9911796707
TMI Blog2015 (3) TMI 566X X X X Extracts X X X X X X X X Extracts X X X X ..... cognised as 100% EOU registered under the Software Technology Park of India (STPI) Scheme. As per the terms of the contract with its AE, the assessee is remunerated at cost plus 12% for the services rendered by it to its AE. For the impugned assessment year, the assessee earned revenue of Rs. 18,59,36,488 from international transaction of providing software development services to its AE. The assessee for the impugned assessment year filed its return of income on 29-10-2005 declaring total income of Rs. 25,94,371/-. Along with return of income, the assessee also submitted a TP study report wherein transaction Net Margin Method (TNMM) was adopted as most appropriate method and operating profit/operating cost as the profit level indicator (PLI). The assessee in the TP study, after conducting a search in the data bases on the basis of functions, assets and risk (FAR) analysis, selected 18 companies as comparables with an average profit margin of 16.97% on cost. Though, assessee's operating margin was shown at 8.19%, but, the price charged to the AE was considered to be within arm's length. 3. During scrutiny assessment proceedings, the Assessing Officer noticing that the assessee had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the comparable company i.e. Satyam Computer Services Ltd., which ld. CIT(A) excluded from the list of comparables. As a result, adjusted mean PLI was worked out to 25.45% and ALP was determined at 21,55,94,489. Thus, adjustment u/s 92CA was scaled down to Rs. 2,96,57,901.. Being aggrieved of the aforesaid order of ld. CIT(A), the assessee has preferred this appeal raising various grounds both on transfer pricing issues as well as corporate tax issues. At the outset, ld. AR expressed his intention of not pressing the ground on corporate tax issues i.e. Ground No. 3 & 3.1 with sub-grounds on account of relief being granted by the learned CIT(A). Hence, these grounds are dismissed. Even, on TP issues also learned AR confined his argument only to the issues of selection of certain comparables and disallowance of risk adjustment. In view of the aforesaid, we shall confine our finding to these two issues only. At first, we will deal with issue of selection of comparables. 6. The learned AR specifically objected to 8 companies selected by the TPO as comparables and retained by learned CIT(A). which are as under:- 1) Bodhtree Consulting Ltd. 2) Exensys Software Solutions Ltd. 3) Sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company as it has software products and held as not comparable to a service provider: - Intoto Software India Pvt. Ltd. (ITA No. 1196/Hyd/2010) - Invensys Development Centre India P. Ltd. in ITA no 1256/Hyd/2010 dt.20-02-2014 - Intergraph Consulting Pvt. Ltd., (ITA No. 923/Hyd/2010) - Ness Innovative Business Services Pvt. Ltd., (ITA No. 472/Hyd/2011) 3. Sankhya Infotech Ltd. i) 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 TPO has in subsequent year rejected this company as comparable relying on the same 133(6) response. ii) The following rulings have analysed and rejected this company as it has software products : - Invensys Development Centre India P. Ltd. in ITA no 1256/Hyd/2010 dt.20-02-2014 - Intergraph Consulting Pvt. Ltd., (ITA No. 923/Hyd/2010) - Ness Innovative Business Services Pvt. Ltd., (ITA No. 472/Hyd/2011) 4. Foursoft Ltd. i) The learned counsel submitted that this company is functionally different as evid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny and relying on the same 133(6) response, rejected it as a comparable to software services provider: - Intergraph Consulting Pvt. Ltd., (ITA No. 923/Hyd/2010) - Ness Innovative Business Services Pvt. Ltd., (ITA No. 472/Hyd/2011) - Invensys Development Centre India P. Ltd. in ITA no 1256/Hyd/2010 dt.20-02-2014 7. Infosys Technologies Ltd. i) The learned counsel submitted that this company is engaged in diversified activities including products, consultancy & solutions and this company commands a premium in the pricing of its products and services due to its goodwill, reputation and brand value. Further due to scale of operations, Infosys enjoys economies of scale, which results in lower cost of infrastructural facilities and overheads. ii) Further, he submitted that the issue of comparability of Infosys to a small captive service provider is no longer res-integra. The following cases have specifically anlaysed in detail