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TMI Blog2015 (11) TMI 1136X X X X Extracts X X X X X X X X Extracts X X X X ..... ifferent. Formula will be Profits of the business of the undertaking × Export turn over / (Export turnover + domestic turn over) Total Turn Over Transfer pricing adjustment - assessee has raised objections against inclusion of 4 companies viz., Infosys Ltd., Persistent Systems Ltd., Tata Elxsi and Wipro Ltd. - Held that:- Infosys Technologies Ltd. is not functionally comparable with the assessee because it owns significant intangibles as well as brands earning revenue from software products apart from software development services. Since no separate segment of SDS and software products is available, therefore, this company cannot be considered as a good comparable for the purpose of ALP in respect of international transaction of rendering SDS. Accordingly, when this company is functionally not comparable with the assessee, we decline to interfere with the impugned order of the CIT(A) directing the AO/TPO to exclude this company on the basis of turnover filter Persistent Systems Ltd. be excluded from the list of comparables as relying on 3DPLM Software Solution Ltd. v DCIT [2014 (12) TMI 612 - ITAT BANGALORE] as it is engaged in product development and product design services while ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransaction of the assessee. Avani Cincom Technologies Ltd. and Celestial Biolabs Ltd. companies cannot be considered as functionally comparable with the assessee. Accordingly, we do not find any error or illegality in the order of the CIT(A) and decline to interfere with the order of the CIT(A) qua this issue. KALS Information Systems Ltd. company was developing software products and was not purely or mainly a software service provider, hence functionally dissimilar. X X X X Extracts X X X X X X X X Extracts X X X X ..... ave heard the learned DR as well as the learned authorised representative of the assessee and considered the relevant material on record. The AO, while computing deduction u/s 10A of the Income-tax Act, 1961, ['the Act' for short], excluded tele-communication charges and insurance expenditure from the export turnover. On appeal, the CIT(A) directed the AO to exclude the said expenses from the total turnover as well and then re-compute the deduction under section 10A. 4.2 At the outset, we note that this issue is now covered by the decision of the Hon'ble jurisdictional High Court in the case of ACIT vs. Tata Elxsi (349 ITR 98) wherein the Hon'ble High Court has held as under: "From the aforesaid judgments, what emerges is that. there should be uniformity in the ingredients of both the numerator and she denominator of the formula, since otherwise it would produce anomalies or absurd results. Sec. 10A is a beneficial section. It is intended to provide incentives to promote exports. The incentive is to exempt profits relatable to exports. In the case of combined business of an assessee, having export business and domestic business, the legislature intended to have a formula to ascer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he legislature, they would have expressly stated so. If they have not chosen to expressly define what the total turnover means then, when the total turnover includes export turnover, the meaning assigned by the legislature to the export turnover is to be respected and given effect to, while interpreting the total turnover which is inclusive of the export turnover. Therefore, the formula for computation of the deduction under s. 10A, would be as under : Profits of the business of the undertaking x Export turnover (Export turnover + domestic turnover) total turnover 11. In that view of the matter, we do not see any error committed by the Tribunal in following the judgments rendered in the context of s. 80HHC in interpreting s. 10A when the principle underlying both these provisions is one and the same. Therefore, we do not see any merit in these appeals. The substantial question of law framed is answered in favour of the assessee and against the Revenue." The CIT(A) has decided the issue by following the judgment of the Hon'ble jurisdictional High Court and therefore, we do not find any error or illegality in the impugned order of the CIT(A) on this issue. 5. Ground No.3 is re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the margin earned by the assessee at 11.99% on operating cost was at arms length being within tolerance range of +/-5%. The TPO did not accept the TP analysis of the assessee. The TPO finally selected 20 comparables and arrived at mean margin of 23.65% and worked out the margin after working capital adjustment at 22.55%. The companies selected by the TPO as comparables and adjustment proposed under section 92CA are as under: Thus the TPO proposed a final adjustment of ₹ 1,76,64,444/- The assessee challenged the action of the AO/TPO before the CIT(A) and raised the objection in respect of comparable companies selected by the TPO. The objections raised by the assessee were based on the ground that these companies are having very high turnover in comparison to the turnover of the assessee and therefore, are not good comparables for determining the arms length price in respect of international transaction of the assessee. The CIT(A) accepted the objections raised by the assessee and directed