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TMI Blog2016 (3) TMI 1114X X X X Extracts X X X X X X X X Extracts X X X X ..... and (iii) various filters adopted; these are held against by DRP on the basis of various decisions of Coordinate Benches of ITAT. Assessee has not made any submissions on them, hence these issues are considered academic now. 3. Briefly stated, assessee company is engaged in providing software research and development services to Daimler AG, its AE. The parent company (AE) is involved in research in automobile and aircraft fields along with manufacturing and assessee supplements the research work as a captive service provider. The uniqueness of assessee service function, it was contended that, was not comparable to other software development services being provided by other companies. As per TPO, the business profile (para 2.2 of TP order), is that it contributes to research in the areas of computer simulation and Computer Aided Design/Engineering (CAD/CAE), electrical, electronics and IT services. Assessee operates on Cost + 5% (CPM) and has reported net profit of 3.20% on operating cost of Rs. 49.81 crores with revenues of Rs. 51.41 crores. Assessee in its TP study adopted Cost Plus Method as appropriate method and gave alternate working under CUP method (external) on man-hourly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 92D. Detail reasons for which CPM is not applicable in the facts and circumstances of the case of the taxpayer have been discussed in the show-cause letter and the order of the TPO for AY 2007-08. As the arguments of the taxpayer on this issue, including reference to CUP method, remain the same, to avoid repetition reference is made to those documents. In view of the above the international transactions of the taxpayer are analyzed under TNMM method. Discussions regard search and filters used by the TPO have also been made in the show-cause notice." 5.1 Thus, TPO based his observations on the order of TPO in AY 2007- 08. At the outset, the ld. counsel submitted that assessee preferred an appeal on the issue in AY 2006-07 and without adjudicating the issue, the ITAT has set aside the matter relating to TNMM comparables. Assessee preferred a Misc. Application and ITAT while acknowledging the same, however, restored the MAM also to the TPO. It was the contention that assessee cannot be compared to other companies as they are only supplementing or testing in the software development services and so the method being adopted since inception should be accepted. Ld. counsel referred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st is also very significant and reasonable, especially because the company does not resume any significant business risks. Thereafter, the assessee has taken 15% of the profits of companies who have R&D activities as per decision of ITAT in Rolls Royce case and analysed the Cost Plus Method. 5.6 However, as the ld. TPO has stated in the report, there is no data furnished by the assessee with reference to Cost Plus method. Even when we enquired, the ld. counsel fairly admitted that assessee would prefer CUP method over Cost Plus Method. In view of this, in the absence of any data, we are not in a position to appreciate the Cost Plus Method. More over, most of captive service provides work on Cost Plus Method ranging from 5% mark-up to 25% mark-up. All the transactions are related party transactions. Therefore, uncontrolled comparable prices are generally not available in the Cost Plus Method. Even the assessee's analysis of 32% Gross Profit and 5% Net Profit cannot be accepted as there cannot be any Gross Profit in the case of assessee, who is operating on Cost Plus Method. More over, even though the assessee is stated to have been operating on Cost Plus 5% Method, OP/Cost as compu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the respective companies, assessee has derived offshore consultancy amount and thereafter assumed the persons who have worked offshore and then the rate per day at 20 days per month working and rate per hour at 8 hours per day, thus on various assumptions and presumptions, the rate per hour was arrived from the total profits as reported in the public domain. It was fairly admitted that rate per hour is not available for strict comparison. It was also submitted that the assessee has not taken NASCOM rates as the basis in comparing the rate per hour. This indicates that assessee's comparability under the CUP method is based on various assumptions of (a) estimating the offshore profits, (b) estimating number of employees, (c) estimating the working hours per employee per day per month, and then dividing the profit by so many assumptions/ numbers. This analysis of the assessee cannot be relied on as an external CUP. As can be seen from the above, there is no internal CUP which can be relied on in order to accept the CUP method. Therefore, in our view, the analysis undertaken by the assessee is not only faulty, but devoid of any data or proper analysis. In view of this, we have no opt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14 LGS Global Ltd. 27.52% 15 Mindtree Ltd. 16.41% 16 Persistent Systems Ltd. 20.31% 17 Quintegra Solutions Ltd. 21.74% 18 R S Software (India) Ltd. 7.41% 19 R Systems International (Seg) 15.30% 20 Sasken Communication Technologies Ltd. (Seg) 7.58% Arithmetic Mean 23.65% 6.2 Assessee is objecting to the companies listed at Sl.Nos. 1 to 11. These companies are elaborately considered by the Coordinate Bench in the case of NXP Semiconductors, IT(TP)A No.1560/Bang/2012 dated 5.3.2015 as under:- "9. Avani Cincom Technologies Ltd. 9.4.