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TMI Blog2014 (8) TMI 870X X X X Extracts X X X X X X X X Extracts X X X X ..... nd ACCEL animation services for 2D and 3D animation and therefore assessee's claim that this company was functionally different was accepted - It directed the Assessing Officer to exclude ACCEL Transmatic Ltd. from the final list of comparables for the purpose of determining TNMM margin - the Assessing Officer /TPO is directed to exclude this while computing ALP – Decided in favor of assessee. Rejection of comparables – Held that:- Proper case was not made out for inclusion of the comparables - once TPO and DRP forms that these comparables are not functionally similar to the assessee on the basis of various filters adopted by the TPO, it would be better if the matter is left like that rather than ordering fresh enquiry - these companies have related party transactions and therefore, may not justify on various filters adopted - When specific 133(6) notice was issued, that assessee has not to responded and therefore, TPO was not in a position to include the above case in the absence of segmental data - there was a specific finding that after enquiry being conducted, it was found that company was taken up by one Kelton Sector P. Ltd. and inspite of being called, the company was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on operating cost. The entire operating revenue was received from the said AE. Assessee incurred cost of ₹ 38.65 crores and earned operating profit of ₹ 3.85 crores. The operating profit ratio was at 9.95%. The TPO, however, rejected the assessee's transfer pricing study and also rejected the comparables and undertaken fresh search of comparables by adopting some filters like employee cost, related party transactions and also analyzing the functional test of various companies. The average operating profit of the 26 comparables was determined at 22.73%. A.O. arrived at the arms length price of operating cost at ₹ 47,44,11,800/- whereas, assessee charged ₹ 42,50,01,369/- from the A.E. The shortfall at ₹ 4,94,10,431/- was added as T.P. adjustment under section 92CA. 3. Assessee preferred objections before the DRP, Hyderabad who by its order dated 09.08.2011 rejected most of the objections, while excluding one comparable - Celestial Labs Ltd. In the result, adjustment of ₹ 4,45,78,567/- was made on the basis of PLI worked out on 25 comparables. 4. Assessee has raised 14 grounds out of which, except ground No.12, rest of the grounds pertain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10.18% 15. Sasken Communication Tech Ltd. (Seg.) 20.64% 16. Thirdware Solutions Ltd. (Seg.) 21.09% 6.2 Assessee is objecting to the inclusion of following comparables in the TPO list : 17. Avani Cimcon Technologies Ltd. 50.99% 18. Infosys Technologies Ltd. 38.68% 19. Ishir Infotech Ltd. 30.05% 20. Lucid Software Ltd. 16.58% 21. Mega Soft Ltd. 51.14% 22. Tata Elxsi Ltd. (Seg.) 25.78% 23. Wipro Ltd. (Seg.) 34.16% 24. Accel Transmatic (Seg.) 19.67% 25. Kals Information Systems Ltd. (Seg.) 23.01% 6.3 Assessee wants the following comparables to be included in the list of compara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT A. No.1054/Bang/2011] (f) Bearing Point Business ITA.No.1124/Bang/2011 (g) LG Soft India Pvt. Ltd. ITA.No.1121/Bang/2011 (h) Transwitch India P. Ltd. ITA.No.948/Bang/2011 (i) Mercedes Benz Research Development [IT Appeal No.1222 (Bang.) of 2011] (j) CSR India P. Ltd. ITA.No.1119/Bang/2011 (k) First Advantage [IT Appeal No.1086 (Bang.) 2012] (l) HCL EAI Services Ltd. ITA.No.1348/Bang/2011 We therefore direct the Assessing Officer /TPO to exclude this while computing ALP. Infosys Technologies Ltd. : 7.2 Objecting to the aforesaid company being treated as comparable, learned AR submitted that the company cannot be considered to be comparable to a captive service provider like the assessee, not only because of the quantum of revenue earned by them but also on account of various other factors. It was submitted that the company command a premium in the pricing of their products and services due to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nfosys Limited on the basis of three years financial data, whereas the TPO considered only the current year data also needs to be appreciated. Therefore, considering the enormity of turnover of the company as well as other relevant factors, the aforesaid company cannot be treated as comparable to the assessee in any manner. This view of ours is also in tune with the view expressed by different Benches of this Tribunal as stated below as well as that of the Hon'ble Delhi High Court in the case of CIT Vs. Agnity India Technologies Pvt. Ltd.,[2013] 85 CCH 146. (a) Foursoft Ltd.'s case (supra) (b) Conexant System India (P.) Ltd.'s case (supra) (c) Virtusa (India) (P.) Ltd.'s case (supra) (d) Telcordia Technologies India (P.) Ltd.'s case (supra) (e) Triology E-Business Solutions case (supra) (f) Adaptec (India) (P.) Ltd. v. Dy. CIT [IT Appeal No.1801 (Hyd.) of 2009] (g) rinity Advanced Software Labs P. Ltd. v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng cases also considered the above company and excluded the same on same reason. (a) Foursoft Ltd.'s case (supra) (b) Intoto Software India (P.) Ltd. case (supra) (c) Telcordia Technologies India (P.) Ltd.'s case (supra) (d) LG Soft India (P.) Ltd.'s case (supra) (e) Transwitch India (P.) Ltd.'s case (supra) (f) Mercedes Benz Research Development's case (supra) (g) CSR India (P.) Ltd.'s case (supra) (h) First Advantage's case (supra) (i) HCL EAI Services Ltd.'s case (supra) Following the aforesaid decisions of the Coordinate Benches, we direct exclusion of the aforesaid company from list of comparables. MEGASOFT Limited : 7.5 The main objection of the assessee with regard to the aforesaid company is that this is predominantly a product development company and margin from software development s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch contention, the learned AR relied upon the following decisions: (a) Telcordia Technologies India (P.) Ltd.'s case (supra) (b) Triology E Business Solutions case (supra) (c) Foursoft Ltd.'s case (supra) (d) Virtusa (India) P. Ltd.'s case (supra) (e) Conexant System India (P.) Ltd.'s case (supra) 7.6.1 The learned DR, on the other hand, supported the orders of the AO/TPO and DRP in this regard and referred to the observations made by the TPO in his order. 