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TMI Blog2015 (5) TMI 365X X X X Extracts X X X X X X X X Extracts X X X X ..... luding companies with abnormal profits - Held that:- CIT(A) rejected some of the comparable companies chosen by the TPO by applying related party transaction filter. The filter of companies dealing in software products and abnormal profits owing to amalgamation of the companies during the relevant period thereby showing abnormal profits was applied to exclude Exensys Software solutions Ltd., was excluded for reasons of high turnover and high risk profile. Satyam Computer Services Ltd., has to be excluded from the comparable companies for non-reliability of financial data as it was involved in financial scam. - Decided against revenue. Exclusion of comparable companies with RPT of less than zero percent is not valid, and that companies where RPT is less than 15% alone can be considered, then the comparable rejected by the CIT(A) on the basis of the said filter will have to be included along with the four comparable retained by the CIT(A). Although 12 comparable which were rejected on the basis of RPT being more than zero percent, one comparable viz., Four Soft Ltd., will have to be excluded since the RPT is at 19.89% and thus in excess of 15%. Sathyam Computers Ltd., will get exclud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate its case regarding advances not having been utilized for acquiring fixed assets - Decided in favour of assessee for statistical purposes. Exclusion of telecommunication expenses and travel expenses both from total turnover as well as export turnover while computing deduction u/s.10A - Held that:- As in Tata Elxsi Ltd. (2011 (8) TMI 782 - KARNATAKA HIGH COURT) held that while computing the deduction under section 10A of the Act, if the export turnover in the numerator is to be arrived at after excluding certain expenditure, then the same expenditure should also be excluded from the total turnover also. Respectfully following the same, we dismiss this ground of revenue and of the view that the CIT(A) has rightly directed the AO to exclude telecommunication charges and travel expenses incurred be excluded both from export turnover and total turnover - Decided against revenue. X X X X Extracts X X X X X X X X Extracts X X X X ..... dopted as the Profit Level Indicator ("PLI"). The PLI of the assessee was arrived at as follows: Operating Revenue Rs.21,61,03,704 Operating Cost Rs.19,48,13,252 Operating Profit ₹ 2,12,90,452 Op.pr/cost% 10.93% 6. The Transfer Pricing Officer (TPO) arrived at a final set of 17 comparable companies. The set of 17 comparable companies is given as Annexure-I to this order. 7. The assessee raised various objections to the methodology adopted and the reasons assigned by the TPO for rejecting the comparable chosen by the assessee in its TP study. The TPO finally passed an order u/s. 92CA of the Act and on the basis of the profit margins of comparable companies set out in Annexure-I to this order, arrived at arithmetic mean of 23.45% after working capital adjustment and 26.59% before working capital adjustment. The computation of the ALP by the TPO in this regard was as follows:- "Computation of Arms Length Price: The arithmetic mean of the Profit Level indicators is taken as the arms length margin. (Please see Annexure B for details of computation of PLI of the comparables). Based on this, the arms length price of the software development services rendered by the taxp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransaction filter. Nevertheless, the CIT(A) held that Satyam Computer Services Ltd., has to be excluded from comparable companies for non-reliability of financial data. In doing so, the CIT(A) followed the decision of this Hon'ble Tribunal in Agnity India Technologies v. ITO (ITA 3856/DeI/2010) and SAP India Pvt. Ltd v. ITO [ITA No. 398/8/2008]. Likewise lnfosys Technologies selected by the TPO, was rejected as a comparable based on high turnover and high risk. In doing so, the CIT(A) followed the decision of this Hon'ble Tribunal in Agnity India Technologies v. ITO and Genisys Integrated Systems (India) Pvt Ltd v. ITO (supra). The CIT(A) also held that the Assessee would be entitled to 5% standard deduction under the proviso to Sec.92CA(2) of the Act. 9. After giving effect to the findings given above, still there would be a very negligible addition that will be sustained even after the CIT(A)'s order. 10. The Revenue and Assessee are in appeal before against the order of the CIT(A). The Assessee in its grounds of appeal emphasized its stand that some of the filters which the Assessee submitted should be applied in choosing some comparable companies have not been accepted by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt ground has to be allowed. It is held that the CIT(A) ought to have adopted a threshold limit of 15% of the total revenue attributable to related party transaction as ground for rejecting comparable companies. Consequently it is held that comparable companies having RPT upto 15% of the total revenues alone can be included. 