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TMI Blog2015 (1) TMI 600X X X X Extracts X X X X X X X X Extracts X X X X ..... e case where such issues are critical. Hence, adjudication is limited to the grievances regarding selection of comparables. 3. Facts apropos are that the assessee had during the relevant previous year international transactions of Rs. 16,11,00,251 on software development services, which were rendered by it to its Associated Enterprises ("AE") called, 'Agile, USA'. The Assessing Officer made a reference of the international transactions to the TPO for fixing the arm's length price ("ALP"). 4. During the course of proceedings before the TPO, the financial results of the company arising out of software development services were found to be as under:- Description Amount (Rs.) Operating Revenue 16,11,00,251 Operating Cost 14,64,54,774 Operating Profit (PBIT) 1,46,45,477 Operating Profit to Cost Ratio 10% 5. The TPO accepted the claim of the assessee that it was a software development service provider. As per the TPO, comparison of the working results of the company had to be done with entities which were having revenue from software development services in excess of 75% of their total revenues. The TPO thereafter considered the TP documentation furnished by the assessee and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (I) Pvt. Ltd. v. DCIT in ITA No.1054/Bang/2010 dated 23.11.2012, 24 x 7 customer.com v. DCIT, ITA No.227/Bang/2010 dated 9.11.2012. 8.1.1 Per contra, the ld. DR submitted that turnover filter was not an appropriate measure for exclusion of comparables. He relied on the decision of the Mumbai Bench of this Tribunal in Capgemini India (P.) Ltd. v. ACIT (2014) 147 ITD 330. As per the ld. DR, in the above decision it was held that turnover was not an appropriate criteria to be applied for exclusion/ inclusion of comparables. 8.1.2 We have heard the rival contentions. There is no dispute that Infosys Ltd. was having turnover far in excess of the assessee. The assessee was a miniscule company when compared to Infosys Ltd. That turnover filter can be adopted for selection of comparables has been held by coordinate Benches of this Tribunal in a number of decisions. We find that this Tribunal in the case of EMC Data (supra) had excluded a number of companies applying the turnover filter with the following observations:- "Turnover Rs. (1) Flextronics Software Systems Ltd. 848.66 crores (2) iGate Global Solutions Ltd. 747.27 crores (3) Mindtree Ltd. 590.39 crores (4) Persis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and heard the rival contentions. We find that KALS Information Systems Ltd. was considered as a software product company in both Trilogy e-business(supra) as well as EMC Data (supra). In these decisions, a host of companies, inter alia, including KALS Information Systems Ltd. were deliberated upon and held as under:- "12. The following were the relevant observations of the Tribunal on the aforesaid comparable companies in the case of Triology E-Business Software India Pvt.Ltd.(supra): "(d) KALS Information Systems Ltd. As far as this company is concerned, the contention of the assessee is that the aforesaid 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 repot, the salary cost debited under the software development expenditure was Q 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 ITAT in the case of Bindview India Private Limited Vs. DCI, ITA No. ITA No 1386/PN/1O whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in its order are as follows: "In regard to Accel Transmatics Ltd. the assessee submitted the company profile and its annual report for financial year 2005-06 from which the DRP noted that the business activities of the company were as under. (i) Transmatic system - design, development and manufacture of multi function kiosks Queue management system, ticket vending system (ii) Ushus Technologies - offshore development centre for embedded software, net work system, imaging technologies, outsourced product development (iii) Accel IT Academy (the net stop for engineers)- training services in hardware and networking, enterprise system management, embedded system, VLSI designs, CAD/CAM/BPO (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 Accel 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 ACCEL animation services for 2D and 3D animation and therefore assessee's claim that this company was functionally different was accepted. DRP the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d from the comparables. 8.8 Accel Transmatics Ltd.: Ld. AR raised similar contentions for exclusion of this company as was made in the case of KALS Information Systems Ltd. (supra). Ld. DR also raised similar objections. We find that Accel Transmatics Ltd. has also been considered as a software product company by this Tribunal in the decisions cited at para 8.7.2 above. Relevant part of the decision has been reproduced by us therein. Accordingly, we direct that Accel Transmatics Ltd. be excluded from the comparables. 8.9 Tata Elxsi Ltd.: Ld. AR submitted that this company was engaged in research & development which resulted in creation of Intellectual Property Rights and therefore was a software product company. Reliance was placed on the decision of coordinate Bench of the Tribunal in the case of EMC Data (supra). 8.9.1 Per contra, the ld. DR submitted that Tata Elxsi Ltd. was not a software product company, but was engaged only in development of software. 8.9.2 We have heard the rival contentions. Whether Tata Elxsi Ltd. could be considered as a software development company was one of the issues which came up for consideration before the this Tribunal in the case of EMC Data ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company fit for comparability analysis for determining the arms length price for the assessee, hence, should be excluded from the list of comparable parties." 15. In view of the above, the ld. counsel for the assessee fairly admitted that comparable company at Sl.No.6 viz., Flextronics Software Systems Pvt. Ltd. should be taken as a comparable, while comparable at Sl.No.24 viz., Tata Elxsi Ltd. should be rejected as a comparable." 18. In view of the aforesaid decision, we hold that Tata Elxsi has to be excluded from the list of comparable chosen by the TPO." 8.9.3 The assessee before us is not developing any niche product. As held by the coordinate Bench of the Tribunal (supra), Tata Elxsi Ltd. could not be considered as a software development company simplicitor. That Tata Elxsi Ltd. was functionally different, has been held by the coordinate Bench of the Tribunal in the case of Yodlee Infotech Pvt. Ltd. (ITA No.1397/Bang/2010 dated 15.2.2013) as well. We therefore direct that Tata E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts vitiated. For the purpose of comparability analysis, it is essential that the characteristics and the functions are by and large similar as that of the assessee company and T.P. analysis/study can be made with fewest and most reliable adjustment. If a company has employed heavy capital in development of a product then profitability in the sale of product would be entirely different from the company, who is involved in service sector. Therefore, this company cannot be treated as having same function and profitability ratio. In our view, due to non-availability of full information about the segmental details as to how much is the sale of product and how much is from the services, therefore, this entity cannot be taken into account for comparability analysis for determining arms length price in the case of the assessee." 15. The facts and circumstances under which the aforesaid companies were considered as comparable is identical in the case of the Assessee as well as in the case of Logica Private Ltd., (supra). Respectfully following the decision of the Tribunal referred to above in the case of Logica Pvt.Ltd..(supra), we direct that the company listed as Sl.No.10 of the list of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PLI of the assessee is within +/- 5% range of the arithmetic mean of the comparables as set out u/s. 92C(2) of the Act and decide on the adjustment, if any, required on the ALP. Ordered accordingly. Corporate tax issues 10. Corporate tax issues raised by the assessee vide its grounds 5 to 10 is regarding exclusion of telecommunication expenditure from its export turnover. An alternative ground has also been taken that if such expenditure is excluded from the export turnover, it has to be excluded from the total turnover also. We find the alternative contention to be acceptable in view of the judgment of Hon'ble jurisdictional High Court in the case of CIT v. Tata Elxsi Ltd., 349 ITR 98. Their Lordships held that if export turnover in the numerator was to be arrived at after excluding certain expenditure, it should also be excluded from the total turnover. Since we have accepted the alternative ground taken by the assessee, we do not find it necessary to adjudicate on other related grounds raised by the assessee. 11. Ground Nos. 11 & 12 of the assessee are general needing no adjudication. 12. In the result, the appeal of the assessee is partly allowed for statistical purposes. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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