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TMI Blog2015 (6) TMI 288X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO should be provided to the assessee for its objections and then re-consider the issue whether the same is comparable or not. Infosys Technologies Ltd. excluded from the list of comparable companies as it is functionally dis-similar and different from the assessee ince it owns significant intangible and has huge revenues from software products. It is also seen that the break up of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. Kals Information Systems (Segmental) should not be regarded as a comparable as this company was developing software products and not purely or mainly software development service provider. Tata Elxsi Ltd., (Segmental) should not be regarded as a comparable as unctionally different from that of the assessee Risk analysis - Held that:- Following the decision in the case of Kenexa Technologies P. Ltd., vs. DCIT, Hyderabad [2014 (11) TMI 587 - ITAT HYDERABAD] We remit the issue to the TPO to consider the risk profile of the assessee. We direct the TPO to allow necessary deductions for risk adjustment, after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing various filters and analysing the data available in the domain, selected 17 companies as comparable companies, thereby arriving at an arithmetic mean of 25.26% and proposed a sum of ₹ 63,53,365 as an adjustment under section 92C(3) of the I.T. Act. Assessee has turnover of ₹ 5.88 crores and its operating cost was at ₹ 5.21 crores. Assessee has raised various objections before the DRP on the proposed addition which were rejected by the DRP in its order. 5. Before us, Ld. Counsel submitted detailed arguments with reference to selection of various companies which are not comparable to the assessee s business operations. Ld. Counsel also made reference to Coordinate Bench decision in the case of Cisco Systems India P. Ltd., ITA.No.271/Bang/2014 for A.Y. 2009-2010 and the decision of Kenexa Technologies P. Ltd., vs. DCIT, Hyderabad (2015) 37 ITR (Trib) 306 (Hyd.) for proposition of various comparables. He also made submissions with reference to negative working capital adjustments and relied on the decisions of the DRP in the case of Market Tools Research P. Ltd., for A.Y. 2010-2011 dated 26.09.2014 and M/s. Mega Systems Worldwide India P. Ltd., for A.Y. 2010-20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... panies Sl.No. 1 to 11. Assessee has objection for the following six companies ( Sl No 12 to 17) and its objections and findings are as under : 1. Bodhtree Consulting Ltd., A. TPO selected this company stating that there is nothing available in the annual report to show any peculiar economic circumstance in the company due to which there is a high margin. TPO further considered that in comparability analysis loss or so-called higher margin is not a determining factor unless there are any peculiar economic circumstances. B. Assessee s objections are that Bodhtree Consulting Ltd., is functionally different. From the 133(6) extract provided in the T.P. order itself, it is evident that the company is into a wide array of business activities including off-shoring data management, open and end to end web solutions, data warehousing which do not fall into any vertical of software services. It is pertinent to note that the company had provided segmental information for A.Y. 2006-07. The abnormal variation in margin of the company of 68.63% vis- -vis 19.14% for the previous year clearly evidences the exceptional operations. C. In support of its contention, assessee relied on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his company based on reply to 133(6) notice that this company is predominantly into software development activities. The income from software development of this company worked out to 95% of total revenue. B. Assessee s objections are that this company is functionally different. As per page 5 of the annual report of this company it is engaged in providing IT enabled services, call center and BPO services. The company earns revenue from licenses, software products, courseware materials. It is further pointed by assessee that the learned TPO has not provided the copy of 133(6) response obtained. C. This company as comparable was considered in Coordinate Bench decision in the case of Kenexa Technologies P. Ltd., vs. DCIT, Hyderabad (2015) 37 ITR (Trib) 306 (Hyd.) wherein the Tribunal has held as under : 38. With respect to Comp-U-Learn Tech India Ltd., the assessee submitted that this company is functionally dissimilar and diversified in services. Further it was submitted by learned counsel that the software development expenditure is only 25% of the total expenditure. It was submitted that the TPO relied on the information obtained from the company under section 133(6) noti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ree different segments. Details of segmental information adopted by TPO are not available. Even though the company itself classified that ITES company, being similar to assessee company, assessee s objection is that the information obtained by the TPO was not provided to the assessee. In view of this, we, in the interest of justice restore the matter to the file of the A.O. to examine afresh. The segmental information pertaining to ITES obtained by the TPO should be provided to the assessee for its objections and then re-consider the issue whether the same is comparable or not. With these directions, the issue is restored to the file of TPO for fresh examination, by giving due opportunity to the assessee. 