14. The Ground raised by the Revenue with regard to the action of the CIT(A) in excluding companies with abnormal profits is misconceived and the issue and does not arise out of the order of the CIT(A). As we have already seen the CIT(A) rejected some of the comparable companies chosen by the TPO by applying related party transaction filter. The filter of companies dealing in software products and abnormal profits owing to amalgamation of the companies during the relevant period thereby showing abnormal profits was applied to exclude Exensys Software solutions Ltd., was excluded for reasons of high turnover and high risk profile. Satyam Computer Services Ltd., has to be excluded from the comparable companies for non-reliability of financial data as it was involved in financial scam. In doing so, the CIT(A) followed the decision of this Hon'ble Tribunal in Agni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g. The company focuses on the development of niche products for the transport and aviation industry. However, segmental information in relation to the above mentioned activities is not available in public domain. Therefore, as Sankhya engages itself in products and services as well as software training, it cannot be considered as a comparable of the Appellant. The products developed and owned by Sankhya are listed below:- (1) SILICONTM Training Suite of Products: The products are a comprehensive enterprise wide training platform that covers the entire spectrum of training in a paperless environment. It comprises of four products:- - SILICONTM LMS (Training Management Information - SILICONTM QT (Online Assessment System) - SILICONTM LCMS (Learning Content Management System) - IRMAQTM : This is an integrated resource planning, management tracking system exclusively developed for Airline operations. It is an end-toend solution for all Flight Operations. - Sakai CLE : This is a widely used and popular open source LMS used in many leading educational institutions and corporate. The relevant extract from the Annual report substantiating that the company also engages in different ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and owns products namely 4S eTrans and 4S eLog. These products are used in Sun Microsystems Inc, in an Application Verification Kit Certified for Enterprises and assessee have been investing continuously on product developments. Since assessee is in the product development, having I.P. rights, the same is not comparable. 15.5. THIRDWARE SOFTWARE SOLUTIONS LIMITED : This company is objected to by the assessee on the reason that the said Thirdware Software Solutions Ltd. is engaged in sale of software licence and related services and not a service provider. Referring to the annual report, it was submitted that this comparable was rejected by the ITAT, Pune in the case of Egain Communications Ltd. This company having revenue from product license and earning extraordinary profit due to intangible owns. 15.6. These three comparable above Flextronics Software Limited, Foursoft Limited and Thirdware Software Solution Limited were analysed by the Coordinate Bench of the Tribunal in the case of Intoto Software Solutions Pvt. Ltd. (supra) wherein it has been held as under : "23. The other companies which are objected to by the assessee are Flextronics Software Limited, Foursoft Limi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if he has adopted the filter of more than 75% of the revenue from the software services for selecting a comparable company, he ought to have taken the segmental results of the software services only. The percentage of expenditure towards the development of software products may differ from company to company and also it may not be proportionate to the sales from the sale of software products. Under section 133(6) of the I.T. Act, the TPO has the power to call for the necessary details from the comparable companies. It is seen that the Assessing Officer/TPO as exercised this power to call for details with regard to the various companies. As seen from the annual report of Foursoft Limited which is reproduced at page 7 of the TPO's Order, the said company has derived income from software licence also and AMCs. 26. As far as Thirdware Software Solution Limited is concerned, we find from the information furnished by the said company that though the said company is also into product development, there are no software products that the company invoiced during the relevant financial year and the financial results are in respect of services only. Thus, it is clear that there is no sale of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his submission and find that the ITAT Hyderabad Bench on identical facts, held on comparability of TATA Elxsi Ltd. as follows: "15.7. TATA ELXSI LIMITED : The objection of the assessee is that TATA Elxsi operating two segments -system communication services and software development services. The TPO accepted the software development services segment in his T.P. analysis and assessee's objection is that the software development services segment itself comprises of three subservices namely (a) product design services (b)design engineering services and (c) visual computing labs. It was submitted that these services are not akin to assessee software services and segmental information of only product design services could have been accepted by the TPO as a comparable but not the entire software development service. Since company's operations are functionally different as such, the same is not comparable. Further, assessee is also objecting on the basis of intangible scale of operations. The coordinate bench in the case of Intoto (supra) considered the issue as under in para 22. "22 Tata Elxsi Limited : As regards this company, the learned Counsel appearing on behalf of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble with that of a software development service provider such as the Assessee. 