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TMI Blog2015 (3) TMI 566X X X X Extracts X X X X X X X X Extracts X X X X ..... considered and analysed in various cases relied on about functional ity and why the same are not comparable to the companies like assessee. Bodhtree consulting Ltd also fails RPT filter as contended. In view of this, we are not discussing above comparables in detail, but, suffice to say that assessee’s submissions are valid. The AO is directed to exclude the above comparables and re-work out the arm’s length margin accordingly. As far as Flextronics Software Limited is concerned, we find that in case of Intoto Software India Pvt. Ltd., (2013 (10) TMI 599 - ITAT HYDERABAD) the co-ordinate Bench of this Tribunal having found it to be functionally different as it is into product development has directed excluding it for comparability analysis. Respectfully following the decision of the coordinate bench of this Tribunal in case of M/s Intoto Software India Pvt.Ltd. (supra) we also direct the Assessing Officer/ TPO to exclude this company. Risk adjustment/working capital adjustment - Held that:- Since TPO himself has concluded that risk adjustment to the extent of 0.85% can be allowed, we direct him to allow the risk adjustment to that extent. It may be pertinent to mention here ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 entered into international transactions with its AE made a reference to the Transfer Pricing Officer (TPO in short) for determining the arm s length price. In course of the proceedings before the TPO, the assessee in response to the query made by the TPO also brought some more companies as comparables. The TPO however did not accept the TP study done by the assessee broadly on the ground that the assessee has used multiple year data of comparable companies , it has used certain non comparable companies as comparables, filters have been selectively used. The TPO, though was of the view that TNMM is the most appropriate method and operating profit/operating cost is the PLI but he nevertheless rejected TP study done by the assessee. After rejecting the TP study submitted by the assessee the TPO himself undertook a search process in the databases by considering only the current year data. In this process, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said, 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) Sankhya Infotech Ltd. 4) Foursoft Ltd. 5) Thirdware Solutions Ltd. 6) Tata Elxsi Ltd. 7) Infosys Technologies Ltd 8) Flexitronics Ltd. 7. The submissions of the learned AR against selection of these comparables, in brief, are as under: 1. Bodhtree Consulting Ltd. i) The learned counsel submitted that this company should be rejected on the basis of filters applied by TPO himself, which are as under: Related party transactions filter: 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 ₹ 133.90 lakhs, being 34.68% of the total turnover. Functionally different filter: The company in its response to notice u/s 133(6) has stated that it provides e-paper solutions, data cleansing softw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 evident from various disclosures in the annual report (Directors report, Management discussion and website information) indicating clearly that the company is into software products. The following rulings have analysed and rejected this company as it has derived income from software license and AMC s: - Intoto Software India Pvt. Ltd. (ITA No. 1196/Hyd/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 - Intergraph Consulting Pvt. Ltd., (ITA No. 923/Hyd/2010) - Ness Innovative Business Services Pvt. Ltd., (ITA No. 472/Hyd/2011) - Intoto Software India Pvt. Ltd. (ITA No. 1196/Hyd/2010) 5. Thirdware Solutions Ltd.: i) Ld. Counsel submitted that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctural 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 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 - Intergraph Consulting Pvt. Ltd., (ITA No. 923/Hyd/2010) - Ness Innovative Business Services Pvt. Ltd., (ITA No. 472/Hyd/2011) 8. Flexitronics Ltd. i) Objecting to this company, the learned AR submitted that the said company is not only functionally different but it cannot be treated as a comparable because it is into development of product. It was submitted that the company has also reported very high margin of profit. The learned AR submitted that the TPO himself having classified the assessee as purely software development service provider, he could not hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 contract captive services provider. Further, various disclosures on the site of the company also indicate that it is into product development. e) 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/signif icant impact on the results of the company for f inancial year ended March 31, 2005 and conf irmed by the company in its response to 133(6) notice. f) 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% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribution 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 rejected this company as it is into trading of sof tware licenses: - Intoto Sof tware India Pvt. Ltd. (ITA No. 1196/Hyd/2010) - ITO Vs. Colt Technology Services India Pvt. Ltd. (ITA No. 609/Del/2011) - ACIT Vs. Sonata Sof tware (ITA No. 3514/Mum/2010) - E-Gain Communications (P) Ltd. Vs. ITO, 23 SOT 385. 6. Tata Elxsi Ltd. The learned counsel submitted that this company shall be rejected as comparable since it is a specialized embedded sof tware development company and this company has in fact clearly stated in its response to 133(6) notice that due to the complex segments in which they are op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ₹ 1.22 crores as against ₹ 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 was seen that out of gross assets of ₹ 7.95 crores, Brands alone consist of ₹ 5 crores, therefore, intangible assets comprising of substantial part of this company s assets. Not only in the correspondence with the TPO that Assessee expressed its inabil ity to furnish separate accounts for two amalgamated companies but also further it has clearly mentioned vide letter dated 26-04-2007 to the TPO that there is a gap in the expenditure expected to incur and actual expenditure incurred which made the company record high operating ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 t Ltd, Infosys,., Sankhya Infotech Ltd., Thirdware Solutions Ltd, Tata Elexi (seg) etc, are also to be excluded as they are considered and analysed in various cases rel ied on about functional ity and why the same are not comparable to the companies like assessee. Bodhtree consulting Ltd also fails RPT f ilter as contended. In view of this, we are not discussing above comparables in detail, but, suff ice to say that assessee s submissions are valid. The AO is directed to exclude the above comparables and re-work out the arm s l ..... X X X X Extracts X X X X X X X X Extracts X X X X
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