7.6.2 We have heard the submissions of both the parties and perused the material on record. In case of Telcordia Technologies India (P.) Ltd. (supra), the ITAT Mumbai Bench while considering the comparability of the aforesaid company with software services provider held as under: 7.7 From the facts and material on record and submissions made by the learned AR, it is seen that the Tata Elxsi is engaged in development of niche product and development services, which is entirely different from the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Adaptec (India) (P.) Ltd.'s case (supra) 7.7.1 The learned DR on the other hand supported the orders of the DRP as well as TPO so far as the selection of the aforesaid company as comparable while determining ALP. 7.7.2 We have heard the submissions of the parties and perused the material on record. The ITAT Mumbai Bench in case of Telcordia Technologies India (P.) Ltd. (supra), while considering the objection of the assessee for treating the aforesaid company as comparable held as follows: 7.5 This company is also a global IT Company having varieties of service and products and looking to the magnitude of its operations, sales and expenses, the same cannot be taken into consideration for comparability analysis. Moreover, 67% of its sales relates to its product which are sold on premium resulting into higher profitability, therefore, cannot be compared with the assessee company at all. There are several judgments of ITAT which have been referred in para 6.5 above, that Wipro cannot be taken as comparable case for comparable case with the company like assessee. In view of these facts and the reasoning given in the case of Infosys, we hold th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Transmatic Ltd. from the final list of comparables for the purpose of determining TNMM margin. A similar view was taken in the following cases : (a) Conexant System India (P.) Ltd.'s case (supra) (b) Intoto Software India (P.) Ltd.'s case (supra) (c) Bearing Point Business Consulting (P.) Ltd.'s case (supra) (d) LG Soft India (P.) Ltd.'s case (supra) (e) Transwitch India (P.) Ltd.'s case (supra) (f) Mercedes Benz Research Development's case (supra) (g) CSR India (P.) Ltd.'s case (supra) (h) HCL EAI Services Ltd.'s case (supra) Respectfully following the decisions of the Coordinate Benches of the Tribunal, we direct that this company should be excluded from the list of comparables. Kals Information System Limited : 7.9 As far as Kals Information System Limited is concerned, learned Counsel for the assessee submitted that it is func ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds. Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. 47. 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 comparable . 7.9.1 We find that both HCL EAI Services Ltd.'s case (supra) as well as Triology E-Business Solutions case (supra) are into software development services to its parent companies. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O has rejected it as there are no foreign exchange earnings, whereas, it was the submission that assessee has 93% of foreign exchange revenues. It was the submission that above companies are to be selected as comparables. 8.2 After considering the submissions, we are of the opinion that proper case was not made out for inclusion of the above comparables. Once TPO and DRP forms that these comparables are not functionally similar to the assessee on the basis of various filters adopted by the TPO, it would be better if the matter is left like that rather than ordering fresh enquiry. We also noticed that these companies have related party transactions and therefore, may not justify on various filters adopted. As far as Indium Software India Ltd. there is a finding that this company is functionally different. L T Infotech also found to be functionally different. Moreover, it has more than ₹ 600 crores turnover and may fail on turnover filter, even though turnover filter was not applied in this case. When specific 133(6) notice was issued, that assessee has not to responded and therefore, TPO was not in a position to include the above case in the absence of segmental data. PSI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the objections to the draft order. 9.1 After hearing rival contentions, we are of the opinion that this issue is to be examined by the TPO afresh. Assessee admits that it is having a single customer risk, whereas, other comparable companies has market risk. The TPO in fact, discussed this issue elaborately vide para 16.2 of his order and analysed the risk and concluded that there is no risk adjustment given as the single customer risk/political risk of tax payer combined with arithmetic mean price considered in the case of comparable companies qualifies the risk differential if any between the tax payer and comparable Indian enterprise. Since DRP has not given any opinion on this, we are of the opinion that this issue requires detailed examination afresh by the TPO and DRP. In case of any adjustment to be required to be done, after excluding the comparables as stated above, risk adjustments may be considered by the TPO, if such situation arises. In case the PLI determined after exclusion of the comparables is within the parameters and no adjustment is to be made for the international transaction, then, adjustment for risk may become academic in nature. With these observations, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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