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TMI Blog2016 (6) TMI 91X X X X Extracts X X X X X X X X Extracts X X X X ..... gawa India Ltd (2011 (8) TMI 845 - Karnataka High Court ) had held that profits eligible for relief u/s.10A of the Act was to be excluded from the total income before giving effect to set off mandated u/s.70 of the Act. . Accordingly, we hold that the claim of deduction u/s.10A of the Act has to be calculated without setting off the loss incurred by the assessee in its non- STP units - Decided in favour of assessee Transfer pricing adjustment - selection of comparable - Held that:- Assessee has to succeed in its pleading for exclusion of the following companies :- Avani cincom Technologies Ltd,Bodhtree Consulting Ltd,Celestial Biolabs,E-Zest Solutions Ltd,Infosys, Kals Information Systems Ltd (seg),Persistent Systems Ltd,Quintegra Solution Ltd,Tata Elxsi (seg),Thirdware Solution Ltd,Wipro Ltd (seg) and Lucid Software Ltd.6. We also find that the above mentioned companies were considered by the Tribunal in assessee's own case for A. Y. 2006-07 were directed for exclusion, due to functional incompatibility. Accordingly we direct exclusion of the above companies from the list of comparables. TPO is directed to rework the PLI of the comparables after excluding the above companies an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before granting deduction u/s.10A of the Act. 7. Ld. AR placed reliance on the decision of Hon'ble jurisdictional High Court in the case of CIT (LTU) v. Yokogawa India Ltd [(2013) 341 ITR 0385] and submitted that deduction u/s.10A of the Act had to be worked out on a stand alone basis. 8. Per contra, Ld. DR supported the orders of authorities below. 9. We have perused the orders and heard the rival contentions. Hon'ble jurisdictional High Court in the case of Yokogawa India Ltd (supra) had held that profits eligible for relief u/s.10A of the Act was to be excluded from the total income before giving effect to set off mandated u/s.70 of the Act. As for the judgment of the jurisdictional High Court in the case of CIT v. Himatasingike Seide Ltd, [286 ITR 255], it dealt with a case of netting of loss of 100% EOU from profits of other 100% EOUs. Therefore in our opinion judgment of Hon'ble jurisdictional High Court in the case of Yokogawa India Ltd, (supra) is more appropriate in the given case. Accordingly, we hold that the claim of deduction u/s.10A of the Act has to be calculated without setting off the loss incurred by the assessee in its non- STP units. Ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... draft assessment on the above lines was issued to the assessee it chose to move the DRP. Assessee submitted to the DRP that CPM was a better method for its case than TNMM. Assessee also raised objections on certain comparables selected by the TPO. However the DRP confirmed the recommendations of the TPO. Assessment was accordingly completed by making an addition of ₹ 2,24,39,633/- . 17. Now before us, Ld. AR submitted that none of the twenty comparables selected by the TPO appeared in the list of companies selected by the assessee. As per the Ld. AR though the assessee was aggrieved on TNMM being adopted, still, if certain companies were excluded from the list of comparables selected by the TPO assessee, there would be no requirement for an adjustment on pricing. The companies which were to be excluded due to functional incompatability, as per the Ld. AR, were the following : 1. Avani cincom Technologies Ltd, 2. Bodhtree Consulting Ltd (BTC Ltd), 3. Celestial Biolabs, 4. E-Zest Solutions Ltd, 5. Infosys Technologies Ltd, 6. Kals Information Systems Ltd (seg), 7. Persistent Systems Ltd, 8. Quintegra Solution Ltd, 9. Tata Elxsi (seg), 10. Thirdw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e order in the case of 3DPLM Software Solutions Ltd (supra) it was held by this Tribunal as under with regard to comparability of Avani Cincom Technologies Ltd :_ : 7.6.1 We have heard both parties and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the final set of comparables only on the basis of information obtained under section 133(6) of the Act. In these circumstances, it was the duty of the TPO to have necessarily furnished the information so gathered to the assessee and taken its submissions thereon into consideration before deciding to include this company in its final list of comparables. Nonfurnishing the information obtained under section 133(6) of the Act to the assessee has vitiated the selection of this company as a comparable. 7.6.2 We also find substantial merit in the contention of the learned Authorised Representative that this company has been selected by the TPO as an additional comparable only on the ground that this company was selected in the earlier year. Even in the earlier year, it is seen that this company was not selected on the basis on any search process carried ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that this company is not functionally comparable, as the company is into bio-informatics software product / services and the segmental break up is not provided. It was submitted that :- (i) This company is engaged in the development of products in the field of bio-technology, pharmaceuticals, etc. and therefore is not functionally comparable to the assessee; (ii) This company has been held to be functionally incomparable to software service providers by the decision of the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra); (iii) The co-ordinate bench of this Tribunal in its order in the case of Triology EBusiness Software India Pvt. Ltd. (supra) at para 43 thereof had observed about this company that .. As