9911796707
TMI Blog2016 (7) TMI 660X X X X Extracts X X X X X X X X Extracts X X X X ..... of charts and submissions. 2.1. Briefly stated, assessee is engaged in the business of computer software development and its related services to its Associated Enterprise (AE). Since assessee has international transactions with the AE, the matter was referred to Transfer Pricing Officer (TPO), Hyderabad u/s. 92CA of the Act. The TPO passed order u/s. 92CA(3) on 31-08-2010. After the above order by TPO, AO issued draft assessment order on 15-12-2010. Assessee filed objections before the DRP and the DRP vide its order dt. 09-08-2011, gave directions u/s. 144C(5) of the Act. Consequent to AO passed order on 25-08-2011, which is the subject matter of present appeal. Transfer Pricing matters: 3. Even though assessee was engaged in software development as well as IT enabled services up to AY. 2006-07, during the year, assessee involved only in software development services. The activities of assessee relate to only one segment i.e., software development. It has reported operating revenue of Rs. 167.19 Crores and an operating cost of Rs. 149.35 Crores. The operating profit by assessee is Rs. 70.84 Crores and the operating profits to cost ratio excluding interest, loss on exchange flu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ata Elxsi Ltd (Seg) 25.86% 21. Wipro Ltd (Seg) 34.20% 22. Flextronics Software Systems Ltd (Seg) 24.73% 23. Helios & Matheson Information Tech Ltd 34.14% 24. Accel Transmatics Ltd 19.79% 25. KALS Information Systems Ltd Comparables to be included but rejected by TPO 23.10% 26. Aztecsoft Ltd Fails RPT filter 27. Birla Technologies Ltd Fails RPT filter 28. Indium Software India Ltd Functionally different 29. Larsen & Toubro Infotech Ltd Response to notice u/s. 133(6) not received 30. PSI Data Systems Ltd (Seg) Fails RPT filter 31. VMF Softech Ltd Fails Employee cost filter 7. At the outset, Ld. Counsel as well as the DR fairly admitted that most of these companies are already considered and rejected in the Co-ordinate Bench decision in the case of M/s. United Online Software Development (India) Pvt. Ltd., in ITA No. 1658/Hyd/2011 dt. 24-09-2015 and also other decisions of the Co-ordinate Benches in the case of Sumtotal Systems India P. Ltd., Invensys Development Centre India Private Limited etc. 8. The DRP itself vide para-II in page 2 of the order stated that the case of assessee was heard along with Invensys Development Centre India Priva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from both product and software services and segment-wise data is not available and secondly, it is contended that the company has shown super normal profit of 52.59% against average margin of other comparables. It is very much evident from the TP order that Assessee has been categorised as a software development service provider. Coordinate Bench of this Tribunal in the case of Virtusa (India) Pvt. Ltd. (ITA No. 1962/Hyd/2011 dated 30/08/2013) after following some other decisions of the Tribunal has held this company cannot be treated as comparable as this company is also into product development. As segmental details of operating income of software development services and sale of software products are not available, it could not be ascertained whether the profit ratio of this company can be taken into consideration for comparing with Assessee. As the aforesaid decision of the Coordinate Bench pertained to the same assessment year i.e. A.Y. 2007-08, following the same, we hold that this company cannot be treated as comparable to Assessee. Other cases considered the same comparable and rejected are as under: a) M/s. Foursoft Limited (ITA.No.1903/H/2011) b) M/s. Conexant System ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n this context, the learned AR relied upon the Income-tax Appellate Tribunal Special Bench decision in case of Quark Systems, 4 ITR (Trib) 606. 