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial decisions cited by the assessee. We find that a co-ordinate bench of this Tribunal in the case of M/s. Curam Software International Pvt. Ltd. in ITA No.1280/Bang/2012 dt.31.7.2013 for Assessment Year 2008-09, has remanded the matter of examination of the comparability of this company to the file of the Assessing Officer / TPO afresh; holding as under at para 9.5.1 to 9.5.2 of its order :- " 9.5.1 We have heard both parties and perused and carefully considered the material on record. It is seen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not discharged the onus upon it to establish that the decision rendered in the case of Triology E-Business Software India Pvt. Ltd. (supra) can be applied to the facts of the case and that too of an earlier year i.e. Assessment Year 2007-08. The assessee, in our view, has not demonstrated that the facts of Triology EBusiness Software India Pvt. Ltd. (supra) are identical to the facts of the case on hand and that the profile of the assessee for the year under consideration is similar to that of the earlier Assessment Year 2007-08. In view of facts as discussed above, we deem it fit to remand the matter back to the file of the Assessing Officer / TPO to examine the comparability of this company afresh by considering the above observations. The TPO is directed to make available to the assessee information obtained under section 133(6) of the Act and to afford the assessee adequate opportunity of being heard and to make its submissions in the matter, which shall be duly considered before passing orders thereon. It is ordered accordingly." 9.4.2 Following the above cited decision of the co-ordinate bench of ITAT, Bangalore in the case of Curram Software International Pvt. Ltd. (supra) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso 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 co-ordinate 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 from the list of comparables. The A.O./TPO are accordingly directed." 10.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), we direct the Assessing Officer / TPO to omit this company from the final set of comparables as it is functionally different from the assessee in the case on hand, who is purely a provider of software development services." "11. KALS Information System Ltd. 11.4.1 We have heard both parties and perused and carefully consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the material on record; including the judicial decision cited and placed reliance upon. We find that the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company has to be excluded from the list of comparables for software development service providers as it is engaged in software product development and the relevant observations of the order at para 16.3 thereof is extracted hereunder :- " 16.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that the company i.e. Lucid Software Ltd., is engaged in the development of software products whereas the assessee, in the case on hand, is in the business of providing software development services. We also find that, co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 (IT(TP)A No.845/Bang/2011), LG Soft India Pvt. Ltd. (supra), CSR India Pvt. Ltd. (supra); the ITAT, Mumbai Bench in the case of Telecordia Technologies India Pvt. Ltd. (supra) and the Delhi ITAT in the case of Transwitch India Pvt. Ltd. (supra) have held, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 21/Mum/2011) has held that Tata 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, ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13.4.1 We have heard both parties and perused and carefully considered the material on record; including the judicial decisions cited. We find that a co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company ought to be excluded from the list of comparables holding as under at paras 12.4.1 and 12.4.2 of its order, which is extracted hereunder :- " 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 financial statements of Wipro wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons for unusually high profit and in order to establish whether the entities with such high profits can be taken as comparable or not. In the light of the aforesaid decision of the Special Bench and in view of the admitted position that the assessee follows Fixed Price Project model where revenues from software development is recognized based on software developed and billed to clients, there is a possibility of the expenditure in relation to the revenue being booked in the earlier year. The results of Bodhtree from FY 2003 to 2008 excluding FY 2007 as given by the learned counsel for the assessee were also perused. Perusal of the same shows, that there has been a consistent change in the operating margins. The chart filed by the assessee in this regard is given as an annexure to this order. It appears to us that the revenue recognition method followed by the assessee is the reason for the drastic variation in the profit margins of this company. In the given circumstances, we are of the view that it would be safe to exclude Bodhtree Consulting from the final list of comparables chosen by the assessee. We hold and direct accordingly." The relevant portion of the order in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich is for Assessment Year 2008-09. In this view of the matter, following the above decision of the co-ordinate bench of the Tribunal, we direct the TPO to include this company form the set of comparable companies to be applied to the assessee. It is ordered accordingly." "17. Thirdware Solutions Ltd. 17.3.1 We have heard both parties and perused and carefully considered the material on record. We find that a co-ordinate bench of ITAT, Bangalore in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has excluded this company from the set of comparables to a pure software development service provider since this company is functionally different as it is engaged in product development and earns revenue from sale of licenses and subscription. The relevant portion of the above order at para 15.3 thereof is extracted hereunder :- " 15.