the AO/TPO to exclude 9 companies from the list of comparables on the ground of high turnover. Apart from rejecting comparables on the ground of high turnover, the CIT(A) has also rej ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e above facts, we will consider the comparability of 4 companies as raised by the assessee in the additional ground which are also common in ground No.3 of the revenue's appeal. I. Infosys Technologies Ltd.: We have heard the learned DR as well as the learned authorised representative of the assessee and considered the relevant material on record. The learned authorised representative of the assessee has relied upon various decisions of this Tribunal in support of the contention that these four companies are functionally not comparable with the assessee. The decisions relied upon by the learned authorised representative of the assessee are as under: 1. 3DPLM Software Solution Ltd. v DCIT - ITA No.1303/Bang/2012 AY: 2008-09 2 . NetHawk Networks Ind Pvt. Ltd, v ITO - ITA No. 7633/M/2012 AY: 2008-09 3. M/s. Mindteck (India) Ltd. v DCIT - IT(TP)A No. 70/Bang/2014 AY: 2009-10 4. M/s. NXP Semi Conductors India Pvt. Ltd. v DCIT TS- 102-ITAT-2015(Bang)-TP AY: 2008-09 5. M/s. Supportsoft India Pvt Ltd. V ITO - IT(TP)A No. 20/Bang/2012 AY: 2005-06 6. M/s. AMD India Pvt Ltd. V ITO - IT(TP)A No. 437/Bang/2013 AY:2008-09 7. Kodiak Networks(India) Pvt. Ltd v DCIT IT(TP) No. 1540/Bang/20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenues is not available ; (v) the company has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in 'AUTOLAY', a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded form the list of comparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 11.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee has brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the assessee and hence is not comparable and the finding rendered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. II. Persistent Systems Ltd. We have heard the learned DR as well as the learned authorised representative of the assessee and considered the relevant material on record. The comparability of this company has been examined and decoded by the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd (supra) in para.17 as under: 17.1.1 This company was selected by the TPO as a comparable. The assessee objected to the inclusion of this company as a comparable for the reasons that this company being engaged in software product designing and analytic services, it is functionally different and further that segmental results are not available. The TPO rejected the assessee's objections on the ground that as per the Annual Report for the company for Financial Year 2007-08, it is mainly a software development company and as per the details furnished in reply to the notice under section 133(6) of the Act, software development constitutes 96% of its revenues. In this view of the matter, the Assessing Officer included this company i.e. Persistent Systems Ltd., in the list of comparables as it qualified the functionality criterion. 17.1.2 Before us, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration. It is ordered accordingly. We find that a similar view has been taken by the Tribunal in the other decisions as relied on by the assessee. Following earlier decision of this Tribunal, we direct the AO/TPO to exclude this company from the list of comparables. Accordingly, we are not inclined to interfere with the order of the CIT(A) in respect of this company. III. Tata Elxsi Ltd.: We have heard the learned DR as well as the learned authorised representative of the assessee and considered the relevant material on record. The comparability of this company has been examined and decided by the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd (supra) in paras.13 to 13.5 as under: 13.1 This company was a comparable selected by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the set of comparables on several counts like, functional dis-similarity, significant R&D activity, brand value, size, etc. The TPO, however, rejected the contention put forth by the assessee and included this company in the set of comparables. 13.2 Before us it was reiterated by the learned Authorised Representative that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Elxsi Ltd. is not a software development service provider and therefore it is not functionally comparable. In this context the relevant portion of this order is extracted and reproduced below :- " …. Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of the learned Authorised Representative that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for 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 as fit for comparability analysis for determining the arm's length price for the assessee, hence, should be excluded from the list of comparable portion." As can be seen from the extracts of the Annual Report of this company produced before us, the facts pertaining to Tata Elxsi have not changed from Assessment Year 2007-08 to Assessment Year 2008-09. We, therefore, hold that this company is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n is available on the segmental bifurcation of revenue from sale of products and software services. (vi) the TPO has adopted consolidated financial statements for comparability purposes and for computing the margins, which is in contradiction to the TPO's own filter of rejecting companies with consolidated financial statements. 