27. In view of the aforesaid decision rendered on identical facts and circumstances, we are of the view that TATA Elxsi Ltd., should be excluded from the list of comparable companies. 28. In the chart filed before us the learned counsel for the Assessee has submitted that Bodhtree Consulting Ltd., should be excluded from the list of comparables because of the RPT being more than 15%. Infosys Technologies Ltd., should be excluded as it has diversified operations and engaged in development of niche products, owns brands, intangibles and has huge scale of operations etc., In this regard, the learned counsel for the Assessee relied on the following observations of the Hyderabad ITAT Bench in the case of IVY Computech P.Ltd. Vs. ACIT ITA No.1558/hyd/2010 for AY 05-06:- (f) Bodhtree Consulting Ltd.: The learned AR objecting to the aforesaid company being treated as a comparable submitted that the related party transaction of the aforesaid company being more than 25% of its revenue i.e., precisely 34%, it fails the RPT filter of more than 25% adopted by the TPO himself. For this contention the learned AR ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, the learned AR relied upon the decision of the ITAT Special Bench in the case of Quark Systems (38 SOT 207). We have heard submissions of the parties and perused the materials on record. So far as Infosys Technologies Ltd. is concerned the issue of comparability of the aforesaid company has been considered by different Benches of the Tribunal including the Hyderabad Benches. It is to be noted that the consistent view of different Benches of the Tribunal is to the effect that Infosys Technologies Ltd. being a big company in all respects including the range of turnover is not a comparable to small companies which are captive service providers having considerably low turnover. In fact, the Hon'ble Delhi Court in a judgement dated 19.7.2013 in the case of Agnity India Ltd. upheld the decision of ITAT Delhi Bench in excluding Infosys Technologies Ltd. as a comparable in view of its size. It is a fact that the assessee in the TP Study had selected Infosys Technologies Ltd. as a comparable. However, as held by ITAT Special Bench in the case of Quark Systems Ltd. (supra) merely because the assessee had selected it as a comparable it cannot operate as an estoppel in raising objections w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r carrying out its day to day operations and also to set off against the provision of services (current or future). The Assessee also submitted that the AE can make advance payments to assist the Assessee in its cash flows. Any advance payment made shall be taken into consideration when settling the final fees. It was also pointed out that the fixed assets were acquired out of the business operations and not out of the advances given by the AE. The TPO as well as the DRP did not consider this claim by examining the details furnished by the Assessee but held that the advances received from the AE were utilized for acquiring fixed assets. 33. Before us, the learned counsel for the Assessee reiterated submissions made before DRP. The learned counsel therefore prayed for inclusion of advances received from AE while computing working capital for arriving at the adjustment to be made to the margins of the Assessee towards working capital adjustment. The learned DR relied on the Directions of the DRP. 34. We have given a careful consideration to the rival submissions. We are of the view that there is no basis for the TPO to come to a conclusion that advances received from AE, as having ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not in connection with delivery of computer software outside India. Without prejudice to its contention that the aforesaid sums should not be excluded from the export turnover while computing deduction u/s.10A of the Act, the Assessee has also made an alternate prayer that expenses that are reduced from the export turnover should also be reduced from the total turnover and in this regard has placed reliance on the decision of the Hon'ble Karnataka High Court in the case of CIT v. Tata Elxsi Ltd [2012] 349 ITR 98 (Karn). The alternate claim was accepted by the CIT(A) against which the revenue has raised ground No.2 & 3 before the Tribunal. 37. We have heard the ld. counsel for the assessee and the ld. DR on the issues raised in this regard. Taking into consideration the decision rendered by the Hon'ble High Court of Karnataka in the case of CIT v. Tata Elxsi Ltd [2012] 349 ITR 98 (Karn), we are of the view that the CIT(A) has rightly directed the AO to exclude telecommunication charges and travel expenses incurred be excluded both from export turnover and total turnover. The relevant grounds of appeal of the Revenue are accordingly dismissed. 38. In the result the appeal by the A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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