7.2.3. We have considered the submissions of the parties and perused the materials on record. On considering the same, we are of the view that this company cannot be considered as comparable to Assessee due to various factors such as its size, turnover, brand value, scale of operation, diversified activities and owning of intangibles. As can be seen from the TP order, the turnovers of Infosys Technologies Limited during the year under consideration are Rs. 13,149 crores as against Rs. 42 crores of Assessee. Though it is a fact that Assessee in the TP documentation, has selected Infosys Technologies Ltd. as comparable but that cannot prevent Assessee from objecting to the aforesaid company being selected as comparable, if there are valid reasons for doing so. In this context, the contention of the learned AR that Assessee has selected Infosys Limited on the basis of three years financial data, whereas the TPO considered only the current year data also needs to be appreciated. Therefore, considering the enormity of turnover of the company as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contention, the learned AR has relied upon the decision of co-ordinate bench in the case M/s Virtusa (India) Pvt. Ltd. (supra). On perusal of the order passed in case of M/s Virtusa (India) Pvt. Ltd. (supra), it is seen that the co-ordinate bench has excluded the aforesaid company accepting assessee's contention that segmental data in respect of sale of products and software services are not available. Further following cases also considered the above company and excluded the same on same reason. a) M/s. Foursoft Limited (ITA.No.1903/H/2011) b) Intoto Software India P. Ltd. ITA.2102/H/2010 c) Telcordia Technologies India P. Ltd. ITA.No.7821/Mum/2011 c) LG Soft India P. Ltd. ITA.1121/Bang/2011 d) Transwitch India P. Ltd. ITA.948/Bang/2011 f) Mercedes Benz Research & Development ITA.No.1222/Bang/2011 g) CSR India P. Ltd. ITA.No.1119/Bang/2011 h) First Advantage ITA.No.1086/Bang/2012 i) HCL EAI Services Ltd. ITA.No.1348/Bang/2011. Following the aforesaid decisions of the Coordinate Benches, we direct exclusion of the aforesaid company from list of comparables. MEGASOFT LIMITED : 7.5. The main objection of Assessee with regard to the aforesaid company is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7.6.1. The learned DR, on the other hand, supported the orders of the AO/TPO and DRP in this regard and referred to the observations made by the TPO in his order. 7.6.2. We have heard the submissions of both the parties and perused the material on record. In case of Telcordia Technologies India Pvt. Ltd., ITA No. 7821/Mum/2011, the ITAT Mumbai Bench while considering the comparability of the aforesaid company with software services provider held as under: "7.7 From the facts and material on record and submissions made by the learned AR, it is seen that the Tata Elxsi is engaged in development of niche product and development services, which is entirely different from Assessee company. We agree with the contention of the learned AR that the nature of product developed and services provided by this company are different from 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 prof it ratio from product and services. Thus, on these facts, we are unable to treat this company f it for comparability analysis for determining the arms length price f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for comparability analysis. Moreover, 67% of its sales relates to its product which are sold on premium resulting into higher prof itability, therefore, cannot be compared with Assessee company at all. There are several judgments of ITAT which have been referred in para 6.5 above, that Wipro cannot be taken as comparable case for comparable case with the company like assessee. In view of these facts and the reasoning given in the case of Infosys, we hold that Wipro also cannot be considered as a comparability analysis, hence, would not be included in the list of the comparable entities as identif ied by the TPO." 7.7.3. As can be seen from the facts and materials on record during the year under consideration, the segmental turnover of the Wipro Ltd. Is 9616.09 crores. Therefore, considering the turnover, brand value as well as other dynamics of Wipro Ltd., it comes in the same category as Infosys and certainly cannot be compared with Assessee. Therefore, following our reasoning in case of Infosys Technologies Ltd. And other coordinate bench decisions, we hold that Wipro Ltd. cannot be treated as comparable with Assessee. ACCEL TRANSMATIC LTD. : 7.8. With regard to this compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... als Information System Limited is concerned, learned Counsel for Assessee submitted that it is functionally different from Assessee. In support of his contention, the learned Counsel for Assessee relied upon the decision of the Bangalore Tribunal in the case M/s. Trilogy EBusiness Software India Private Limited (supra) wherein at paras 46 and 47 of its order, the Tribunal has discussed the functional dissimilarity with Assessee therein and has directed that the company should be excluded from the list of comparables. Similarly, the