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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 ..... qual amount had to be given from the total turnover also in view of the judgment of Hon'ble jurisdictional High Court in the case of CIT v. Tata Elxsi Ltd [349 ITR 98]. 4. Ld. DR on the other hand supported the orders of authorities below. 5. We have perused the orders and heard the rival contentions. In view of Explanation 2(iv) to Section 10A of the Act, which defines 'export turnover', we are unable to accede to the contention of the Ld. AR that travelling expenditure had to be included in the export turnover for computation of deduction u/s.10A of the Act. However in so far as the claim that amounts which were excluded from export turnover has to be deducted from total turnover as well, we are inclined to agree in view of the law laid down by the Hon'ble jurisdictional High Court in the case of Tata Elxsi Ltd (supra). Accordingly, we direct that such amounts which were excluded from export turnover be excluded from total turnover also while computing the deduction allowable u/s.10A of the Act. Grounds 2 to 6 of the assessee are treated as partly allowed. 6. Vide its grounds 7 to 9 grievance raised by the assessee is that AO adjusted loss of Rs. 60,26,010/-, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparables from Prowess and capitaline data base. As per the assessee, it was earning a margin of 10% on operating cost from its associated enterprises whereas the average profit margin of the six comparables selected by it was 9.87%. As per assessee, therefore, there was no requirement of any adjustment for the pricing of its international transactions. 14. However, when the matter was referred to TPO by the AO during the course of assessment proceedings, TPO was of the opinion that the cost base of the comparables selected by the assessee were not accurately available. Data bases as per the TPO did not allow an analysis which was required for a CPM study. TPO thereafter went by the TNMM, considering the assessee to be in software development segment, and selected the following comparables from the very same data base, which were used by the assessee : 15. On the PLI of 23.65% worked out, TPO made a negative working capital adjustment of 0.96% and arrived at a mean PLI of 22.69%. Applying the above PLI on the operating cost of the assessee, TPO made a recommendation for an upward adjustment of Rs. 2,24,39,633/- u/s.92C of the Act. The work out of the recommended adjustment was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be considered on par with 3DPLM Software Solutions Ltd (supra). Thus according to him, the decision given in the case of 3DPLM Software Solutions Ltd (supra) did not have any applicability in assessee's case. 20. We have perused the orders and heard the rival contentions. Profile of the assessee as it appears in the TP order reads as under : 21. At para 2.2 of the very same order with regard to international transactions undertaken by the assessee what has been stated by the TPO reads as under : 22. Coming to the case of 3DPLM Software Solutions Ltd (supra), which has been strongly relied on by the Ld. AR, its profile is mentioned in para 21 of the order of the coordinate bench which is reproduced hereunder: 23. What we find is that TPO had considered the assessee here to be a software service provider and the services rendered by 3DPLM Software Solutions Ltd (supra) was also on the very same segment. Accordingly, we are of the opinion that the decision of the coordinate bench in the case of 3DPLM Software Solutions Ltd (supra), can be applied vis-a-vis assessee's arguments for exclusion of some of the companies. 24. At para 7.3 of the order in the case of 3DPLM Software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6.2 that the said company was functionally dissimilar. Same view was also taken by the coordinate bench in the case of Triology E- Business Software India P. Ltd v. DCIT [(2013) 140 ITD 540]. 24. Observation of this Tribunal with regard to Celestial Biolabs Ltd, as it appears in the case of 3DPLM Software Solutions Ltd (supra) is reproduced hereunder : 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 objection raised in respect of the employee cost filter issue, the TPO rejected the objections by observing that the employee cost filter is only a trigger to know the functionality of the company. 9.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8- 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 relying on the afore cited judicial decisions in the matter (supra), the assessee has brought on record substantial factual evidence to establish that this company is functionally dissimilar and different from the assessee in the case on hand and is therefore not comparable and also that the findings rendered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion in the case on hand. The A.O. / TPO is accordingly directed. 26. Vis-a-vis Infosys Technologies Ltd, findings of the Tribunal appears at para 11.1 to 11.4 of the order in the case of 3DPLM Software Solutions Ltd, (supra), and this is reproduced hereunder : 11.1 This was a comparable selected by the TPO. Before the TPO, the assessee objected to the inclusion of the company in the set of comparables, on the grounds of turnover and brand attributable profit margin. The TPO, however, rejected these objections raised by the assessee on the grounds that turnover and brand aspects were not materially relevant in the software development segment. 11.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee in the case on hand. The learned Authorised Representative drew our attention to various parts of the Annual Report of this company to submit that this company commands substantial brand value, owns intellelctual 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 bran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Trilogy E-Business Software India Pvt. Ltd. (supra) for Assessment Year 2007-08 is applicable to this year also. We are inclined to concur with the argument put forth by the assessee that Infosys Technologies Ltd is not functionally comparable since 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. It is ordered accordingly. 27. With regard to Kals Information Systems Ltd, (seg) findings of the Tribunal in the above mentioned case of 3DPLM Software Solutions Ltd (supra) appear at para 10.1 to 10.4 of the order which is reproduced hereunder : 10.1 This is 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 grounds of functional differences and that the segmental details have not been provided in the Annual Report of the company with respect to software services revenue and software products revenue. The TPO, however, rejected the objections of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Tribunal in the case of Triology E-Business Software India Pvt. Ltd. (supra) was rendered with respect to F.Y.2006-07 and therefore there cannot be an assumption that it would continue to be applicable to the year under consideration i.e. A.Y. 2008-09. To this, the counter argument of the learned Authorised Representative is that the functional profile of this company continues to remain the same for the year under consideration also and the same is evident from the details culled out from the Annual Report and quoted above (supra). 