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the material on record that the company is engaged in product development and earns revenue from sale of licenses and subscription. However, the segmental profit and loss accounts for software development servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he list of comparables as it has RPT of 18.30% which is in excess of 15%. It is ordered accordingly." "16. E-Zest Solutions Ltd. 16.4.1 We have heard both parties and perused and carefully considered the material on record. We find that a co-ordinate bench of ITAT, Bangalore in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 had excluded this company from the list of comparables holding that this company is into rendering of product development services and high end technical services in the category of KPO Services and therefore cannot be considered as comparable to an assessee rendering purely software development services. The relevant portion of the order of the co-ordinate bench at para 14.4 thereof is as under :- " 14.4 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the list of comparables only on the basis of the statement made by the company in its reply to the notice under section 133(6) of the Act. It appears that the TPO has not examined the services rendered by the company to give a finding whether the services perfor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hey are within the filter range adopted by the TPO. Detailed objections and working as provided in objections to DRP at page 72 to 74 are referred in support of the contentions. 7.2 The above companies were considered by the Coordinate Bench in the case of Yodlee Infotech Pvt. Ltd. in IT(TP)A No.1538/Bang/2012 dated 30.8.2013 wherein vide para 25 and 26, the Bench directed as under:- "25.0 Aditya Birla Minacs IT Services 25.1 This company was selected by the TPO on the basis of the search conducted by him and was proposed as a comparable company in the show cause notice issued to the assessee. The assessee had no objection to the inclusion of this company in the set of comparables. The TPO, however, excluded this company from the final set of comparables for the reason that this company failed the Related Party Transaction (RPT) filter, having 33.65% RPT. 25.2 In this appeal before us, the learned Authorised Representative contended that the reason far which the TPO has rejected this company as a comparable is incorrect since he had calculated the RPT figure at 33.6% wrongly. It is submitted that the RPT for this company is only 5.03% and that the TPO has computed the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view of this the learned Authorised Representative prayed that the TPO/AO be directed to include this company in the final set of comparables. 26.3 Per contra the learned Departmental Representative supported the orders of the TPO in excluding this company from the final set of comparables on the ground that it failed the RPT filter applied by the TPO. 26.4 We have heard both parties and perused and carefully considered the material on record. It is clear from the record that the TPO had actually proposed this company for inclusion as a comparable based on the search process carried out by him. In the search process, the TPO had applied the RPT filter at 25%. It is seen that after having selected this company as a comparable after using the RPT filter, the TPO rejected the case on the very same issue of RPT filter. Evidently, therefore, the computation of RPT is erroneous in either one of the two computations made by the TPO. We find that the TPO has not explained his computation either in the show cause notice while selecting the company as a comparable or in the TP order while rejecting the company as a comparable. In this view of the matter we deem it fit to remand the issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e finding, we direct the TPO to consider accordingly. Ground is allowed. 9. The last issue for consideration is the issue of risk adjustment. This issue was also considered and held in favour of assessee in AY 2007-08 in assessee's own case as under:- "5.11 It was the case of the assessee that the AO/TPO erred in not making suitable adjustments on account of differences in the risk profile of the assessee vis-a-vis the comparables. At this juncture, we would like to recall that a similar issue raised by the assessee in the immediately preceding assessment year has been remanded back to the files of AO/TPO by the earlier Bench to decide the issue afresh. The above direction was in conformity with the findings recorded in the case of M/s. Insilica Semiconductors India Pvt. Ltd v. ITO [ITA No.1399/Bang/2010 for the AY 2006-07 dated 29.2.2012]. We are, therefore, of the view that the findings of the earlier Bench (supra) hold good for this AY also. It is ordered accordingly." 9.1 In conformity with the above finding, we direct the TPO to consider accordingly. Ground is allowed. 10. In conclusion, the Assessing Officer/TPO is directed to work out the ALP of the assessee in accordan ..... X X X X Extracts X X X X X X X X Extracts X X X X
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