12.3 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the list of comparables. 12.4.1 We have heard both parties and carefully perused and considered the material on record. We find merit in the contentions of the assessee for exclusion of this company from the set of comparables. It is seen that this company is engaged both in software development and product development services. There is no information on the segmental bifurcation of revenue from sale of product and software services. The TPO appears to have adopted this company as a comparable without demonstrating how the company satisfies the software development sales 75% of the total revenue filter adopted by him. Another major flaw in the comparability analysis carried out by the TPO is that he adopted comparison of the consolidated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed at the level of the TPO/AO, therefore, without going into merits of the issue of comparability, we set aside the issue of comparability of this company to the record of the AO/TPO for considering the functional and other criteria of comparability for including the said company in the list of comparables for determining the ALP in respect of international transaction of the assessee. We find that the assessee, in its TP analysis excluded this company for want of financial details and data in the public domain. It appears that during the appellate proceedings, the financial data were produced by obtaining directly from the company and therefore, these details including the functional comparability of the company are required to be examined. The ground No.4 of the revenue is allowed for statistical purposes. II. Avani Cincom Technologies Ltd. We have heard the learned DR as well as the learned authorised representative of the assessee and considered the relevant material on record. At the outset, we note that the comparability of this company has been examined and decided by the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd (supra) in paras.7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s customised solutions and services in different areas; (ii) The Website of this company evidences that this company develops and sells customizable software solutions like "DX Change, CARMA, etc. 7.4 The learned Authorised Representative submitted that a coordinate bench of the Tribunal in its order in Curram Software International Pvt. Ltd., in its order in ITA No.1280/Bang/2012 dt.31.7.2013 has remanded the matter back to the file of the Assessing Officer / TPO to examine the comparability of this company afresh, by making the following observations at paras 9.5.2 and 9.5.3 thereof :- 9.5.2 As regards the submission of the learned Authorised Representative, we are unable to agree that this company has to be deleted from the list of comparables only because it has been deleted from the set of comparables in the case of Triology EBusiness Software India Pvt. Ltd. (supra). No doubt this company has been deleted as a comparable in the case of Triology EBusiness Software India Pvt. Ltd. (supra) and this can be a good guidance to decide on the comparability in the case on hand also. This alone, however, will not suffice for the following reasons :- (i) The assessee needs to dem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... analysis or as per the search process conducted by the TPO, but only as an additional comparable for the reason that it was selected as a comparable in the earlier year i.e. Assessment Year 2007-08 on the basis of information obtained under section 133(6) of the Act. In this regard, the learned Authorised Representative took us through the relevant portions of the TP order under section 92CA of the Act and the show cause notices for both the earlier year i.e. Assessment Year 2007-08 and for this year and contended that the selection of this company as a comparable violates the principle enunciated in Curram Software International Pvt. Ltd. (supra) that a company can be selected as a comparable only on the basis of FAR analysis conducted for that year and therefore pleaded for its exclusion. The learned Authorised Representative also submitted that he has brought on record sufficient evidence to show that the functional profile of this company remains unchanged from the earlier year and hence the findings rendered by the co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) and in other cases like Triology E-Business Software India Pvt. L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owing the orders of this Tribunal, we hold that this company cannot be considered as functionally comparable with the assessee. Accordingly, we do not find any error or illegality in the order of the CIT(A) and decline to interfere with the order of the CIT(A) qua this issue. III. Celestial Biolabs Ltd. We have heard the learned DR as well as the learned authorised representative of the assessee and considered the relevant material on record. At the outset, we note that the comparability of this company has been examined and decided by the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd (supra) in paras.9.1 to 9.4.2. as under: 9.1 This comparable was selected by the TPO for inclusion in the final list of comparables. Before the TPO, the assessee had objected to the inclusion of this company in the list of comparables for the reasons that it is functionally different form the assessee and that it fails the employee cost filter. The TPO, however, brushed aside the objections raised by the assessee by stating that the objections of functional dissimilarity has been dealt with in detail in the T.P. order for Assessment Year 2007-08. As regards the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the list of comparable companies. The learned Departmental Representative submitted that the decisions cited and relied on by the assessee are for Assessment Year 2007-08 and therefore there cannot be an assumption that it would continue to be applicable for the period under consideration i.e. Assessment Year 2008-09. 