the comparability of Infosys on various parameters to a similar size software service provider and rejected it: - Intoto Software India Pvt. Ltd. (ITA No. 1196/Hyd/2010) - Patni Telecom Solutions Pvt. Ltd. Vs. ACIT (ITA No. 1846/Hyd/2012) - DCIT Vs. M/s He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Hyderabad vide ITA.No.472, 553 & 1775/Hyd/2011 dated 18.06.2014 on the above 7 comparables are extracted as under: "1. Bodhtree Consulting Ltd. The learned counsel submitted that this company should be rejected under the following TPO's f ilters: * Related party transactions f ilter: As per schedule 4 of the balance sheet, the company has investments in Perigon, LIC, USA and as per the response u/s 133(6); the company has export sales to Perigon LIC, USA of Rs. 133.90 lakhs, being 34.68% of the total turnover. * Functionally different f ilter: The company in its response to notice u/s 133(6) has stated that it provides e-paper solutions, data cleansing sof tware, website development and other customized sof tware and also state that the epaper solutions and data cleansing services would come under the category of IT enabled services. 2. Exensys Sof tware Solutions Ltd., The learned counsel submitted that this company should be rejected under the following TPO's f ilters: d) Functionally different: The company is a sof tware product and ITES company. The company owns signif icant brand intangibles (almost 60% of its net block of assets), unlike the appellant, which is a con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany as it has derived income from sof tware license and AMC's: - Intoto Sof tware India Pvt. Ltd. (ITA No. 1196/Hyd/2010) - DCIT Vs. M/s Hellosof t India Pvt. Ltd. ( ITA No. 645/Hyd/09) - Invensys Development Centre India P. Ltd. in ITA no 1256/Hyd/2010 dt.20-02-2014 5. Thirdware Solutions Ltd.: Ld. Counsel submitted that this company is functionally different for the following reasons: * As per reply to notice issued u/s 133(6), the company informed that it is engaged in implementation and customer services which include training, customized development and help desk services for ERP sof tware and distribution of products of Quad Inc. and Hyperion Solutions Corporation. * Various news articles available on the internet http://www.hinduonnet.com/2001/07/11/stories/0611 000h.htmstated that the company is a distributor of products; * As per the company's website www.thirdware.net/ourcapabilities.htm. has stated the company has partnered with QAD Inc to deliver the entire business cycle of MGF/PRO, a product of QAD Inc. from Pre-sales, sales, training, consulting, implementation and support to application management services. * The following rulings have analysed and rejec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nologies Vs. ITO (ITA No. 3856/Del/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 6. 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-comparabil ity of various comparable companies selected by the TPO. 7. As regards the Exensys Sof tware 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 Rs. 737.79 lakhs is possible with the amalgamation of Holool India Ltd. It was further mentioned that Assessee company has got benef it 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 Rs. 1.22 crores as against Rs. 30.21 lakhs in earl ier year. This was clearly stated in Notes that claim was with reference to the AS-14 and also due to amalgamation of two companies. Vide page 957 of paper book, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. If it is found that there is an amalgamation of Exensys Sof tware Limited and Holool India Limited and formed as one entity viz.,Exensys Sof tware Solutions Limited. during the relevant previous year and the f inancial result is the combined result of these two companies, then, we direct the Assessing Off icer/TPO to exclude this company from the list of comparables." 8. 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 Sof tware India Pvt. Ltd., complete details were not placed on record, therefore, the matter was sent to AO for verif ication 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 f ile of the AO for examination as was done in the case of Intoto Sof tware(supra). We are, therefore, of the opinion that on the basis of facts placed on record, the case of Exensys Sof tware Solutions Ltd. cannot be taken as comparable. 9. Similarly, the other cases, Bodhtree consulting Ltd, Four Sof ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