4. Infosys Technologies Ltd., A. TPO selected this company stating that assessee itself considered this company as comparable in the T.P. study. The assessee has not furnished any economic rationale to say higher turnover companies or companies with brand value have earned better margins than low turnover companies. For example, ST Micro Electronics; and Symantee Software Solutons P. Ltd., The TPO further pointed out that Infosys itself is not sure of the computation of bran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to submit that this company commands substantial brand value, owns intellectual property rights and is a market leader in software development activities, whereas the assessee is merely a software service provider operating its business in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that :- (i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any intangible and hence does not have an additional advantage in the market. It is submitted that this decision is applicable to the assessee's case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee ; (ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856 (Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision of the Tribunal referred to above, we hold that Infosys Ltd. be excluded from the list of comparable companies. Respectfully following the coordinate bench decision, we hold that this company cannot be regarded as a comparable. AO is directed to exclude the same. 5. Kals Information Systems (Segmental) A. TPO selected this company stating that this company in its response to 133(6) notice clearly stated that their business may be classified as a pure software development service provider. In many cases, the company uses its own library of products and prepares customized software. B. Assessee s objections are that this company is engaged in development of software and software products and no break-up of revenue is provided. Further, the company has inventory of -34% of revenue, clearly evidencing that the company has significant revenue from products (i.e., in excess of 25%). This company is functionally different as it is engaged in two segments (i) development of software and software products (ii) training services. In support of its contention, the Ld. Counsel relied on the following decisions : (i) Cisco Systems (India) P. Ltd., ITA.No.271/Bang/2014 (ii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable 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 Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following two companies, namely (i) Tata Elxsi Ltd; and (ii) M/s. Flextronics Software Systems Ltd., deserve to be eliminated for the following reasons : (i) Tata Elxsi Ltd., : The company operates in the segments of software development services which comprises of embedded product design services, industrial design and engineering services and visual computing labs and system integration services segment. There is no sub-services break up/information provided in the annual report or the databases based on which the margin from software services activity only could be computed. The company has also in its response to the notice u/s.133(6) stated that it cannot be considered as comparable to any other software services company because of its complex nature. Hence, Tata Elxsi Ltd., is to be excluded from the list of comparables. (ii) Flextronics Software Systems Ltd. : The learned TPO has considered this company as a comparable based on 133(6) reply wherein this company reflected its software development services revenues to be more than 75% of the software products and services segment revenues. Flextronics has a hybrid revenue model and hence should be rejected as function ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arable, the same was not objected to it by the taxpayer. As the facts mentioned by the taxpayer are the same and these were there in the earlier FY 2005-06, there is no reason why the taxpayer is objecting to it. How the company is functionally similar in the earlier FY 2005-06 but the same is not functionally similar for the subsequent FY 2006-07 even when no facts have been changed from the preceding year. Thus the taxpayer is arguing against this comparable as the company was not considered as a comparable by the taxpayer for the present FY 2006-07. 21. We have heard the rival submissions and considered the facts and materials on record. After considering the submissions, we find that Tata Elxsi and Flextronics are functionally different from that of the assessee and hence they deserve to be deleted from the list of six comparables and hence there remains only four companies as comparables, as listed below: 26.5. Following the aforesaid decision of the Tribunal, we hold that M/S.Tata Elxsi Ltd. should not be regarded as a comparable. Respectfully following the coordinate bench decision, we hold that this company cannot be regarded as a comparable. AO is directed to excl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll comparables at 22.03%, the A.O. worked out negative working capital adjustment of 3.22% thereby, making arms length price at 25.25%. Even though, DRP refused to interfere with the objections of the assessee in its order, we were informed that DRP has directed the TPO/A.O. not to make any negative working capital adjustment in some of the cases in the next assessment year, in the cases of Market Tools Research P. Ltd., and Mega Systems Worldwide India P. Ltd., assessee placed on record copies of orders of DRP. In that DRP considered the issue and directed the TPO as under : 14. Ground No.11 : Negative Working Capital adjustment Making a negative working capital adjustment without appreciating the fact that the company does not bear any working capital risks. On this issue, the assessee submitted as under : The learned TPO determined the ALP for the international transactions with A.Es by making a negative working capital adjustment for the differences in working capital between the assessee and the companies considered as comparables. The assessee does not agree with the learned TPO as : The company does not bear any working capital risk since it is been fully fun ..... X X X X Extracts X X X X X X X X Extracts X X X X
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