9.4.1 We have heard both the parties and perused and carefully considered the material on record. While it is true that the decisions cited and relied on by the assessee were with respect to the immediately previous assessment year, and there cannot be an assumption that it would continue to be applicable for this year as well, the same parity of reasoning is applicable to the TPO as well who seems to have selected this company as a comparable based on the reasoning given in the TPO's order for the earlier year. It is evidently clear from this, that the TPO has not carried out any independent FAR analysis for this company for this year viz. Assessment Year 2008-09. To that extent, in our considered view, the selection process adopted by the TPO for inclusion of this company in the list of comparables is defective and suffers from serious infirmity. 9.4.2 Apart from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wever, rejected the objections of the assessee observing that the software products and training constitutes only 4.24% of total revenues and the revenue from software development services constitutes more than 75% of the total operating revenues for the F.Y. 2007-08 and qualifies as a comparable by the service income filter. 10.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee and ought to be rejected / excluded from the list of comparables for the following reasons :- (i) This company is functionally different from the software activity of the assessee as it is into software products. (ii) This company has been held to be functionally not comparable to software service providers for Assessment Year 2007-08 by the co-ordinate bench of this Tribunal in the assessee's own case. This company has been held to be different from a software development company in the decision of the Tribunal in the case of Bindview India Pvt. Ltd. V DCIT in ITA No.1386/PN/2010. (iii) The rejection of this company as a comparable has been upheld by co-ordinate benches of the Tribunal in the case of - (a) Triology E-Busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Triology E-Business Software India Pvt. Ltd. (supra) have held that this company was developing software products and was not purely or mainly a software service provider. Apart from relying of the above cited decisions of co-ordinate benches of the Tribunal (supra), the assessee has also brought on record evidence from various portions of the company's Annual Report to establish that this company is functionally dis-similar and different form the assessee and that since the findings rendered in the decisions of the co-ordinate benches of the Tribunal for Assessment Year 2007-08 (cited supra) are applicable for this year i.e. Assessment Year 2008-09 also, this company ought to be excluded from the list of comparables. In this view of the matter, we hold that this company i.e. KALS Information Systems Ltd., is to be omitted form the list of comparable companies. It is ordered accordingly. A similar view has been taken by the Tribunal in other decisions relied upon by the assessee. Following the orders of this Tribunal, we hold that this company cannot be considered as functionally comparable with the assessee. Accordingly, we do not find any error or illegality in the order of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he appellant and the comparable companies, including but not limited to risk adjustment. PRAYER 12. On an overall consideration of the facts of the case and the law applicable, the ALP as determined by the Transfer Pricing Officer, as adopted by the Assessing Officer and as modified by the CIT(A), being not correct, is to be quashed and the figures as determined and returned by the appellant being correct are to be accepted 13. The learned Assessing Officer has erred in levying interest under Section 234B. The appellant submits that each of the above grounds/subgrounds are independent and without prejudice to one another". 13. We have heard the learned authorised representative of the assessee as well as the learned DR and considered the relevant material on record. Apart from the additional ground raised by the assessee, no other specific issue has been raised or pressed by the assessee in the cross appeal. Accordingly, in view of our finding on the additional ground, no further adjudication is either sought or required in respect of the grounds raised by the assessee in the cross appeal. Accordingly, the original grounds raised by the assessee stand dismissed except the gro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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