Tribunal at Bangalore in the case of M/s. HCL EAI Services Ltd. vs. DCIT IT(TP) A. No. 1348/ Bang/2011 at para 17 at pages 24 to 26 of its order has discussed at length the reasons for not considering the said company as comparable to software development services company. The relevant portion of the order is reproduced hereunder : (d) KALS Information Systems Ltd. 46. As far as this company is concerned, the contention of Assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11 as well as M/s. Trilogy E-Business Solutions ITA.No.1054/Bang/2011 are into software development services to its parent companies. Assessee is also into similar type of activity. Therefore, the decision taken in M/s. Trilogy E-Business Software India Private Limited as well as M/s. HCL EAI Services Ltd. to exclude Kals Information Systems Ltd. applies to the facts of the case before us also. Similar view has been expressed by the Coordinate Bench of the Tribunal in the following cases : a) M/s. Conexant System India P. Ltd. ITA.No.1978/Hyd/2011. b) Intoto Software India P. Ltd. ITA.2102/H/2010 c) Bearing Point Business ITA.No.1124/Bang/2011 d) LG Soft India P. Ltd. ITA.1121/Bang/2011 e) Transwitch India P. Ltd. ITA.948/Bang/2011 f) CSR India P. Ltd. ITA.No.1119/Bang/2011 g) First Advantage ITA.No.1086/Bang/2012 Therefore, respectfully following the decision of the Coordinate Benches (supra), we direct the Assessing Officer/TPO to exclude the company from the list of comparables." 18. Similarly, as contended by the learned counsel for Assessee comparable nature of Flextronics Software Systems Ltd.(Seg) and Helio & Matheson Information Tech Ltd., has been r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e cases relied on and decided earlier in various cases". 9. Further, as per the chart furnished before us, similar view has been taken by the Co-ordinate Benches of the Tribunal in similar matters, wherein comparable nature of above eleven companies has come up for consideration, such as- (a) M/s. Axsys Healthcare Ltd. (ITA No.2076/Hyd/2011) (b) M/s.Virtusa (I) P. Ltd. (ITA No.1962/Hyd/2011) (c) M/s. Contexant System India Pvt. Ltd. (ITA Nos.1978/Hyd/2011) (d) Intoto Software India Pvt. Ltd. (ITA No.2102/Hyd/2010) (e) TriologyE Business Solutions (ITA No.1054/Bang/2011) (f) Telcordia Technologies India Pvt. Ltd. (ITA No.7821/Mum/2011) (g) LG Soft India Pvt. Ltd. (ITA No.1121/Bang/2011) (h) Transwitch India Pvt. Ltd. (ITA No.948/Bang/2011) (i) Mercedes Benz Research & Development (ITA No.1222/Bang- -/2011) (j) CSR India Pvt. Ltd. (ITA No.1119/Bang/2011) (k) First Advantage (ITA No.1086/Bang/2012) (l) HCL EAI Services Ltd. (ITA No.1348/Bang/2011) (m) Adaptec (India ) Pvt. Ltd.(ITA No.1801/Hyd/2011) 10. Respectfully following the consistent view taken by the Tribunal with regard to comparable nature of the above companies in similar matters and mor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... & T Infotech, they are functionally similar. It was the submission by the Ld. Counsel that they are not functionally different and TPO should have considered segmentals from the details furnished by Assessee. In the case of L & T Infotech., even though information was not received under section 133(6), it was the submission that this company also should be considered as the comparable. As far as PSI Data Systems Ltd. are concerned, the TPO is rejected the comparison on the related party transactions filter. It was the submission that RPT was worked out by including reimbursement transactions. With reference to VMF Soft Tech, the TPO has rejected it as there are no foreign exchange earnings, whereas, it was the submission that assessee has 93% of foreign exchange revenues. It was the submission that above companies are to be selected as comparables. 8.2. After considering the submissions, we are of the opinion that proper case was not made out for inclusion of the above comparables. Once TPO and DRP forms that these comparables are not functionally similar to Assessee on the basis of various filters adopted by the TPO, it would be better if the matter is left like that rather tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO. It was fairly submitted that this issue was also covered by the Co-ordinate Bench decision in assessee's own case for AY. 2005-06 in ITA No. 471/Hyd/2011 dt. 26-08-2015, wherein the issue was considered and decided as under: "23. The next issue which arises for consideration as raised in Ground No.12 is with regard to inclusion of reimbursement cost of Rs. 6,55,57,576 in the operating cost for the purpose of determining ALP of software development services segment. 