is the contention of the learned AR that TPO has wrongly rejected by this company applying RPT filter, It is submitted that the RPT of this company is only 3.07% of the total revenue. It is submitted that TPO by including reimbursement transactions has calculated RPT. 6.5 In respect of Golden Stock Technology Ltd., it is submitted that TPO has rejected this company as BPO service provider. The learned AR submitted that the statement relied upon by the TPO in response to the notice issued u/s 133(6) is contrary to the disclosures in company s annual report. It was submitted that during the year the company has income from software services and satisfies all selection criteria adopted by the TPO, hence, this company should be selected as comparable. 6.6 In respect of Quintegra Solutions Ltd., it is submitted that this comp-any was rejected by the TPO on the ground that it is predominantly on site company, however, as per the annual report of the company, the foreign exchange expenditure incurred is only 4.25% of the export turnover. Hence, there is no defect in selecting the aforesaid company as comparable. 7. The learned DR, on the other hand, sub ..... X X X X Extracts X X X X X X X X Extracts X X X X
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