10.4 We have heard both parties and perused and carefully considered the material on record. We find from the record that the TPO has drawn conclusions as to the comparability of this company to the assessee based on information obtained u/s.133(6) of the Act. This information which was not in the public domain ought not to have been used by the TPO, more so when the same is contrary to the Annual Report of the company, as pointed out by the learned Authorised 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 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) Page 60 of the Annual Report of the company for F.Y. 2007-08 indicates that this company, is predominantly engaged in 'Outsourced Software Product Development Services' for independent software vendors and enterprises. (iii) Website extracts indicate that this company is in the business of product design services. (iv) The ITAT, Mumbai Bench in the case of Telecordia Technologies India Pvt. Ltd. (supra) while discussing the comparability of another company, namely Lucid Software Ltd. had rendered a finding that in the absence of segmental information, a company be taken into account for comparability analysis. This principle is squarely applicable to the company presently under consideration, which is into product development and product design services and for which the segmental data is not available. The learned Authorised Representative prays that in view of the above, this company i.e. Persistent Systems Ltd. be omitted from the list of comparables. 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 consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enance, SAP, product engineering and infrastructure management services), proprietary software products and consultancy services in IT on various platforms and technologies." (iii) This company is also engaged in research and development activities which resulted in the creation of Intellectual Proprietary Rights (IPRs) as can be evidenced from the statements made in the Annual Report of the company for the period under consideration, which is as under : " Quintegra has taken various measures to preserve its intellectual property. Accordingly, some of the products developed by the company ............... have been covered by the patent rights. The company has also applied for trade mark registration for one of its products, viz. Investor Protection Index Fund (IPIF). These measures will help the company enhance its products value and also mitigate risks." (iv) The TPO has applied the filter of excluding companies having peculiar 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 pray ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), appear at para 13.1 to 13.4.2 which is reproduced hereunder : 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 this company is not functionally comparable to the assessee as it performs a variety of functions under software development and services segment namely - a) product design, (b) innovation design engineering and (c) visual computing labs as is reflected in the annual report of the company. The learned Authorised Representative submitted that, (i) The co-ordinate bench of the Mumbai Tribunal 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 2007-0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parable 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 to be considered for inclusion in the set of comparables in the case on hand. It is ordered accordingly. 31. Coming to Thirdware Solutions Ltd (seg), findings of the Tribunal in the above mentioned case of 3DPLM Software Solutions Ltd(supra),appear at para nos.15.1 to 15.3 which is reproduced hereunder : 15.1 This company was proposed for inclusion in 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 Rs. 500 Crores. Before us, the assessee has objected to the inclusion of this company as a comparable for the reason that apart fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO, the assessee had objected to the inclusion of this company in the list of comparables on several grounds like functional dis-similarity, brand value, size, etc. The TPO, however, brushed aside the objections of the assessee and included this company in the set of comparables. 12.2 Before us, the learned Authorised Representative of the assessee contended that this company i.e. Wipro Ltd., is not functionally comparable to the assessee for the following reasons:- (i) This company owns significant intangibles in the nature of customer related intangibles and technology related intangibles, owns IPRs and has been granted 40 registered patents and has 62 pending applications and its Annual Report confirms that it owns patents and intangibles. (ii) the ITAT, Delhi observation 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 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, direct the Assessing Officer/TPO to omit this company from the set of comparable companies in the case on hand for the year under consideration. 33. Coming to Lucid Software Ltd, this has been dealt with at para 16.1 to 16.3 of the order in the case of 3DPLM Software Solutions Ltd, (supra), and this is reproduced hereunder : 16.1 This company was selected as a comparable by the TPO. Before us, the assessee has objected to the inclusion of this company as a comparable on the grounds that it is into software product development and therefore functionally different from the assessee. In this regard, the learned Authorised Representative submitted that - (i) This company is engaged in the development of software products. (ii) This company has been held to be functionally different and 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 provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to demonstrate that the factual and other circumstances pertaining to this company have not changed materially from the earlier year i.e. Assessment Year 2007-08 to the period under consideration i.e. Assessment Year 2008-09. In this factual matrix and following the afore cited decisions of the co-ordinate benches of this Tribunal and of the ITAT, Mumbai and Delhi Benches (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand. 34. As for Bodhtree Consulting Ltd, comparability of the said company was an issue which came up before the Mumbai Bench of the Tribunal in the case of Nethawk Networks India P. Ltd (supra). The decision was also for the very same assessment year and the segment considered 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned by the TPO at Hyderabad and not by the TPO of the assessee in the present case. It is stated in the letter dated 5.2.2010 written by the Chartered Accountant of Bodhtree Consulting Ltd to the TPO Hyderabad that the company is providing data cleaning services to clients for whom it had developed the software application........." 23. Considering the above, we are of the opinion that Bodhtree Consulting Limited is not engaged in the software development services and there is no segmental data comparable. Therefore, the FAR analysis goes against the TPO/AO. 14 Accordingly, we dismiss the argument of the Ld DR in this regard. Ex consequenti, the AO/TPO is directed to exclude the same from the list of final comparables for working out the arithmetic 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 Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X
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