24. Ld.AR submitted before us, the TPO while determining the ALP of the software development services segment has included the reimbursement cost of Rs. 6,55,57,576 being the cost of travel and stay of personnel to assessee. Ld.AR submitted, there being no profit element in such reimbursement cost, it should not have been included in the OC. In support of such contention, ld . AR relied upon the decision of the IT AT, Hyderabad bench in case of M/s. HSBC Electronic Data Process India Ltd. Vs. DCIT , IT A No. 1624/Hyd/2010, dt. 28/06/2013. 25. The ld. DR submitted before us, if the reimbursement cost according to the Tribunal cannot form part of the OC, then, the TPO may be directed to determine the ALP of r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tware development services. In that process, bad debts/reimbursements has to be excluded and segmental profitability has to be adopted. We find support in this behalf from various decisions of the Tribunal relied upon by the learned counsel for the assessee duly filing copies thereof in the paperbook, which have been noted hereinabove. That being so, the TPO should have determined the Arms Length Price for the international transactions with associated enterprises considering only the operating cost allocable to the Associated Enterprises segment. Since the assessing officer had no occasion to verify the veracity of the segmental financials prepared by the assessee company, for limited purpose, we direct the assessing officer to verify the segmental financials prepared by the assessee company and adopt the same for arriving at the net margin on the international transaction with AEs in respect of software development services. We direct accordingly. Respectfully following the same, we direct the Assessing Officer/ TPO to exclude the reimbursement costs while working out the operating costs. This ground is considered allowed." Facts being materially same, following the vie w expre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, we direct the AO to re-compute deduction u/s. 10A after reducing communication charges both from the export turnover as well as total turnover. Accordingly, we allow the ground raised by the assessee". 17. In view of the ratio laid down as above, we direct the AO to re-compute the reduction u/s. 10A after reducing the communication charges both from the export turnover as well as total turnover. Accordingly, we allow Ground No. 13 raised by assessee. 18. Ground No. 14 pertains to reduction of foreign exchange gain of Rs. 21,41,915/- from business profits while computing deduction u/s. 10A. AO treated the above amount as part of other income and reduce the same from profits of the business of assessee. Before the DRP, assessee relied on various case law to contend that foreign exchange gain was on account of fluctuation - qua export business; is eligible for exemption u/s. 10A. DRP however, without giving a finding whether the foreign exchange gain is out export business or not, however, rejected on the reason that the decision of the ITAT in the case of M/s. Intelle Group Asia Pvt. Ltd., was contested before the Hon'ble High Court and also relied on other case law which a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assed by him u/s. 263 of the Act for the assessment year 2005-06 to the effect that the deduction u/s. 10A for the STPI unit has to be computed after setting off of the losses of other divisions was reversed by the ITAT. In other words, the ITAT allowed the claim with regard to set off and carry forward of loss. It is the contention of the learned AR that if the direction of the ITAT is carried out then the assessee will get the benefit of carry forward of loss and assessee's claim of set off of brought forward losses for the impugned assessment year has to be allowed. Considering the totality of facts and circumstances of the case, who deem it just and proper to remit the matter to the file of the AO who shall take a decision on the issue after the consequential order is passed in pursuance to the directions of the ITAT in ITA No. 1646/Hyd/2010 pertaining to the assessment year 2005-06. The AO shall afford an opportunity of being heard to the assessee before taking a final decision on the issue. The ground raised is allowed for statistical purposes". Not only the above, even on the principles of law, the issue was decided in favaour of assessee in the case of CIT Vs. Yokogawa In ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