explained earlier, it is a diversified company and therefore cannot be considered as comparable functionally with the assessee. There has been no attempt to identify, eliminate and make adjustment of the profit margins so that the difference in functional comparability can be eliminated. By not resorting to such a process of making adjustments, the TPO has rendered this company as not qualifying f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in the case on hand and is therefore not comparable and also that the findings rendered in the cited decisions for the earlier years i.e. Assessment Year 2007- 08 is applicable for this year also. We agree with the submissions of the assessee that this company is functionally different from the assessee. It has also been so held by co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) as well as in the case of Triology E-Business Software India Pvt. Ltd. (supra). In view of the fact that the functional profile of and other parameters of this company have not changed in this year under consideration, which fact has also been demonstrated by the assessee, following the decision of the coordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 in ITA No.845/Bang/2011 and Triology E-Business Software India Pvt. Ltd. in ITA No.1054/Bang/2011, we hold that this company ought to be omitted form the list of comparables. The A.O./TPO are accordingly directed. 25. Vis-a-vis E-Zest Solutions Ltd, findings of the Tribunal as it appears at para 14.4 of the order in the case of 3DPLM Software Solutions Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 be considered as comparable to captive service providers assuming limited risk ; (iii) the company has generated several inventions and filed for many patents ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ual Report of the company with respect to software services revenue and software products revenue. The TPO, however, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ised Representative. We also find that the co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) and in the case of 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. 28. With regard to Persistent Systems Ltd, findings of the Tribunal in appears at para 17.1 to 17.3 of the order in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 17.2 Per contra, the learned Departmental Representative support the action of the TPO in including this company in the list of comparables. 17.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that this company i.e. Persistent Systems Ltd., is engaged in product development and product design services while the assessee is a software development services provider. We find that, as submitted by the assessee, the segmental details are not given separately. Therefore, following the principle enunciated in the decision of the Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. (supra) that in the absence of segmental details / information a company cannot be taken into account for comparability analysis, we hold that this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. It is ordered accordingly. 29. As for Quintegra Solutions Ltd, findings of the Tribunal appear at paras 18.1 to 18.3.3 of the order in the case of 3DPLM Software Solutions Ltd, (supra), and this is reproduced hereunder: 18. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar economic circumstances. Quintegra fails the TPO s own filter since there have been acquisitions in this case, as is evidenced from the company s Annual Report for F.Y. 2007-08, the period under consideration. The learned Authorised Representative prays that in view of the submissions made above, it is clear that inter alia, this company i.e. Quintegra Solutions Ltd. being functionally different and possessing its own intangibles / IPRs, it cannot be considered as a comparable to the assessee in the case on hand and therefore ought to be excluded from the list of comparables for the period under consideration. 18.2 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the set of comparables to the assessee for the period under consideration. 18.3.1 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details brought on record that this company i.e. Quintegra Solutions Ltd. is engaged in product engineering services and is not purely a software development service provider as is the assessee in the case on hand. It is also seen that this company is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal in the case of Telecordia Technologies Pvt. Ltd. (supra) has held that Tata Elxsi Ltd. is not a functionally comparable for a software development service provider. (ii) The facts pertaining to Tata Elxsi Ltd. have not changed from the earlier year i.e. Assessment Year 2007-08 to the period under consideration i.e. Assessment Year 2008- 09 and therefore this company cannot be considered as a comparable to the assessee in the case on hand. (iii) Tata Elxsi Ltd. is predominantly engaged in product designing services and is not purely a software development service provider. In the Annual Report of this company the description of the segment software development services relates to design services and are not to software services provided by the assessee. (iv) Tata Elxsi Ltd. invests substantial funds in research and development activities which has resulted in the Embedded Product Design Services Segment of the company to create a portfolio of reusable software components, ready to deploy frameworks, licensable IPs and products. The learned Authorised Representative pleads that in view of the above reasons, Tata Elxsi Ltd. is clearly functionally different ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the list of comparables by the TPO. Before the TPO, the assessee objected to the inclusion of this company in the list of comparables on the ground that its turnover was in excess of ₹ 500 Crores. Before us, the assessee has objected to the inclusion of this company as a comparable for the reason that apart from software development services, it is in the business of product development and trading in software and giving licenses for use of software. In this regard, the learned Authorised Representative submitted that:- (i) This company is engaged in product development and earns revenue from sale of licences and subscription. It has been pointed out from the Annual Report that the company has not provided any separate segmental profit and loss account for software development services and product development services. (ii) In the case of E-Gain communications Pvt. Ltd. (2008-TII- 04-ITAT-PUNE-TP), the Tribunal has directed that this company be omitted as a comparable for software service providers, as its income includes income from sale of licences which has increased the margins of the company. The learned A.R. prayed that in the light of the above facts and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . in ITA No.3856(Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and a market leader assuming all risks leading to higher profits, cannot be considered as comparable to captive service providers assuming limited risk; (iii) the co-ordinate bench of the ITAT, Mumbai in the case of Telecordia Technologies India Pvt. Ltd. (ITA No.7821/Mum/2011) has held that Wipro Ltd. is not functionally comparable to a software service provider. (iv) this company has acquired new companies pursuant to a scheme of amalgamation in the last two years. (v) Wipro Ltd. is engaged in both software development and product development services. No information 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 h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore not comparable to software service providers by the order of a co-ordinate bench of the Tribunal in the assessee's own case for Assessment Year 2007-08 (IT(TP)A No.845/Bang/2011), following the decision of Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. (ITA No.7821/Mum/2011). (iii) The rejection of this company as a comparable to software service providers has been upheld by the co-ordinate benches of this Tribunal in the cases of LG Soft India Pvt. Ltd. (ITA No.1121/Bang/2011) and CSR India Pvt. Ltd. [ IT(TP)A No.1119/Bang/2011 ] and by the Delhi Bench of the Tribunal in the case of Transwitch India Pvt. Ltd. (ITA No.6083/Del/2010). (iv) The factual position and circumstances pertaining to this company has not changed from the earlier Assessment Year 2007-08 to the period under consideration i.e. Assessment Year 2008-09 and therefore on this basis, this company cannot be considered as a comparable in the case on hand. (v) The relevant portion of the Annual Report of this company evidences that it is in the business of product development. The learned Authorised Representative prays that in view of the factual position a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidered was again software development services. Comparability of Bodhtree Consulting Ltd, was dealt with at paras 21 to 23 of the said order, which is reproduced herebelow : Bodhtree Consulting Limited 21.On this comparable, case of the assessee is that the company is not a good comparable in view of the software products produced by the company. As such, no segmental data is adequately available too. 22. On the other hand, Ld DR filed a copy of the financial statement and argued vehemently stating that this company is not engaged in the software products. In this regard, Ld DR relied on the note no.3, relating to the relating to the revenue recommendation in Schedule 12, note no.5 relating to the segmental information etc to mention that the company is engaged in the software development only. However, the assessee argued vehemently stating that this company is engaged in the software based products. Further, Ld Counsel mentioned that the said company was already examined and was held as product based company by the TPO in the TP study of other case and the TPO cannot take different stand in this case. In this regard, we have perused the para 29 of the order of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etic mean. 35. In view of the above decisions, we are of the opinion that assessee has to succeed in its pleading for exclusion of the following companies : 1. Avani cincom Technologies Ltd, 2. Bodhtree Consulting Ltd, 3. Celestial Biolabs, 4. E-Zest Solutions Ltd, 5. Infosys 6. Kals Information Systems Ltd (seg), 7. Persistent Systems Ltd, 8. Quintegra Solution Ltd, 9. Tata Elxsi (seg), 10. Thirdware Solution Ltd, 11. Wipro Ltd (seg) and 12. Lucid Software Ltd. 36. We also find that the above mentioned companies were considered by the Tribunal in assessee's own case for A. Y. 2006-07 in IT(TP)A.589/Bang/2012, dt.10.04.2015] and were directed for exclusion, due to functional incompatibility. Accordingly we direct exclusion of the above companies from the list of comparables. TPO is directed to rework the PLI of the comparables after excluding the above companies and considering the working capital adjustment and proceed in accordance with law. In the result, grounds 10 to 18 of the assessee are treated as partly allowed. 36. To summarise the result, appeal of the assessee is treated as partly allowed. Order pronounced in the ope ..... X X X X Extracts X X X X X X X X Extracts X X X X
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